MCI announces second quarter 2005 results

MCI, Inc has reported its results for the second quarter ended 30 June 2005.

The company returned to profitability in the second quarter, generating net income of $64 million or $0.20 and $0.19 per basic and diluted share, respectively, compared to a net loss of $2 million or $.01 per basic and diluted share in the first quarter. In the second quarter of 2004, MCI reported a net loss of $71 million or $0.22 per basic and diluted share.

Revenues for the second quarter were $4.7 billion, down 2% sequentially and 10% year-over-year. Operating expenses fell to $4.6 billion, down 11% year-over-year and 1% sequentially; reflecting the benefits of last year`s restructuring efforts, a reduction in severance expense, lower bad debt expense and ongoing efficiencies in selling, general and administrative expenses, as well as lower depreciation and amortisation expense.

Operating income was $61 million in the second quarter, compared to operating income of $115 million in the first quarter of 2005 and $37 million in the year-earlier second quarter. The company recognised depreciation and amortisation expense of $325 million in the second quarter of 2005, $328 million in the first quarter of 2005 and $569 million in the second quarter of 2004.

"In the second quarter, we continued to launch next-generation products and services, improve customer service and realise results from our cost reduction initiatives," said Michael D Capellas, MCI president and chief executive officer. "In the second half of the year, we will remain focused on executing in the marketplace and moving toward a timely completion of our merger with Verizon."

For the first half of 2005, revenues were $9.5 billion, down 11% year-over-year. Operating income was $176 million, compared to an operating loss of $233 million in 2004. Operating income in the first half of 2005 included $653 million of depreciation and amortisation expense, compared to $1.1 billion in 2004. Net income for the first six months of 2005 was $62 million or $0.19 per basic and diluted share, compared to a net loss of $459 million in the first half of 2004. Year-to-date, merger-related expenses totalled $29 million, severance expense was $40 million and reorganisation costs were $16 million, for a total of $85 million.

Consolidated results

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Segment results

MCI`s operations are organised into three distinct business units defined by their respective customer bases: Enterprise Markets, US Sales and Service and International and Wholesale Markets. The quarterly operating results of these business segments follow:

Enterprise Markets

Enterprise Markets, which includes the company`s most complex, high-end accounts in business and government, provide local-to-global business data, Internet and voice services, as well as managed network services and solutions.

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In the second quarter, Enterprise Markets generated $1.2 billion of revenues, up 1% sequentially and down 3% year-over-year.

Operating income was $55 million in the quarter, compared to operating income of $83 million a year earlier and $54 million in the first quarter of 2005.

Enterprise Markets continued to focus on accelerating growth and gaining share in IP, hosting, security and contact centre services, and during the quarter invested in additional professional sales and technical training to support these initiatives.

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US Sales and Service

US Sales and Service (USS&S) is comprised of Commercial Accounts, which serves small to large US-based business customers, plus SkyTel; and Mass Markets, which serves consumer and small business customers.

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During the second quarter, USS&S generated revenues of $2 billion, down 4% sequentially and 14% compared to the year-earlier quarter. Commercial accounts contributed $923 million to revenues, down 1% sequentially and 8% year-over-year. Mass Markets revenue fell to $1 billion, down 6% sequentially and 19% year-over-year, reflecting the company`s reduced emphasis on customer acquisition related to market and regulatory changes.

Operating income from US Sales and Service was $49 million in the second quarter of 2005, down 36% compared to a year ago and down 56% sequentially. In the Commercial Accounts business, results reflected competitive pricing in major product groups as well as investments in training and development. This decline was partially offset by improvement in the Mass Markets business, which reduced marketing costs and improved bad debt performance related to changes in marketing activities and customer churn, respectively.

International and Wholesale Markets

MCI`s International and Wholesale Markets segment serves customers in 164 countries around the world, as well as wholesale customers in the US.

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During the second quarter, International and Wholesale Markets contributed revenues of $1.5 billion, down 2% sequentially and 10% year-over-year. International accounts generated revenues of $862 million, down 5% sequentially and 2% compared to the second quarter of 2004. Wholesale Markets revenue was $685 million, up slightly compared to the first quarter, but 18% lower than last year`s second quarter. Segment operating loss was $43 million, compared to an operating loss of $51 million in the first quarter of 2005 and an operating loss of $122 million in last year`s second quarter.

MCI`s International group continues to focus on improving profitability through cost controls, improved collection efforts and facilities optimisation. Operating profit declined sequentially, reflecting lower revenues, as the company proactively raised rates, particularly for fixed-to-mobile wholesale services in Europe and fixed-to-fixed on selected routes. Data revenues were almost flat sequentially and Internet revenues declined slightly as customer acquisition activity and new strategic products offset downward pressure on rates.

Wholesale revenues grew approximately 1% sequentially and operating loss improved in the second quarter, reflecting higher volumes in voice, higher average rates for data services and a decline in Internet revenue driven by the migration from dial-up to broadband access.

Balance sheet

At 31 March 2005, cash, cash equivalents and marketable securities were approximately $5.4 billion. During the second quarter, MCI paid $143 million in bankruptcy claims and invested $315 million in property, plant and equipment. At 30 June 2005, cash, cash equivalents and marketable securities totalled $5.3 billion.

Total debt of approximately $5.9 billion included $250 million of capitalised leases. The company incurred interest expense of $116 million in the quarter and earned $44 million of interest income on its portfolio of cash and marketable securities. In addition, MCI recognised a pre-tax gain of $32 million on the sale of a portion of its interest in an affiliate in Mexico.