WorldCom Has Explaining To Do, Analysts Say

WorldCom Inc. needs to stand up and explain why it expects such a drastic decline in revenue and earnings this year, something leery investors are anxious to learn, analysts say.

WorldCom last week slashed its 2002 sales forecast for its data and Internet businesses by as much as $1.4 billion, catching investors by surprise because the company had reiterated its initial projections only two weeks earlier. The telecommunications company also significantly reduced its profit target.

WorldCom reports first quarter earnings Thursday for WorldCom Group, the focus of the revised financial predictions, and MCI Group, the company's other sector that tracks consumer services such as long distance.

"They have a lot of explaining to do,'' said analyst Patrick Comack of Guzman & Co. in Miami. "Did the adjustments show some sloppiness or did things get significantly worse over that two-week period?''

In the wake of the negative guidance news, no less than seven equity analysts downgraded WorldCom shares Monday as the stock, trading at 10-year lows, continued its tumble.

On Tuesday, Moody's Investors Service cut its credit rating on WorldCom's $30 billion in long-term debt. Moody's new rating of Baa2, down from A3, is only two steps above junk status.

Fitch Ratings also downgraded WorldCom.

In a statement, Moody's predicted WorldCom may adjust its projected operating performance again by year's end.

"While the company has experienced growth in new services, it has not been enough to offset combined declines in pricing and downsizing in network grooming, and Moody's does not see a reversal of this trend in the near term,'' the bond ratings company said.

In afternoon trading Wednesday on the Nasdaq Stock Market, shares of WorldCom Group were down 8 cents to $3.33. The shares have lost nearly 80 percent of their value this year.

MCI Group shares were up 19 cents to $4.09, also on the Nasdaq.

WorldCom has said it will cut capital expenditures by as much as $1 billion this year.

Analysts say they'd like news Thursday on any further capital or operating reductions, an ongoing Securities and Exchange Commission investigation into accounting and loan practices and plans to pay off long-term debt.

Moody's said it doesn't think WorldCom "faces significant liquidity challenges in 2002, although debt maturities step up in 2003 and beyond.''

Drake Johnstone, an analyst with Davenport & Co. in Richmond, Va., said it's not certain the company can make its $1.7 billion debt payments next year and $2 billion-plus payments in 2004 and 2005 considering lingering cash flow concerns.

WorldCom, like others in the telecom industry, has faced stiffer competition and lower demand for its services.

"The Street really needs some confidence,'' Johnstone said.

Other questions analysts say investors hope to get answered Thursday:

  • Will the company continue to pay the dividend on its MCI tracking stock?
  • Following 3,700 job cuts in WorldCom Group earlier this month, are any others planned?

"WorldCom was supposed to be the creme de la creme of long distance companies,'' Comack said. "We need to be able to trust their guidance going forward.''

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