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BellSouth Earnings Inch Up

Cingular's profit contribution falls.

Despite providing nearly a million fewer phone lines than at this time last year,

BellSouth

(BLS)

cruised past expectations, posting third-quarter earnings and revenue gains on the strength of Internet broadband, long distance and bundled services.

Unlike rival

SBC Communications

(SBC)

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, which suffered an earnings decline this quarter because of lost phone lines, BellSouth reported earnings (including BellSouth's 40% share of Cingular Wireless) of $980 million, or 53 cents per share, on revenue of $7.3 billion in the period, up from earnings of $958 million, or 51 cents per share, on revenue of $7.0 billion in the year ago period. Analyst polled by First Call had expected the company to earn 51 cents per share on revenue of $7.1 billion.

About 65%, or $4.7 billion, of BellSouth's revenue comes from its Communications Group, and despite the substantial loss in the number of phone lines its provides, customers bought a variety of other services, led by an increase of over 650,000 new long-distance customers. Data revenue was up nearly 6% vs. the year-ago period as the company added 111,000 DSL customers during the quarter, for a total of 1.3 million as of Sept. 30, 2003.

According to the company, customers have reacted positively to calling plans that combine local, long distance, Internet and wireless services all on one bill, including long-distance plans that provide unlimited domestic long distance for a flat monthly fee. More than 10% of the total phone lines are now billed through one of these package plans, including 25% of its residential customers that now use BellSouth for both local and long-distance service.

The only area of concern this quarter came from Cingular. While revenue is up nearly 5% from the year-ago period, providing $1.6 billion, or 22% of BellSouth's total revenue, earnings are down. Cingular contributed $195 million, or 20% of the company's earnings vs. $246 million, or 26%, in the year-ago period. The company blamed higher operating costs because of customer additions, and increased depreciation costs due to equipment upgrades. The company also expressed concern that customer retention expenses are high due to new wireless local number portability rules that take effect in November.

The company did not offer new guidance on the fourth quarter, but analysts believe it will report full-year earnings of $2.01 per share on revenue of $28.2 billion. At $23.78, the stock is trading down 12% for the year and at a price-to-earnings ratio of 12 times 2004 expected earnings vs. 14 for SBC and 14 for

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