GTEs Strong Financial Performance Continues with Second Quarter
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IRVING, Texas. -- GTE Corp. today announced its second quarter 1999 financial results, with earnings per share (EPS) from consolidated operations of 79 cents, an increase of 14.5 percent over the year-ago quarter, on net income of $776 million. Consolidated revenues were $6.3 billion in the second quarter compared with adjusted revenues of $5.9 billion in the second quarter of 1998, an increase of 7 percent. (Reported and adjusted results are described in the associated financial statements and accompanying notes.)
GTE Chairman and CEO Charles R. Lee said, "The first two quarters of this year represent a turning point in GTEs financial results, and deliver on a commitment we made in May 1997 to grow earnings in the 13-to-15 percent range. Especially gratifying is the outstanding growth and continued evolution of our data and Internet businesses, in which we have made substantial investments over the past two years as part of our overall strategy for growth. In addition, during the past quarter we have continued to grow our existing core businesses, while successfully divesting non-strategic assets and working diligently to close our merger with Bell Atlantic. These successes bolster GTEs position as a top-tier provider of telecommunications services with global reach."
Strong customer demand for GTE services was evidenced by the achievement this quarter of 5 million wireless customers and 3 million long-distance customers. The long-distance customer base was built in just over three years, from when GTE entered the long-distance business in March 1996.
On the merger front, GTE and Bell Atlantic gained U.S. Department of Justice (DOJ) and shareholder approvals for the proposed merger. The DOJ cleared the merger after exhaustive review, finding no competitive issues in the companies combined wireline businesses. At the state level, 28 public service commissions have either approved or declined to review the transaction. In addition, the shareholders of each company overwhelmingly approved the merger.
In its property repositioning initiatives, GTE announced purchasers for its Government Systems and Airfone units as well as for wireline properties located in Alaska, Arizona, Arkansas, Iowa, Minnesota, and parts of California and Missouri. The company will use the proceeds from these sales to finance its pending purchase of Ameritechs wireless territories in Illinois and Missouri, and to invest in other high-growth opportunities.
"We are delighted with the high level of interest and value we are receiving for these wireline properties. Having signed agreements for more than half of the 1.6 million lines we are selling, we are confident that, along with the sale of our Government Systems and Airfone units, we will now exceed $4 billion in after-tax proceeds from these transactions," said Mr. Lee.
GTEs consolidated revenues in the second quarter grew $410 million, or 7 percent, over adjusted revenues in the second quarter of 1998. Major contributors to this revenue growth include:
- Domestic access line growth of 2.2 million or 10 percent, for a total of 25 million access lines in service. This includes 5 percent growth in switched access lines and 35 percent growth in special access lines;
- Domestic access minutes of use growth of 1.7 billion minutes or 8 percent;
- Domestic wireline revenue growth, representing the combined results of GTE Network Services and GTEs CLEC, of approximately 5 percent;
- GTE Internetworking data revenue growth of $87 million or 62 percent;
- Long-distance revenue growth of $52 million or 40 percent;
- Revenue growth of 13 percent from consumer vertical services, such as call waiting, Caller ID and voice messaging;
- International consolidated revenue growth of $52 million or 13 percent, with proportionate revenue growth of $218 million or 30 percent;
- Continued domestic customer growth, including:
Total as of
Internet billable subscribers (GTE.net)
CLEC bundled customers
Consolidated operating income for the second quarter was $1.5 billion, an increase of $185 million, or 14.5 percent, over the same period in 1998. The increase resulted from revenue growth and the favorable effects of continuing cost-cutting initiatives. Operating income includes the losses associated with GTEs continuing investments in its data and competitive local exchange company (CLEC) initiatives.
Regarding GTEs business performance during the second quarter, Mr. Lee said, "Our results reflect strong growth in data, long-distance and bundled services on the domestic side, while our investments in Latin America and the Caribbean continue to fuel our international expansion. Additionally during the quarter, further steps were taken to strengthen our position in the industry, announcing an agreement to purchase Ameritechs wireless properties in the Midwest and acquiring a new PCS license in Buenos Aires, Argentina."
