MCI Communications Corp. said Tuesday that it would invest about $1.1 billion to transform its telephone network into a fully digital system to improve efficiency and profit, leading to a writeoff of $500 million to $550 million.
MCI, the nation's second-largest long-distance telephone company, said the charge could occur in the current quarter. It expects the new network to be in place by the end of 1991.
The announcement sparked a selloff in the company's stock. MCI fell $1.125 to $33.625 a share on the over-the-counter market, where it was the most active issue.
The Washington-based telecommunications company said its plan includes sharing telephone networks with Williams Telecommunications Group, a unit of Tulsa, Okla.-based Williams Cos. Each company will have access to the other's network. Terms of that agreement were not disclosed.
MCI also said it would integrate 3,000 miles of optical fiber network acquired in its recent merger with Telecom U.S.A. and an investment of about $1.1 billion next year to modernize its network.
As part of its modernization plan, MCI said it was "considering a writedown of antiquated" analog equipment.
Digital technology permits clearer and faster voice and data transmissions. It is based on a stream of pulsed codes that are regenerated at the receiving end. Unlike analog transmissions, digital signals do not get weaker as they get farther from the originating point.
MCI's plan follows its acquisition of rival Telecom for $1.25 billion, which will increase its long-distance market share to about 15% from 12.9%.
The company has been steadily chipping away at American Telephone & Telegraph Co.'s commanding 68.7% share of the market since the giant's monopoly was broken in 1984. MCI was founded in 1968, but it did not become profitable until 1988.
Analysts said the company's plans to modernize its network could result in a third-quarter loss, but they expect the new system to eventually improve efficiency and profit.
"MCI's planned improvements imply the need to make some upgrades to respond to the competitive pressures of the business," said New Japan Securities analyst David Boczar.
"The move will be positive over the long term, allowing MCI to control costs more efficiently and offer new services," Boczar said.
Several industry analysts said they were cutting their third-quarter and full-year earnings estimates for MCI.
Greg Sawers, an analyst with C. Bernstein, said the writeoff will result in a third-quarter loss of about 50 cents a share. But he said he still expects the company to earn 75 cents a share in operating earnings in the quarter.
MCI earned 62 cents a share in the year-ago third quarter.