BellSouth Feels Southern Heat

Updated from 11 a.m. EST

BellSouth's ( BLS) aggressive expansion into Latin America is again setting the company apart from its rivals, but not in the way it had hoped.

Just five weeks after its last earnings update, BellSouth Thursday slashed its 2002 guidance, citing among other things the economic deterioration south of the border.

"Latin America is turning over, and it's affecting Bell South's revenue and earnings growth," said Patrick Comack, an analyst at Guzman. "Of the Baby Bells, they've got the most exposure there."

Ill-Timed

In the past few years, BellSouth expanded rapidly in Latin America, becoming a dominant wireless provider there. But as the economy has faltered, so too has BellSouth's fortunes. And while the Baby Bells are still among the safest investments in telecom, this exposure makes BellSouth more risky.

In the fourth quarter, 9% of BellSouth's operating revenue came from Latin America. By contrast, only 3.6% of Verizon's ( VZ) and just 0.4% of SBC Communication's ( SBC) operating revenue came from that region, according to Comack.

The Baby Bell blamed its revision on currency devaluations and deteriorating conditions in Argentina and Venezuela. It will take a $200 to $230 million first quarter charge for debt revaluation.

BellSouth now expects revenue growth of 2% to 4% and earnings per share growth of 3% to 5% in 2002. In January, BellSouth forecast revenue gains of 5% to 7% and EPS improvement of 7% to 9%.

Too Optimistic

To some degree, the revision was expected. Back in January, many analysts thought BellSouth's forecast for 2002 was too optimistic: "These numbers are more in line with what we were thinking," said Thomas Morabito, an analyst at McDonald. "This is going to be a rebuilding year, and investors have to ratchet back their expectations."

In addition to weakness in Latin America, BellSouth has been seeing an unprecedented erosion of its core local phone service, due to the recession and a slowdown in demand for new lines as customers turn to wireless and other competing phone service providers.

Last year, BellSouth's line count fell for the first time, a trend each of the Baby Bells experienced. The phone company said its total local lines fell 2% to 25.4 million from 25.9 million in 2000.

BellSouth also said that the impact of delayed entry into the long distance market, while not material to guidance by itself, was a factor in its revision.

Potential Losers

Until the economy improves, analysts don't expect a marked improvement in revenue growth. BellSouth also cut its outlook for capital spending by $500 million to between $4.8 and $5 billion, as a result of weakness in demand, primarily in the domestic telecom market.

But while other phone companies have slashed their spending plans by as much as 56% in Qwest's ( Q) case, BellSouth is only 14% below last year's level.

The penny pinching by phone companies has battered the sales outlooks for the network equipment sector for the past year, though BellSouth says it was not one of the two major Ciena ( CIEN) customers to inform the slumping optical gear-maker of sudden spending cuts. The regional Bell says most of its cuts will come out of its core local network expansion budget. Outfits such as Lucent ( LU) and Marconi ( MONI) are key suppliers of local gear that could be affected by BellSouth's cuts.

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