IP Democracy: BellSouth Profits Rise as Line Losses Accelerate

Incumbent telco BellSouth issued its Q2 06 earnings today showing strong profit growth on very weak revenue increases. Net income was $887 million, or $.49/share, compared to $795 million, or $.43/share, during the year-ago quarter.

Excluding one-time charges, net income was $1.08 billion, or $.60/share, a noteworthy performance given that the telco posted almost flat revenues. Revenues for Q2 06 (excluding the Cingular wireless arm) were $5.21 billion, up only 1.2% year-over-year.

But, and it’s a big caveat, local access line loss accelerated during the quarter, with BellSouth losing around 500,000 voice lines, more than double the 200,000 or so lines lost last quarter. Although mobile substitution and the loss of second lines due to increased broadband adoption played a part in this line loss acceleration, cable VoIP competition was cited by the company’s CFO Pat Shannon during BellSouth’s earnings call.

Around 50% of BellSouth’s territory has cable VoIP competition. Shannon danced around the fact that BellSouth is still facing only half the cable VoIP competition it will ultimately face by saying that “the markets vary widely” in terms of their impact on BellSouth’s core business or something along these lines.

Still, DSL growth continued along seasonal lines, with BellSouth adding a 128,000 net new DSL customers during the quarter, slightly above the 124,000 net adds during Q2 05. Moreover, as Shannon pointed out during the earnings call, customers are upgrading to higher-priced DSL tiers.

During the quarter, BellSouth added 159,000 net new customers for its 3/6 Mbps tier and gained 11,000 for its 1.5 Mbps tier. Its least expensive tier, which offers download speeds of only 256 kbps, lost 42,000 customers.

Quarterly DSL revenue rose by almost 40% between Q2 05 and Q2 06, rising from $287 million to $400 million. The high-speed service, which for years had been an unprofitable option, is now a big contributor to the bottom line.

As Shannon said during the earnings call, “in the second quarter, we generated $400 million in DSL revenue, up $113 million year over year and very little change in the cost of DSL. Almost all of that fell to the bottom line.”

BellSouth Operating Statistics
	2Q05	3Q05	4Q05	1Q06	2Q06
Total access lines (mil.)	20.8	20.4	20.0	19.8	19.3
Change	(0.4)	(0.4)	(0.4)	(0.2)	(0.5)
% change	-2%	-2%	-2%	-1%	-2%
DSL customers (000)	2,473	2,678	2,882	3,145	3,273
Quarterly adds (000)	124	205	204	263	128
% chg. in quarterly run rate	-51%	65%	0%	29%	-51%
Video (000)	394	460	523	628	691
Change	80	66	63	105	63
Source:  Emerging Media Dynamics, Inc. analysis of BellSouth data.

Posted by Cynthia Brumfield on July 24, 2006 4:59 PM to IP Democracy