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BellSouth falls on warning
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November 17, 2000: 3:20 p.m. ET
Shares drop 13 percent following local carrier's warning on 2001 profit
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NEW YORK (CNNfn) - BellSouth Corp. announced ambitious growth plans after the close of trading yesterday, but investors didn't like the costs associated with that growth.
Shares of the regional phone carrier slid nearly 13 percent Friday after the company said that costs of expanding its Digital Subscriber Line service and wireless services in Latin America would cause its earnings growth in 2001 to be lower than analysts had forecast. In midafternoon trading, BellSouth (BLS: Research, Estimates) shares were down $6.31 at $42.94
BellSouth, the dominant local phone carrier in nine southeastern states, now forecasts earnings growth of 7 to 9 percent in 2001, well below its previous guidance of 13 to 15 percent. At the same time, the company repeated its guidance of 10 to 12 percent earnings-per-share growth and $6 billion to $6.5 billion in capital expenditures for 2000.
"Performance for 2000 continues to meet expectations, highlighted by data revenue growth, including a dramatic ramp-up in DSL customers, solid overall performance in domestic wireless, and strong customer growth in international wireless," BellSouth said after the close Thursday.
 The phone carrier said that it expects to triple its DSL customers from approximately 200,000 this year to 600,000 next year. This growth is expected to generate revenue of approximately $225 million in 2001 and $500 million in 2002. Data revenue for 2001 is expected to continue growing at approximately 30 percent, driven by strong growth in several data services, including Web hosting centers in Atlanta and Miami.
DSL is a technology used to deliver high-speed Internet access over standard twisted-pair telephone lines, instead of coaxial cable. Consumers are rapidly adopting DSL lines because they can provide Internet access that is up to 20 times faster than a standard 56K modem. However, DSL is a distance-sensitive technology -- users need to be within 12,000 feet of a telephone company central office to be able to use it.
"Our customers have told us that they want access to high-speed data services," said Duane Ackerman, Chairman and CEO of BellSouth, in a statement. "Through expanded deployment strategies and highly successful self-installs, we believe that our 2001 projection is very achievable."
The capital investment to support the higher level of DSL growth is within BellSouth's previously stated guidance of $5.5 billion to $6.0 billion for 2001, the company said. The incremental cost of expanding DSL deployment is anticipated to be 7 cents per share in 2001.
BellSouth also faces additional costs related to the addition of the nationwide wireless phone market in Colombia. This acquisition added more than 40 million potential wireless subscribers to the company's base, and is expected to be a significant contributor to BellSouth's overall market presence in Latin America. The incremental cost of the acquisitions made in Colombia will be 6 cents per share in 2001, the company said.
Analysts reactions
Drake Johnstone, an analyst at Davenport & Co. in Richmond, Va., said on CNNfn that the company's investment in DSL should benefit it in the long run.
"Growth sometimes comes at price," Johnstone said. "The company is ramping up its investment to aggressively deploy DSL services. I would urge investors to focus on the fact that growth in DSL -- while it may slow earnings next year -- ought to help the company long term to achieve higher earnings and revenue growth."
The regional phone carrier SBC Communications (SBC: Research, Estimates) has shown that it can achieve rapid revenue growth from DSL, and BellSouth should be in a similar situation next year, Johnstone said. [349K WAV, 349K AIFF]
UBS Warburg analyst Linda Meltzer lowered her 2001 earnings-per-share estimate for BellSouth in response to Thursday's announcement.
"We are fine tuning our 2001 estimate down to $2.35 from $2.48 to reflect the [costs] associated with tripling the number of DSL subscribers and the entry into the national Columbian market," Meltzer wrote in a research note. "We maintain our 'hold' rating on BellSouth shares on our belief that the company's domestic strategy and asset composition are not yet as developed as some of its peers." 
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BellSouth
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