Tax Revamp Hits Qwest Profits

Qwest Communications International Inc. (NYSE: Q)'s net income fell 35 percent in the first quarter of 2008 mainly thanks to a new way that the operator records income tax expenses.

For the quarter, Qwest earned $157 million, or 9 cents per share, on revenues of $3.4 billion. In the same quarter last year, Qwest earned $240 million, or 12 cents per share, on revenues of $3.45 billion. Analysts polled by Thomson Financial were expecting earnings of 10 cents per share on revenues of $3.41 billion.

Table 1: Qwest's First Quarter 2008 Results
1Q08 1Q07 y/y Change
Revenue (Millions) $3,399 $3,446 -1.36%
Earnings (Millions) $157 $240 -34.58%
GAAP EPS $0.09 $0.12 -25.00%
Access Lines 12,497,000 13,551,000 -7.78%
Broadband Subscribers 2,701,000 2,305,000 +17.18%
Video Subscribers 699,000 491,000 +42.36%

Under the new tax conditions, Qwest was docked $99 million this quarter compared to the $2 million it was charged in the same quarter last year. Excluding those taxes in both years, net income rose 5.8 percent.

Qwest blamed pricing pressures and industry consolidation for the decline in its financial results. Its mass markets division, which includes traditional telephone and residential broadband services, was down only 0.7 percent thanks to strong growth from data and video revenue. But wholesale was a major weakness in the quarter, which declined by 7 percent.

One of Qwest’s focuses has been its enterprise business which enjoyed 3.1 percent revenue growth. But the extra investment Qwest put into the sector resulted in added expenses and a 4.1 percent decline in this segment's income.

Unlike Verizon Communications Inc. (NYSE: VZ) and AT&T Inc. (NYSE: T), wireless has been a weakness for Qwest. (See Wireless Fuels Verizon's Q1 and Wireless Pumps AT&T's Q1.) CEO Ed Mueller has complained about his wireless partnership with Sprint Corp. (NYSE: S) and his complaints were justified in this quarter as the strong growth within the mass markets sector from video and data was offset by declines in traditional voice and wireless services. (See Qwest Not Satisfied With Sprint.)

The next few quarters will be a test for CEO Ed Mueller’s strategy, but he has already achieved the two biggest parts: a $300 million upgrade of Qwest’s fiber-to-the-node (FTTN) network and a new wireless partnership. (See Qwest to Spend up to $300M on FTTN and Qwest Wants More Wireless.)

In the past quarter, the company introduced two new high speed Internet packages in the quarter that will run on the new FTTN network, and it got the expanded wireless partnership Mueller wanted with a different carrier in Verizon Wireless. (See Qwest Moves Quickly With FTTN and Qwest Ditches Sprint for Verizon.)

Shares of Qwest are down $0.20 (3.73 percent) to $5.16 in premarket trading on the New York Stock Exchange (NYSE) .

— Raymond McConville, Reporter, Light Reading

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