WorldCom at the Crossroads [News] July 27, 2000

WorldCom at the Crossroads

The number two long-distance provider reported earnings this morning, with its Internet and data divisions leading the way. The company indicated it may spin off its voice division, which would mean a major change of direction for the company.

By Chris Rugaber (TMF RFK)
July 27, 2000

Telecom carrier WorldCom (Nasdaq: WCOM) reported second-quarter earnings this morning, and indicated that it may spin off or issue a tracking stock for its voice division. Revenue growth from voice operations was anemic, at only 4%, but its data, Internet, and international divisions compensated with revenue growth of 25% or greater. These services now account for 48% of the company's sales.

Overall, WorldCom reported a 53% increase in earnings per share (EPS) over last year's second quarter, to $0.46, meeting consensus earnings estimates. Including a $55 million charge related to the company's foiled acquisition of Sprint (NYSE: FON), earnings were at $0.44 per share. Revenues were up 14% from the year-earlier period, to $10.2 billion. The stock traded down this morning in response to the company's indications that revenue growth would slow in the second half.

Data and the Internet Lead the Way
Perhaps not too surprising for a company that owns almost half of the world's Internet infrastructure, revenues from WorldCom's Internet division increased 40%, due to increased corporate use. WorldCom's customers spent 1.6 billion hours connected to the company's dial-up Internet service in the second quarter, a 62% increase over the year-ago figure.

One interesting, less-positive note came on the company's conference call: Apparently, America Online (NYSE: AOL) subscribers spent less time on the Web in the second quarter, which they connect to over WorldCom's network, and so revenues from AOL's business declined sequentially.

The company's data division increased revenues by 25%, also thanks largely to greater demand from corporate customers. WorldCom's data business consists of private internal networks and other data transmission services for large corporations. Traffic on the company's data networks was up 98% from the previous year.

What's WorldCom's Next Move?
The company's announcement that it is "exploring opportunities" to spin off or issue a tracking stock for its voice division raises plenty of questions about WorldCom's future. One telecom service that the company does not provide is wireless, and rectifying that was clearly was one of the primary goals of the company's attempted merger with Sprint. Since that merger is now off the table, there are plenty of strategic questions facing the company.

The Wall Street Journal reported late last month that WorldCom management views consumer phone service, without a wireless component, as a commodity. Most of its competitors, such as AT&T (NYSE: T), are bundling consumer services ranging from wireless to phone to cable. In the not-too-distant future, consumer long distance may end up being offered for free as part of such a package.

WorldCom could continue searching for a wireless company to acquire, and attempt to build up its consumer services. Or, perhaps more likely, the company could unload its consumer voice businesses -- maybe even to Deutsche Telekom (NYSE: DT), as the Journal article mentioned -- and refocus itself on its fast-growing business services. Either way, the company will be an interesting one to watch.

Your Turn:
What do you think WorldCom's next move should be? Let us know on the WorldCom discussion board.

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