For the quarter, GTEs national operations delivered operating income of $1.4 billion, an increase of $125 million, or 10 percent, over the second quarter last year. Over the same period, national operations revenue grew $363 million or 7 percent to $5.9 billion. The major business units generating these results include:
GTE Network Services revenues for the quarter increased by $90 million, or 2 percent, to $3.9 billion. This increase was due to growth in access lines, minutes of use, data services and vertical services, partially offset by mandated price reductions and intraLATA toll erosion. Growth in total access lines was 10 percent, with residential and business switched access lines growing by 911,000 or 5 percent and special access lines increasing 1.3 million, or 35 percent, over the past 12 months. Minutes of use increased 8 percent compared to the same quarter last year.
Data services generated revenue growth of $61 million, or 27 percent. These include special access data lines, frame relay, ISDN and CyberPOPSM. GTEs ADSL service, which provides customers with ultra-fast Internet access, is currently offered through 483 central offices in 17 states. Through successful promotions, consumer vertical services units have increased 2.5 million, or 21 percent, from the same quarter last year, generating additional revenue of $18 million.
Offsetting the revenue increases were mandated federal and state price reductions of approximately $88 million in the quarter and approximately $327 million over the past 12 months. In addition, revenue has been affected by erosion in GTEs intraLATA toll and local markets. The impact on local markets is evidenced by the loss to-date of approximately 247,000 of the Companys 25 million domestic access lines to resale (approximately half of these lines were resold to GTEs CLEC).
Operating income in the second quarter was $1.4 billion, an increase of $185 million or
15 percent, over the year-ago quarter, primarily due to revenue increases and continuing cost-cutting initiatives, including the favorable effects of the employee-reduction program largely completed in the first quarter of 1999. These cost-cutting initiatives have mitigated the impact of price reductions and allowed operating margins to be maintained in the mid-30 percent range.
Wireless Products and Services
Domestic wireless revenues for the quarter were $870 million compared to $769 million in the year-ago quarter. Wireless subscribers grew 396,000, or 9 percent, from the second quarter of 1998 to a new high of 5 million. Net customer additions were 80 percent higher than the first quarter and 57 percent higher than the same quarter last year, largely due to the GTE CHOICESM pricing plans introduced earlier this year. Initial customer response has been very favorable as evidenced by strong retention of high-value customers and reduced churn. Through the end of the second quarter, 31 percent of total customers now subscribe to the new GTE CHOICE pricing plans. The average revenue per user per month also increased to $48 this quarter from $46 in the first quarter.
Operating cash flow improved $16 million, or 6 percent, from the second quarter of 1998, while operating cash flow margin for the quarter remained strong at 39 percent, consistent with its performance over the past 12 months. Cash operating expense per customer dropped to a new low of $25 per month due to ongoing process and productivity improvements. In addition, improved efficiencies in all distribution channels and lower telephone equipment subsidies have decreased the cost per gross customer add by 18 percent from the year-ago quarter.
Data Products and Services
GTE Internetworking revenues were $227 million in the second quarter, an increase of $87 million, or 62 percent, over the second quarter of 1998. Operating cash flow for GTE Internetworking improved 29 percent from the same quarter last year.
GTEs consumer Internet Service Provider (ISP), GTE.net, generated additional revenue of $17 million, or 89 percent, above the year-ago quarter. Over the same period, Internet billable subscribers grew 66 percent to 517,000. Compared to the first quarter, the number of subscribers decreased due to the churn of customers recently obtained through promotional offers on new PC sales.
Revenue from business services, which include web hosting, virtual private networks and e-commerce, increased $22 million, or 58 percent, from the second quarter last year. With the recent expansion of GTEs international dial-up remote access service, which we have branded DiaLinx, the Company now has comprehensive global reach. It also expanded its fully managed virtual private networking service to key business markets in 39 countries. In addition, revenue increased $30 million, or 50 percent, over the prior year quarter from networking services provided to non-affiliated ISPs.
