Qwest Communications (Q), the third-largest U.S. local-phone serviceoperator, reported third quarter adjusted earnings per share of 11 cents, surpassing the Zacks Consensus Estimate as well as the year-ago earnings by 2 cents. Earnings shot up 22% year over year as revenue trends continued to improve.
On a GAAP basis, Qwest reported a net loss of $90 million in the third quarter compared with net income of $136 million in the year-ago quarter. The company continues to make steady progress on improving revenue trends across all segments.
However, operating revenue declined 3.9% year over year to $2.93 billion due to landline disconnections, but was ahead of the Zacks Consensus Estimate of $2.90 billion. Reported revenues were flat sequentially for the first time in eight quarters.
Adjusted EBITDA rose 2.5% year over year at $1.12 billion. Adjusted EBITDA margin climbed 240 bps y-o-y to 38.2%.
Segment Results
Business Markets: Revenues from the segment remained flat year over year at $1 billion as growth in strategic revenue offset the decline in legacy services. Strong IP services led to the 9% growth in strategic revenue while revenues from legacy services decreased 7% due to lower voice revenue and migration to newer generation services. Data integration sales also remained strong with a 2.6% year-over-year increase.
Mass Markets: Revenues from this segment fell 5% year over year to $1.2 billion. Strategic revenue (including broadband and video revenue) upped 10% year over year, driven by strong broadband growth while voice service revenue declined 9% in the reportable quarter.
Total subscribers in access lines reached 6.23 million, down 11.6% year over year. On an annualized basis, broadband subscribers increased 4.7% to 2.9 million driven by strong demand for higher speed service, the launch of its new Heavy Duty Internet marketing campaign, and seasonal benefits, while Video subscribers leaped 7% to 963,000.
Qwest added 62,000 wireless subscribers in the quarter to reach 1.04 million customers, up 37.4% year over year. Average revenue per unit rose 10.2% in the third quarter.
Wholesale Markets: Revenues from Wholesale Markets dropped 8% year over year to $661 million in the third quarter, which is below the annual decline of 10% reported in the second quarter of 2010. Thus, revenue trends have improved on increased demand for strategic services and product mix.
The company is making solid progress in deploying fiber-based backhaul services to more than 1,000 sites, which is expected to grow to approximately 2,000 sites by the end of the year.
Liquidity and Dividend
Qwest exited the quarter with cash and short-term investments of $2 billion. Net debt reduced to $11 billion compared with $12.1 billion in the year-ago quarter. Net debt-to-adjusted EBITDA leverage ratio improved to 2.5 times (the lowest leverage ratio since 1999) from 2.7 times at the end of 2009.
The company generated free cash flow of $554 million compared with $428 million in the year-ago quarter. Capital expenditure increased 9.4% year over year to $373 million.
Qwest remains committed to offering attractive returns to shareholders. The company paid a dividend of 8 cents per share for the quarter, amounting to approximately $139 million. Qwest is expected to pay a quarterly dividend of 8 cents for the upcoming quarter on December 17.
Company Guidance
For the fourth quarter, Qwest expects a low single-digit decline in revenues, compared with its previous expectation of a low to mid single-digit decline.
For 2010, Qwest now expects adjusted EBITDA to be at the higher end of the previous guidance of $4.3 to $4.4 billion. Capital expenditure is projected at approximately $1.7 billion. Adjusted free cash flow, with the benefit of capital leasing, is projected between $1.7 billion and $1.8 billion for 2010.
Our Analysis
Qwest, currently in the process of being bought by CenturyLink Inc. (CTL), continues to offer attractive returns to shareholders in the form of healthy dividend payouts. However, its high debt exposure remains our primary concern, as it impedes the company’s ability to invest in expanding business operations.
We expect the company’s growth prospects to be driven by solid subscriber additions on the fiber-to-the-node (FTTN) footprint network, stable results in Business Markets, improving revenue trends in Wholesale Markets, continued strong demand for its broadband Internet service, expansion of fiber-based network capabilities and the wireless backhaul wholesale service. However, access line losses due to competition will continue to erode operating revenues in the upcoming quarters.
We are currently maintaining our long-term Neutral recommendation on Qwest supported by Zacks # 3 Rank (Hold).
QWEST COMM INTL (Q): Free Stock Analysis Report
Zacks Investment Research
