Merger Costs Put MCI WorldCom in the Red
(Adds details, CEO & analyst quotes, updates stock price) By Dan Burns
NEW YORK, Oct 29 (Reuters) - MCI WorldCom Inc. <WCOM.O>, reporting earnings for the first time since MCI Communications Corp. and WorldCom Inc. joined forces to create the nation's second-largest long-distance company, said on Thursday it lost $2.9 billion in the third quarter due to costs associated with the $40 billion merger.
Setting aside a lower-than-expected $3.3 billion in various merger-related charges, however, MCI WorldCom's profits from combined continuing operations jumped more than three-fold to $268 million, or 21 cents per share, from $69 million, or 7 cents per share, in the same period last year.
The operating results fell in line with what Wall Street analysts had forecast, according to the earnings tracking service First Call Corp. In late-afternoon trading, MCI WorldCom's stock was up 44 cents at $54.50 in heavy trading on Nasdaq.
(now for the good stuff ..)
Wall Street's telecommunications analysts, while hardly bowled over by the results, accepted them as a good indication that the long-distance company was on track with its integration efforts following the merger and is now poised for solid growth.
"That's a sustainable growth story," Goldman Sachs analyst Richard Klugman said. "This is their first quarter since the merger was completed, and I think there is a lot of upside."
"What you were looking for in this quarter was the pieces to be in place for synergies to accelerate in the fourth quarter," Legg Mason analyst Daniel Zito said. "By no means a blowout, but all in all, it was solid. There's nothing there that gives me concern about the fourth quarter or next year."
Pro forma revenues, which reflect the new combined MCI WorldCom, were $7.7 billion, up 16 percent from $6.6 billion a year ago. Including MCI WorldCom's recent investment in Brazilian long-distance carrier Embratel, third-quarter revenues were $8.6 billion.
"The acceleration in our year-over-year pro forma revenue growth is in spite of a competitive voice market and underscores the value of our investments in the fastest growing segments of the market," MCI WorldCom President and Chief Executive Officer Bernard Ebbers said in a statement.
MCI WorldCom's core communications service revenues -- voice, data, international and Internet services -- increased 19 percent on a pro forma basis to $7.3 billion. Traffic jumped 18 percent, far outpacing the 3 percent third-quarter traffic growth at chief rival AT&T Corp. <T.N>, the nation's largest long-distance carrier.
Voice revenues, which are 64 percent of the company's total, grew 10 percent to $4.9 billion while data revenues rose 33 percent to $1.5 billion. Internet revenues bolted higher by 72 percent to $589 million.
International revenues, after reclassifying certain settlement fees, increased a strong 55 percent to $302 million. Strength in continental Europe and Britain fueled much of the international growth, the company said.
Revenues for its information technology sector, which includes MCI systemhouse and other consulting and outsourcing services, fell 25 percent to $356 million. The decline reflected the elimination of certain lines of business, as well as Canadian currency translation effects. Excluding those factors, revenue from recurring operations on a constant dollar basis grew about 12 percent.
The company said the merger charges included $3.1 billion to write off research and development costs, which it originally had expected to be as much as $7 billion. It reduced them based on guidance from the Securities and Exchange Commission, which has become more strict about the use of aggressive accounting techniques regarding acquisitions.
Critics have said the use of huge R&D write-offs allow companies to eliminate those costs from their books and artificially inflate future earnings.
MCI and WorldCom, formerly the No. 2 and No. 4 long-distance companies, respectively, consummated their merger in September after almost a year of international regulatory scrutiny.
The combined company, with annual revenues expected to be more than $30 billion, remains firmly entrenched as the No. 2 U.S. long-distance carrier, well behind AT&T, which has annual revenues of about $55 billion, but well ahead of No. 3 Sprint Corp. <FON.N>, with annual revenues of about $16 billion.
Ebbers was characteristically upbeat, but not specific, on the new company's outlook.
"After culminating almost a year's effort to complete our merger, MCI WorldCom's outlook is particularly bright," Ebbers said. "Our shareholders should sense this renewed vigor in our product announcements, our financial performance and the general air of excitement as we attract new customers."
"The almost four full quarters of approval process were put to good use in planning the integration of our operations," Ebbers said. "We have hit the ground running with new products, and we will soon be in full stride as one company."
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