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Profits at 'Baby Bell' Firms Climb, but AT&T's Slip 8.5%

July 18, 1986|BRUCE KEPPEL | Times Staff Writer

Ma Bell's offspring, now 2 1/2 years old, continue to show robust development as their erstwhile parent, American Telephone & Telegraph, struggles to adjust to the new world of competitive telecommunications and computer technology.

Second-quarter reports of earnings, made public Thursday, showed significant increases for six of the "Baby Bells"--the regional holding companies created to take over AT&T's local telephone networks after the breakup of the Bell System in January, 1984--while AT&T's earnings were off 8.5%.

In New York, AT&T Chief Executive Charles L. Brown, who is retiring next month, blamed a 26-day strike by 155,000 workers in June for some of the earnings drop. AT&T said the strike cost it up to $140 million in lost profits. Net income dipped to $422 million, compared to $461 million for the same quarter of 1985, while revenue slipped to $8.4 billion from $8.6 billion a year earlier.

New York-based Nynex led the parade among the regionals with an 18.4% increase in earnings for the quarter. Next came Pacific Telesis, parent of Pacific Bell, with a 16.2% increase on revenue growth of just 6.4%. San Francisco-based Pacific Telesis reported earnings of $283 million for the quarter on revenue of $2.26 billion.

For the other regionals, earnings rose 11.5% for U.S. West, 11.3% for BellSouth, 8.6% for Bell Atlantic and 5.3% for Ameritech. The seventh regional company, Southwestern Bell, said it will release its earnings today.

Securities analysts either discounted or were surprised by the magnitude of the strike's effects on AT&T's financial performance. They attributed most of the slippage to continued sluggishness and strong competition in sales of computers and telecommunications equipment--a factor also noted by Brown.

The major revenue-generating activity of the regional companies, on the other hand, remains the provision of local telephone service as regulated monopolies. They have, if anything, benefited from the misfortunes of equipment manufacturers such as AT&T, these analysts said.

One theme running through all seven earnings reports is significant growth in communications services, even for AT&T's long-distance service, observed Robert B. Morris III, who follows telecommunications for Prudential-Bache Securities in San Francisco.

"The other side (of AT&T's operations) is anemic--worse than anemic," Morris said.

Michael D. Kennedy of the Gartner Group in Stamford, Conn., called the present economic climate "just about the best" for the regional monopolies, since it offers the modest sort of growth that they can easily accommodate, low inflation enabling them to reduce debt expenses in a very capital-intensive business and the depressed prices for telecommunications equipment that hurt AT&T.

While the June strike by the Communications Workers of America hurt equipment sales and service revenue--some of which Brown predicted will be offset by year-end--AT&T also emerged with a labor contract that assures stability over the next few years, said Frank Governali, an analyst for Kidder, Peabody & Co.

"It should help them keep their costs under control, manage their labor force better and improve their competitiveness longer term," he said.

At least one analyst, Joe Bettipaglia of Gruntal & Co. in New York, expressed satisfaction with AT&T's results, saying the firm's earnings are steadying.

"We started with the firm two years ago and suffered through several slings and arrows with it, and we feel that the uncertainty about earnings is holding it back but that, fundamentally, it's very sound," he said.

Investors took the bad news in stride. AT&T stock fell 25 cents a share to $23.75 in New York Stock Exchange composite trading.

Meanwhile in Atlanta, Contel Corp., whose major business is providing local telephone service through its Continental Telephone subsidiary, reported net income of $56.9 million, up 6%, on revenue of $776 million.

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