SBC Earnings Tumble 62% as Sales Slide
SBC Communications Inc. turned in its worst full-year financial performance since it bought its way into the California phone market seven years ago, as fourth-quarter profit plunged 62% and sales dropped year-over-year for the 13th straight quarter.
California’s dominant local phone carrier said Tuesday that it earned $905 million, or 27 cents a share, in the fourth quarter, compared with net income of $2.4 billion, or 71 cents, in the same period a year earlier. Revenue fell 10% to $10.1 billion.
SBC Chairman Edward E. Whitacre Jr. said that pinched profit margins should stabilize in the current quarter and that sales should start climbing toward the end of the year.
But analysts cautioned that the former monopoly holder should expect to see its market share continue to erode and its prices to fall, leading to even lower revenue and profit margins. They said SBC should be doing more to shore up its bottom line as competitors undermine its core business of selling local phone lines in 13 states.
“What’s happening here is that SBC is sharply reducing the prices on its services, losing a lot of access lines and clearly not cutting expenses fast enough,” said analyst F. Drake Johnstone of Davenport & Co. in Richmond, Va. At the same time, he said, “You’ve got a nasty little price war that will put a damper on profitability.”
SBC shares dropped 74 cents to $25.95 on Tuesday on the New York Stock Exchange. Wall Street analysts believe the stock is overvalued. Richard D. Klugman at Jefferies & Co. in New York predicts it will fall as low as $16 this year.
Some analysts say SBC is spending too much time and money lobbying state and federal regulators to change the rules that give other companies access to SBC’s network. The company also has been pursuing its cause in courts.
In fact, SBC has been the loudest of the Baby Bells in complaining about the prices it is allowed to charge rivals for the use of lines and equipment. All the Bells contend that the rental rates set by many state regulatory bodies are below their costs, but some observers say SBC should ease up on its strident approach.
The company is facing heated competition as AT&T; Corp. and others pick off some of its most lucrative local customers, including small businesses. And some competitors are using wireless phone networks, cable lines and the Internet to offer alternative sources of dial tone.
In addition, analyst Christopher M. Larsen at Prudential Equity Group in New York wrote in a note to investors, Cingular Wireless, which is 60% owned by SBC, may need a cash infusion if it succeeds in its bid to acquire AT&T; Wireless for $30 billion.
Klugman said SBC historically had relied on slashing its payroll and reducing capital expenditures to stabilize its earnings through 2002. But after cutting 24,000 workers in two years, SBC “needs to spend heavily on sales and marketing, discount its service aggressively and find creative packages ... to stave off market-share losses and revenue declines,” he said in a report to investors.
For 2003, SBC earned a record $8.5 billion, or $2.56 a share, but about $2.5 billion of that came in an accounting change. It earned $5.7 billion, or $1.69, in 2002.
SBC’s income before those one-time charges and accounting changes came to $6 billion, the lowest since it bought Pacific Bell parent Pacific Telesis Group in 1997. Annual revenue fell 5% to $40.8 billion and is off 20.5% from the company’s high-water mark in 2000.
In California, SBC controls about 78% of the local phone market and has captured 26% of the long-distance market.
Companywide, it has slowed the migration of access lines to competitors, losing 177,000 lines in the fourth quarter compared with 401,000 in the third quarter.
