Telecommunications giant works through tough time

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Published: April 2,2001

CLINTON — Even as merger speculation swirls and the outlook in the telecom industry looks rather bleak, WorldCom’s stocks are inching up again and CEO Bernie Ebbers seems optimistic.

“Our business is progressing as planned,” said WorldCom spokesperson Charlie Sutlive. “This year, our focus is on executing well in the marketplace because we know that our stock will perform much better as a result of strong execution than as a result of acquisition rumors. That’s why we have announced many new, industry-leading services and technological advancements, which have been designed to capture the growth opportunities in the industry. For example, we recently introduced a comprehensive package of managed Web hosting solutions, and a full suite of global IP networking and communications services. At the same time, we are continuously upgrading and enhancing our global network to allow it to transmit more traffic at even faster speeds.”

On Feb. 8, the company announced its fourth quarter earnings, for the first time explaining them in three divisions: WorldCom Inc.; WorldCom Group; and MCI Group. The explanation showed how earnings would fit if trackers had already gone through, Sutlive said.

“This is really an exciting time for WorldCom,” he said. “Our goal of becoming the preeminent voice and data service company for the digital generation — what we call Gen D — is proceeding as planned. The WorldCom Group is focused on high growth and the MCI Group is focused on delivering high-value, high-cash flow to investors. As we reported during our fourth quarter 2000 earnings results, the WorldCom Group exceeded the goals we had set for it with revenues from data services surpassing voice revenues for the first time. Meanwhile, the MCI Group continued to outpace its competitors in the consumer market with innovative products and services.”

Under terms of a renegotiated deal to satisfy the objections of shareholders at Intermedia-controlled Web hosting company Digex (Nasdaq: DIGX), WorldCom and Intermedia are scheduled to merge before the end of the second quarter in a one-for-one share swap, a deal that is still on track, Sutlive confirmed.

Ebbers, the dealmaker who has negotiated nearly 60 acquisitions in a decade to grow WorldCom into the No. 2 U.S. long distance carrier, has been criticized for paying too much to make the Intermedia deal work. In fact, WorldCom’s depressed stock price is currently preventing the company from pursuing new deals.

Intermedia, a nearly bankrupt telecom company with some CLEC (competitive local exchange carrier) assets of questionable value, has a 54% stake in Digex, a Web-hosting business that Ebbers views as an essential part of the high-margin, data-driven strategy for WorldCom’s future.

To recoup losses, WorldCom has said it plans to sell Intermedia’s CLEC operations once acquired.

When asked at a conference last month if the meltdown in Web-hosting stocks changed WorldCom’s desire to complete the Digex deal, Ebbers quipped, “absolutely not.”

Coupled with a slowdown in the economy, many U.S. telecom companies have warned shareholders that the high cost of building new data businesses and fending off competitors may hurt first-quarter results. And if the economic downward trend continues, telephone service providers may see a slowing demand for discretionary products such as second telephone lines, high-speed Internet access or wireless telephones, analysts have said.

Intense competition and price pressures on the long-distance front continue to haunt WorldCom’s consumer telephone operations, which, despite a massive restructuring, may overshadow any growth in the company’s data and Internet businesses.

“The entire telecommunications sector is depressed and has been for most of last year,” said Nancy Lottridge Anderson, a financial advisor and president of New Perspectives Inc. in Clinton, who also writes a monthly column for the Mississippi Business Journal. “This is due to the fundamental change in how we use the technology. Long distance is becoming a commodity. It has been the cash cow, but is now the albatross. A change this big is painful, but I believe the players left standing will reap great rewards.”

Last month, WorldCom gave nearly 7% of its workforce, or nearly 6,000 people, pink slips as the company continued streamlining operations. Locally, more than 200 WorldCom employees lost their jobs.

Some analysts speculated that the workforce reduction would be higher — up to 15%, particularly because some experts estimated that each employee can cost a big communications company about $150,000 annually, including salary, benefits and overhead.

“WorldCom, like many other companies, is going through a major cost-cutting initiative,” said J. Harmon Bays, a financial advisor with Legg Mason Wood Walker Inc. in Jackson. “Unfortunately, part of that does involve layoffs. It is all part of management’s plan to get the stock headed in the right direction.”

Other analysts have interpreted the layoffs as a response to the overall weakness in the long distance market. While new companies have plunked down billions of dollars to build national fiber optic communications networks, established carriers have bellied up billions to expand their own systems’ capabilities.

“I think (layoffs are) typical in this market,” Anderson said. “One way to help the bottom line is to lower expenses, and the surest way to do that is to lay off employees. They are not alone in this. I wish Ebbers had been more forthcoming about the layoffs. It was a bad PR move on his part, but, ultimately, lower expenses are good for shareholders. In the short-term, it’s a perception problem.”

Despite weak consumer sales, WorldCom recently allayed fears that it would cut its outlook and said it has seen strong growth in its data and Internet operations. Its business in Europe also continues to grow despite weakness in the euro.

“Business is doing extremely well,” Ebbers told investors last month. “We’re not revising guidance. We stick by our guidance. We are not going to miss it. But we’re not revising upward at this point.”

Mirroring many analysts, Jack Grubman of Salomon Smith Barney raised his first-quarter revenue growth expectations for WorldCom’s data unit to 12.5%, from 12%, and increased the full-year target to 14% from 13.2%.

“There’s a lot of sentiment out there by investors who are worried about the future of (WorldCom),” said B. Taylor Boone, an investment officer for Pinnacle Trust in Ridgeland. “We feel WorldCom is in a great position in the global markets and would take a strong look at buying stock in the company. Investors need to realize that the probability of seeing such great appreciation in the stock price as we saw in 1998 and 1999 will not be the case this year, but we expect to see growth around 12% to 15% in 2001.”

WorldCom has long been on the list of several prominent institutional investors, said Anderson.

“I still think there’s a lot of value in that company, certainly more than is being expressed in the stock price,” she said. “WCOM (is now) showing up on buy lists because of the depressed stock price. All those are good signs to me. I believe spinning off the residential business will help, since it is the business/Internet/data transmission piece that is so valuable.”

Some analysts are openly predicting a buyout of the company, said Anderson.

“My concern is how this could affect the Jackson area,” she said.

When asked if WorldCom is for sale, Sutlive said the company would always look at transactions that increase shareholder value, adding “we believe that executing our 2001 business plan is the best way to drive value at this time.&
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