SBC Communications delivered a mixed bag of second-quarter earnings as its earnings per share fell, due to the cost of its two mergers, but still exceeded Wall Street expectations. In addition, the company posted slightly better than expected revenues, growing 22% to $15.49 billion, but didn’t attract as many new DSL customers as expected with its low-cost new customer option.

The immediate response to the earnings announcement was a slight dip in SBC’s stock of 15 cents to $23.65.

Earnings per share before merger costs were 43 cents, but that figure dropped to 30 cents after factoring in 8 cents per share for the Cingular merger costs and five cents per share for the cost of buying out SBC’s long-distance contract with WilTel, to prepare for the AT&T merger it still hopes to close in 2006, said Rich Dietz, vice president of investor relations. SBC is paying WilTel $236 million to terminate the original contract under which WilTel carried SBC’s long-distance traffic. Earnings per share for the second quarter of 2004 were 34 cents per share, SBC said.

On a more positive note, SBC saw a 4.8% increase in business services and a 9% increase in data revenues overall, Dietz said. Its consolidated operating income margin rose 14% and it generated $2 billion in free cash flow, after dividends.

In speaking with industry analysts, Rick Lindner, senior vice president and CFO, said SBC has now experienced five straight quarters of both overall and wireline revenue growth. Although SBC continues to lose access lines--access lines declined by 186,000 this quarter driven by year-end line cutoffs by students--the rate of decline has slowed by 36%, and retail access lines went up by 6000. The company added 360,000 DSL lines overall--when disconnects are factored in--and that figure was below Wall Street expectations.

The company is encouraged by growth in business retail data revenues of 12.9% and overall business wireline revenues of 4.8% year-over-year, he said.

“The second and third quarters tend to be higher, versus the first and fourth quarters, but this quarter positions us well to meet, certainly, our guidance for the year, and be at the upper end of that range,” Lindner said. “We are encouraged by what we are seeing. The small and medium-sized business in particular has been very strong.”

Project LightSpeed and the AT&T merger both loom as major forces impacting SBC’s earnings outcome going forward, and Lindner offered some guidance on both.

SBC is pulling back on selling DISH network video services in areas where it is planning Project Lightspeed rollouts, but retains a strong relationship with DISH owner EchoStar and will roll out the HomeZone product later this year that ties the DISH service in with SBC DSL to create an integrated home media platform, he said. SBC’s capital expenses have been running a bit below guidance, but that will change as the cost of laying fibers and conditioning lines begins for Project Lightspeed in the second half of the year.

Other highlights of the earnings announcement:

• SBC's second-quarter 2005 revenues totaled $10.3 billion, up 1.3 percent versus the year-earlier second quarter. Wireline revenues totaled $9.4 billion, up 1.6 percent from $9.2 billion in the second quarter of 2004.
• Cingular's second-quarter revenues totaled $8.6 billion, up 4.6 percent versus the first quarter of this year. Cingular's second-quarter reported operating expenses totaled $8.1 billion, essentially flat versus the first quarter of this year. Reported operating income totaled $504 million, up substantially from $114 million in the first quarter of this year.
• SBC's total long distance lines went up by 770,000 to 22.8 million, up 23.6% year over year. At the end of the second quarter, 61 percent of SBC's consumer retail lines and 42 percent of its retail business voice lines included long distance service.