-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ngka/ylinLewSzynVLVqu4Gj6GYB7+tYE+NWwiOdoWlglDnrA+vbsRhu1sX9ZDYa rlhu8Y11dKKuQNeMh3gLqw== 0000732713-05-000161.txt : 20050725 0000732713-05-000161.hdr.sgml : 20050725 20050725092414 ACCESSION NUMBER: 0000732713-05-000161 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20050725 ITEM INFORMATION: Results of Operations and Financial Condition FILED AS OF DATE: 20050725 DATE AS OF CHANGE: 20050725 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BELLSOUTH CORP CENTRAL INDEX KEY: 0000732713 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 581533433 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08607 FILM NUMBER: 05970333 BUSINESS ADDRESS: STREET 1: 1155 PEACHTREE ST NE STREET 2: ROOM 15G03 CITY: ATLANTA STATE: GA ZIP: 30309-3610 BUSINESS PHONE: 4042492000 MAIL ADDRESS: STREET 1: 1155 PEACHTREE STREET NE CITY: ATLANTA STATE: GA ZIP: 30309-3610 8-K 1 form8k072505.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of report (Date of earliest event reported): July 25, 2005 BELLSOUTH CORPORATION - -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) GEORGIA - -------------------------------------------------------------------------------- (State or Other Jurisdiction of Incorporation) 1-8607 58-1533433 - -------------------------------------------------------------------------------- (Commission File Number) (IRS Employer Identification No.) Room 15G03, 1155 Peachtree Street, N. E., Atlanta, Georgia 30309-3610 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) (404) 249-2000 - -------------------------------------------------------------------------------- (Registrant's Telephone Number, Including Area Code) - -------------------------------------------------------------------------------- (Former Name or Former Address, if Changed Since Last Report) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below): |_| Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |_| Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |_| Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Item 2.02 Results of Operations and Financial Condition The information in this report, including the Exhibits described below, shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, nor shall they be deemed incorporated by reference in any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference in such filing. Attached and incorporated herein by reference are: (i) Exhibit 99-a, which is a copy of a press release of BellSouth Corporation dated July 25, 2005, reporting the company's financial results for the quarter ended June 30, 2005 and (ii) Exhibit 99-b, which is a document entitled "Investor News" that contains more detailed information about the recently completed quarter. Non-GAAP Financial Information To provide clarity, internally and externally, about the most tangible and relevant measures of our financial performance, we supplement the reporting of BellSouth's consolidated financial information under GAAP with certain non-GAAP financial measures, including normalized operating results from continuing operations, free cash flow from continuing operations and income from continuing operations before depreciation and amortization margin. In connection with Cingular Wireless' (Cingular) acquisition of AT&T Wireless, which was completed on October 26, 2004, we have also reported pro forma revenue and pro forma Average Revenue Per Unit (ARPU) for our domestic wireless segment. The pro forma adjustments are consistent with those set forth in Cingular's Form 8-K/A dated October 25, 2004. This information should not be considered in isolation or as a substitute for the consolidated (GAAP) financial information. Further, investors should note that these non-GAAP measures involve judgments by management (in particular, judgments as to what is or is not classified as a special item). We believe the presentation of these measures provides useful information to investors for the specific reasons set forth below. Normalized Results From Continuing Operations. The presentation of normalized results from continuing operations enables investors to focus on period-over-period operating performance, without the impact of significant non-operational or non-recurring items. Additionally, normalized results include BellSouth's 40 percent share of Cingular Wireless' revenues and expenses. Cingular's results are recognized on the equity method for GAAP purposes. Accordingly, Cingular's results are not included in the revenue, expense, or operating income line items in the GAAP presentation. The financial results of Cingular, a joint venture representing our second largest operating segment, are a critical element of BellSouth's overall financial performance. The inclusion of Cingular's revenues and expenses on a proportional basis enables investors to evaluate BellSouth's overall financial performance, including all business segments. Normalized results from continuing operations are provided to enhance the user's overall understanding of the Company's current financial performance and the Company's prospects for the future. We believe normalized results from continuing operations are an important measure of our recurring operations because it excludes items that may not be indicative of our core operating results, includes items that are core to our operating results not allowed by GAAP (e.g. Cingular's results) and provides a better baseline for modeling future earnings expectations. We believe the inclusion of normalized results from continuing operations provides consistency and comparability in our financial reporting and is provided in order to enable investors to more thoroughly evaluate our current performance compared to past performance. Finally, normalized measures are among the primary indicators management uses in planning and operating the business. By providing this information to investors supplementally, investors will be able to evaluate the results of the business through the eyes of management and assess the fundamental performance of the business. Normalized results from continuing operations may exclude (a) events, such as changes in accounting method, that are generally non-recurring in nature and (b) material one-time gains or losses, both of which can distort reported operating results. A complete list of normalizing items, as well as a full reconciliation of normalized results to GAAP reporting, are included in the quarterly financial statements that are attached hereto and are available on the company's Web site, www.bellsouth.com/investor. Free Cash Flow. We believe free cash flow provides investors a meaningful measure of liquidity of the business. It indicates the level of cash the business is generating from normal continuing operations less capital reinvestment that is required to continue the operations. Investors can utilize this measure to make assessments of the viability of the company and as a base line for valuation of the company. Management monitors operating free cash flow and makes operating decisions based on its level. We define operating free cash flow as operating cash flow from continuing operations less capital expenditures, both of which are taken directly from the statement of cash flows. Operating Income Before Depreciation and Amortization and Related Margin. Facility-based telecommunications companies require significant recurring capital investments that generate large non-cash expense, making operating income a less meaningful measure of current period business performance and profitability. We use operating income from continuing operations before depreciation and amortization, and the related margin, as a measure of underlying operating performance of the business and to make meaningful comparisons of different operating periods. Domestic Wireless Pro Forma Revenue and ARPU. Pro forma revenues and pro forma ARPU are used to provide more meaningful period to period comparisons of reported revenues and ARPU. These unaudited pro forma measures incorporate AT&T Wireless' results for the three and six months ended June 30, 2004 and include results from other acquired properties, exclude results from divested operations, and reflect intercompany eliminations and other adjustments for such periods. For further detail regarding other pro forma combined historical financial information, see the information filed by Cingular Wireless on Forms 8-K/A filed on November 29, 2004 and March 11, 2005. The unaudited pro forma information is not intended to represent or be indicative of the results of Cingular that would have been reported had the merger and the above mentioned items been completed as of the dates presented, and should not be taken as representative of the future results of Cingular. In addition to historical information, this document contains forward-looking statements regarding events and financial trends. Factors that could affect future results and could cause actual results to differ materially from those expressed or implied in the forward-looking statements include: (i) a change in economic conditions in domestic or international markets where we operate or have material investments which would affect demand for our services; (ii) the intensity of competitive activity and its resulting impact on pricing strategies and new product offerings; (iii) higher than anticipated cash requirements for investments, new business initiatives and acquisitions; (iv) unfavorable regulatory actions; and (v) those factors contained in the Company's periodic reports filed with the SEC. The forward-looking information in this document is given as of this date only, and BellSouth assumes no duty to update this information. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BELLSOUTH CORPORATION By: /s/ Pat Shannon Pat Shannon Senior Vice President - Finance and Controller July 25, 2005 EX-99 2 form8k072505ex99a.txt EXHIBIT 99-A Exhibit 99-a For Immediate Release July 25, 2005 BellSouth Reports Second Quarter Earnings o Sequential earnings growth from continuing operations o Strong Cingular results drive margin improvements ATLANTA - BellSouth Corporation (NYSE: BLS) announced second quarter 2005 earnings per share (EPS) from continuing operations of 43 cents compared to 37 cents in the first quarter of 2005 and 51 cents in the second quarter of 2004. Normalized EPS from continuing operations was 46 cents, an increase compared to 39 cents in the first quarter of 2005 and a decline compared to 51 cents in the second quarter of 2004. Normalizing items in the second quarter of 2005 consisted of wireless merger integration costs (2 cents) and debt extinguishment costs (1 cent). "The realignment of our assets toward wireless and broadband services is starting to pay off," said Duane Ackerman, Chairman and Chief Executive Officer. "Cingular delivered strong growth in customers, revenues and operating margins. Our results this quarter clearly demonstrate how Cingular's progress impacts BellSouth's bottom line. Our wireline business and growing Advertising & Publishing services delivered consistent, overall financial performance." Normalized Results from Continuing Operations Normalized results from continuing operations include BellSouth's 40 percent proportionate share of Cingular's revenues and expenses. Cingular completed its acquisition of AT&T Wireless on Oct. 26, 2004. Results prior to the acquisition date have not been restated. For the second quarter of 2005, normalized revenue was $8.52 billion, up 2.6 percent compared to the first quarter of 2005. Operating margin was 19.2 percent, a 190 basis point improvement compared to the first quarter of 2005. Net income was $849 million, up $131 million from the first quarter of 2005. These improvements reflect Cingular's continued growth and merger integration progress, stable results from Communications Group and continued Advertising & Publishing revenue growth. Year-over-year, second quarter 2005 normalized revenue was $8.52 billion compared to $6.71 billion in the second quarter of 2004. Second quarter normalized net income decreased $89 million compared to $938 million in the second quarter of 2004, impacted by a decline in core voice revenues and higher retiree medical expense in the Communications Group and financing costs