Qwest Cuts Costs, Boosts Earnings

Qwest isn't seen as cutting edge these days. But it does get props for cutting costs.

Despite slipping revenues, Qwest Communications International Inc. (NYSE: Q) reported that its first-quarter profit nearly tripled due to lower costs and increased sales of higher-margin bundled services. (See Qwest Reports Earnings.)

For the first quarter, Qwest reported a net profit of $240 million, or $0.12 per share, compared with a profit of $88 million, or $0.05 per share, in the year-ago quarter. Revenues for the quarter fell slightly, to $3.45 billion, versus $3.48 billion in the first quarter of 2006.

Qwest's bottom line was helped by improved operational expenses, which fell 6.2 percent to $2.9 billion during the first quarter. Qwest says reduced opex was driven by improvements in productivity and operating efficiencies and lower facility costs. [Ed. note: And coffee is only for 'closers.']

The company also talked up its bundled services, which at least partially offset weaker voice service revenues. During the company's conference call, CEO Dick Notebaert said, "The underlying trends continue to support modest growth. Despite continued access line losses, customer demand and a clear value proposition for our growth products continues to drive volume, ARPU, and bundle penetration."

Total voice services fell 6.6 percent to $2.07 billion. However, Qwest saw increased revenues in its higher-margin data, Internet, and video services business, which rose 10.2 percent to $1.22 billion for the quarter.

The company's total number of high-speed Internet users rose 37 percent, to 2.3 million subscribers. Data sales now make up more than 35 percent of the company's revenues.

Capitalizing on a partnership with DirecTV, Qwest added 80,000 satellite video subscribers. For the year, the number of video subscribers has more than doubled, to 506,000 from 219,000. (See Qwest's Quest for Video and DirecTV Signs Qwest.)

Also on the conference call, CFO John Richardson said, "The success of bundles and our focus on driving higher-value, higher-ARPU products continues to offset the impact of access line pressure."

Bundle penetration increased to 59 percent, from 53 percent during the first quarter of 2006, and the number of customers bundling three or more products grew to 41 percent, from 30 percent a year ago. This helped to drive average revenue per user (ARPU) 6.1 percent to $52, from $49 in the previous year.

While Qwest believes that decreasing access line revenues will continue to be offset by high-speed Internet and other add-on products, analysts are skeptical that Qwest can keep cutting costs fast enough to offset its legacy service weakness.

"The continued decline in local access lines, including a 6.4 percent year-over-year drop in 4Q06, have made cost reductions critical in the wireline business," Argus Research Co. analyst Joseph Bonner wrote in a research note today. "Total wireline services revenue, including local access, long-distance, and DSL fell 0.1% in 2006. We expect 2007 to be another slow growth year for revenue, which makes cost-cutting and network optimization all the more important."

Qwest shares were up $0.19 (2.14%) to $9.07 in early afternoon trading on Tuesday.

— Ryan Lawler, Reporter, Light Reading

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