ASHBURN, Va., April 29, 2004 - MCI, Inc. (MCIAV.PK) today updated earnings guidance for 2004 following the filing of its 2003 Form 10K. Changes in guidance reflect the application of Fresh Start accounting, the anticipated sale of the Company's interest in Embratel Participacoes S.A., and continuing competitive industry fundamentals.
MCI expects to generate revenue in 2004 at the lower end of previous guidance of $21 billion to $22 billion. In 2003, the Company reported revenue of $27.3 billion, which included $3.0 billion from Embratel. The Company announced in March 2004 its plans to sell its Embratel interest and, accordingly, will classify Embratel as a discontinued operation in the second quarter of 2004. Projections for 2004 discussed in this release exclude the operations of Embratel.
MCI expects revenue from its global, high-end enterprise and government markets businesses to decline approximately 7 percent versus 2003, outperforming the overall Business Markets segment, which remains exposed to a challenging wholesale pricing environment. Overall Business Markets revenue is expected to decline 12 percent to 14 percent compared to 2003 revenue of $14.1 billion.
International revenue is expected to decline 2 percent in 2004, reflecting stable volumes in the Europe, Middle East and Africa region (EMEA), new entries into emerging markets and an assumed favorable effect of foreign currency exchange. In 2003, International revenue (excluding Embratel) was $3.9 billion. MCI continues to operate the largest facilities-based network, with the highest number of Company-owned points-of-presence of any international carrier.
The Company continues to expect Mass Markets revenue to decline 20 percent to 25 percent, reflecting the negative impact of Do Not Call legislation, increasing wireless substitution and ongoing pricing pressure. To offset these challenges, Mass Markets will continue to focus on U.S. local services and expects to launch a voice-over Internet protocol (VOIP) initiative this year. In 2003, Mass Markets revenue was $6.4 billion.
"Our solid enterprise customer base, industry-leading IP strengths and ability to serve businesses globally positions us as a strong competitor in a fast-changing market," said Bob Blakely, MCI executive vice president and chief financial officer. "We believe our strong balance sheet and positive cash flow will allow us to weather the difficult environment that prevails in the telecommunications industry today."
Operating income before depreciation, amortization and expenses associated with the early retirement of assets is estimated at $2.1 billion to $2.3 billion in 2004, compared to $3.0 billion in 2003, exclusive of Embratel, which contributed $552 million in 2003. The reduction reflects margin compression driven by continued pricing pressure and the anticipated unfavorable effect of regulatory changes on access costs. Selling, general and administrative expenses are expected to decline 8 percent to 10 percent in 2004.
Depreciation and amortization expense will increase sharply to approximately $2.2 billion in 2004 from $1.7 billion contemplated in previous guidance, reflecting the adoption of Fresh Start accounting. In 2003, MCI recognized depreciation and amortization expense of $2.6 billion. The Company also anticipates that it will incur approximately $150 million to $200 million of non-cash expense related to the early retirement of assets.
MCI expects to incur net interest expense of $415 million to $425 million in 2004.
MCI estimated that costs associated with its reorganization will be approximately $100 million in 2004. Other non-operating costs are estimated at $50 million to $65 million. MCI projects a tax rate of approximately 39 percent for 2004.
Although aggressive cost reductions and network consolidation initiatives are expected to return the Company to profitability in the second half of 2004, MCI currently expects to generate a net loss for the full year.
The Company's cash position remains strong. On its December 31, 2003 balance sheet, the Company reported cash and equivalents of $6.2 billion, or $5.6 billion exclusive of Embratel. Of this total, approximately $2 billion will be disbursed to fulfill emergence claims. In 2004, cash flows provided by operating activities plus proceeds from the sale of non-core assets less capital expenditures is expected to exceed $800 million. The $2 billion expected to be disbursed for emergence claims is not included in the estimate of cash flows provided by operating activities.
According to the assumptions included in the Company's plan of reorganization, MCI will issue approximately 326 million shares to meet reorganization claims.
Capital Expenditures
MCI has invested $38 billion in its network during the last six years, placing it in a strong position to benefit from the industry's move toward IP. Today, MCI's IP network can connect customers to more places, more directly than any other IP network in the world. Continuing to invest for the future remains a high priority, and the Company expects 2004 capital expenditures to equal approximately 5 percent of revenue. MCI is expanding its MPLS footprint that supports the convergence of voice and data, as well as investing in network security products and advanced applications features.
Fresh Start Accounting
On April 20, 2004 the Company emerged from bankruptcy. MCI implemented Fresh Start accounting to its financial statements effective December 31, 2003, in accordance with generally accepted accounting principles (GAAP). Accordingly, the company adjusted its balance sheet to a new basis of accounting. The most important mechanics of this process include adjusting assets values, liabilities and shareholders' equity for the effects of the Company's plan of reorganization.
This process also impacted the 2003 income statement and resulted in a $22.1 billion gain on the line item "Reorganization Items, net." This gain is composed primarily of the discharge of debt obligations, offset partially by the amounts of new debt and stock issued to settle the claims of creditors, as well as other reorganization items.
First Quarter Results
MCI plans to release first quarter operating results on May 10, 2004.
About MCI
MCI, Inc. (MCIAV.PK) is a leading global communications provider, delivering innovative, cost-effective advanced communications connectivity to businesses, governments and consumers. With the industry's most expansive global IP backbone, based on the number of company-owned points-of-presence, and wholly-owned data networks, MCI develops the converged communications products and services that are the foundation for commerce and communications in today's markets. For more information, go to www.mci.com.
Forward Looking Statements
This press release includes certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances. While management has prepared the guidance contained in this press release in good faith and believes the assumptions to be reasonable, it is important to note that the Company can provide no assurance that such assumptions will be realized. Important assumptions used in preparing the guidance include, but are not limited to: the successful completion of the sale of Embratel in 2004, the successful launch of a VOIP initiative, access to external funding sources as necessary, a generally stable economic environment with low inflation, a satisfactory commercial alternative to the unbundled network element platform can be negotiated in response to the March 2, 2004 circuit court decision on the FCC's Triennial Review Order,and no significant change in the regulatory and competitive conditions under with the Company currently operates. Furthermore, no additional material restructuring costs are forecast for 2004. Actual results could vary materially if any of these assumptions turns out to be incorrect or other unexpected events occur. A variety of risk factors could affect the Company's projected financial results, including: matters arising out of pending class-action and other lawsuits and internal and government investigations relating to the previously-announced restatement of financial results, economic uncertainty; the effects of vigorous competition, including price compression; the impact of technological change on our business, alternative technologies, and dependence of availability of transmission facilities; risks of international business; regulatory risks in the United States and internationally; contingent liabilities; uncertainties regarding the collectibility of receivables; risks associated with debt service requirements and our financial leverage; uncertainties associated with the success of acquisitions; and the ongoing war on terrorism. More detailed information about these risk factors is contained in the Company's filings with the Securities and Exchange Commission.
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