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Gloom on the horizon for long-distance giants

AT&T, WorldCom and Sprint are likely to bring the telecommunications sector down with plunging long-distance revenue and a mixed outlook for upcoming quarters.

    Despite strong earnings from Qwest Communications International and SBC Communications, investors shouldn't get comfortable with telecommunications earnings.

    AT&T, WorldCom and Sprint are likely to bring the sector down with plunging long-distance revenue and a mixed outlook for upcoming quarters.

    Since the "Big Three" have all issued profit warnings, investors are prepared for a dreary quarter; the only surprise could come from what they have to say about 2001. "We're confident about fourth-quarter results, but concerned for downward revisions in 2001," said Gary Jacobi, who covers telecommunications stocks for Deutsche Banc Alex Brown.

    The outlook from these long-distance giants has become even more important since shares of AT&T, WorldCom and Sprint have enjoyed a nice rally in January. After a dismal performance in 2000, the Big Three have done well so far. AT&T is up 40 percent, WorldCom is up 53 percent, and Sprint is up 28 percent for the year through Jan. 24.

    "The market is different than it was six or nine months ago--the value investors have moved in," said Drake Johnstone, an analyst with Davenport. "It remains to be seen if investors will react negatively to lower long-distance numbers."

    Analysts said gloomy outlooks were priced into AT&T, WorldCom and Sprint shares two to three weeks ago. But if these long-distance giants cut their projections again for 2001, these stocks are going to look overvalued in a hurry.

    The biggest problem is that the Big Three haven't made the transition to high-growth businesses fast enough to counterbalance falling long-distance revenue. For example, strong growth in DSL (digital subscriber line) subscribers enabled Qwest, SBC and BellSouth to top estimates with sales growth averaging 8 percent. The Big Three are expected to grow at a 3 percent clip.

    However, in a move to increase WorldCom's profits and to turn around its struggling stock, a company executive said Friday morning that more than 10,000 WorldCom employees could be receiving pink slips as early as Monday.

    AT&T: Looking for traction
    Among the telecommunications giants, AT&T's quarter may be the most depressing. Ma Bell isn't inspiring many hopes for its fourth quarter after it cut estimates for the second time, in December.

    When the company reports earnings Monday, look for AT&T execs to be peppered with questions about the company's outlook for 2001, its breakup plans and what it's doing to offset the death of its long-distance business. AT&T also has a heavy debt load from its spate of acquisitions.

    "They're not data focused enough," said Guzman analyst Patrick Comack. "AT&T is getting punished by long-distance, it's suffering market share loss and pricing pressure and its viability is questionable going forward."

    Analysts are mixed about AT&T's prospects for the second half of 2001, considering that long-distance revenue may never rebound. "It would not surprise me if revenue growth is low, flat or even negative due to the long-distance and consumer segments," Johnstone said.

    However, AT&T investors may stick around for one of Ma Bell's future spinoff candidates. Wireless revenue is expected to increase 30 percent to 35 percent for the quarter, and broadband revenue is expected to increase 10 percent to 11 percent.

    "There's the potential that even after a run-up in shares, investors will be focused on getting a stake in the broadband and wireless businesses," said Johnstone, who noted that AT&T is well above its 52-week low of $16.50, which hit in December.

    AT&T is expected to turn a profit of 26 cents a share on revenue of $16.8 billion, according to First Call. Its wireless unit, AT&T Wireless, is expected to report a loss of 6 cents a share, and revenue of $2.7 billion.

    Sprint: Best of the bunch?
    Sprint may have been left at the altar by WorldCom after regulators killed their merger, but the telecommunications giant may be the most insulated from the long-distance fallout. It has promised to make 2001 a transition year and has begun the move into data and broadband, which it hopes will make up 50 percent of revenues by 2003.

    Of the Big Three, Sprint remains the least exposed to the highly competitive consumer long-distance voice business, which made up just more than 15 percent of total company revenue, compared with nearly 20 percent at WorldCom and more than 26 percent at AT&T, said Morgan Stanley Dean Witter analyst Simon Flannery in a recent report.

    In early November, Sprint lowered earnings estimates for its core telecommunications unit but cushioned the news by projecting strong growth for its wireless unit, which is expected turn a profit by 2002.

    Current expectations for the company's core FON Group call for growth of about 3 percent for the quarter, and mid-single-digit growth in 2001. Growth should improve to double-digit rates in 2002, Sprint said.

    Analysts were mixed on Sprint PCS, Sprint's wireless unit and growth engine. Wireless competition is expected to increase as more players such as Cingular and Verizon hit the national scene.

    Sprint is slated to report results Thursday, along with its wireless PCS unit. First Call is expecting earnings of 39 cents a share and revenue of $4.4 billion from Sprint. Sprint PCS is expected to report revenue of $1.65 billion and a loss of 53 cents a share.

    WorldCom: Long-distance drag
    WorldCom, one of the last major operators to report, on Feb. 8, will be hit hard by the evaporation of long-distance revenue. And it doesn't have a significant wireless or data business to use as a shield.

    "The company could come in below estimates" Johnstone said. Almost 40 percent of WorldCom's revenue comes from long-distance, and growth at the company's prized UUNet Internet unit is slowing.

    When WorldCom lowered estimates in early November, analysts downgraded the stock and agreed that its consumer long-distance business will plague the company through 2001. Given the outlook, it's no surprise the company is reportedly considering laying off roughly 10 percent to 15 percent of its work force.

    "At least with AT&T you have the dynamic of investors potentially buying or hanging on to the stock for a stake in AT&T Wireless or Broadband," Johnstone said. But with WorldCom, there's a real chance that "the decline in long-distance could offset the company's Internet and data growth," he said.

    Wall Street will be keeping a close eye on how the company's commercial and business services operations fare this quarter. According to Johnstone's estimates, the company's business segment should post revenue growth of 12 percent to 15 percent. If the company doesn't report at least 12 percent growth, "investors could give up," he cautioned.

    As for long-distance, WorldCom wants no part of it. The company plans to create a tracking stock for its MCI unit, to be traded under the symbol MCIT. MCI will encompass consumer, small-business, wholesale long-distance voice and dialup Internet access operations.

    When WorldCom reports in two weeks, it's expected to bring in 25 cents a share on revenue of $9.9 billion, compared with earnings of 41 cents a share on revenue of $9.6 billion in 1999, according to First Call's data. Analysts will be watching for more information on the timing of its breakup along with projections for 2001.

    A company executive said Friday morning that more than 10,000 WorldCom employees could be laid off as early as Monday.