Qwest Keeps Cutting
In its fourth-quarter earnings report today, Qwest Communications International Inc. (NYSE: Q) reported ongoing losses along with plans to improve its margins and profitability this year (see Qwest Closes a Tough Year).
"Let's make no mistake. We're not pleased with these results," CEO Joseph P. Nacchio told analysts on a conference call this morning. "The economy is still a big issue, despite our efforts to manage the business."
On the plus side, Nacchio said he was pleased with the uptick in Qwest's wireless, DSL, and enterprise Internet services (including dedicated and dial-up Internet access and virtual private network services). Revenue from these services grew 42 percent, 85 percent, and 30 percent, respectively, for the quarter.
Qwest's results included quarterly revenue of $4.70 billion, down 6 percent year over year and 6.3 percent sequentially. Full-year 2001 revenue increased 4.2 percent to $19.74 billion from 2000's results. Net loss on the quarter was $516 million ($0.31 cents per diluted share), more than three times the loss reported in the fourth quarter of 2000. Qwest posted a net loss for the year 2001 of $2.41 per diluted share, compared with a net loss of $0.06 per diluted share for 2000.
Normalized EBITDA (earnings before interest, taxes, depreciation, and amortization) for the quarter was $1.61 billion, compared to $1.99 billion last year. Pro forma normalized EBITDA for the year 2001 was $7.40 billion, just a hair up from the $7.37 billion reported for 2000.
The carrier blamed a witches' brew of factors for its disappointing financials. Quarterly losses were attributed to "previously announced restructuring actions" and "non-operating restructuring charges and other one-time items associated primarily with KPNQwest and write-downs for certain equity investments." EBITDA and revenues were hit by reduced sales and increased network buildouts.
Bottom line? "We're fighting a tough economy," Nacchio maintained.
Upshot? Qwest is forging ahead with plans to reduce expenses and increase its revenues by focusing on key strategic areas. Here are some highlights of its 2002 plans:
- Slightly lowered capex. Qwest originally planned to spend about $5.5 billion on its network in 2002. Then, in December, it cut that guidance to between $4.2 billion and $4.3 billion (see What's Behind Qwest's Numbers?). Now, it plans to spend just $4 billion. Qwest's already well set with network capabilities in its global backbone, IP services, dial access, hosting, and DSL network facilities, execs say. Of the $4 billion Qwest will spend, about 80 percent will go to improving its local network infrastructure (in the 14 Western states covered by the former US West territory) and 20 percent will go to improving worldwide network and global IP capabilities.
- Ongoing workforce reductions. "Our EBITDA objective for 2002 will be met [in part] by workforce reduction of 7,000," said CFO Robin R. Szeliga on today's call. Originally announced back in December, the reduction will be accomplished through attrition and layoffs (see Qwest Lowers Expectations). About 80 percent of layoffs will take place in areas directly related to customer demand (technicians, engineers, etc.), while 20 percent will be in staff and back-office functions. The total reduction is expected to be complete in June 2002.
- Cuts in facilities costs. Qwest plans to rid itself of some contracts that call for it to pay other players to terminate calls and provide leased facilities. This will include the termination of some access contracts with incumbent local exchange carriers. In all, these cuts will result in about $400 million to $500 million saved in 2002.
- Asset sales. Nacchio said today that Qwest hopes to please its shareholders and improve its balance sheet by reducing its debt by $1.5 billion to $2 billion in 2002, in part by selling some of its assets. He cited four possible areas that the company is considering as saleable: its wireless business (which had about 1.11 million customers by the end of 2001 and garnered about $211 million in quarterly revenue); its access lines; its yellow-pages business; and its application service provider (ASP) services business. Nacchio said plans are already in the works but no final decisions have been made, and that more than one asset will probably be sold in order to meet the goal.
- Reduced guidance. Back in December, Qwest anticipated that 2002 revenue would be $19.4 billion to $19.8 billion, with EBITDA of $7.1 billion to $7.3 billion. The company is still holding to that guidance, but Nacchio was clear that final figures will probably fall "in the low end" of the estimates. In addition, Qwest fell short of cash flow breakeven by $100 million this quarter and may not be able to meet breakeven by next quarter.
At press time, Qwest shares were trading at $11.61, down $0.74 (5.99%).— Mary Jander, Senior Editor, Light Reading