associated with the acquisition of AT&T Wireless. Year-over-year, Cingular's higher operating income before depreciation and amortization offset increased intangible amortization expense related to the acquisition of AT&T Wireless. Reported Results from Continuing Operations For the second quarter of 2005, BellSouth's consolidated reported revenue from continuing operations totaled $5.14 billion, an increase of 1.2 percent compared to the same quarter of 2004. Income from continuing operations was $795 million compared to $939 million in the same quarter of the previous year. In addition to the items noted above, the comparison of period-to-period reported results was negatively impacted by wireless merger integration costs associated with the acquisition of AT&T Wireless. Operating free cash flow (defined as net cash provided by operating activities less capital expenditures) was $1.3 billion for the second quarter of 2005. In June, the Company increased the dividend by more than 7 percent to 29 cents per share quarterly or $1.16 per share annually. Over the last three years, BellSouth has raised the quarterly dividend a total of 53 percent. Capital expenditures for the second quarter of 2005 were $829 million. In addition, the Company has paid down $2.9 billion in debt since the beginning of 2005. Communications Group In the second quarter of 2005, Communications Group revenue remained stable at $4.62 billion, a slight increase compared to the same quarter of 2004. Revenue growth from long distance, DSL and small business access line gains effectively offset revenue declines from residential access line loss and large business services. Second quarter operating margin was 23.6 percent compared to 25.0 percent for the full year of 2004. As of June 30, 2005, total access lines were 20.8 million, down 419,000 compared to the first quarter of 2005. Access line loss was driven by wireless substitution, competition and seasonal household moves that traditionally affect the second quarter. UNE-P access lines resold by BellSouth competitors were down 235,000 compared to the first quarter of 2005. Residential retail access lines were down 204,000. In contrast, business retail access lines held steady, boosted by 33,000 net new access lines in the small business segment. BellSouth long distance customers reached 53 percent penetration of its mass-market customer base. The Company added 301,000 net mass-market long distance customers during the second quarter of 2005, and now serves nearly 6.8 million mass-market long distance customers. New and existing customers continue to choose BellSouth as their long distance provider. With many residential and small business customers choosing unlimited long distance and international calling plans, average revenue per user (ARPU) is about $17 per month. Driven by DSL, network data revenue for the second quarter was $1.17 billion, an increase of 4.5 percent compared to the same quarter of 2004. BellSouth now serves more than 2.4 million DSL subscribers. During the second quarter of 2005, BellSouth added 124,000 net DSL customers. Net customer additions declined compared to the first quarter of 2005, impacted by changes in promotional activity during the first quarter and traditional seasonal slowing. Increasing broadband penetration remains a priority for BellSouth. An additional 80,000 customers added DIRECTV(R) service to their communications packages during the second quarter, bringing the total number of customers with this package to 394,000. Through our successful alliance with DIRECTV(R), BellSouth provides competitively priced packages that include wireline and wireless voice, Internet access and entertainment services. Cingular Wireless Cingular Wireless, the nation's largest wireless provider, added approximately 1.1 million net customers in the second quarter of 2005, bringing its nationwide customer base to 51.6 million customers. Cingular's gross customer additions in the second quarter were 4.4 million, demonstrating continued success in the marketplace. Overall churn remained at 2.2 percent in the second quarter of 2005, and postpaid churn improved sequentially by 10 basis points to 1.8 percent. Cingular's reported revenue was $8.6 billion for the second quarter of 2005, representing a 5.4 percent increase over pro forma revenue from the prior year period and a 4.6 percent sequential increase. BellSouth's normalized revenue includes its 40 percent share of Cingular's reported revenue. Service ARPU (average revenue per user) in the second quarter was $50.43, a decline of 5.6 percent from the prior year (pro forma) and a sequential increase of 1.7 percent from this year's first quarter ARPU. ARPU from data services continued to grow in the second quarter reaching $4.16, a 46 cent increase from the previous quarter. This increase was driven by customer usage of text messaging, downloadable ringtones, games and many other wireless applications. Cingular's second quarter normalized service margin from operating income before depreciation and amortization (OIBDA) was 28.9 percent, 340 basis points better than the first quarter of 2005. This increase was driven by improved revenue growth, lower gross customer additions and customer upgrades and operational efficiencies associated with merger synergies. During the second quarter, 78 percent of Cingular's subscriber base was GSM-equipped, up from 72 percent in the first quarter of 2005. In addition, an impressive 90 percent of the company's total combined minutes are now carried on its GSM network. Through roaming partners, Cingular now has coverage in more than 170 countries worldwide. Cingular is on track to launch UMTS/HSDPA in 15-20 markets by the end of 2005. This next-generation technology provides superior speeds for data and video services. Advertising & Publishing In the second quarter of 2005, Advertising & Publishing continued to grow revenue. Revenue was $531 million, a 3.9 percent increase over the same quarter of 2004, and operating margin was 46.1 percent. Segment net income was $154 million, up $4 million compared to the second quarter of 2004. Normalizing Items In the second quarter of 2005, the difference between reported (GAAP) EPS from continuing operations and normalized EPS is shown in the following table: - -------------------------------------------------------- ----------- ----------- 2Q05 2Q04 - -------------------------------------------------------- ----------- ----------- - -------------------------------------------------------- ----------- ----------- GAAP Diluted EPS - Income from continuing operations $0.43 $0.51 - -------------------------------------------------------- ----------- ----------- - -------------------------------------------------------- ----------- ----------- - -------------------------------------------------------- ----------- ----------- - -------------------------------------------------------- ----------- ----------- Wireless merger integration costs $0.02 - -------------------------------------------------------- ----------- ----------- - -------------------------------------------------------- ----------- ----------- Debt extinguishment costs $0.01 - -------------------------------------------------------- ----------- ----------- - -------------------------------------------------------- ----------- ----------- - -------------------------------------------------------- ----------- ----------- - -------------------------------------------------------- ----------- ----------- Normalized Diluted EPS - Income from continuing operations $0.46 $0.51 - -------------------------------------------------------- ----------- ----------- Wireless merger integration costs - Represents BellSouth's 40 percent share of tax-effected wireless merger integration costs of $204 million incurred during the second quarter of 2005 in connection with the Cingular/ AT&T Wireless merger. Integration costs include one-time cash outlays or specified non-cash charges, including accelerated depreciation directly related to rationalization of the wireless network, sales distribution channels, the workforce, information technology systems and real estate. Debt extinguishment costs - Represents one-time expenses associated with the early extinguishment of $300 million of long-term debt in the second quarter of 2005. About BellSouth Corporation BellSouth Corporation is a Fortune 100 communications company headquartered in Atlanta, Georgia. BellSouth has joint control and 40 percent ownership of Cingular Wireless, the nation's largest wireless voice and data provider with more than 50 million customers. Backed by award winning customer service, BellSouth offers the most comprehensive and innovative package of voice and data services available in the market. Through BellSouth Answers(R), residential and small business customers can bundle their local and long distance service with dial-up and high-speed DSL Internet access, satellite television and Cingular(R) Wireless service. For businesses, BellSouth provides secure, reliable local and long distance voice and data networking solutions. BellSouth also offers online and directory advertising through BellSouth(R) RealPages.com(R) and The Real Yellow Pages(R). BellSouth believes that diversity and fostering an inclusive environment are critical in maintaining a competitive advantage in today's global marketplace. More information about BellSouth can be found at www.bellsouth.com. Further information about BellSouth and Cingular's Second quarter earnings can be accessed at www.bellsouth.com/investor. The press release, financial statements and Investor News summarizing highlights of the quarter are available on the BellSouth Investor Relations website starting today at 8 a.m. Eastern Time (ET). BellSouth will host a conference call with investors today at 10 a.m. (ET). Dial-in information for the conference call is as follows: Domestic: 888-370-1863 International: 706-634-1735 The conference call will also be webcast live beginning at 10 a.m. (ET) on our website at www.bellsouth.com/investor. The webcast will be archived on our website beginning at approximately 1 p.m. (ET) today. A replay of the call will be available beginning at approximately 1 p.m. (ET) today, through August 1, 2005, and can be accessed by dialing: Domestic: 800-642-1687 - Conference ID: 4107471 International: 706-645-9291 - Conference ID: 4107471 In addition to historical information, this document may contain forward-looking statements regarding events and financial trends. Factors that could affect future results and could cause actual results to differ materially from those expressed or implied in the forward-looking statements include: (i) a change in economic conditions in markets where we operate or have material investments which would affect demand for our services; (ii) the intensity of competitive activity and its resulting impact on pricing strategies and new product offerings; (iii) higher than anticipated cash requirements for investments, new business initiatives and acquisitions; (iv) unfavorable regulatory actions; and (v) those factors contained in the Company's periodic reports filed with the SEC. The forward-looking information in this document is given as of this date only, and BellSouth assumes no duty to update this information. This document may also contain certain non-GAAP financial measures. The most directly comparable GAAP financial measures, and a full reconciliation of non-GAAP to GAAP financial information, are attached hereto and provided on the Company's investor relations website, www.bellsouth.com/investor. For More Information Contact: Jeff Battcher, Media Relations at 404-249-2793 BellSouth Investor Relations at 800-241-3419 BellSouth Corporation Consolidated Statements of Income - Reported Basis (unaudited) (amounts in millions, except per share data) Note to Readers: See Normalization Earnings Summary and Reconciliation to GAAP results on pages 3 and 4 for a summary of unusual items included in Reported Basis results. 