- The Washington Times - Monday, July 7, 2003

Shares of Talk America Holdings Inc. climbed yesterday after the company announced it would exceed earnings estimates for the second quarter.

The Reston provider of local telephone service said revenue would be more than the $88 million to $91 million it anticipated, and said net income would be more than $7 million, after estimates of $5 million to $7 million. It also said it paid down about $22.2 million in debt during the quarter.

Shares rose $1.14, or 11 percent, to close at $11.73 on Nasdaq yesterday.

Talk America reported net income of $9.1 million (35 cents per share) in the first quarter this year, compared with $8.1 million (30 cents) a year earlier. The company will report second-quarter earnings July 29.

It has become more visible to investors since February, when the Federal Communications Commission handed down a preliminary ruling allowing states to determine how much the Baby Bell phone companies can charge for the use of their lines.

A ruling in favor of the Baby Bells could have allowed them to charge more than companies such as Talk America could afford. Instead, the ruling meant Talk America and other competitors in the local phone market could compete.

In the month after the ruling, Talk America’s stock price more than doubled. Shares began the year trading at about $3.50 but rose to a high of $13.02 last month.

Analysts who track the company disagree on its future, though. Skeptics say the company’s success is still too beholden to the FCC, which is required to revisit the issue in three years. The regulatory agency is expected to give a final, more-detailed report on the February ruling this summer, and many analysts said it will be less positive than the original.

Talk America said it ended the first quarter with about 443,000 local lines, which fell just under estimates the company made in March that it would have between 445,000 and 455,000 local customers.

“This time they slightly missed the lower end of the range, which is notable,” said Gregory Miller, an analyst with Fulcrum Global Partners, who rates the company a “sell” and does not own shares.

Talk America historically has hit or exceeded the higher end of estimates for local subscribers.

Fewer customers mean less money for construction of its own networks. What’s more, Baby Bells such as SBC and Verizon have responded to competition by offering bundled services similar to Talk America’s, and have had fewer subscribers leave.

But more-bullish analysts said Talk America is poised for growth. It operates in 27 states and has a significant presence in Michigan, where it controls 5 percent of the market.

“For the foreseeable future, they are going to take local market share,” said Vik Grover, an analyst with Kaufman Brothers, who rates the company a “buy” and does not own shares.

Mr. Grover said he anticipates Talk America will have 2 million subscribers by 2012 and could increase the value of each customer if it adds wireless service to its bundling options.

Despite disagreements over the company’s future, analysts agree that Talk America is in better shape than it was three years ago. Its dependence on the struggling long-distance industry and an expensive relationship with AOL came at a terrible time. Not only was the telecommunications industry facing uncertainty, but Talk America — then known as Tel-Save — faced a host of legal battles from states accusing the company of “slamming,” or switching customers’ service without permission.

“They’ve made some mistakes over the years, but they’ve figured it out,” Mr. Grover said.

Talk America has posted five consecutive quarters of sales growth and seven straight quarters of profits.

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