The latest quarterly conference call for BellSouth (NYSE:BLS) came up with the wrong number. Last year's hurricane damage and the continued loss of residential phone lines contributed to the company's 54% decline in profits in the fourth quarter. The third-largest independent regional Baby Bell reported earnings of $618 million, or $0.34 per share, versus a profit of $0.74 per share a year ago. Hurricane-related expenses reduced results by $0.08 per share.
Cingular Wireless -- BellSouth's 40% joint venture with Motley Fool Stock AdvisorAT&T (NYSE:T) -- earned $204 million on a revenue jump of slightly more than 9%. Although BellSouth does not include the sales or profits from its wireless division in the continuing operations results, the normalized gains include Cingular results and omit one-time charges, which boosted the bottom line to $0.53 per share from a normalized $0.39 in the year-ago period.
By the company's own admission, customers are abandoning traditional landlines in droves. They're switching to cell phones, as well as voice over Internet protocol (VoIP) service from providers like Stock Advisor pick Time Warner (NYSE:TWX), Comcast (NASDAQ:CMCSA), and privately owned Vonage. The competitors have steadily eroded BellSouth's customer base by offering cheaper calling plans packed with features such as free voice mail and unlimited long distance.
BellSouth did have some good news to report. Revenues rose about 2% to $5.24 billion, thanks to the addition of 204,000 DSL Internet subscriber lines; nearly 3 million customers now surf the Internet via BellSouth's DSL. By the end of 2005, the company had paid off $3.4 billion in outstanding debt and posted free cash flow of $3.3 billion. The company also announced plans to repurchase as much as $2 billion in common stock through the end of 2007 -- not too shabby.
BellSouth is the Southeast's dominant telephone service provider, but increased competition has taken its toll. To survive, the company must offset the decline in its traditional landline phone business; competition isn't coming from just the cable companies, but also from Verizon's (NYSE:VZ) DSL and wireless offerings, and Internet portals like Yahoo! (NASDAQ:YHOO).
Technological advances are increasingly integrating computers, phones, and wireless devices into the ways we communicate. That's a challenge for a company that relies heavily on traditional phone service for revenues, since the landline business is becoming less and less relevant to the average consumer. BellSouth's key to success, at least for now, is to bundle together wireless, DSL, long distance, and satellite TV service at competitive rates. This strategy will likely keep profits growing, albeit more moderately than before, and allow the company to reap higher margins via its entrenched infrastructure.
The expansion of cable companies into the phone market via VoIP will continue to whittle away the customer base BellSouth has managed to keep all these years. In my opinion, BellSouth will have no choice but to market the triple-play services of DSL, TV, and long distance. Entering the TV and Internet markets in force will also bring its share of competition, but it seems to be the lesser of two evils for now.
We've called up further Foolishness:
Fool contributor Kelvin Taylor does not own shares of any of the companies mentioned.