2Q05 2Q04 Growth 1Q05 Growth Operating Revenues Communications group $4,598 $4,565 0.7% $4,593 0.1% Advertising and publishing 527 507 3.9% 488 8.0% All other 17 11 54.5% 10 70.0% Total Operating Revenues 5,142 5,083 1.2% 5,091 1.0% Operating Expenses Cost of services and products 1,925 1,789 7.6% 1,920 0.3% Selling, general & administrative expenses 951 938 1.4% 901 5.5% Depreciation and amortization 916 914 0.2% 918 -0.2% Total Operating Expenses 3,792 3,641 4.1% 3,739 1.4% Operating Income 1,350 1,442 -6.4% 1,352 -0.1% Interest Expense 285 211 35.1% 291 -2.1% Other Income (Expense), net 124 224 -44.6% (24) N/M* Income from Continuing Operations before Income Taxes and Discontinued Operations 1,189 1,455 -18.3% 1,037 14.7% Provision for Income Taxes 394 516 -23.6% 354 11.3% Income from Continuing Operations 795 939 -15.3% 683 16.4% Income (Loss) from Discontinued Operations, net of tax - 57 -100.0% 381 -100.0% Net Income 795 996 -20.2% 1,064 -25.3% Diluted: Weighted Average Common Shares Outstanding 1,835 1,836 -0.1% 1,836 -0.1% Earnings Per Share: Income from Continuing Operations $0.43 $0.51 -15.7% $0.37 16.2% Income from Discontinued Operations $0.00 $0.03 -100.0% $0.21 -100.0% Net Income $0.43 $0.54 -20.4% $0.58 -25.9% * - Not meaningful. Selected Financial and Operating Data Operating income $1,350 $1,442 -6.4% $1,352 -0.1% Operating margin 26.3% 28.4% -210 bps 26.6% -30 bps Declared dividends per share $0.29 $0.27 7.4% $0.27 7.4% Capital expenditures $829 $731 13.4% $750 10.5% Common shares outstanding 1,832 1,831 0.1% 1,831 0.1% Book value per share $13.10 $11.75 11.5% $12.93 1.3% Year-to-Date 2005 2004 Growth Operating Revenues Communications group $9,191 $9,053 1.5% Advertising and publishing 1,015 986 2.9% All other 27 20 35.0% Total Operating Revenues 10,233 10,059 1.7% Operating Expenses Cost of services and products 3,845 3,587 7.2% Selling, general & administrative expenses 1,852 1,860 -0.4% Depreciation and amortization 1,834 1,812 1.2% Total Operating Expenses 7,531 7,259 3.7% Operating Income 2,702 2,800 -3.5% Interest Expense 576 426 35.2% Other Income (Expense), net 100 854 -88.3% Income from Continuing Operations before Income Taxes and Discontinued Operations 2,226 3,228 -31.0% Provision for Income Taxes 748 1,139 -34.3% Income from Continuing Operations 1,478 2,089 -29.2% Income (Loss) from Discontinued Operations, net of tax 381 506 -24.7% Net Income 1,859 2,595 -28.4% Diluted: Weighted Average Common Shares Outstanding 1,835 1,837 -0.1% Earnings Per Share: Income from Continuing Operations $0.81 $1.14 -28.9% Income from Discontinued Operations $0.21 $0.28 -25.0% Net Income $1.01 $1.41 -28.4% * - Not meaningful. Selected Financial and Operating Data Operating income $2,702 $2,800 -3.5% Operating margin 26.4% 27.8% -140 bps Declared dividends per share $0.56 $0.52 7.7% Capital expenditures $1,579 $1,366 15.6% BellSouth Corporation Consolidated Statements of Income - Normalized Basis (unaudited) (amounts in millions, except per share data) Note to Readers: Our reported results, as shown on page 1, are prepared in accordance with generally accepted accounting principles (GAAP). The normalized results presented below exclude the impact of certain non-recurring or non-operating items, the details of which are provided on pages 3 and 4 of this release. In addition, the normalized results reflect our 40% proportionate share of Cingular's results, the presentation of which is not allowed under GAAP. Normalized results exclude discontinued operations from all periods. Certain reclassifications have been made to prior periods to conform to the current presentation. 2Q05 2Q04 Growth 1Q05 Growth Operating Revenues Communications group $4,537 $4,514 0.5% $4,521 0.4% Domestic wireless 3,443 1,675 105.6% 3,292 4.6% Advertising and publishing 527 507 3.9% 488 8.0% All other 16 10 60.0% 10 60.0% Total Operating Revenues 8,523 6,706 27.1% 8,311 2.6% Operating Expenses Cost of services and products 3,268 2,333 40.1% 3,231 1.1% Selling, general, & administrative expenses 2,097 1,519 38.1% 2,053 2.1% Depreciation and amortization 1,524 1,140 33.7% 1,588 -4.0% Total Operating Expenses 6,889 4,992 38.0% 6,872 0.2% Operating Income 1,634 1,714 -4.7% 1,439 13.6% Interest Expense 392 268 46.3% 403 -2.7% Other Income (Expense), net 58 8 N/M* 74 -21.6% Income Before Income Taxes 1,300 1,454 -10.6% 1,110 17.1% Provision for Income Taxes 451 516 -12.6% 392 15.1% Net Income $849 $938 -9.5% $718 18.2% Diluted: Weighted Average Common Shares Outstanding 1,835 1,836 -0.1% 1,836 -0.1% Earnings Per Share $0.46 $0.51 -9.8% $0.39 17.9% * - Not meaningful. Selected Financial and Operating Data Operating income $1,634 $1,714 -4.7% $1,439 13.6% Operating margin 19.2% 25.6% -640 bps 17.3% 190 bps Declared dividends per share $0.29 $0.27 7.4% $0.27 7.4% Capital expenditures $829 $731 13.4% $750 10.5% Common shares outstanding 1,832 1,831 0.1% 1,831 0.1% Book value per share $13.10 $11.75 11.5% $12.93 1.3% Total employees 62,524 64,113 -2.5% 62,636 -0.2% Year-to-Date 2005 2004 Growth Operating Revenues Communications group $9,058 $9,005 0.6% Domestic wireless 6,735 3,262 106.5% Advertising and publishing 1,015 986 2.9% All other 26 19 36.8% Total Operating Revenues 16,834 13,272 26.8% Operating Expenses Cost of services and products 6,499 4,682 38.8% Selling, general, & administrative expenses 4,150 2,983 39.1% Depreciation and amortization 3,112 2,259 37.8% Total Operating Expenses 13,761 9,924 38.7% Operating Income 3,073 3,348 -8.2% Interest Expense 795 540 47.2% Other Income (Expense), net 132 12 N/M Income Before Income Taxes 2,410 2,820 -14.5% Provision for Income Taxes 843 994 -15.2% Net Income $1,567 $1,826 -14.2% Diluted: Weighted Average Common Shares Outstanding 1,835 1,837 -0.1% Earnings Per Share $0.85 $0.99 -14.1% * - Not meaningful. Selected Financial and Operating Data Operating income $3,073 $3,348 -8.2% Operating margin 18.3% 25.2% -690 bps Declared dividends per share $0.56 $0.52 7.7% Capital expenditures $1,579 $1,366 15.6% BellSouth Corporation Normalized Earnings Summary and Reconciliation to Reported Results (amounts in millions, except per share data) Second Quarter 2005 Normalized Items Discon- Contin- Merger tinued uing Integra- Debt Opera- Opera- tion Exting. tions tions Cingular Costs Costs GAAP C (GAAP-C) A E F Normalized Operating Revenues $5,142 $- $5,142 $3,381 $- $- $8,523 Operating Expenses 3,792 - 3,792 3,178 (81) - 6,889 Operating Income 1,350 - 1,350 203 81 - 1,634 Interest Expense 285 - 285 107 - - 392 Other Income (Expense), net 124 - 124 (86) - 20 58 Income from Continuing Operations before Income Taxes 1,189 - 1,189 10 81 20 1,300 Provision for Income Taxes 394 - 394 10 39 8 451 Income from Continuing Operations 795 - 795 - 42 12 849 Income (Loss) from Discontinued Operations, net of tax - - - - - - - Net Income $795 $0 $795 $0 $42 $12 $849 Diluted Earnings Per Share $0.43 $0.00 $0.43 $0.00 $0.02 $0.01 $0.46 Year-to-Date 2005 Normalized Items Discon- Contin- Merger tinued uing Integra- Debt Opera- Opera- tion Exting. tions tions Cingular Costs Costs GAAP C (GAAP-C) A E F Normalized Operating Revenues $10,233 $- $10,233 $6,601 $- $- $16,834 Operating Expenses 7,531 - 7,531 6,353 (123) - 13,761 Operating Income 2,702 - 2,702 248 123 - 3,073 Interest Expense 576 - 576 219 - - 795 Other Income (Expense), net 100 - 100 (10) - 42 132 Income from Continuing Operations before Income Taxes 2,226 - 2,226 19 123 42 2,410 Provision for Income Taxes 748 - 748 19 60 16 843 Income from Continuing Operations 1,478 - 1,478 - 63 26 1,567 Income (Loss) from Discontinued Operations, net of tax 381 (381) - - - - - Net Income $1,859 ($381) $1,478 $0 $63 $26 $1,567 Diluted Earnings Per Share * $1.01 ($0.21) $0.80 $0.00 $0.03 $0.01 $0.85 * Normalized earnings per share for year-to-date 2005 does not sum due to rounding. BellSouth Corporation Normalized Earnings Summary and Reconciliation to Reported Results (amounts in millions, except per share data) Second Quarter 2004 Normalizing Items Discon- Contin- tinued uing Opera- Opera- tions tions Cingular Rounding Normalized GAAP C (GAAP-C) A Operating Revenues $5,083 $- $5,083 $1,623 $- $6,706 Operating Expenses 3,641 - 3,641 1,351 - 4,992 Operating Income 1,442 - 1,442 272 - 1,714 Interest Expense 211 - 211 57 - 268 Other Income (Expense), net 224 - 224 (215) (1) 8 Income from Continuing Operations before Income Taxes 1,455 - 1,455 - (1) 1,454 Provision for Income Taxes 516 - 516 - - 516 Income from Continuing Operations 939 - 939 - (1) 938 Income (Loss) from Discontinued Operations, net of tax 57 (57) - - - - Net Income $996 $57) $939 $0 ($1) $938 Diluted Earnings Per Share $0.54 ($0.03) $0.51 $0.00 ($0.00) $0.51 Year-to-Date 2004 Discontinued Continuing Operations Operations GAAP C (GAAP - C) Operating Revenues $10,059 $- $10,059 Operating Expenses 7,259 - 7,259 Operating Income 2,800 - 2,800 Interest Expense 426 - 426 Other Income (Expense), net 854 - 854 Income from Continuing Operations before Income Taxes 3,228 - 3,228 Provision for Income Taxes 1,139 - 1,139 Income from Continuing Operations 2,089 - 2,089 Income (Loss) from Discontinued Operations, net of tax 506 (506) - Net Income $2,595 ($506) $2,089 Diluted Earnings Per Share * $1.41 ($0.28) $1.14 * Normalized earnings per share for year-to-date 2004 does not sum due to rounding. Year-to-Date 2004 Normalizing Items Sale of Regulatory Cingular Sonofon Settlement Rounding A B D Normalized Operating Revenues $3,163 $- $50 $- $13,272 Operating Expenses 2,668 - (3) - 9,924 Operating Income 495 - 53 - 3,348 Interest Expense 114 - - - 540 Other Income (Expense), net (379) (462) - (1) 12 Income from Continuing Operations before Income Taxes 2 (462) 53 (1) 2,820 Provision for Income Taxes 2 (167) 20 - 994 Income from Continuing Operations - (295) 33 (1) 1,826 Income (Loss) from Discontinued Operations, net of tax - - - - - Net Income $0 ($295) $33 ($1) $1,826 Diluted Earnings Per Share* $0.00 ($0.16) $0.02 ($0.00) $0.99 * Normalized earnings per share for year-to-date 2004 does not sum due to rounding. BellSouth Corporation Notes to Normalized Financial and Operating Data (pages 3 and 4) (amounts in millions, except per share data) Our normalized earnings have been adjusted for the following: (a) The periods presented have been adjusted to include our 40% proportional share of Cingular Wireless' operating results, net of eliminations for amounts charged by other BellSouth companies to Cingular. (b) Gain related to the sale of our operations in Denmark. (c) Discontinued Operations -- In March 2004, we announced our intention to sell our Latin American properties. Accordingly, the prior period results have been recast to reflect the Latin American operations as Discontinued Operations and thus excluded from normalized results. The first quarter 2005 results include an after-tax gain of $390 related to the final 2 of the 10 properties that were closed in January. (d) Regulatory Settlement -- In April 2004, BellSouth entered into a settlement agreement with respect to previously disclosed litigation (See 2004 10K for further discussion). (e) Wireless merger integration costs -- Represents BellSouth's 40% share of tax-effected wireless merger integration costs of $105 incurred during the 1st quarter 2005 and $204 incurred during 2nd quarter 2005 in connection with the Cingular/AWE merger. Integration costs include one-time cash outlays or specified non- cash charges, including accelerated depreciation, directly related to rationalization of the wireless network, sales distribution channels, the workforce, information technology systems and real estate. (f) Debt extinguishment costs -- Represents one-time expenses associated with the early extinguishment of $400 of long-term debt in 1st quarter 2005 and one-time expenses associated with the early extinguishment of $300 of long-term debt in 2nd quarter 2005. BellSouth Corporation Consolidated Balance Sheets (unaudited) (amounts in millions, except per share data) Change Change June 30, Dec. 31, vs. March 31, vs. Prior Prior 2005 2004 Year 2005 Quarter Assets Current Assets: Cash and cash equivalents $485 $680 ($195) $516 ($31) Short-term investments 0 16 (16) 0 0 Accounts receivable, net of allowance for uncollectibles of $287, $317, and $291 2,480 2,559 (79) 2,467 13 Material and supplies 335 321 14 308 27 Other current assets 951 1,055 (104) 907 44 Assets of discontinued operations 0 1,068 (1,068) 0 0 Total Current Assets 4,251 5,699 (1,448) 4,198 53 Investment in and Advances to Cingular Wireless 21,952 22,771 (819) 22,265 (313) Property, Plant and Equipment, net 21,853 22,039 (186) 21,913 (60) Other Assets 7,741 7,400 341 7,512 229 Goodwill 0 0 0 0 0 Intangible Assets, net 1,529 1,587 (58) 1,557 (28) Total Assets $57,326 $59,496 ($2,170) $57,445 ($119) Liabilities and Shareholders' Equity Current Liabilities: Debt maturing within one year $3,293 $5,475 ($2,182) $4,149 ($856) Accounts payable 1,027 1,047 (20) 994 33 Other current liabilities 3,444 3,018 426 3,049 395 Liabilities of discontinued operations 0 830 (830) 0 0 Total Current Liabilities 7,764 10,370 (2,606) 8,192 (428) Long-Term Debt 14,399 15,108 (709) 14,669 (270) Noncurrent Liabilities: Deferred income taxes 6,594 6,492 102 6,351 243 Other noncurrent liabilities 4,575 4,460 115 4,557 18 Total Noncurrent Liabilities 11,169 10,952 217 10,908 261 Shareholders' Equity: Common stock, $1 par value 2,020 2,020 0 2,020 0 Paid-in capital 7,836 7,840 (4) 7,810 26 Retained earnings 20,053 19,267 786 19,802 251 Accumulated other comprehensive income (70) (157) 87 (80) 10 Shares held in trust and treasury (5,845) (5,904) 59 (5,876) 31 Total Shareholders' Equity 23,994 23,066 928 23,676 318 Total Liabilities and Shareholders' Equity $57,326 $59,496 ($2,170) $57,445 ($119) BellSouth Corporation Consolidated Statements of Cash Flows (unaudited) (amounts in millions, except per share data) Year-To-Date 2Q05 2Q04 1Q05 2005 2004 Cash Flows from Operating Activities: Income from Continuing Operations $795 $939 $683 $1,478 $2,089 Adjustments to income from continuing operations: Depreciation and amortization 916 914 918 1,834 1,812 Provision for uncollectibles 80 80 85 165 195 Net losses (earnings) of equity affiliates (68) (151) 80 12 (255) Deferred income taxes 162 434 (45) 117 603 Net (gains) losses on sale or impairment of equity securities - - - - 3 Pension income (133) (121) (133) (266) (242) Pension settlement (gains) losses - - - - - Stock-based compensation expense 23 30 25 48 58 Loss on extinguishment of debt 20 - 22 42 - (Gain) loss on sale/disposal of operations - - - - (462) Net change in: Accounts receivable and other current assets (79) (116) (84) (163) (124) Accounts payable and other current liabilities 368 47 23 391 103 Deferred charges and other assets (60) (37) 20 (40) (62) Other liabilities and deferred credits 101 24 103 204 33 Other reconciling items, net 26 26 21 47 46 Net cash provided by operating activities 2,151 2,069 1,718 3,869 3,797 Cash Flows from Investing Activities: Capital expenditures (829) (731) (750) (1,579) (1,366) Purchase of short-term investments - (1,022) (12) (12) (1,846) Proceeds from sale of short-term investments - 478 28 28 1,036 Investments in debt and equity securities (71) (276) (32) (103) (416) Investments in and advances to equity affiliates - - (2) (2) - Net short term (advances to) repayments from Cingular 266 - 400 666 - Proceeds from sale of securities and operations 15 - 929 944 559 Proceeds from repayment of loans and advances 121 - 2 123 109 Settlement of derivatives on advances - - - - (17) Other investing activities, net (9) 10 (3) (12) 5 Net cash provided by (used for) investing activities (507) (1,541) 560 53 (1,936) Cash Flows from Financing Activities: Net borrowing (repayments) of short-term debt (571) 23 (1,093) (1,664) (339) Proceeds from long-term debt - 696 - - 696 Repayments of long-term debt (613) (214) (669) (1,282) (221) Dividends paid (494) (457) (494) (988) (914) Purchase of treasury shares (6) (99) (77) (83) (99) Other financing activities, net 9 3 6 15 51 Net cash used for financing activities (1,675) (48) (2,327) (4,002) (826) Net Increase/(Decrease) in Cash from Continuing Operations (31) 480 (49) (80) 1,035 Net Increase/(Decrease) in Cash from Discontinued Operations - (176) (115) (115) (185) Net Increase (Decrease) in Cash and Cash Equivalents (31) 304 (164) (195) 850 Cash and Cash Equivalents at Beginning of Period 516 3,493 680 680 2,947 Cash and Cash Equivalents at End of Period $485 $3,797 $516 $485 $3,797 BellSouth Corporation Results by Segment (amounts in millions) (unaudited) Communications Group (1) 2Q05 2Q04 Growth 1Q05 Growth Operating Revenues Voice $3,155 $3,154 0.0% $3,154 0.0% Data 1,165 1,115 4.5% 1,160 0.4% Other 305 323 -5.6% 304 0.3% Total Operating Revenues 4,625 4,592 0.7% 4,618 0.2% Operating Expenses Cost of services and products 1,850 1,724 7.3% 1,853 -0.2% Selling, general, & administrative expenses 775 758 2.2% 738 5.0% Depreciation and amortization 910 908 0.2% 910 0.0% Total Operating Expenses 3,535 3,390 4.3% 3,501 1.0% Segment Operating Income 1,090 1,202 -9.3% 1,117 -2.4% Interest Expense 100 90 11.1% 98 2.0% Other Income (Expense), net 20 6 233.3% 11 81.8% Income Before Income Taxes 1,010 1,118 -9.7% 1,030 -1.9% Provision for Income Taxes 350 403 -13.2% 366 -4.4% Segment Net Income(1) $660 $715 -7.7% $664 -0.6% Selected Financial and Operating Data (amounts in millions) Segment operating income $1,090 $1,202 -9.3% $1,117 -2.4% Segment operating margin 23.6% 26.2% -260 bps 24.2% -60 bps Long distance revenues $580 $479 21.1% $578 0.3% Switched Access MOUs 15,617 17,755 -12.0% 16,151 -3.3% BSLD MOUs 6,301 4,998 26.1% 6,011 4.8% Total Access minutes of use 21,918 22,753 -3.7% 22,162 -1.1% Capital expenditures $826 $726 13.8% $742 11.3% (amounts in thousands) Wholesale lines 2,664 3,139 -15.1% 2,882 -7.6% DSL customers 2,473 1,738 42.3% 2,349 5.3% LD customers 6,771 5,131 32.0% 6,470 4.7% Consumer ARPU (4) $58.39 $55.33 5.5% $58.25 0.2% BellSouth Corporation Results by Segment (amounts in millions) (unaudited) Communications Group (1) Year-To-Date 2005 2004 Growth Operating Revenues Voice $6,309 $6,323 -0.2% Data 2,325 2,206 5.4% Other 609 627 -2.9% Total Operating Revenues 9,243 9,156 1.0% Operating Expenses Cost of services and products 3,703 3,465 6.9% Selling, general, & administrative expenses 1,513 1,503 0.7% Depreciation and amortization 1,820 1,799 1.2% Total Operating Expenses 7,036 6,767 4.0% Segment Operating Income 2,207 2,389 -7.6% Interest Expense 198 183 8.2% Other Income (Expense), net 31 9 244.4% Income Before Income Taxes 2,040 2,215 -7.9% Provision for Income Taxes 716 803 -10.8% Segment Net Income(1) $1,324 $1,412 -6.2% Selected Financial and Operating Data (amounts in millions) Segment operating income $2,207 $2,389 -7.6% Segment operating margin 23.9% 26.1% -220 bps Long distance revenues $1,158 $919 26.0% Switched Access MOUs 31,768 36,474 -12.9% BSLD MOUs 12,312 9,572 28.6% Total Access minutes of use 44,080 46,046 -4.3% Capital expenditures $1,568 $1,352 16.0% BellSouth Corporation Results by Segment (unaudited) Supplemental Operating Data (in thousands) Communications Group -- Network Access Lines In Service Reported (a) 2Q05 2Q04 Growth 1Q05 Growth Access lines Residence Retail Primary 11,595 11,876 -2.4% 11,752 -1.3% Additional 1,257 1,447 -13.1% 1,304 -3.6% Total Retail Residence 12,852 13,323 -3.5% 13,056 -1.6% Wholesale Resale 151 127 18.9% 133 13.5% UNE-P 1,689 2,149 -21.4% 1,886 -10.4% Total Wholesale Residence 1,840 2,276 -19.2% 2,019 -8.9% Total Residence 14,692 15,599 -5.8% 15,075 -2.5% Business Retail Total Retail Business 5,253 5,282 -0.5% 5,251 0.0% Wholesale Resale 59 63 -6.3% 60 -1.7% UNE-P 700 740 -5.4% 737 -5.0% Total Wholesale Business 759 803 -5.5% 797 -4.8% Total Business 6,012 6,085 -1.2% 6,048 -0.6% Other Retail/Wholesale Lines Retail 31 42 -26.2% 30 3.3% Wholesale 65 60 8.3% 66 -1.5% Total Other Retail/Wholesale Lines 96 102 -5.9% 96 0.0% Total Access Lines in Service 20,800 21,786 -4.5% 21,219 -2.0% ISDN line equivalents Residence 7 11 -36.4% 9 -22.2% Business 1,421 1,477 -3.8% 1,416 0.4% Total ISDN Adjusted ALIS 22,228 23,274 -4.5% 22,644 -1.8% Access Line Equivalents (b) Selected digital data services: Unbundled Loops 298 343 -13.1% 298 0.0% DS0 & ADSL 15,079 10,695 41.0% 14,335 5.2% DS1 8,028 7,475 7.4% 7,861 2.1% DS3 & higher 32,861 32,547 1.0% 32,449 1.3% Total digital data lines in service 56,266 51,060 10.2% 54,943 2.4% Total equivalent access lines in service 78,494 74,334 5.6% 77,587 1.2% (a) Prior period operating data are often revised at later dates to reflect updated information. The above information reflects the latest data available for the periods indicated. (b) Access line equivalents represent a conversion of non-switched data circuits to a switched access line basis and is presented for comparability purposes. Equivalents are calculated by converting high-speed/high-capacity circuits to the equivalent of a switched access line based on transport capacity. While the revenues generated by access line equivalents have a directional relationship with these counts, revenue growth rates cannot be compared to line growth rates on an equivalent basis. BellSouth Corporation Results by Segment (amounts in millions) (unaudited) Domestic Wireless Segment (1)(a) 2Q05 2Q04 Growth 1Q05 Growth Operating Revenues Service revenues (2) $3,087 $1,534 101.2% $2,968 4.0% Equipment and other revenues 356 141 152.5% 324 9.9% Total Operating Revenues 3,443 1,675 105.6% 3,292 4.6% Operating Expenses Cost of services and products 1,401 592 136.7% 1,375 1.9% Selling, general, & administrative expenses 1,151 585 96.8% 1,159 -0.7% Depreciation and amortization 608 226 169.0% 670 -9.3% Total Operating Expenses 3,160 1,403 125.2% 3,204 -1.4% Segment Operating Income 283 272 4.0% 88 221.6% Interest Expense 130 80 62.5% 135 -3.7% Other Income (Expense), net (4) (52) 92.3% 4 -200.0% Income Before Income Taxes 149 140 6.4% (43) N/M* Provision for Income Taxes 72 51 41.2% (10) N/M Segment Net Income (1) $77 $89 -13.5% ($33) N/M * - Not meaningful. Selected Financial and Operating Data (amounts in millions, except customer data in thousands) Segment operating income $283 $272 4.0% $88 221.6% Segment operating margin 8.2% 16.2% -800 bps 2.7% 550 bps Cellular/PCS Operating Metrics (100% Cingular): Total Customers 51,596 25,044 106.0% 50,369 2.4% Net Customer Additions 1,071 428 150.2% 1,419 -24.5% Partitioned Customers and/or Adjustments 156 (2) N/M (159) 198.1% Churn 2.2% 2.7% -50 bps 2.2% 0 bps Wireless Service ARPU (3) $50.43 $50.75 -0.6% $49.59 1.7% Minutes Of Use Per Subscriber(4) 704 568 23.9% 642 9.7% Licensed POPs (5) 292 243 20.2% 292 0.0% Penetration (5) 18.0% 11.1% 690 bps 17.7% 30 bps PROFORMA 2Q05 2Q04 Growth 1Q05 Growth Service Revenue 3,087 2,981 3.6% 2,968 4.0% Total Revenue (40%) 3,443 3,267 5.4% 3,292 4.6% Net Adds (100%) 1,071 424 152.6% 1,419 -24.5% ARPU $50.43 $53.42 -5.6% $49.59 1.7% (a) The domestic wireless segment is comprised of BellSouth's 40% share of the reported results of Cingular Wireless. BellSouth Corporation Results by Segment (amounts in millions) (unaudited) Domestic Wireless Segment (1)(a) Year-To-Date 2005 2004 Growth Operating Revenues Service revenues (2) $6,055 $2,967 104.1% Equipment and other revenues 680 295 130.5% Total Operating Revenues 6,735 3,262 106.5% Operating Expenses Cost of services and products 2,776 1,186 134.1% Selling, general, & administrative expenses 2,310 1,133 103.9% Depreciation and amortization 1,278 447 185.9% Total Operating Expenses 6,364 2,766 130.1% Segment Operating Income 371 496 -25.2% Interest Expense 265 159 66.7% Other Income (Expense), net - (99) 100.0% Income Before Income Taxes 106 238 -55.5% Provision for Income Taxes 62 90 -31.1% Segment Net Income (1) $44 $148 -70.3% * - Not meaningful. Selected Financial and Operating Data (amounts in millions, except customer data in thousands) 2005 2004 Growth Segment operating income $371 $496 -25.2% Segment operating margin 5.5% 15.2% -970 bps Cellular/PCS Operating Metrics (100% Cingular): Total Customers 51,596 25,044 106.0% Net Customer Additions 2,490 982 153.6% Partitioned Customers and/or Adjustments (3) 35 -108.6% Churn 2.2% 2.7% -50 bps Wireless Service ARPU (3) $50.01 $49.54 0.9% Minutes Of Use Per Subscriber (4) 674 547 23.2% Licensed POPs (5) 292 243 20.2% Penetration (5) 18.0% 11.1% 690 bps (a) The domestic wireless segment is comprised of BellSouth's 40% share of the reported results of Cingular Wireless. BellSouth Corporation Results by Segment (amounts in millions) (unaudited) Advertising & Publishing (1) 2Q05 2Q04 Growth 1Q05 Growth Operating Revenues Advertising and publishing revenues 481 466 3.2% 475 1.3% Commission revenues 50 45 11.1% 16 212.5% Total Operating Revenues 531 511 3.9% 491 8.1% Operating Expenses Cost of services 99 90 10.0% 90 10.0% Selling, general, & administrative expenses 180 167 