GTE's national fiber network deployment continues on track, with the network carrying voice traffic in California and data traffic for GTEs other business units. With the planned 17,000 mile network expected to be fully operational in the second half of the year, GTE is now in the process of adding additional capacity throughout the network to meet projected customer demand.
GTE Internetworking continues its industry-leading role through aggressive development and rapid deployment of new and innovative product offerings that will stimulate and shape the evolution of the Internet. For example, the company has recently introduced three new wholesale services to be offered over its national fiber network. Internet Call Manager provides dial-up ISP users with an Internet version of call waiting. Unified Messaging offers customers a consolidated in-box for voicemail, fax, and e-mail, with message retrieval via PC or telephone. Virtual ISP Service provides companies the ability to offer full-service, branded Internet access to their customers by outsourcing the entire infrastructure and back-office support functions from GTE.
GTE Internetworking revenues do not include data revenues from other business units, such as T-1 connections and ISDN sold by GTE Network Services. Combined data revenue from all business units grew to $571 million in the quarter, providing annualized data revenues in excess of $2.2 billion.
Other National Operations
Second quarter revenue for our CLEC, long-distance, video and strategic accounts businesses, was $350 million, an increase of $104 million, or 42 percent, over the second quarter of 1998. This revenue growth was driven in part by a 36 percent increase in the number of long-distance customers over the past 12 months, ending the quarter with over 3 million long-distance customers. GTE's CLEC, now operating in 8 states, generated revenue growth by providing bundled local, long-distance, wireless, paging and Internet services to 150,000 customers by the end of the quarter, an increase of 188 percent over the past 12 months.
International operations net income for the quarter was $122 million, an increase of $13 million, or 12 percent, from the second quarter last year. Contributing to the favorable net income performance were strong proportionate revenue gains and operational efficiencies, as evidenced by a 53 percent increase in operating income. Proportionate revenue of $947 million in the second quarter increased $218 million, or 30 percent, from the same quarter last year, primarily due to GTEs investment in the Puerto Rico Telephone Company. Strong demand for prepaid services in Latin America and rapid growth of the Taiwan cellular operations contributed to an 89 percent increase in proportionate wireless customers.
GTE expanded its Latin American wireless presence in the quarter by winning the bid for one of two PCS wireless licenses that were auctioned by the Argentine government for the Buenos Aires greater metropolitan area. The PCS license, which covers a population of 13 million, complements GTEs existing investment in CTI, an Argentine wireless company serving the interior of Argentina. CTI implemented enhanced digital service during the second quarter and Buenos Aires PCS is expected to be operational in late 1999 or early 2000. Together they will provide nationwide wireless service in Argentina.
With 1998 revenues of more than $25 billion, GTE is a leading telecommunications provider with one of the industrys broadest arrays of products and services. In the United States, GTE provides local service in 28 states and wireless service in 17 states, as well as nationwide long-distance, directory, and internetworking services ranging from dial-up Internet access for residential and small-business consumers to Web-based applications for Fortune 500 companies. Outside the United States, the company serves customers on five continents.
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Note: All references noted above to earnings per share (EPS) reflect diluted earnings per share.
A copy of this release and associated tables can be found on the Internet at www.gte.com
This announcement contains forward-looking statements. For each of these statements, GTE claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. If future events and actual performance differ materially from GTEs assumptions, actual results could vary significantly from the performance projected in these forward-looking statements.
The following important factors could affect the future results of GTE, and could cause these results to differ materially from those expressed in this announcement: materially adverse changes in economic conditions; material changes in available technology; the final resolution of certain federal, state and local regulatory initiatives and proceedings pertaining to, among other matters, the terms of interconnection, access charges, universal service, unbundled network elements and resale rates; the effects of competition in GTEs markets; the success of GTEs efforts in achieving Year 2000 compliance; and the success of GTEs efforts to expand its service capability in the data communication, long-distance and enhanced services segments of the telecommunications marketplace and to provide a bundle of products and services both in and outside of its traditional service territories.
GTEs Report on Form 10-Q for the quarter ended March 31, 1999 discusses in greater detail the important factors that could cause its actual results to differ materially.