Qwest Reports on Q1
DENVER -- Qwest Communications International Inc. (NYSE: Q) today announced its earnings and operational highlights for the first quarter of 2003. The company announced first quarter net income of $150 million or $0.09 per diluted share.
"We continue to see signs of improvement in our core businesses," said Richard C. Notebaert, Qwest chairman and CEO. "Our focus on improving the service we provide to customers and the great value we offer is paying off not only in retaining our local customers, but also in growth opportunities such as long-distance service."
"Qwest took additional steps to improve its financial positioning in the first quarter," said Oren G. Shaffer, Qwest vice chairman and CFO. "We continued to strengthen the balance sheet through strategic financing transactions, and made significant progress in our financial restatement process. These actions, combined with improving operational trends, are helping position Qwest for long-term financial success."
Revenue for the first quarter was $3.63 billion, a 9.4 percent decrease from the same period last year. First quarter revenues declined year-over- year due to competitive pressures in local voice and wireless services, as well as strategic de-emphasis of certain lines of business, including customer premise equipment (CPE) resale and out-of-region consumer and wholesale long- distance.
For the first quarter, operating income increased to $179 million from a loss of $47 million a year ago.
Cost of sales and SG&A expenses for the first quarter decreased $233 million, or 8.1 percent year-over-year. Operating expense declines were driven by cost reduction initiatives, reductions in depreciation and amortization, as well as reductions in demand for certain products. These expense reductions were partially offset by year-over-year increases to pension and other employee benefits.
First quarter net income was $150 million or $0.09 per diluted share, including a $206 million gain, net of related income tax, for the cumulative effect of adopting SFAS 143, "Accounting for Asset Retirement Obligations." This compares to a net loss in the first quarter of 2002 of $23.9 billion or $14.32 per share. This loss included a $23.1 billion charge or $13.36 per share, net of tax, related to the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets."
Operational and Financial Highlights
Some of the key operational and financial highlights achieved since the announcement of fourth quarter results include:
-- The company's Qwest Corporation (QC) subsidiary obtained a commitment
for a $1 billion senior term loan due in 2007. This loan is being
arranged by Merrill Lynch & Co., Credit Suisse First Boston and
Deutsche Bank. The proceeds will be used to refinance QC bonds due in
2003. With completion of this refinancing transaction, as well as the
close of the second phase of the QwestDex sale, Qwest expects its
business plan to be fully funded, based upon its ability to generate
operating cash flow and continued access to the capital markets.
-- By the end of the first quarter, Qwest had signed up 530,000 access lines within its local service area for long-distance service. These long-distance sales were within the nine states approved by the Federal Communications Commission (FCC) in late December 2002
-- Colorado, Idaho, Iowa, Montana, Nebraska, North Dakota, Utah, Washington and Wyoming. These nine states represent approximately 55 percent of Qwest's total local access line base.
-- On April 15, 2003, Qwest received unanimous approval from the FCC to re-enter the long-distance business in three additional states: New Mexico, Oregon and South Dakota. These three states represent approximately 15 percent of Qwest's total local access line base. With this action, Qwest now has FCC approval to offer long-distance service everywhere in its local service territory except for Minnesota and Arizona. An FCC decision on Qwest's Minnesota application is due by June 26, 2003. Qwest plans to file a similar application for long- distance authority in its final state, Arizona, this summer.
-- Qwest continued to experience positive stabilizing trends in its core business. In the first quarter, Qwest lost approximately 130,000 retail consumer access lines, 27,000 fewer lines than in the fourth quarter. This represents the third consecutive quarter of sequential improvement. The company believes this improvement was due to ongoing retention and customer service initiatives, partially offsetting the effects of competition and technology substitution. Combined consumer and business access lines declined 4.1 percent year- over-year in the first quarter. Qwest continues to face competition in its retail access line business from UNE-P service providers and technology substitution.
-- As part of an ongoing, disciplined approach to capital investment, first quarter capital expenditures were approximately $450 million, or approximately 12 percent of revenue. Qwest is committed to upholding quality customer service through a disciplined capital investment strategy.
-- Qwest reported strong and measurable service improvements in the first quarter. Since the launch of the Spirit of Service(TM) campaign last year, Qwest has improved its customer service based upon direct customer feedback. In the American Customer Satisfaction Index (ACSI) published by the University of Michigan Business School, Qwest's score moved up 10.7 percent over last year's survey, the largest improvement of any telecom company and the second-highest improvement of all the companies surveyed. Qwest's own customer survey also reports significant improvements in service: the percentage of consumers reporting their customer care experience was excellent or very good increased five percentage points in the first quarter, and 13 percentage points since the third quarter of 2002.
-- Qwest continued to secure major contracts with large enterprise and government customers for voice and data services, entering into new service agreements with: the states of Minnesota and Utah, Grubb and Ellis, the Department of Energy, Crate and Barrel, and Recreational Equipment, Inc.
-- Qwest reached a settlement agreement with the Utah Public Utilities Division for approval of the QwestDex sale. This settlement agreement has been adopted by the Utah Public Services Commission. Regulatory reviews of the QwestDex transaction remain pending in two states. Qwest has reached a settlement agreement with the staff of the Arizona Corporation Commission. Hearings in Arizona began May 27. In addition, Qwest has reached an agreement with the Washington Attorney General and certain other groups in advance of Washington hearings that began on May 19. The second phase of the QwestDex sale is expected to close in 2003 subject to customary closing conditions with gross proceeds of $4.3 billion.
During the first quarter, Qwest reduced the principal amount of short- and long-term borrowings by $333 million, from $22.7 billion at December 31, 2002 to $22.3 billion at March 31, 2003. This reduction was achieved through debt maturity payments of approximately $160 million, as well as approximately $173 million of principal debt reduction through private exchange transactions. An unamortized premium of $87 million was recorded related to these exchanges and is not recognized on the statement of operations as a gain. As a result, total debt was reduced by $258 million, net of normal debt extinguishments and amortization. The private exchange transactions included exchanges of $392 million principal amount of Qwest Capital Funding (QCF) bonds (guaranteed by Qwest Communications International Inc.) for $218 million of new Qwest Services Corporation (QSC) notes and approximately 18 million shares of common stock.
Year-to-date (through 5/29/03), the company has reduced the principal amount of short- and long-term borrowings by approximately $500 million, through debt maturity payments of about $210 million, as well as approximately $290 million of principal debt reduction through private exchange transactions. An unamortized premium of $154 million was recorded related to these exchanges and is not recognized on the statement of operations as a gain. As a result, total estimated debt reduction is $360 million, net of estimated debt extinguishments and amortization. The private exchange transactions included exchanges of $697 million principal amount of QCF bonds for $406 million of new QSC notes and approximately 30 million shares of common stock.
Based upon the economic and competitive trends experienced in the first quarter, Qwest's outlook for 2003 financial results is as follows:
-- The rate of annual revenue decline is expected to be in the mid-single
-- Cost of sales and SG&A expenses, in total, are expected to decline from 2002 levels.
-- Free cash flow from continuing operations (cash provided by operating activities less capital expenditures) is expected to be approximately breakeven.
-- Free cash flow expectations are based upon capital expenditures of approximately $2.5 billion, net interest expense of $1.7 billion, and a modest contribution from net working capital (changes in current liabilities, excluding short-term borrowings, less changes in current assets).
-- Qwest will continue to monitor market conditions for opportunities to reduce total outstanding debt through strategic financing transactions.
Qwest Communications International Inc.