Telecom Profits to Feel Pain of Economy
Tuesday October 9 2:00 PM ET
By Jessica Hall
PHILADELPHIA (Reuters) - Despite a flood of calls and a rush to buy mobile phones after the Sept. 11 attacks, third-quarter profits at most major U.S. telephone companies will be weak.
While the urge to reach out and call someone in a time of crisis was strong, the tug of the weakening economy on consumers and businesses has been stronger, analysts said.
``The impact of recession will be far greater than increased need for telecommunications in the near term,'' said J.P. Morgan analyst Marc Crossman.
The telecommunications industry, already hurting from cut-rate competition, felt new pressure from a slowdown in spending on luxury items like high-speed Internet lines and second telephones.
Corporations, meanwhile, needed fewer services as they fired workers and postponed network upgrades or new software investments, analysts said. That's cut the volume of voice, data and video traffic traveling across long-distance networks, and trimmed the number of local telephone lines in use.
Analysts said the Sept. 11 attacks, as well as the prospect of a prolonged retaliation, could trigger increased demand for services such as videoconferencing if Americans become afraid to travel.
Still, that will not be enough to offset the damage caused by the strained economy, they said.
``The expected reductions in (corporate) spending should far outweigh any benefit from increased volume due to travel cutbacks,'' said J.P. Morgan analyst Crossman.
In recent weeks, high-speed network providers Qwest Communications International Inc. (NYSE:Q - news) and Global Crossing Ltd. (NYSE:GX - news) cut their financial forecasts, citing weak sales of wholesale capacity. Companies ranging from Baby Bells SBC Communications Inc. (NYSE:SBC - news) and BellSouth Corp. (NYSE:BLS - news) to long-distance carriers Sprint Corp. (NYSE:FON - news) and WorldCom Group (Nasdaq:WCOM - news) cut their financial forecasts earlier this year.
Investors will be watching Qwest and Global Crossing to see if their revenues are boosted by one-time sales of capacity on their network rather than ongoing sales of communications services. Qwest also may be hurt by the recent bankruptcy of customers such as Exodus Communications, WinStar Communications and Rhythms NetConnections, analysts said.
STRATEGY UPDATES EXPECTED BY AT&T, SPRINT
Meanwhile, the third-quarter earnings report from AT&T Corp. (NYSE:T - news) may be less interesting than the company's expected update on the sale of its cable television unit, AT&T Broadband, investors said.
AT&T's profits are expected to fall nearly 90 percent to 4 cents a share from 38 cents a share, a year ago, according to research firm Thomson Financial/First Call. AT&T already warned that its third-quarter pro forma revenues would fall at a rate similar to the 5.9-percent drop seen in the second-quarter due to weak calling prices in the long-distance market.
On the a positive note, AT&T is expected to show further cost cuts, as well as improvements in the broadband unit's revenues, margins, and sales of digital video and telephone customers, analysts said.
The real interest, however, lies in the fate of AT&T Broadband, the No. 1 U.S. cable television company. Smaller rival Comcast Corp. (Nasdaq:CMCSK - news) offered in July to purchase AT&T Broadband in a deal originally valued at $44.5 billion.
AT&T rejected that offer as inadequate, and explored other strategic options for the unit, holding talks with AOL Time Warner Inc. (NYSE:AOL - news), Cox Communications Inc. (NYSE:COX - news) and Walt Disney Co. (NYSE:DIS - news) about buying or investing in the unit, people familiar with the situation said. AT&T also weighed proceeding with its plan to spin off the unit.
Comcast, however, remains the most viable suitor, sources said. Disney last week essentially bowed out, saying an investment in a broadband network company was ``highly unlikely.'' Cox, meanwhile, would likely by hampered by its small size and financial power, and a deal with AOL would be unlikely to win regulatory approval, analysts said.
Meanwhile, Sprint Corp. (FON.N) is expected to cancel or significantly reduce its ION -- Integrated On-demand Network -- service, which allows customers to make phone calls, send faxes, and cruise the Internet over a single phone line.
Although the cancellation of the small customer segment has been widely expected, Sprint also may sideline the entire ION project -- including the service already marketed to medium- and large-businesses, sources familiar with the situation said. An announcement is expected when Sprint, the No. 3 U.S. long-distance telephone company, reports earnings Oct. 18.
VERIZON OFFERS GLIMPSE INTO BABY BELL RESULTS
Verizon Communications (NYSE:VZ - news), the dominant local telephone company in the Northeastern United States, said the attacks on the World Trade Center may hurt its results in the second half of the year since key parts of its network in lower Manhattan were destroyed when the buildings collapsed.
The company said it would outline on Oct. 30 the costs to repair networks damaged by the attacks and the revenue lost during service outages for tens of thousands of business and residential customers. Verizon also warned last week it added fewer wireless and long-distance customers in the third quarter than in the second quarter.
Verizon also saw lackluster third-quarter growth in the key areas on which it has bet its future growth -- wireless, long-distance and high-speed DSL (digital subscriber line) Internet access and data services.
As the No. 1 U.S. local telephone company, Verizon serves as a barometer for the rest of the Baby Bells and its results may indicate that consumers have tightened discretionary spending even more than expected, analysts said.
The weak wireless sales, however, may be specific only to Verizon, analysts cautioned. Consumer electronics retailer RadioShack Corp. (NYSE:RSH - news) said same-store sales of wireless communications products surged 30 percent in September, building upon a 20 percent increase in August.
That bodes well for Sprint PCS, which gets about 25 percent of its new customers through its ``store within a store'' at RadioShack, analysts said.
``We believe the third quarter showed exceptional growth for PCS,'' said William Blair & Co. analyst William Benton. Assuming other distribution channels performed as well as RadioShack, Sprint PCS' net subscriber additions could exceed one million, Benton said.
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Venkie: you and your friends must have been buying Harleys -- they seem to be in strong demand even in a tough economic time period...=)
Regards,
Scott |