7.8% 163 10.4% Depreciation and amortization 7 7 0.0% 7 0.0% Total Operating Expenses 286 264 8.3% 260 10.0% Segment Operating Income 245 247 -0.8% 231 6.1% Interest Expense 2 2 0.0% 3 -33.3% Other Income (Expense), net 1 1 0.0% (1) 200.0% Income Before Income Taxes 244 246 -0.8% 227 7.5% Provision for Income Taxes 90 96 -6.3% 86 4.7% Segment Net Income(1) $154 $150 2.7% $141 9.2% Segment operating income $245 $247 -0.8% $231 6.1% Segment operating margin 46.1% 48.3% -220 bps 47.0% -90 bps * - Not meaningful. BellSouth Corporation Results by Segment (amounts in millions) (unaudited) Advertising & Publishing (1) Year-To-Date 2005 2004 Growth Operating Revenues Advertising and publishing revenues 956 932 2.6% Commission revenues 66 61 8.2% Total Operating Revenues 1,022 993 2.9% Operating Expenses Cost of services 189 170 11.2% Selling, general, & administrative expenses 343 323 6.2% Depreciation and amortization 14 14 0.0% Total Operating Expenses 546 507 7.7% Segment Operating Income 476 486 -2.1% Interest Expense 5 4 25.0% Other Income (Expense), net - 1 -100.0% Income Before Income Taxes 471 483 -2.5% Provision for Income Taxes 176 186 -5.4% Segment Net Income(1) $295 $297 -0.7% Segment operating income $476 $486 -2.1% Segment operating margin 46.6% 48.9% -230 bps * - Not meaningful. BellSouth Corporation Notes (1) Segment net income (loss) is based on normalized results which exclude certain one-time transactions and certain corporate intercompany billings. Certain intersegment revenues are not eliminated for purposes of management reporting. (2) Wireless service revenues includes activation fees, access, airtime, roaming, long distance and value added services. Roaming revenues are included on a gross basis for the Domestic Wireless segment. Average monthly revenue per customer is calculated by dividing average monthly service revenue by average customers. (3) Management uses average revenue per unit (ARPU) as an indicator of operating performance of the business. Consumer ARPU is defined as consumer revenues during the period divided by average primary access lines during the period. Wireless Service ARPU - Cellular/PCS is defined as Cellular/PCS service revenues during the period divided by average Cellular/PCS subscribers during the period. This metric is used to compare the recurring revenue amounts being generated on our network to prior periods and internal targets. We believe that each of these metrics provides useful information concerning the performance of our initiatives to attract and retain high value customers and the use of our network. (4) Total Minutes of Use per Cell/PCS Subscriber definition was changed effective with the 2Q05 reporting period. Prior to the change, the numerator was defined as Local Minutes of Use. Effective with this change, the numerator is now defined as including Local Minutes of Use and Outcollect Minutes of Use. (5) Licensed POPs refers to the number of people residing in areas where Cingular and its partners have licenses to provide cellular or PCS service including areas where Cingular has not yet commenced service. Penetration calculation for 2Q05 is based on licensed "operational" POP's of 292 million. BellSouth Corporation Non-GAAP Measures - Reconciliation (amounts in millions) (unaudited) Segment Net Income Reconciliation to GAAP Net Income Year-to-Date 2Q05 2Q04 1Q05 2005 2004 Communications group segment net income $660 $715 $664 $1,324 $1,412 Domestic wireless group segment net income 77 89 (33) 44 148 Advertising and publishing group segment net income 154 150 141 295 297 Corporate, eliminations and other (42) (16) (54) (96) (31) Normalized net income 849 938 718 1,567 1,826 Add back Excluded non-recurring or non-operational items (a) (54) 58 346 292 769 Consolidated GAAP net income $795 $996 $1,064 $1,859 $2,595 Free Cash Flow Year-to-Date 2Q05 2Q04 1Q05 2005 2004 Net cash provided by operating activities $2,151 $2,069 $1,718 $3,869 $3,797 Less Capital Expenditures (829) (731) (750) (1,579) (1,366) Operating Free Cash Flow $1,322 $1,338 $968 $2,290 $2,431 Net Debt June 30, December 31, March 31, 2005 2004 2005 Total Debt $17,692 $20,583 $18,818 Less Cash (485) (680) (516) Net Debt $17,207 $19,903 $18,302 Communications Group Operating Income before Depreciation and Amortization Year-to-Date 2Q05 2Q04 1Q05 2005 2004 Operating Revenues $4,625 $4,592 $4,618 $9,243 $9,156 Operating Income 1,090 1,202 1,117 2,207 2,389 Add back Depreciation and amortization 910 908 910 1,820 1,799 Operating Income before Depreciation and Amortization $2,000 $2,110 $2,027 $4,027 $4,188 Margin 43.2% 45.9% 43.9% 43.6% 45.7% Domestic Wireless Operating Income before Depreciation and Amortization Year-to-Date 2Q05 2Q04 1Q05 2005 2004 Service revenues $3,087 $1,534 $2,968 $6,055 $2,967 Equipment and other revenues 356 141 324 680 295 Operating revenues 3,443 1,675 3,292 6,735 3,262 Operating Income 283 272 88 371 496 Operating Margin (Operating income divided by operating revenues)(b) 8.2% 16.2% 2.7% 5.5% 15.2% Add back Depreciation and amortization 608 226 670 1,278 447 Operating Income before Depreciation and Amortization $891 $498 $758 $1,649 $943 Margin (Operating Income before Depr & Amort divided by service revenues) (b) 28.9% 32.5% 25.5% 27.2% 31.8% Domestic Wireless Proforma Revenue 2Q05 2Q04 1Q05 Operating Revenue $3,443 $1,675 $3,292 Add back Proforma Adjustments (c) - 1,592 - Total Operating Revenue (Proforma) $3,443 $3,267 $3,292 Domestic Wireless Proforma ARPU 2Q05 2Q04 1Q05 Service revenues $3,087 $1,534 $2,968 Less Mobitex data revenues - 24 - Add back Proforma Adjustments (c) - 1,447 - Service revenue used to calculate Proforma ARPU $3,087 $2,957 $2,968 ARPU (Proforma) $50.43 $53.42 $49.59 (a) See pages 3 and 4 for detail of excluded items. (b) Margin calculations for our domestic wireless segment represents 40% of Cingular's margin calculations adjusted for the related normalized items as presented on pages 3-4. (c) These adjustments are consistent in nature with those set forth in Cingular's Form 8-K/A dated November 29, 2004. EX-99 3 form8k072505ex99b.txt EXHIBIT 99-B Exhibit 99-b BellSouth Reports Second Quarter Earnings o Sequential earnings growth from continuing operations o Strong Cingular results drive margin improvements ATLANTA - BellSouth Corporation (NYSE: BLS) announced second quarter 2005 earnings per share (EPS) from continuing operations of 43 cents compared to 37 cents in the first quarter of 2005 and 51 cents in the second quarter of 2004. Normalized EPS from continuing operations was 46 cents, an increase compared to 39 cents in the first quarter of 2005 and a decline compared to 51 cents in the second quarter of 2004. Normalizing items in the second quarter of 2005 consisted of wireless merger integration costs (2 cents) and debt extinguishment costs (1 cent). "The realignment of our assets toward wireless and broadband services is starting to pay off," said Duane Ackerman, Chairman and Chief Executive Officer. "Cingular delivered strong growth in customers, revenues and operating margins. Our results this quarter clearly demonstrate how Cingular's progress impacts BellSouth's bottom line. Our wireline business and growing Advertising & Publishing services delivered consistent, overall financial performance." Normalized Results from Continuing Operations Normalized results from continuing operations include BellSouth's 40 percent proportionate share of Cingular's revenues and expenses. Cingular completed its acquisition of AT&T Wireless on Oct. 26, 2004. Results prior to the acquisition date have not been restated. For the second quarter of 2005, normalized revenue was $8.52 billion, up 2.6 percent compared to the first quarter of 2005. Operating margin was 19.2 percent, a 190 basis point improvement compared to the first quarter of 2005. Net income was $849 million, up $131 million from the first quarter of 2005. These improvements reflect Cingular's continued growth and merger integration progress, stable results from Communications Group and continued Advertising & Publishing revenue growth. Year-over-year, second quarter 2005 normalized revenue was $8.52 billion compared to $6.71 billion in the second quarter of 2004. Second quarter normalized net income decreased $89 million compared to $938 million in the second quarter of 2004, impacted by a decline in core voice revenues and higher retiree medical expense in the Communications Group and financing costs associated with the acquisition of AT&T Wireless. Year-over-year, Cingular's higher operating income before depreciation and amortization offset increased intangible amortization expense related to the acquisition of AT&T Wireless. Reported Results from Continuing Operations For the second quarter of 2005, BellSouth's consolidated reported revenue from continuing operations totaled $5.14 billion, an increase of 1.2 percent compared to the same quarter of 2004. Income from continuing operations was $795 million compared to $939 million in the same quarter of the previous year. In addition to the items noted above, the comparison of period-to-period reported results was negatively impacted by wireless merger integration costs associated with the acquisition of AT&T Wireless. Operating free cash flow (defined as net cash provided by operating activities less capital expenditures) was $1.3 billion for the second quarter of 2005. In June, the Company increased the dividend by more than 7 percent to 29 cents per share quarterly or $1.16 per share annually. Over the last three years, BellSouth has raised the quarterly dividend a total of 53 percent. Capital expenditures for the second quarter of 2005 were $829 million. In addition, the Company has paid down $2.9 billion in debt since the beginning of 2005. Communications Group In the second quarter of 2005, Communications Group revenue remained stable at $4.62 billion, a slight increase compared to the same quarter of 2004. Revenue growth from long distance, DSL and small business access line gains effectively offset revenue declines from residential access line loss and large business services. Second quarter operating margin was 23.6 percent compared to 25.0 percent for the full year of 2004. As of June 30, 2005, total access lines were 20.8 million, down 419,000 compared to the first quarter of 2005. Access line loss was driven by wireless substitution, competition and seasonal household moves that traditionally affect the second quarter. UNE-P access lines resold by BellSouth competitors were down 235,000 compared to the first quarter of 2005. Residential retail access lines were down 204,000. In contrast, business retail access lines held steady, boosted by 33,000 net new access lines in the small business segment. BellSouth long distance customers reached 53 percent penetration of its mass-market customer base. The Company added 301,000 net mass-market long distance customers during the second quarter of 2005, and now serves nearly 6.8 million mass-market long distance customers. New and existing customers continue to choose BellSouth as their long distance provider. With many residential and small business customers choosing unlimited long distance and international calling plans, average revenue per user (ARPU) is about $17 per month. Driven by DSL, network data revenue for the second quarter was $1.17 billion, an increase of 4.5 percent compared to the same quarter of 2004. BellSouth now serves more than 2.4 million DSL subscribers. During the second quarter of 2005, BellSouth added 124,000 net DSL customers. Net customer additions declined compared to the first quarter of 2005, impacted by changes in promotional activity during the first quarter and traditional seasonal slowing. Increasing broadband penetration remains a priority for BellSouth. An additional 80,000 customers added DIRECTV(R) service to their communications packages during the second quarter, bringing the total number of customers with this package to 394,000. Through our successful alliance with DIRECTV(R), BellSouth provides competitively priced packages that include wireline and wireless voice, Internet access and entertainment services. Cingular Wireless Cingular Wireless, the nation's largest wireless provider, added approximately 1.1 million net customers in the second quarter of 2005, bringing its nationwide