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WorldCom lowers 2001 earnings forecast

WorldCom slashes its earnings projections for 2001, as it restructures its accounting for a 19 percent stake in Brazilian phone company Embratel.

    WorldCom slashed its earnings projections for 2001 Thursday, as it restructured its accounting for its 19 percent stake in Brazilian phone company Embratel.

    WorldCom, a telecommunications company with Internet and commercial voice businesses, said it would no longer combine Embratel's financial results with its own.

    WorldCom has had mixed results with its investments in other companies. Metricom, the bankrupt wireless Internet firm, owes it $355 million. But its stake in Embratel had been paying off.

    Though earnings and revenue will be lower than projected for 2001 without the addition of Embratel's results, analysts lauded the company's deconsolidation of the Brazilian long-distance telephone company's results.

    "Embratel deconsolidation is a smart move," said Salomon Smith Barney analyst Jack Grubman. "It aligns WorldCom's financial reporting with economic reality," he added, since WorldCom has no operating control of the company. Grubman reiterated his "buy" rating on the stock, Wednesday adding that it "seems cheap."

    WorldCom warned that the change in accounting, along with a recent debt issue due to its acquisition of Intermedia Communications, will drop earnings to a range of $1.05 to $1.10 a share, down from previous projections of $1.25 to $1.35 a share.

    WorldCom
    Stock price from July 2000 to present.  
    Source: Prophet Finance
    The downward revision isn't just due to the breakout of Embratel's earnings, which were only expected to add about 4 cents a share. The company's release shows that for the WorldCom Group, its core operations, earnings were previously expected to be in a range of $1.21 to $1.31 a share, even without the Embratel results.

    Although earnings may be lower, WorldCom's revenue projections have actually increased.

    For the second quarter, WorldCom Group expects revenue to be between $5.3 billion and $5.4 billion, representing growth of 11 percent to 13 percent from the second quarter of 2000. First Call had been expecting $9.9 billion for the consolidated revenue, which includes Embratel's results.

    Revenue for WorldCom's core business, which includes the company's data and Internet operations, is now expected to increase 12 percent to 15 percent, compared with previous forecasts of 11 percent to 14 percent.

    Prior results, including Embratel, were also projected to have shown a 12 percent to 15 percent increase (Embratel added 1 percent to 2 percent to revenue), making the company's change to final numbers nil.

    EBITDA, or earnings before interest, taxes, depreciation and amortization, will come in at $7.8 billion to $8.3 billion, down from the previous projection for consolidated EBITDA of $9.0 billion to $9.4 billion. But the core group's results will stay the same, since Embratel had added $1.1 billion to $1.2 billion.

    Earnings per share, excluding currency loss and adjustments, should be between 28 cents and 29 cents for the second quarter of 2001, in line with consensus estimates, WorldCom said.

    "While these deliberate measures impact our below-the-line earnings in the short term, I'm confident they make the company stronger going forward," CEO Bernard J. Ebbers said in a statement.