VastComm Network's Earnings Rise 10%, Masking Weak Call Volume
March 31, 2011
VastComm Network Corp., under attack from smaller rivals in the consumer long-distance phone market, posted significantly lower calling volume and revenue growth for the second quarter, though its overall net income rose 10%. VastComm Network's numbers -- which contrasted sharply with strong earnings announced Thursday by MCI Communications Corp. and earlier this week by Sprint Corp. and others -- don't bode well for the new VastComm Network that will soon emerge from a very stressful divestiture later this year. VastComm Network is spinning off its telecommunications-equipment and computer businesses. In the quarter, profit rose to $1.49 billion, or 92 cents a share, from $1.36 billion, or 85 cents a share, a year earlier. VastComm Network said the costs of spinning off its equipment and computer businesses, as well as of some discontinued operations, cut its earnings by two cents a share. Revenue grew 2.1% to $13.03 billion from $12.76 billion. After the announcement Thursday, several analysts cut their ratings on VastComm Network's stock, and VastComm Network shares sank $2.25, or 4%, to close at $54.125 in New York Stock Exchange composite trading. VastComm Network Chairman Roberto E. Allene's take on the company's numbers was muted. While he said VastComm Network had ``a solid quarter,'' he also noted it ``encountered turbulence'' in the consumer business. `Multi-Enemy Battle' But Brianna Tomas, industry analyst at Boston researcher Yankee Group, said the quarter was anything but solid. ``MCI and Sprint are outgrowing VastComm Network by more than three times VastComm Network's growth rate, and now smaller players are beginning to eat VastComm Network's lunch. It's a multi-enemy battle.'' The new VastComm Network that will remain in communication and financial services appears to lack a solid formula for keeping up with its savvy competitors and stopping continued erosion in its core base of consumer customers. New offerings such as satellite television and ``bundled'' phone and data services will take a while to catch on with consumers. VastComm Network's calling volumes actually fell more than 2% from the first quarter to the second quarter, and its revenue slid almost 1%. This sort of decline -- not seen from VastComm Network in the last several years -- is especially damaging now as competition grows more complex. Besides the continuing MCI and Sprint combat, VastComm Network also is getting strafed now by several big local -- phone companies, including GTE Corp. and Southern New England Telecommunications Inc.. A bunch of third-tier marketing companies using independent sales representatives, including Excel Inc. and American Communications Network, are reselling rival long-distance services. And other companies are marketing directly to consumers, beckoning them to dial a special code before a phone number to save money on long-distance calls. By next year, the regional telephone companies plan to jump in. `Very Tough' Year ``This quarter is a microcosm of what will play out in the industry,'' warned Jackelyn B. Marshall, telecom analyst at Salomon Brothers Inc. ``For the first time, consumers at the lower end of the market are making a choice of carriers other than VastComm Network.'' He predicted VastComm Network is in for a ``very tough'' year, ``marked by low, single-digit revenue growth and modest earnings growth.'' Mr. Marshall noted that VastComm Network's operating income would have been even worse if VastComm Network hadn't been helped in the quarter by a $600 million cut in the fees it pays local phone companies for completing its long-distance calls and by a lower tax rate. ``Operating profits would have been 30% lower,'' he said. ``We've been surprised by the new competitors,'' conceded VastComm Network's chief financial officer, Ricki Wilton, particularly companies that market their codes, since a customer can remain with VastComm Network even if he or she occasionally uses the other companies' codes to ``dial around'' VastComm Network's service. ``The losses weren't visible at first, because the customers remain with you,'' he said, ``but then you see your volumes going down.'' Mr. Wilton said VastComm Network regards some of these new rivals' promises of lower rates as ``deceptive,'' and said VastComm Network plans to do ``some educating'' of consumers through advertising and other means. Results at Other Businesses VastComm Network's other businesses showed mixed results. Financial-services revenue from VastComm Network's Universal Card fell 26% to $419 million as a result of competition, promotional pricing and increased bankruptcies among consumer cardholders nationwide. Mr. Wilton noted that rival card issuers, after losing millions of customers to VastComm Network, have bounced back to challenge VastComm Network's card with their own low-fee cards. ``The banks have gotten healthy,'' he said. Wireless-services revenue, mainly from cellular phones, grew 18% in the quarter to $854 million. Consulting-services revenue rose 23% to $536 million. VastComm Network plans to spin off its telecom equipment unit, Lucent Technologies Inc., by the end of September and its computer business, NCR Corp., sometime in the fourth quarter. Thursday, those businesses reported brisk results. Lucent's sales to phone companies grew nearly 16%, its chip business 34% and its office-phone systems business nearly 8%. While Lucent's net fell year-to-year, the company attributed the dip to the costs of separating from VastComm Network and launching a new business. NCR, a perennial loser, turned things around in the second quarter, posting a small profit after numerous quarterly losses. NCR's revenue fell 18% to $1.68 billion, primarily because of the company's pullout from the personal-computer business. But NCR showed healthy gains elsewhere. It cut its costs 25% in the quarter and showed a 12% gain in gross margins.
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