Embarq profit falls 2 percent

By Ritsuko Ando

NEW YORK (Reuters) - Phone company Embarq Corp (EQ.N) reported a 2 percent drop in third-quarter profit on Thursday due to severance charges and a fall in traditional voice service customers.

Embarq, the wireline spin-off of Sprint Nextel Corp (S.N), said net profit fell to $157 million, or $1.01 per share, from $160 million, or $1.06 per share, a year earlier.

The results were hurt by severance charges of $33 million, or 13 cents per share, as well as $4 million in costs related to the spin-off.

Excluding the charges, earnings were $1.14 per share, compared to analysts' average forecast of $1.13 a share, according to Reuters Estimates.

Operating revenue fell to $1.59 billion from $1.61 billion a year earlier, with revenue from high-speed Internet subscribers partially offsetting a fall in voice sales.

Embarq said it lost 126,000 access lines in the third quarter, as it continued to lose subscribers but at a slower pace than the 146,000 lost in the second quarter.

"The numbers were positive. The year-over-year decline in revenue was smaller than it has been, so that's obviously a positive. The line losses, the decline, was within expectations of what we were looking for," said Jefferies & Co. analyst Jonathan Levine.

Embarq shares, which closed down 2.44 percent at $51.63 on the New York Stock Exchange, were unchanged in after-hours trading although they briefly rose immediately following release of the results.

The stock has fallen around 19 percent over the past three months amid worries about competition from cable providers, which provide high-speed Internet and voice services.

"We're in a hyper-competitive market," Embarq Chief Executive Dan Hesse told Reuters. In a conference call with analysts, he acknowledged a tough fight with rivals such as privately held cable provider Cox Communications Inc.

"Again this quarter we saw an increase in consumer competition from cable companies as cable VoIP availability expanded from roughly 55 percent of households in our operating area a year ago to the upper 60 percent range at the end of Q3," he said on the call.

Embarq said it was not changing its forecasts for 2007, except that it now plans around $840 million in capital spending rather than $865 million as previously stated, due to a slowdown in housing construction.

The Overland Park, Kansas-based company operates in 18 states, including Florida and Nevada. Las Vegas is its biggest metropolitan market.

The company said it expected additional severance charges of more than $20 million in the fourth quarter, but plans to realize cost savings of about $75 million in 2008.

Levine at Jefferies said he saw the cost-cutting measures as a step that will help the company improve its EBITDA margins.