Qwest Communications (Q) has announced third-quarter 2009 earnings with reported earnings per share (EPS) of 8 cents matching both the Zacks Consensus Estimate and the year-ago quarter EPS. Net income declined 6.2% year over year to $136 million on lower revenues as erosion in legacy landline business continues.
Operating revenue declined 9.6% from the prior-year quarter to $3.05 billion, primarily due to lower voice service revenue as consumers continue to disconnect their landline services. Qwest reported healthy growth in Internet revenue in the quarter, driven by respectable broadband customer growth. However, voice service revenue declined due to access line erosion.
Results by Segment
Business Markets
Revenue from the business market segment declined 1% year over year to $1 billion due to declines across legacy voice and data businesses. The segment contributed 33.8% of the group revenue for the quarter.
Driven by growth in IP services, strategic revenue increased 11.4% year over year to $402 million and accounted for 39% of total business market revenue. Revenue from legacy voice services declined 9.1% year over year to $477 million. Data revenue also decreased 3.2% year over year to $153 million due to increased customer switch to IP-based services. Total access lines declined 7.9% year over year to 2.47 million.
Mass Markets
Reported revenue from the mass market segment declined 14% year over year to $1.2 billion, representing 40% of total revenue. Strategic revenue (including broadband and video revenue) increased 3.3% from prior-year quarter while voice service revenue declined 11.8% year over year, partly due to wireless substitution and macro-economic factors.
Qwest’s growth business broadband Internet added 28,000 new customers in the quarter, taking the total subscriber base to 2.95 million. Direct TV video subscriber base grew by 15,000 to 858,000 customers. However, these positives were offset by a 12.2% year-over-year decline in access lines that reached 7 million at the end of the quarter.
Wireless service revenue declined 82.8% year over year to $20 million. The company added 23,000 wireless subscribers in the third quarter and exited with 786,000 customers, up 1.8% year over year.
Wholesale Markets
Revenue from wholesale markets declined 14.2% year over year to $700 million (23% of total sales), due to access line erosion and lower long-distance sales. Strategic service revenue declined 1.9% year over year to $303 million, while voice revenue contracted 21.7% to $397 million. Total access lines decreased 10.2% on an annualized basis to 1.05 million.
Cash Flow, CapEx and Dividend
Adjusted free cash flow for the quarter grew 30% year over year to $428 million, driven by reduced capital expenditure (CapEx), which declined 27% year over year to $341 million. Qwest remains committed in offering attractive returns to shareholders leveraging a healthy free cash flow as it paid a dividend of 8 cents per share for the quarter, amounting to approximately $138 million.
Outlook
Qwest has updated its outlook for full year 2009 with adjusted EBITDA is expected to reach the higher end of its previously forecasted range of $4.25 billion to $4.4 billion. CapEx for the year is projected at $1.6 billion, down from $1.7 million as per previous guidance. The company has increased free cash flow forecast to $1.6 billion – $1.7 billion from its previous target of $1.5 billion – $1.6 billion.
Opportunities & Challenges
Qwest continues to invest in building necessary infrastructure to boost network capacity and availability. The company is devoting a major portion of the overall CapEx in expanding its fiber-to-the-node (FTTN) network capacity to increase broadband network performance. FTTN deployments reached over 3 million homes with 500,000 homes added in the quarter.
Through a joint venture with Alcatel-Lucent (ALU), Qwest is upgrading its fiber-based network infrastructure to offer top Internet speeds of 100 gigabits per second (Gbps). Recently, the company introduced a new fiber-based Ethernet backhaul wholesale service for wireless operators. We expect these new business opportunities to drive growth moving forward.
However, Qwest remains more challenged than the other regional telephone companies (Baby Bells) in the US such as AT&T (T) and Verizon (VZ) given the lack of its own wireless and satellite TV services. This has prevented Qwest from achieving meaningful penetration in these lucrative markets.
Qwest’s transition from a mobile virtual network operator (MVNO) to wireless reseller has resulted in lower wireless revenue. Since 2004, the company has been marketing Sprint Nextel’s (S) wireless products and services under its own brand by operating as an MVNO on Sprint’s network. However, Qwest will officially terminate this service on Oct. 31, 2009. Nevertheless, the company will continue reselling Verizon’s products and services (under Verizon brand).
While we expect the company’s business prospects to be driven by continued strong demand for its broadband Internet service, access line losses due to competition and economic weakness will continue to erode operating revenue for the remainder of 2009.
Read the full analyst report on “Q”
Read the full analyst report on “T”
Read the full analyst report on “VZ”
Read the full analyst report on “S”
Read the full analyst report on “ALU”
Zacks Investment Research