customer base to 51.6 million customers. Cingular's gross customer additions in the second quarter were 4.4 million, demonstrating continued success in the marketplace. Overall churn remained at 2.2 percent in the second quarter of 2005, and postpaid churn improved sequentially by 10 basis points to 1.8 percent. Cingular's reported revenue was $8.6 billion for the second quarter of 2005, representing a 5.4 percent increase over pro forma revenue from the prior year period and a 4.6 percent sequential increase. BellSouth's normalized revenue includes its 40 percent share of Cingular's reported revenue. Service ARPU (average revenue per user) in the second quarter was $50.43, a decline of 5.6 percent from the prior year (pro forma) and a sequential increase of 1.7 percent from this year's first quarter ARPU. ARPU from data services continued to grow in the second quarter reaching $4.16, a 46 cent increase from the previous quarter. This increase was driven by customer usage of text messaging, downloadable ringtones, games and many other wireless applications. Cingular's second quarter normalized service margin from operating income before depreciation and amortization (OIBDA) was 28.9 percent, 340 basis points better than the first quarter of 2005. This increase was driven by improved revenue growth, lower gross customer additions and customer upgrades and operational efficiencies associated with merger synergies. During the second quarter, 78 percent of Cingular's subscriber base was GSM-equipped, up from 72 percent in the first quarter of 2005. In addition, an impressive 90 percent of the company's total combined minutes are now carried on its GSM network. Through roaming partners, Cingular now has coverage in more than 170 countries worldwide. Cingular is on track to launch UMTS/HSDPA in 15-20 markets by the end of 2005. This next-generation technology provides superior speeds for data and video services. Advertising & Publishing In the second quarter of 2005, Advertising & Publishing continued to grow revenue. Revenue was $531 million, a 3.9 percent increase over the same quarter of 2004, and operating margin was 46.1 percent. Segment net income was $154 million, up $4 million compared to the second quarter of 2004. Normalizing Items In the second quarter of 2005, the difference between reported (GAAP) EPS from continuing operations and normalized EPS is shown in the following table: - ----------------------------------------------------------------------- 2Q05 2Q04 - ----------------------------------------------------------------------- - ----------------------------------------------------------------------- GAAP Diluted EPS - Income from continuing operations $0.43 $0.51 - ----------------------------------------------------------------------- - ----------------------------------------------------------------------- Wireless merger integration costs $0.02 - ----------------------------------------------------------------------- - ----------------------------------------------------------------------- Debt extinguishment costs $0.01 - ----------------------------------------------------------------------- - ----------------------------------------------------------------------- Normalized Diluted EPS - Income from continuing operations $0.46 $0.51 - ----------------------------------------------------------------------- Wireless merger integration costs - Represents BellSouth's 40 percent share of tax-effected wireless merger integration costs of $204 million incurred during the second quarter of 2005 in connection with the Cingular/ AT&T Wireless merger. Integration costs include one-time cash outlays or specified non-cash charges, including accelerated depreciation directly related to rationalization of the wireless network, sales distribution channels, the workforce, information technology systems and real estate. Debt extinguishment costs - Represents one-time expenses associated with the early extinguishment of $300 million of long-term debt in the second quarter of 2005. Communications Group Total Communications Group revenues remained stable in the second quarter of 2005, increasing 0.7 percent compared to the same period last year and 0.2 percent sequentially. Revenue growth from increased penetration of InterLATA long distance and DSL high-speed Internet access offset revenue loss from retail access line products. Year-over-year for the second quarter, data revenue grew 4.5 percent and voice revenue was flat, while other revenue declined 5.6 percent. Growth in Consumer long distance and DSL revenue was partially offset by retail residential access lines losses, resulting in a 2.5 percent year-over-year increase in Consumer revenue. Retail residential access lines declined 3.5 percent compared to the second quarter of 2004 primarily due to wireless and broadband substitution. Sequentially, primary residential lines decreased 157,000. Second quarter access line trends are traditionally impacted by seasonal household moves. Revenue for BellSouth's Small Business unit increased 6.2 percent in the second quarter and 5.7 percent year-to-date compared to the same periods in 2004. Increased penetration of long distance and DSL and Small Business' customer reacquisition and retention programs continued to drive revenue growth. This marks the ninth consecutive quarter of year-over-year revenue growth for Small Business. Targeted reacquisition and retention efforts and further competitive pullback helped Small Business gain more than 33,000 lines in the second quarter. Large Business revenue decreased 2.0 percent in the second quarter compared to the same period last year. Competitive pricing pressure and access line losses continued to negatively impact revenues, and overshadowed revenue growth in complex long distance services. Access line losses have shown some stability over the past year, averaging approximately 25,000 per quarter. Almost 50 percent of year-to-date access line losses have migrated to BellSouth data products. [Graphic inserted here Communications Group Revenues (in millions) 2Q04 - $4,592 3Q04 - $4,618 4Q04 - $4,639 1Q05 - $4,618 2Q05 - $4,625] In the second quarter, wholesale revenue decreased 0.2 percent compared to the prior year. Revenue declines in transport services sold to inter-exchange carriers and switched access were nearly offset by growth in wireless transport and increased UNE-P revenue. UNE lines declined 235,000 during the second quarter versus a decline of 95,000 in the first quarter of 2005. BellSouth has signed more than 150 commercial agreements with wholesale customers, representing more than 60 percent of its UNE-P base. [Graphic inserted here Small Business Net Access Line Change (in thousands) 2Q04 - (2) 3Q04 - 3 4Q04 - 13 1Q05 - 37 2Q05 - 33] Voice Revenue and Access Lines Details InterLATA long distance revenue growth offset decreased revenue from retail switched access line products, resulting in flat Communications Group voice revenues for the second quarter. InterLATA long distance voice revenue increased more than 30 percent compared to the prior year second quarter and totaled more than $370 million. Wireless and broadband substitution and, to a much lesser extent, access line losses to cable providers contributed to a 4.5 percent year-over-year decline in switched access lines. As of June 30, 2005, total access lines were 20.8 million, down 419,000 compared to the first quarter of 2005. Second quarter has traditionally been impacted by seasonal activity related to household moves. Total retail residential lines declined 3.5 percent compared to second quarter of 2004, driven primarily by wireless substitution. Additional residential lines were down 13.1 percent compared to the second quarter of 2004. Retail business lines were almost flat year- over-year, declining only 0.5 percent from the second quarter of 2004. A gain of more than 69,000 Small Business access lines year-to-date nearly offset declines in Large Business from continued demand pressures and migration to data services. UNE-P lines decreased 495,000 year-over-year and 235,000 sequentially. Year-to-date, approximately 50 percent of all UNE-P disconnects were reacquired as retail lines. Total access minutes of use, excluding wireless, decreased 3.7 percent in the second quarter. Declines in switched access minutes of use due to access line losses and wireless substitution more than offset a 26.1 percent increase in BellSouth Long Distance access minutes of use. Wireless carrier minutes increased 26.4 percent compared to the same quarter of 2004. Broadband and Data Services In the second quarter, network data revenues grew 4.5 percent year-over-year to more than $1.1 billion, fueled by DSL and complex long distance services. DSL revenue totaled more than $287 million, an increase of 22.6 percent year-over-year, as the total DSL subscriber base grew by 42.3 percent. Complex long distance data revenue growth of almost $18 million from the prior year second quarter also contributed to the increase in data revenues. Through June of 2005, total network data revenues represented 13.8 percent of total BellSouth normalized revenues and 25.2 percent of Communications Group revenues. Retail data revenue grew 11.7 percent compared to the second quarter of 2004. Revenue from wholesale data transport services sold to other communications providers, including long distance companies and CLECs, decreased 3.9 percent in the second quarter compared to the same quarter in the previous year. A decrease in wholesale DSL revenue and declines in data transport services sold to inter-exchange carriers drove most of the decline in wholesale data revenue. Also contributing was a decrease in revenue from continued declines in the wholesale aggregation of dial-up Internet traffic. BellSouth offers tiered DSL speeds and associated pricing to meet a broad range of customer needs. BellSouth(R) FastAccess(R) DSL Ultra runs at downstream connection speeds of up to 1.5 megabits. For customers who want higher speeds, the Company offers BellSouth(R) FastAccess(R) DSL Xtreme, delivering downstream speeds of up to 3.0 megabits and upload speeds of up to 384 kilobits. The Company also offers a lower speed version - BellSouth(R) FastAccess(R) DSL Lite - - that runs at downstream speeds of up to 256 kilobits. To enrich our broadband offering, BellSouth plans to launch a new high-speed broadband service in the fourth quarter of 2005, which will deliver residential and business customers downstream connection speeds of up to 6 megabits. BellSouth ended the second quarter with more than 2.4 million DSL subscribers, an increase of 42.3 percent year-over-year and 5.0 percent sequentially. DSL net customer additions were approximately 124,000 during the quarter. This represented a decline from prior quarters due in part to seasonality. Lower net additions also reflected the impact of changes in market promotions to direct customers toward higher speeds of service. During the second quarter, new residential FastAccess(R) DSL customers could receive for the first three months a $23 discount on FastAccess(R) DSL Ultra or a $15 discount on FastAccess(R) DSL Xtreme. The discounts enabled customers who also purchased the BellSouth(R) Complete Choice plan and BellSouth(R) Unlimited long distance to receive DSL service for as low as $9.95 per month for the first three months. These actions resulted in a more profitable mix of customers. [Graphic inserted here DSL Customers & Penetration of Retail Access Lines* (in thousands) 2Q04 - 1,738; 8.6% 3Q04 - 1,872; 9.4% 4Q04 - 2,096; 10.6% 1Q05 - 2,349; 11.9% 2Q05 - 2,473; 12.6% * Penetration of ISDN-Adjusted Retail Access Lines] DSL penetration increased to 16.0 percent of qualified lines and 12.6 percent of retail (ISDN-adjusted) switched access lines. DSL coverage currently extends to more than 80 percent of BellSouth households. About 50 percent of DSL-qualified lines can support up to 5 megabits of speed. In July, BellSouth announced new broadband DSL pricing that simplifies the sale and allows the Company to offer attractive DSL pricing to a larger universe of customers. New residential customers can order FastAccess(R) DSL Lite for $24.95 per month, FastAccess(R) DSL Ultra for $32.95 per month or FastAccess(R) DSL Xtreme for $42.95 per