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Technology Stocks : Sprint Nextel Corporation (S)
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To: kech who wrote (1667)7/1/2004 11:54:32 PM
From: Jon Koplik   of 1691
 
WSJ -- SEC Dials 411 on Telecom Math.

July 1, 2004

SEC Dials 411 on Telecom Math

Agency Asks Many Companies How They Count Subscribers To Check for Signs of Inflation

By RANDALL SMITH, SHAWN YOUNG and JESSE DRUCKER
Staff Reporters of THE WALL STREET JOURNAL

The Securities and Exchange Commission has asked more than 20 telecommunications companies for information about how they count their subscribers. The request is an apparent effort to determine whether any have changed their practices or taken other steps to bolster the appearance of growth.

Those receiving the requests include AT&T Corp., BellSouth Corp., Verizon Communications Inc. and Cingular Wireless, a joint venture of SBC Communications Inc. and BellSouth, officials at the companies said.

One such letter, dated June 17, asks AT&T to "explain in detail the methodologies that the company currently uses to calculate numbers of customers and/or subscribers, and access lines, for the purpose of releasing such information publicly." The information sought includes how the company insures that customers who cancel service are removed from the totals.

An AT&T spokesman said, "It's a routine request for information and we always cooperate with the SEC." A spokesman for Verizon, the nation's largest telephone company by revenue, said the company intends to respond. BellSouth and Cingular declined to elaborate beyond confirming receipt of the letter. A spokesman for the SEC declined to comment.

The SEC letter to AT&T also asks whether the long-distance company has changed the methodology or applied it consistently over the past three years, and to explain any changes and whether they have been disclosed publicly. The letter, which says the SEC staff is "conducting an informal investigation" into the subject at "certain telecom companies," asks for the data to be provided voluntarily by July 19, 2004.

The enforcement-division request is part of the SEC's new "wildcatting" program of trying to find possible scams and abuses without necessarily having hard evidence of misconduct, according to a person familiar with the request. Indeed, the SEC letter to AT&T noted: "This request should not be construed as an indication by the commission or its staff that any violations of law have occurred, nor should it be considered an adverse reflection upon any person, entity or security."

The wildcatting program was created after New York Attorney General Eliot Spitzer exposed a number of abusive anti-investor practices in the securities markets, upstaging the SEC. The Spitzer inquiries found research that was biased to win investment-banking fees and improper mutual-fund trading in which fast-trading professionals took advantage of individual, long-term investors.

One example of the kind of inflated customer counts the SEC is checking for at the telecom companies was contained in a set of fraud charges filed in July 2002 against Adelphia Communications Corp. and six of the cable-TV company's former officials, according to one person familiar with the telecom probe.

In the Adelphia charges, which remain pending, the SEC accused the company of misstating the number of its basic-cable subscribers, which the agency described as one of the factors that are "crucial to the metrics used by Wall Street to evaluate cable companies." A spokesman for Adelphia, based in Greenwood Village, Colo., said the company has "been in discussions" with the agency "to work on some kind of outcome."

For example, the SEC said Adelphia in 2000 and 2001 added 15,000 subscribers of an affiliate in Brazil that hadn't previously been counted in Adelphia's reported financial results, and 28,000 customers in a similar venture in Venezuela. In 2001, the SEC said, Adelphia added 39,000 subscribers of its "Powerlink" Internet services to its cable-subscriber count. Also in 2001, Adelphia counted 60,000 customers of its home-security service as cable subscribers.

In all, the SEC said, Adelphia used such tactics to overstate its number of reported basic-cable subscribers -- which it said totaled 5.8 million at the end of 2001 -- by 142,000, which the SEC said were "improperly included in [the] number of reported basic subscribers."

Wall Street analysts say subscriber-number changes can have a big impact on stock price. Quarterly net customer additions are considered particularly important in the U.S. wireless industry, where carriers are typically ranked based on the size of their customer base, rather than on annual revenue.

Last October, for example, AT&T Wireless Services Inc. announced third-quarter results that included strong performances in several key areas. However, it reported disappointing net subscriber additions and the company's shares fell 10.8% in heavy trading.

A year earlier, Sprint PCS, the wireless division of Sprint Corp., said it expected to report its first-ever quarterly net loss of customers, largely because it disconnected hundreds of thousands of subscribers who weren't paying their bills. Sprint PCS stock fell as much as 16% on the news before closing down 5.8%.

Yet defining a subscriber is up to each company. "The definition of what counts as a subscriber isn't very scientific," says Jonathan Atkin, a telecom analyst for RBC Capital Markets. "Is a subscriber who hasn't paid for 60 or 90 days still considered a subscriber? Every company has a different definition."

Wall Street typically has a good idea in advance of quarterly subscriber announcements, since companies often provide subscriber-growth guidance during the quarter and typically preannounce any major changes. Indeed, Verizon Wireless -- the country's biggest cellular operator, which is a joint venture of Verizon Communications and Vodafone Group PLC -- earlier last month disclosed that it had already added more than one million net subscribers during the first two months of the second quarter.

Investors in traditional wire-line phone companies such as Verizon and AT&T haven't watched customer counts as closely as investors in newer areas like wireless and cable. That is partly because the traditional companies have typically reported profits, while newer segments like cable and wireless emerged with little besides revenue growth and a growing customer base for investors to measure.

"When those companies went public, that was all they had," said John Hodulik, an analyst at UBS, "and so that's what investors looked at."

Write to Randall Smith at randall.smith@wsj.com, Shawn Young at shawn.young@wsj.com and Jesse Drucker at jesse.drucker@wsj.com

Copyright © 2004 Dow Jones & Company, Inc. All Rights Reserved.
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