US telecoms seen beating cable on broadband in Q2

By Justin Hyde
WASHINGTON, July 18 (Reuters) - U.S. local telephone companies likely outgunned the cable industry last quarter in the race for new high-speed Internet subscribers by their widest margin to date, according to analysts' estimates.
Industry experts say the sales figures for broadband lines due to be released with second-quarter earnings reports over the next couple of weeks are likely to be among the few bright spots in an otherwise lackluster period for the dominant telephone companies.
"Share of broadband subscribers is critical to telecom companies as a defense against competition from VOIP (voice over Internet protocol), as well as a major driver of near-term revenue growth," Morgan Stanley analyst Simon Flannery said in a research note on Monday.
Several analysts expect telephone companies to report roughly 1 million new digital subscriber lines for the second quarter. While such a total would be down about 20 percent from the first quarter's growth rate, analysts say it would still be good for 55 percent of all new broadband subscribers.
Only a year ago, telephone companies such as Verizon Communications Inc. (VZ.N: Quote, Profile, Research) and SBC Communications Inc. (SBC.N: Quote, Profile, Research) were just pulling even with cable companies in new high-speed Internet lines. Since then, the "Baby Bells" have become more aggressive in selling DSL lines, on the theory that broadband subscribers are far less likely to switch services.
Last month, SBC announced it would offer its DSL service to new users for $14.95 per month for one year. Analysts say that promotion will give it roughly 400,000 new DSL lines, about 27 percent more than for the same period a year earlier. Estimates for Verizon and BellSouth Corp. (BLS.N: Quote, Profile, Research), which have been less aggressive in their DSL promotions, range widely.
Outside of DSL growth, analysts expect the Bells to report flat earnings before one-time items in the second quarter.
Banc of America analyst David Barden estimates the Bells lost 1.8 million consumer lines in the quarter, hurt by seasonal effects like vacationers and college students disconnecting services, by strong wireless growth and by cable companies pushing their voice services.
Even with that decline, the revenues at the Bells are expected to have held steady through DSL and long-distance sales.
"Despite poor expected line performance, financial performance at the Bells could well hold up on the wireline side," Barden said in a research note.
While shares of the Baby Bells have tracked just behind the broader Standard & Poor's 500 Index over the past two months, they still trail the index for the year so far. Analysts say the Bells' steady dividends and cash flow provide a floor to their share prices, while recent mergers, billions of dollars in network upgrades and shrinking traditional business temper any upside.
"To a great degree the market is already discounting the major challenges the wireline sector faces," said Goldman Sachs analyst Jason Armstrong in a research note.