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Qwest Profits Shrink

Light Reading
News Analysis
Light Reading
7/24/2001

Qwest Communications International Corp. (NYSE: Q) this morning reported revenue growth, shrinking profits, and a $3.72 billion charge in its second-quarter earnings results (see Qwest Q2 Revenues, Losses Grow).

The company took a one-time $3.72 billion pre-tax charge, primarily associated with its investment in European provider KPNQwest NV (Nasdaq/Amsterdam: KQIP). This resulted in a net loss of $3.31 billion or $1.99 per share, compared to a net loss of $121 million or $0.14 per share in the second quarter of 2000.

On a pro forma basis including the results of the recent merger with US West and excluding special charges, the company recorded second-quarter net earnings of $128 million, or $0.08 per diluted share, compared to net earnings of $255 million, or $0.15 per diluted share, a year ago.

As for guidance, full year revenues are projected at $21.3 billion to $21.5 billion, with EBITDA between $8.5 billion and $8.6 billion. The company expects to fulfill its plan to spend $8.8 billion to $9.0 billion on capital expenditures. Spending plans will remain focused on building local fiber loops to enable end-to-end connectivity over its vast fiber optic backbone.

On the bright side, the company saw growth in strategic areas such as data services.

Total revenues rose 12 percent to $5.22 billion. Internet and data services revenues increased 41 percent and now represent 27 percent of revenue. IP-centric revenues, including dedicated access and corporate VPNs (virtual private networks), continued to show strong growth, comprising 70 percent of sales, up from roughly 60 percent the previous quarter.

Gross margins were up, but operating expenses increased as a percentage of sales. The company attributed this increase to the cost of entering new markets and introducing new services.

In the conference call, company executives discussed their intention to lift overall market share from the current 5 percent to 7.8 percent over the next four years.

Management said it is closing in on AT&T in terms of network size, and believes it is completing this expansion with superior efficiency metrics. They point to improving gross margins and a positive trend in revenue per household as indicators of efficiency gains. Management expects to gain further approvals for long-distance entry, while increasing its local presence. They point to access line growth that compares favorably to BellSouth Corp. (NYSE: BLS) and other RBOC peers as a strong harbinger for growth in this market segment.

— Christopher P. Bulkey, research analyst, Light Reading
http://www.lightreading.com

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