4Q 2007 Results: The Good, the Bad and the Ugly

How various companies and sectors in the communications space will fare during the economic downturn is hard to say, but a look at some fourth-quarter 2007 financial results offers some clarity on how they’re doing so far.

In the three months ending Dec. 31, 2007, some companies recorded impressive profits (think AT&T Inc.), while others reported billions in write-offs and other losses (paging Sprint Nextel Corp.).

On the down side, a trend we saw develop late last year was M&A fallout. Some companies, from carriers to equipment makers (read: Alcatel-Lucent, Level 3 Communications Inc. and Sprint), saw acquisitions come back to bite them — and the earnings reports indicated those struggles were far from over. For example, Alcatel-Lucent lost $3.8 billion on writedowns of Lucent Technologies assets.

On the up side, several carriers demonstrated they have enough revenue in certain lines of business, such as wireless, to buoy losses in units like landline. Meanwhile, prospects for CLECs and even the cablecos are looking up.

At industry giants AT&T and Verizon Communications Inc., mobile revenue contributed to sizeable increases in overall earnings — much-needed to offset attrition from the their wireline units. (Verizon alone lost 3 million landlines in all of 2007. In the fourth quarter, AT&T lost 656,000 local phone customers.) AT&T’s wireless division, thanks to an exclusive contract for Apple Inc.’s iPhone and the takeover of regional provider Dobson Communications, pitched in more than a third — or $11.4 billion — of the carrier’s entire sales of $30.35 billion. Verizon Wireless, meanwhile, tacked on 2 million new net subscribers to bring mobile sales to $9.87 billion, nearly half of Verizon Communications’ $23.8 billion in total revenue. AT&T and Verizon each reported higher net income compared to the fourth quarter of 2006 — $3.14 billion and $1.07 billion, respectively.

Of course, not all news has been good news in wireless circles. At the end of 2007, both wireless device maker Motorola Inc. and Sprint sunk to new lows, even as more users tossed landline connections in favor of mobility. Sprint continues its highly publicized struggle to keep subscribers amid terrible customer service marks, complaints of poor service quality and the inability to implement its WiMAX strategy. All of that, coupled with ongoing integration problems (and a required writedown) around the $36 billion acquisition of Nextel, translated into a staggering $29.5 billion loss and the defection of 683,000 subscribers in the fourth quarter. Sprint appointed new CEO Dan Hesse, formerly head of Sprint landline spinoff EMBARQ, to help turn the ship. During Sprint’s fourth-quarter conference call, Hesse said that a turnaround would take “many quarters” to execute and predicted Sprint would lose 1.2 million more postpaid subscribers in the first quarter of 2008. While many of Sprint’s problems are not attributed to the economy, trying to fix any company during a downturn obviously doesn’t help matters.

The story is just as bleak for Motorola, whose fortunes fizzled as the handset division couldn’t manage to produce a device to follow the rabid success of its RAZR to rival Apple’s iPhone and new devices from Nokia and Samsung. As a result, the equipment maker saw an 84 percent plunge in fourth-quarter profits. Motorola now is in the No. 3 slot in terms of U.S. wireless device market share, behind Nokia and Samsung, respectively. Motorola’s fourth-quarter numbers looked like this: a drop in net income by $523 million (to $100 million), and a dive in sales, from $11.79 billion down to $9.65 billion. And with ongoing tumult within the company — two more executives were ousted in March, and the devices unit will be spun off from Motorola proper in 2009 — plus economic uncertainty, the first part of 2008 doesn’t look good for Motorola, even if the country does avoid too deep of a recession. To its credit, Motorola has taken the first, long-awaited step toward rectifying the situation. On March 26, the company announced the spinoff of its handset division. The unit will remain publicly traded. Investors welcomed the news, boosting Motorola's share prices by 5 percent in a single day.

So how does the CLEC sector, which was uprooted during the last economic upheaval, expect to fare this time around? Remarkably well, if you believe the majority of CLECs speaking at the recent COMPTEL event. CLECs say a recession, in fact, means opportunity for them because SMBs and enterprises need well-priced products and a flexibility they can’t get from the LECs. 

Arunas Chesonis, chairman and CEO of PAETEC, said his company actually went cash-flow positive during the last downturn. Regardless, if a recession lasts five years or more, “we all have bigger problems,” said Chesonis of PAETEC, a super-Tier 2 provider which increased its fourth-quarter revenue a whopping 91 percent to $288.6 million, mostly thanks to the acquisition of US LEC.

Elsewhere on the CLEC front, Time Warner Telecom Inc. last year topped $1 billion in sales. And Cbeyond Inc., which provides all-IP-based voice and data services to small businesses, nearly tripled its fourth-quarter profits, although much of that was due to an accounting change to reduce tax liability. Cbeyond’s net income jumped to $12.5 million, up from $4.3 million in the fourth quarter of 2006.

Even the cable operators, which recently have been plagued with low stock prices, are raking in profits from price increases and plain old subscriber additions. They face stiff competition from DBS providers like DIRECTV and even the telcos, which are rolling out their own fiber-based triple plays, but they are hanging in there. Comcast Corp., which suffered a major hit to its stock after it revised its revenue forecast and increased its capital budget, reported a healthy 54 percent jump in fourth-quarter 2007 profits. That was due to demand for more channels as well as the acquisition of Patriot Media & Communications, which completed Comcast’s New Jersey coverage. And so, shortly after some were calling for the head of Comcast CEO Brian Roberts, the nation’s largest cable operator recorded net income of $602 million, up from $390 million in the final quarter of 2006. RCN Corp., meanwhile, beat analysts’ expectations thanks to customer additions and price increases. The New York-based company boasted $167.9 million in sales (up from $150.6 million a year earlier), whereas analysts had predicted $160.2 million.

A Look at Q4 Wireless Subscriber Numbers

Source: Author, based on Q4 2007 earnings statements

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