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SBC braces for tough times
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October 22, 2001: 1:35 p.m. ET
Telecom to cut thousands of jobs as it sees downturn still hurting results.
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NEW YORK (CNNmoney) - With increased competition from its rivals and an economic outlook that's uncertain at best, SBC Communications Inc. is digging in for what could be several tough quarters.
The nation's number-two local telephone company said Monday it will cut thousands of jobs, pare back capital spending and back off the development of high-speed Internet access infrastructure projects, an area the company has identified as a key growth opportunity.
Executives of SBC (SBC: down $2.37 to $41.27, Research, Estimates), one of the seven original "Baby Bells" created when AT&T Corp. was split up by regulators in 1984, said the moves were part of the company's response to "one of the most challenging business environments in recent memory."
Further, they said they expect the economic downturn to persist throughout 2002, further dampening business and consumer demand. That economic weakness, combined with stiff competition and ongoing regulatory pressures, will put "significant pressure on its ability to generate meaningful growth in 2002," the company said.
"The company is in a defensive position right now, and in a defensive mode like much of the rest of the U.S. economy should arguably be in," said ABN Amro analyst Greg Miller.
Earlier Monday, the San Antonio, Tex.-based company, which has been extending its reach into long-distance, wireless and data communications, posted third-quarter profits that rose from the year-earlier quarter but missed Wall Street's forecasts.
At $2 billion, or 59 cents per share, SBC's third-quarter operating profit was a penny a share below the forecast of analysts surveyed by First Call. The company earned $1.96 billion, or 57 cents a share, a year earlier.
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SBC's third-quarter revenue also was weaker than expected, coming in at $13.5 billion where the Street had expected $13.8 billion, according to the First Call survey.
The company's results were hurt by a 1.7 percent drop in telephone lines and slower growth in data communications services sales.
"SBC is facing pressure from at least two areas -- competition and the economy. Contrary to what many people might think, competitors are making a real dent in SBC's business," said independent telecommunications analyst Jeffrey Kagan.
The economy, meanwhile, weighed on sales of "more discretionary services like extra phone lines," Kagan said. "Calling features can be where big profits are, and these are the things customers are temporarily cutting back on."
In response to the deteriorating business environment, SBC said it would cut "several thousand jobs" and reduce its capital spending by about 20 percent in 2002. The company also said it would slow the development of a high-speed Internet access network called "Project Pronto."
The company recently had said it would spend $6 billion in an effort to have all of its wireline customers ready to receive digital subscriber line, or DSL, service within three years.
"Project Pronto is, quite frankly, earnings dilutive. Scaling it back and lessening its importance to the overall business is probably going to help their near-term earnings," said Banc of America Securities analyst Andrew Hamerling.
SBC is not the only local telephone company to make such moves recently. Last week, BellSouth Corp. (BLS: down $1.51 to $37.15, Research, Estimates) slashed its profit outlook for 2001 and said it shed 3,000 jobs, or 2.8 percent, of its work force.
Long-distance telephone company Sprint Corp. (FON: up $0.04 to $20.04, Research, Estimates) also said last week that it would scrap a costly high-speed network project and cut 6,000 jobs, or 7 percent of its staff.
Looking ahead, SBC said it "continues to work toward" its goal of posting 2001 earnings, before one-time items, or $2.35 per share, but it did not provide a forecast for 2002.
ABN Amro's Miller said SBC's problems appear to be tied to the general economic downturn, and the company's fundamentals remain strong.
"The company itself is fine." Miller said. "Increasing cash flows are being generated after their dividend payment, and as a result it will likely come away as one of the strongest survivors in the post-recession environment." 
-- Reuters contributed to this report
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