Qwest Earnings Up, Revenues Down

Glasses tinkle as Notebaert talks about Qwest becoming 'a much stronger company' this year

May 29, 2003

4 Min Read
Qwest Earnings Up, Revenues Down

Qwest Communications International Inc. (NYSE: Q) beat Wall Street earnings expectations in its first-quarter 2003 earnings report today (see Qwest Reports on Q1). But revenues actually fell, and the carrier's ongoing financial audit continues to dog its progress.

Still, execs were upbeat in a conference call this morning, laughing companionably with questioning analysts, as glasses tinkled away in the background (water, coffee... something stronger?).

"By the end of the 2003, we'll be a much stronger company," said CEO Richard C. Notebaert. "Our consumer access line losses have improved... Our long distance launch is off to a strong start... I am encouraged by the direction of revenues."

Qwest posted revenues of $3.63 billion, down just a bit from last quarter's $3.7 billion, but down 9.4 percent from the same quarter last year. Net income was $150 million, or $0.09 per diluted share -- in favorable contrast with a net loss of $23.9 billion or $14.32 per share for the first quarter of 2002. Analysts had expected a loss of $0.09 cents per share, according to First Call estimates. Last quarter, Qwest posted $2.7 billion, or $1.61 per diluted share (see Qwest: Decent Quarter, Drab Outlook).

Qwest's been working to reduce debt and conserve cash. During the quarter it lowered the principal amount of short- and long-term debt by $333 million. When Qwest completes the sale of its directory business, more payments will be made to reduce debt even further. The total is still $22.3 billion, however.

Execs said Qwest's revenue decline is due to "competitive pressures in local voice and wireless services, as well as strategic deemphasis of certain lines of business, including customer premises equipment resale and out-of-region consumer and wholesale long-distance." Qwest also saw volumes of UNE-P rise, with corresponding compliance costs. Apparently, volumes had been down for the two quarters preceding this one.

The carrier's outlook? Revenues will decline by single digits for the full year 2003. Cash flow will be "breakeven to modestly positive." Capex will stay the same at $2.5 billion.

As part of its drive away from wholesale services, Qwest is eyeing the enterprise market and long-distance bundling as key revenue-enhancing opportunities in the coming months. It's charging hard to win enteprise customers, particularly mid-sized businesses. And it claims to have won new service agreements with the U.S. Department of Energy, the states of Minnesota and Utah, Crate and Barrel, and others.

On the long-distance side, Qwest says it's lined up 530,000 access-line customers within its local area for long-distance services. That's still fewer long-distance lines than its peers (see US Incumbents Go the Distance), but Qwest is forging ahead, with approval to offer long-distance service everywhere in its territory except Minnesota and Arizona, which are expected to fall into place later this year.

Like other carriers, Qwest's focused on bundling long-distance services for both business and consumer customers. It's ready to reduce DSL pricing, and it's talking to potential partners that can help it offer wireless and video services nationwide -- something analysts have been waiting for.

But execs were careful to say they won't sign any deals until everything's "perfect." The carrier's learned a lot from its broadband Internet access partnership with Microsoft Corp. (Nasdaq: MSFT), execs said (see Qwest, MSN Extend Partnership). Everything needs to be completely nailed down regarding pricing and marketing, they noted, before any agreements are signed. But they did indicate that a video relationship may be announced this summer.

In general, Qwest's quarterly earnings echo similar modestly positive statements from other RBOCs, which are emerging as the strongest players in North American telecom (see SBC's Quarter: Growth in Key Areas, Verizon Earnings Don't Disappoint, and BellSouth Reports Q1 Profit). But there's a dark shadow haunting Qwest -- namely, ongoing investigations by the state of Colorado and the Securities and Exchange Commission (SEC). Qwest's also undergoing a massive auditing process, and it continues to restate various items in past financials.

Today, execs admitted they can't say for certain when the final shoe will drop regarding the restatements or the investigations. But CFO Oren G. Shaffer indicated any future changes will probably be made mostly in Qwest's balance sheet and include one-time items.

— Mary Jander, Senior Editor, Light Reading

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