month. In addition, BellSouth will no longer charge residential customers a service activation fee and will reduce the price of its modems and gateways to $75. Shipping and handling charges will be eliminated, and customers can pay for their modem or gateway in 10 monthly installments of $7.50, or receive it free (after rebate) if they order online. Packages With a BellSouth Answers(R) package, customers can combine local calling plans with long distance, Internet, Cingular Wireless services and digital satellite television service from DIRECTV(R) to create a communications and entertainment services bundle unique to their needs. At the end of the second quarter, the Company had 4.8 million Answers customers, representing an increase of 28.7 percent compared to the same period in 2004. Retail primary line penetration of BellSouth Answers(R) packages increased to 41.5 percent at the end of the second quarter compared to 31.4 percent in the same quarter of the previous year. Approximately 45 percent of Answers customers had either FastAccess(R) DSL or BellSouth Dial(R) Internet service. Long distance service was included in 85 percent of all BellSouth Answers(R) packages. An additional 80,000 customers added DIRECTV(R) service to their communications packages during the second quarter, including both new sales and "opt-ins." The total number of customers with a DIRECTV(R) package is 394,000. More than 35 percent of BellSouth Answers(R) customers have two or more affiliate services - such as long distance, Cingular Wireless, DSL or dial-up Internet. These customers, who subscribe to multiple services in their communications bundle, spend more on average with BellSouth and are less likely to churn. Growth in packages with two or more services has driven BellSouth Answers(R) ARPU to more than $65. Long Distance BellSouth ended the second quarter with nearly 6.8 million mass-market long distance subscribers, an increase of more than 30 percent compared to the same quarter last year. The company added 301,000 subscribers to its long distance plans and packages during the quarter. Mass-market penetration increased to 53.4 percent, representing 52.9 percent of primary residential access lines and 58.5 percent of BellSouth's mass-market small business accounts. BellSouth has achieved 50 percent mass-market penetration in eight out of nine states in our region. Revenues for mass-market long distance services totaled $339 million for the second quarter, an increase of 33.7 percent year-over-year and 1.4 percent sequentially. Year-to-date mass-market long distance revenues were 42.6 percent higher than the same period in 2004. Mass market long distance ARPU was approximately $17 in the second quarter. LONG DISTANCE PENETRATION States # Quarters Consumer Business Total Mass Competing Penetration Penetration Market Penetration GA/LA 13 56.1% 61.2% 56.6% AL/KY/ 11 54.6% 58.0% 54.9% MS/NC/ SC FL/TN 10 49.3% 57.3% 50.0% Total 52.9% 58.5% 53.4% Customers continue to choose BellSouth(R) Unlimited Long Distance, making it the top selling BellSouth long distance plan again this quarter. More than 2.0 million customers have a BellSouth Unlimited plan, comprising one-third of the consumer long distance base. Competitive offers in the marketplace help drive the success of BellSouth(R) Unlimited Long Distance. As part of a promotion announced in the second quarter, eligible new customers signing up for any domestic BellSouth Unlimited plan by Aug. 31 will receive a coupon redeemable for $25. Revenue from complex long distance services was nearly $75 million in the second quarter, a 51.2 percent increase over the same period one year ago, and a 4.8 percent increase sequentially. On a year-to-date basis, complex long distance revenue increased 60 percent over the same period last year. [Graphic inserted here Long Distance Customers (in thousands) 2Q04 - 5,131 3Q04 - 5,663 4Q04 - 6,015* 1Q05 - 6,470* 2Q05 - 6,771* * Does not include toll block customers] Technology Update As BellSouth transforms from a narrowband voice company to a broadband services company, the Company continues to extend fiber deeper into its network. Almost 50 percent of BellSouth households are served by a combination of fiber and short copper loops (less than 5,000 feet), and approximately half of our 44,000 remote terminals are fed with fiber. At the end of the second quarter, BellSouth had more than 5.4 million miles of fiber, a more than 10 percent increase from one year ago, and had deployed fiber-to-the-curb (FTTC) facilities to 1.1 million homes. BellSouth is continuing to advance network capacity by adding new fiber-fed remote terminals, upgrading existing RTs to fiber-fed and laying additional fiber miles. Through the first five months of 2005, the Company upgraded or added DSLAM capacity to about 2,400 sites and was in the process of updating more than 900 copper fed sites with fiber. Overall, 35 percent of capital expenditures during the first half of the year were spent on broadband investments, including fiber, DSL and packet switches. [Graphic inserted here Network Fiber Miles (in thousands) 2Q04 - 4,911 3Q04 - 5,025 4Q04 - 5,163 1Q05 - 5,269 2Q05 - 5,426] BellSouth began field testing ADSL2+ technology in December 2004. ADSL2+ vendors initially promised speeds up to 12 megabits over a single copper pair and up to 24 megabits using a software upgrade that allows copper pair bonding. In early field trials, BellSouth has confirmed these estimates and observed even higher speeds in some cases. By the end of the second quarter, approximately 350 lines were involved in the field trials, with a goal to ramp up to 1,000 lines by year-end. BellSouth is also involved in a limited IPTV technical field trial to test and gain customer feedback using Microsoft's platform. The trial involves approximately 25 "friendly" users and is expected to expand to about 300 users in the second half of 2005. In June, BellSouth announced that it will deploy wireless broadband service to select areas of Athens, Ga. beginning in August, and expand its wireless broadband service to several Florida cities later in the year. The new BellSouth(R) FastAccess(R) Internet Service will provide Internet access to customers at broadband speeds. The system transmits signals between local radio towers and a small non-line-of-sight desktop subscriber modem that plugs into a desktop or laptop computer, or a local router. The wireless broadband modem transmits data to and from nearby radio towers or tall structures using BellSouth licensed BRS and WCS radio spectrum instead of traditional landline wires. BellSouth residential and business customers will be able to choose from various wireless broadband service options, ranging in price, features and speeds. In the second quarter, BellSouth also announced the market trial of an enterprise seamless mobility solution. The service will provide true integration of wireless and wireline communication, delivering additional flexibility and efficiency to the workplace. Grey Worldwide's Atlanta office is the debut customer for the trial, and the firm will use the service to create an environment of one number/one voice mailbox for communication. As part of the trial, employees will carry a single device that operates on the cellular network outside the office and the wireless local area network (WLAN), or Wi-Fi, on the corporate campus. The seamless mobility trial is part of extensive ongoing wireless/wireline integration initiatives between BellSouth and Cingular. The joint work includes research and product development, sales initiatives and bundled offers with both traditional services and innovative solutions such as seamless mobility. Expenses and Margins Communications Group operating margin was 23.6 percent compared to 26.2 percent in the second quarter of 2004. About 120 basis points of the year-over-year decline is due to previously disclosed changes to accounting for other post-retirement benefits. The remaining year-over-year decline reflects a shift in product mix and pressures in BellSouth's Large Business segment. Capital expenditures for the Communications Group were approximately $826 million in the second quarter. Depreciation and amortization expense increased 0.2 percent year-over-year. Regulatory In June 2005, the Supreme Court announced its decision in the "Brand X" case and reversed a 9th U.S. Circuit Court of Appeals ruling that had struck down an earlier decision by the Federal Communications Commission (FCC). The FCC had ruled that cable modem service constituted an information service rather than a telecom service and was not subject to the rules and regulations of a telecom service. BellSouth believes in parity of regulation among the competing delivery systems and supports the FCC moving forward to provide the same treatment for DSL service - eliminating regulated wholesale pricing requirements and other outdated regulations. The "Brand X" Supreme Court decision paves the way for the FCC to act quickly and lift DSL regulation on broadband service offered by telephone companies so that companies like BellSouth can make business decisions based on market demand, not regulatory requirements. At the state level, BellSouth continues to work with legislative and regulatory bodies to reduce regulation in the telecommunications industry. On May 5, Alabama's governor signed into law a new bill that substantially decreases that state's regulation of BellSouth's traditional phone services. On May 28, a Tennessee deregulation bill removed commission regulation of bundles of BellSouth's products or services. This relief also eliminated the tariff process for new or existing bundles such as Complete Choice(R), BellSouth Answers(R) bundles and the majority of special contracts. On June 2, Florida's governor signed legislation removing regulation of broadband, VOIP, wireless and intrastate toll. On June 23, North Carolina's governor signed legislation that eliminated commission regulation of broadband. In addition to these successes, BellSouth continues to make progress throughout our markets. Cingular Wireless Cingular's financial statements can be accessed at http://www.bellsouth.com/investor/. (Pro forma results reflect acquisitions and dispositions, including the acquisition of AT&T Wireless, as if they had occurred on Jan. 1, 2003.) In the second quarter, Cingular made considerable progress in integrating the assets of the former AT&T Wireless. Almost every operating and financial metric showed steady or improving trends compared to the merged company's previous two quarters of reported results. [Graphic inserted here Cingular Wireless Customers (in millions) 4Q04 - 49.1 1Q05 - 50.4 2Q05 - 51.6] Cingular ended the second quarter with 51.6 million cellular/PCS subscribers. Subscriber net additions this quarter were 1.1 million. The quality of the second quarter's net subscriber increase was also impressive. Nearly all the additions were retail postpaid contract subscribers. Cingular's postpaid subscribers are less likely to churn and have higher average revenue per user (ARPU) than other categories of customers. Cingular has exceeded 1 million postpaid net additions for three consecutive quarters. Prepaid subscribers declined during the quarter, with reseller additions offsetting the prepaid downturn. Second quarter prepaid subscriber loss is primarily the result of churn among former AT&T Wireless prepaid subscribers. [Graphic inserted here Cingular Subscriber Churn Total Churn*; Postpaid Churn 4Q04 (Proforma) - 2.4%; 2.1% 1Q05 - 2.2%; 1.9% 2Q05 - 2.2%; 1.8% * Total figures include reseller conformity adjustments.] Network and customer service enhancements are reflected in Cingular's steadily improving churn metrics. Total customer churn decreased markedly compared to the same period last year and remained steady sequentially at 2.2 percent in the second quarter. Postpaid churn was also better - declining 10 basis points sequentially and 90 basis points on a pro forma basis year-over-year to 1.8 percent. During the quarter, Cingular upgraded 7 percent of its postpaid subscriber base. Of these upgrades, 1.4 million were migrations of former AT&T Wireless customers to Cingular's rate plans, handsets and back-office systems. Since the merger with AT&T Wireless was closed in October 