SBC Earnings Drop 40% in 3rd Quarter

Poised to become the nation’s biggest phone company, SBC Communications Inc. on Thursday reported third-quarter earnings that appeared lackluster but showed its ability to navigate the tumult of an industry upheaval.

SBC earned $1.2 billion, or 38 cents a share, down 40% from earnings of $2.1 billion, or 38 cents, in the same quarter last year. Revenue was flat at $10.3 billion.

Excluding one-time costs from Hurricane Katrina damage and from 60%-owned Cingular Wireless’ acquisition of AT&T; Wireless, earnings totaled 47 cents a share. That was 6 cents ahead of the average estimate of analysts surveyed by Thomson Financial.

Additionally, last year’s third-quarter results were boosted by the sale of SBC’s phone directories in two states, which gave it an after-tax gain of $827 million, or 25 cents a share.

Shares of SBC, which expects to complete its $16-billion purchase of AT&T; Corp. by year’s end, rose 13 cents to $22.54.

San Antonio-based SBC is California’s dominant local phone company.

The residential phone market, where SBC’s access lines have been dwindling, produced strong revenue growth and a 34.7% profit margin. That was driven mainly by greater cost cutting, said analyst David W. Barden of Banc of America Securities.

SBC trimmed 3,000 jobs, mostly through attrition, in the quarter, bringing total jobs eliminated this year to more than 8,000.

Overall, the company’s profit margin was 19%, well ahead of the 16.5% margin recorded a year earlier.

Rick Lindner, SBC’s chief financial officer, said the company wasn’t looking at access lines much anymore as a barometer for growth.

That’s because many of the SBC customers dropping service are eliminating additional lines or switching over to high-speed digital subscriber lines (DSL) or to Internet protocol technology, neither of which the company counts as part of total access lines.

The company, the largest DSL provider in the nation, added 528,000 lines in the three-month period to give it 6.5 million high-speed lines in service.

“It’s not just plain old telephone service in the house anymore,” SBC spokeswoman Anne Vincent said. “So we’re looking at revenue trends.”

For the third quarter, SBC’s consumer revenue rose 3.4% and its business customer revenue gained 2.3%.

As more households convert to high-speed Internet connections, they also can take advantage of numerous offers from other companies to provide voice over Internet protocol (VOIP), a technology that can replace conventional phone service.

But Lindner and SBC aren’t worried. They figure that VOIP companies will take some market share away but they won’t be a big threat. Customers, Lindner said, prefer the bundle of services that include DSL and wireless.

The competitive threats from VOIP and wireless companies have raised alarms in the industry “to a point that it’s irrational,” Lindner said.

“Those threats are coming from technologies that are still largely unproven or new entrants that are not clearly in the space,” he told analysts.