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BellSouth's Profit Higher Amid Line Loss

Posted on: Tuesday, 27 July 2004, 06:00 CDT

ATLANTA - Telecommunications giant BellSouth Corp., which serves a nine-state region that includes Louisiana, reported Monday a nearly 5 percent rise in second-quarter profit on flat revenue as it continued to lose access lines but benefited from growth in its long- distance and high-speed Internet services.

Shares of Atlanta-based BellSouth and other companies in its industry rose as investors continued to react to AT&T Corp.'s decision last week to stop seeking new customers for its traditional consumer long-distance service.

"This is more a group thing where it's driven off AT&T's announcement than BellSouth's earnings surprise," said Patrick Comack, an analyst with Guzman & Co. in Miami. "It's a major benefit to BellSouth in the short-term, but in the long-term the major enemy is cable."

BellSouth said it earned $996 million, or 54 cents a share, for the three months ending June 30, compared to a profit of $951 million, or 51 cents a share, in the same three-month period a year ago.

Analysts surveyed by Thomson First Call were expecting earnings of 50 cents a share.

Revenue in the April-June quarter was roughly the same as last year at $5.08 billion.

BellSouth said it added 535,000 mass-market long-distance customers in the second quarter. The company said the increase was driven by its offering of unlimited long-distance plans and new flat- rate calling plans.

BellSouth said it added 120,000 net DSL customers during the second quarter. Total access lines, however, declined in the quarter by 832,000, or 3.7 percent, from a year ago to 21.8 million.

"It's pretty obvious to us that wireless continues to take a large piece of the access line market," said chief financial officer Ron Dykes.

Dykes said the loss of access lines has hurt BellSouth's overall revenue growth. Still, he said, the company has been able to offset that with growth in other segments, such as long distance and Internet.

Dykes said competition from new providers of phone and data services could be challenging for BellSouth going forward.

Legg Mason Wood Walker analyst Michael Balhoff in Baltimore agreed. His firm has a "hold" rating on BellSouth stock.

"We continue to expect further competitive shifts to develop as long-distance carriers and cable (operators) begin offering IP- based telephone services over the next year," Balhoff wrote in a research note.

Shares of BellSouth rose 91 cents, or 3.5 percent, to close at $26.81 in trading on the New York Stock Exchange. Also on the NYSE, shares of SBC rose 53 cents, or 2.2 percent, to close at $24.75, while shares of New York-based Verizon Communications rose $1.18, or 3.3 percent, to close at $36.50.

BellSouth is the dominant local phone provider in nine southeastern states. It jointly owns Cingular Wireless LLC, the nation's No. 2 cell phone provider, with SBC Communications Inc. of San Antonio.

Dykes said Cingular's planned $41 billion all-cash acquisition of AT&T Wireless Services Inc. is on schedule and is expected to close in the fourth quarter. He said BellSouth is conserving as much cash as possible to pay for its $16 billion share of the deal. In the second quarter, Cingular added 428,000 net customers, bringing its total base to 25 million, BellSouth said.

As for its work force, BellSouth ended the second quarter with 64,113 employees, a 3.1 percent decline from a year ago, when it had 66,170 employees, spokesman Jeff Battcher said.

For the first six months of the year, BellSouth said it earned $2.60 billion, or $1.41 a share, compared to a profit of $2.18 billion, or $1.18 a share, in the year-ago period. Six-month revenue was down slightly at $10.06 billion, compared to $10.09 billion a year ago.

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