2004, Cingular has migrated more than 4 million "blue" customers to "orange" products and systems. The rapid migration of customers to new rate plans has helped accelerate the proportion of minutes carried on Cingular's higher-efficiency GSM network. At the end of the second quarter, 90 percent of the company's combined total minutes were on GSM assets. Service revenue in the second quarter was up 4.0 percent compared to the first quarter of 2005 and increased 3.6 percent on a pro forma basis year-over-year. The sequential improvement was attributable to higher roaming revenues, increased data usage and a larger average customer base. Year-over-year, service revenues rose due to subscriber growth, partially countered by lower ARPU. Service ARPU in the second quarter was $50.43, up $0.84 sequentially due to seasonal roaming revenue, overage minutes and customers' increasing use of data services. Compared to the same period last year, ARPU fell 5.6 percent. Most of the decline was due to reduced airtime as customers migrated to popular rollover, free mobile-to-mobile and nation plans. A greater proportion of lower-priced Reseller and FamilyTalk additions also affected year-over-year ARPU by limiting per month access revenues paid by Cingular customers. Data ARPU climbed $0.46, or 12.4 percent sequentially, as customers continued their rapid adoption of data services like short-text messaging, downloadable multi-media and wireless web browsing. [Graphic inserted here Active Cingular Data Customers (in millions) 4Q04 - 17.0 1Q05 - 18.0 2Q05 - 20.0] Since the fourth quarter of 2004, the first period Cingular reported as a combined company, normalized service margin from operating income before depreciation and amortization (OIBDA) has increased 550 basis points on a pro forma basis. Cingular's second quarter OIBDA margin, excluding merger-related integration costs of $95 million, was 28.9 percent, up 340 basis points relative to the first quarter of 2005. Normalized results for Cingular exclude $204 million in total direct merger integration costs during the period. Merger synergies had a positive effect in the second quarter. Lower equipment and customer service expenses along with increased back-office efficiencies were responsible for a sizeable portion of the sequential margin improvement. Lower subscriber acquisition expense due to fewer gross adds and upgrades drove most of the remaining reduction in operating costs. Network planning and design is substantially complete with more than 10,000 sites identified for decommissioning, including 5,000 sites that were sold to T-Mobile in the first quarter. Cingular has also completed its four major TDMA turndowns and is on track to complete redundant TDMA turndowns in all 47 markets by the end of 2005. Assimilation of retail locations is also on pace. More than 340 store and kiosk closures have been completed so far this year. Cingular expects to close another 160 underperforming stores while adding 150-175 higher-productivity locations by the end of this year. Cingular's deployment of its next-generation wireless data service - Universal Mobile Telecommunications System (UMTS) with High Speed Download Packet Access (HSDPA) - advanced in the second quarter. Cingular has successfully completed UMTS/HSDPA end-to-end calls in nine markets this year and expects to offer UMTS/HSDPA in 15 to 20 markets by the end of 2005. The company's UMTS/HSDPA overlay will allow subscribers to obtain average data speeds of up to 700 kilobits per second, with bursts up to several megabits per second on capable devices. Customers will be able to experience their high-speed data services while maintaining a voice session - unlike competing wireless data technologies. UMTS/HSDPA also gives Cingular a more cost-efficient network platform to drive voice and data growth. During the quarter, Cingular enhanced and re-introduced its GoPhone prepaid services. GoPhone, which was originally launched by AT&T Wireless in 2003, consists of two offerings, "Pay As You Go" and "Pick Your Plan." Pay As You Go is a traditional cash prepaid product that also offers a set per day per minute price with postpaid-like features. Pick Your Plan provides customers with rate plans that include many of the features offered with Cingular's postpaid service, but month-to-month charges are prepaid via customers' credit cards. Pick Your Plan features include Rollover minutes, unlimited mobile-to-mobile, unlimited nights and weekends, no roaming charges and no long distance charges. On June 22, 2005, Cingular signed an agreement to sell its operations and licenses in the Caribbean and Bermuda to Digicel Limited. Under the terms of the agreement, Cingular will sell to Digicel former AT&T Wireless properties, including licenses, network assets and subscribers. Advertising & Publishing BellSouth's Advertising & Publishing segment generated $531 million in revenue during the second quarter of 2005. Total revenue was up 3.9 percent compared to the previous year, representing the highest year-over-year growth rate in 12 quarters. Advertising & Publishing's revenue growth compared to last year is attributable to improved sales of traditional print products and the popularity of new companion directories. Revenue also benefited from fast-growing online directory and search engine marketing offerings. For example, BellSouth's RealSearchSM product revenue grew 50 percent in the first six months of 2005 compared to all of 2004. RealSearchSM products provide local businesses with an efficient way to distribute and track their search engine marketing. BellSouth's network of affiliated search engines covers more than 75 percent of the search market and includes Google, Yahoo and InfoSpace among others. Operating income decreased 0.8 percent to $245 million compared to the same period in the prior year due to higher manufacturing and selling costs. Sequentially, operating income grew 6.1 percent as higher advertising, publishing and commission revenues more than offset increased production expense. In the second quarter, RealPages.com advertisers were added to YellowPages.com, an Internet Yellow Pages joint venture between BellSouth and SBC Communications. The addition of the YellowPages.com distribution drove 11 million incremental lookups for BellSouth RealPages.com advertisers over the quarter. Also this quarter, RealPages.com completed a website refresh that maintains the look and feel of YellowPages.com. By the end of 2005, RealPages.com, SBC's Smartpages.com and YellowPages.com are expected to be fully integrated with a common brand, website and products. Normalized Results and Additional Details Normalized results from continuing operations include BellSouth's 40 percent proportionate share of Cingular's revenues and expenses. Cingular completed its acquisition of AT&T Wireless on Oct. 26, 2004. Results prior to the acquisition date have not been restated. [Graphic inserted here Net Debt (in billions) 4Q04 - $19.9 1Q05 - $18.3 2Q05 - $17.2 (Defined as long-term plus short-term debt less cash] Compared to first quarter of 2005, total normalized revenue increased 2.6 percent to $8.5 billion, driven primarily by 4.6 percent growth at Cingular. On a pro forma basis, Cingular revenues increased 5.4 percent relative to the second quarter of 2004. Cingular's performance reflected continued subscriber growth and merger integration progress. Revenue growth in the Communications Group and the Advertising & Publishing group also contributed to sequential growth in normalized revenue. Operating margin was 19.2 percent, a 190 basis point improvement compared to the first quarter of 2005. In the second quarter, Cingular contributed more than 40 percent of BellSouth's total normalized revenue. Cingular's cash margin, however, represented only 28 percent of total normalized BellSouth operating income before depreciation and amortization. As Cingular continues to grow revenue and margins, the positive impact on BellSouth's bottom line will magnify. Operating free cash flow (defined as net cash provided by operating activities less capital expenditures) was $1.3 billion for the second quarter of 2005. BellSouth's capital expenditures were $829 million in the current quarter and represented 16.3 percent of normalized revenue excluding Cingular. Year-to-date capital expenditures were $1.6 billion and comprised 15.6 percent of normalized revenue excluding wireless. During the second quarter, BellSouth's Board of Directors approved a quarterly dividend of 29 cents per common share, an increase of 7.4 percent from the previous level of 27 cents per common share. Over the last three years, BellSouth has increased its quarterly dividend by 53 percent, from 19 cents per common share to 29 cents per common share. In May, BellSouth announced it signed an agreement for the sale of its 34.75 percent equity ownership in Cellcom, a cellular communications operator in Israel. Discount Investment Corp, Ltd., which currently holds a 25 percent interest in Cellcom, has agreed to pay BellSouth $625 million for BellSouth's entire Cellcom ownership interest. The other major shareholder in Cellcom has a right-of-first-refusal to purchase BellSouth's interest at the same price and on the same terms and conditions. If this right is exercised, BellSouth is obligated to pay Discount an $18 million "breakup fee", effectively reducing BellSouth's proceeds from the sale to $607 million. BellSouth expects to record a gain on the transaction based on the book value at closing. Based on current book value, the after-tax gain would be approximately $220 million to $235 million, or 12 cents to 13 cents per share. The sale is expected to close in the fourth quarter of 2005. BellSouth will release third-quarter earnings on Tuesday, Oct. 25, 2005, at 8 a.m. (ET). About BellSouth Corporation BellSouth Corporation is a Fortune 100 communications company headquartered in Atlanta, Ga. BellSouth has joint control and 40 percent ownership of Cingular Wireless, the nation's largest wireless voice and data provider, with more than 50 million customers. Backed by award-winning customer service, BellSouth offers the most comprehensive and innovative package of voice and data services available in the market. Through BellSouth Answers(R), residential and small business customers can bundle their local and long distance service with dial-up and high-speed DSL Internet access, satellite television and Cingular(R) Wireless service. For businesses, BellSouth provides secure, reliable local and long distance voice and data networking solutions. BellSouth also offers online and directory advertising through BellSouth(R) RealPages.com(R) and The Real Yellow Pages(R). BellSouth believes that diversity and fostering an inclusive environment are critical in maintaining a competitive advantage in today's global marketplace. More information about BellSouth can be found at www.bellsouth.com. In addition to historical information, this document may contain forward-looking statements regarding events and financial trends. Factors that could affect future results and could cause actual results to differ materially from those expressed or implied in the forward-looking statements include: (i) a change in economic conditions in markets where we operate or have material investments which would affect demand for our services; (ii) the intensity of competitive activity and its resulting impact on pricing strategies and new product offerings; (iii) higher than anticipated cash requirements for investments, new business initiatives and acquisitions; (iv) unfavorable regulatory actions; and (v) those factors contained in the Company's periodic reports filed with the SEC. The forward-looking information in this document is given as of this date only, and BellSouth assumes no duty to update this information. This document may also contain certain non-GAAP financial measures. The most directly comparable GAAP financial measures, and a full reconciliation of non-GAAP to GAAP financial information, are attached hereto and provided on the Company's investor relations website, www.bellsouth.com/investor. For More Information Contact: Jeff Battcher, Media Relations at 404-249-2793 BellSouth Investor Relations at 800-241-3419 -----END PRIVACY-ENHANCED MESSAGE-----