Qwest Communications Inc. (Q), the third-largest U.S. local-phone services operator, reported fourth quarter adjusted earnings per share of 12 cents, surpassing the Zacks Consensus Estimate by 2 cents and the year-ago quarter by 4 cents.
Adjusted earnings exclude non-recurring charges of 21 cents per share.
For fiscal 2010, adjusted earnings were 44 cents, compared to 38 cents in 2009.
However, operating revenue declined 3.2% year-over-year to $2.89 billion and was below the Zacks Consensus Estimate of $2.91 billion. Operating revenues for 2010 declined 4.7% to $11.73 billion from $12.31 billion in 2009.
Adjusted EBITDA for the reported quarter rose 1.3% year over year to $1.09 billion. Adjusted EBITDA margin climbed 170 bps year-over-year to 37.9%.
Adjusted EBITDA for the full year inched up 0.5% to $4.43 billion and adjusted EBITDA margin was up 190 bps year-over -year to 37.8%.
Segment Results
Business Markets: Revenues from the segment remained flat year over year at $1.01 billion in the fourth quarter as the increase in revenues in the strategic services and data integration revenue was partially offset by revenue decline in legacy services.
Strategic revenue grew 6.1%, while legacy services declined 8.8% year-over-year, mainly due to lower local voice revenue and migration to newer generation data services. Data integration sales also remained strong with a 14.9% year-over-year increase.
Mass Markets: Revenues from this segment fell 4.3% % year-over-year to $1.14 billion. Strategic revenue (including broadband and video revenue) upped 7.6% year over year, driven by strong broadband growth while voice services revenue declined 8.9% in the reportable quarter.
Total subscribers in access lines reached 6.03 million, down 12.0% year over year. On an annualized basis, broadband subscribers increased 3.6% to 2.91%, while Video subscribers leaped 6.7% to 1,003,000.
Qwest added 42,000 wireless subscribers in the quarter to reach 1.08 million customers, up 29.6% year -over- year. Average revenue per unit rose 10.0% in the fourth quarter. Mass Markets added 92,000 Fiber-to-the-node (FTTN) subscribers in the reported quarter, to reach a total of 713,000 subscribers or 25% of the subscriber base. The growth was offset by a decline of 77,000 ATM-based DSL subscribers.
Wholesale Markets: Revenues from Wholesale Markets dropped 6.6% year-over-year to $649 million in the fourth quarter, lower than the annual decline of 8% reported in the third 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 services to wireless cell sites. Construction has been completed at approximately 2,000 sites and the company has another 2,000 sites under contract for deployment in future periods.
Liquidity and Dividend
Qwest exited FY10 with cash and short-term investments of $372 million compared with $2,406 million in FY09. Net debt reduced to $219 million compared with $11,794 million in FY09. Net debt-to-adjusted EBITDA leverage ratio improved to 2.6 times from 2.7 times at the end of FY09.
Qwest achieved its debt reduction target of $3.5 billion announced in February 2010, following the payment of $180 million of debt, maturing on February 2011.
The company generated free cash flows of $426 million compared with $506 million in the year-ago quarter and $1.92 billion in 2010 against $1.93 billion in 2009. Capital expenditure increased 3.1% year over year to $398 million in fourth quarter 2010, and 5.6% to $1,488 million in 2010.
Qwest remains committed to offering attractive returns to shareholders. The company paid a dividend of 8 cents per share for the fourth quarter, amounting to approximately $139 million. In 2010, Qwest paid common stock dividends totaling $555 million.
On January 24, Qwest’s board of directors announced a dividend of $0.08 per share for first quarter 2011. The quarterly dividend is payable on February 25, 2011 to shareholders of record as of February 18, 2011.
Company Guidance
The company expects its merger with CenturyLink, Inc. (CTL) to receive the required approvals in first quarter 2011and is looking at April 1, 2011 as the closing date for the merger.
Our Analysis
The company remains focused on improving revenue generation, expanded margins and significant free cash flows, while make optimum utilization of fiber-based services to cater to customer needs. It is also expected to make substantial progress in its merger with CenturyLink.
The company is aggressively promoting bundled services (combining video with Internet and voice) to fend off cable competition.
Moreover, Qwest continues to offer attractive returns to shareholders in the form of healthy dividend payouts. it continues to invest in expanding network capacity to boost subscriber retention. However, the primary concern still remains its high debt exposure, which impedes the company’s ability to invest in expanding business operations.
Thus, we are currently maintaining our long-term Neutral recommendation on Qwest supported by a Zacks #3 Rank (Hold).
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