MCI Cuts Costs to Narrow Loss;  Sales Slide 12%
By Yuki Noguchi
Washington Post Staff Writer
Friday, May 6, 2005

MCI Inc., which this week reaffirmed its agreement to merge with Verizon Communications Inc., said yesterday that it had sharply reduced its losses even as sales slipped across the company in the first quarter.

The Ashburn telecommunications company cut costs most dramatically in its mass-markets division, which is overseeing the company's exit from the consumer telephone business.  That helped MCI reduce its overall losses to $2 million (1 cent a share), compared with a $388 million loss ($1.19) in the first quarter last year.

Revenue fell 12 percent, to $4.8 billion from $5.4 billion, largely because of the company's departure from the consumer business.  MCI stopped marketing service to consumers after regulators changed rules governing phone competition, though it fared better in hanging on to its corporate and government customer base during the quarter.

MCI spent nearly three months in merger negotiations as Verizon and Qwest Communications International Inc. bid against each other for the company, pushing up the final deal to $8.5 billion.  It incurred $7 million in expenses during the quarter from legal and advisory fees associated with the negotiations, the company said.

"We achieved solid performance in the first quarter," Michael D. Capellas, MCI president and chief executive, said in a written statement.

MCI's financial performance didn't impress some analysts.

Patrick Comack, an analyst with Zachary Investment Research, said the results showed MCI's difficulty in generating profit.

"There's a reason they're selling this company," he said.

Compared with other long-distance carriers, such as AT&T Corp. and Sprint Corp., MCI continues to pay too much to maintain its networks and connect to other networks, he said.

"This management has been unable to fix MCI.  They have done nothing to improve gross profits," he said.  "Verizon's paying way too much for this company, but on the other hand, it's a fixer-upper."

Verizon will need to reverse the slight decline in MCI's corporate customer base.  It hopes to add clients in that arena by expanding its reach nationally.

Once combined, the companies are planning to sell other services, such as wireless communications, to that corporate client base, company officials said, and MCI is already looking into forming joint ventures with Verizon Wireless, MCI officials said yesterday.

Until the merger is approved by federal and state regulators, which could happen by the end of the year, MCI and Verizon will still be legally required to compete against each other.

MCI shareholders will vote on the proposed merger in coming months