SBC Revenue Falls 5.8%; Firm Sees Slow 2003

SBC Communications Inc. said Tuesday that discount pricing mandated by regulators, along with slack demand for telephone service, pushed revenue down 5.8% to $11.2 billion in the fourth quarter and probably would slow sales further this year.

California’s dominant local telephone service carrier, struggling to find an end to the long slump in the telecommunications industry, disappointed Wall Street with its results and dreary forecast.

Combined with weak outlooks last week from AT&T; Corp. and BellSouth Corp., “SBC’s news today indicates that the telecom services industry remains mired in difficulties,” analyst Richard G. Klugman of Jefferies & Co. in New York wrote in a note to investors.

The industry has been banged up by competitive price cutting, a long-standing glut in fiber-optic capacity, weak demand for data services and more reliance by customers on wireless phones and e-mail.

SBC Chairman Edward E. Whitacre Jr. warned investors and analysts in a conference call that the “near-term may get worse before we see an upturn.”

For the fourth quarter, SBC said net income doubled to $2.4 billion, or 71 cents a share, from $1.2 billion, or 35 cents a share, for the final three months of 2001. But the difference came from higher telephone directory advertising, substantial cost cutting and relatively high one-time charges the previous year.

Excluding special charges and expenses of stock option transactions, SBC earned 62 cents a share for the fourth quarter of 2002 -- lower than the 64 cents a share earned in the prior year but about what Wall Street had anticipated.

Analysts, though, were hoping for better sales figures.

“We were expecting SBC to have weak results because of competition and economic factors, but the numbers are lower than expected,” said Michael J. Balhoff of Legg Mason Wood Walker in Baltimore.

Whitacre called 2003 a “pivotal year” because major regulatory decisions, among other items, could affect earnings and sales significantly.

The Federal Communications Commission, for instance, plans to decide next month on discount pricing rules that Whitacre calls “the biggest driver of our losses” because they force the Baby Bells to lease equipment to AT&T; and other competitors at deep discounts.

SBC said it lost 810,000 lines -- 372,000 in California -- to such pricing in the last quarter and 2.5 million lines altogether last year. The discount rates are designed to spur competition, allowing rivals into SBC’s local territory and SBC into long- distance markets. Each local line represents about $35 in revenue.

By comparison, SBC gained 1.2 million long-distance lines last year, bringing its total to 6.1 million lines in six states. Yet each long-distance line accounts for just $11 in revenue, SBC said.

SBC said AT&T; and WorldCom Inc. picked up nearly 1.7 million of its discounted lines last year. AT&T;, however, considers its level of penetration to be minimal. It noted that the 2.5 million local lines it picked up in eight states amounts to just 3% of the market. It hopes to add customers in a dozen more states this year.

For its part, SBC won the right to offer long-distance service in California, the nation’s largest such market, at the end of December. In 19 days this month, SBC said, it picked up 2.5% of the long-distance residential lines in its territory.

California represents a third of SBC’s total business, and its penetration of the long-distance field should “catapult” its numbers well beyond the local lines lost to discount pricing, said analyst Patrick Comack at Guzman & Co. SBC expects to win approval this year to offer long-distance in six other states.

But for now, SBC remains mired with problems. In addition to grappling with deeply discounted wholesale prices, the San Antonio-based company faces lower retail prices too. In fact, revenue is off in nearly every business segment.

Analysts said the company did a good job of cutting costs -- 17,000 workers were fired last year -- and reducing debt. And SBC intends to lay off more workers this year even as it hires more than 1,000 salespeople to sell long-distance service.

SBC said pension and retirement costs, employee health-care benefits, growth initiatives and other one-time costs this year would dampen profit. Merrill Lynch & Co.’s Adam Quinton estimates that those costs will shave 55 to 64 cents off earnings and leave SBC with results of $1.60 to $1.69 a share this year, well below previous expectations.

For all of 2002, SBC earned $5.7 billion, or $1.69 a share, down from $7 billion, or $2.07 a share, the previous year. Annual sales fell 6% to $43.1 billion.

SBC shares fell 53 cents to $24.32 on the New York Stock Exchange.