April 29, 2009
- Achieves substantial increase in adjusted free cash flow
- Strong growth in net income and EPS
- Continued revenue growth in Business Markets supported by demand for data and IP services
- Steady demand for consumer broadband services
- Solid progress on wireless transition
- Margins improve in each business segment on strong cost controls
DENVER, April 29, 2009 - Qwest Communications International Inc. (NYSE:Q) today reported financial results for the first quarter 2009. In the quarter, net income was $206 million, an increase of 37 percent compared to $150 million for the first quarter of 2008. Earnings per share for the quarter were 12 cents, a 50 percent increase from the first quarter of 2008. The current quarter results reflect a strong contribution from each business segment. Earnings per share were impacted by an increase in non-cash pension and OPEB expense, which was offset by a lower tax rate and reduced net interest expense. First quarter 2009 results include a 1 cent per share charge for severance, realignment and restructuring cost compared to 2 cents per share in the first quarter of 2008.
Revenue in the quarter was $3.2 billion, a decline of 7 percent compared to $3.4 billion in the first quarter of 2008 and a decline of 4 percent compared to the fourth quarter of 2008. As expected, Qwest’s move from a wireless MVNO model to a reseller model beginning in the third quarter of 2008 impacted reported revenue comparisons in the period. Excluding wireless MVNO services, revenues decreased 5 percent vs. the first quarter of 2008 and declined 3 percent sequentially. Adjusted EBITDA for the quarter was $1.15 billion, flat to year-ago results and a 3 percent decline compared to $1.18 billion in the fourth quarter. In the first quarter of 2009, adjusted EBITDA includes approximately $50 million of incremental non-cash pension and OPEB expenses. The adjusted EBITDA margin percentage expanded to 36.1 percent in the period compared to 33.6 percent in the first quarter of 2008 and 35.6 percent in the fourth quarter. Adjusted free cash flow for the quarter was $339 million compared to $56 million reported in the first quarter of 2008.
In the first quarter, Qwest continued to demonstrate steady progress on profitability goals with all segments reporting year-over-year and sequential improvement in segment margin percentages. The company continued to achieve solid demand for data and Internet services across all segments. Business Markets revenue growth is once again expected to have outperformed the industry in the first quarter. Qwest added 42,000 net new broadband customers in the quarter. Demand was fueled by expanded availability of higher speeds offered with fiber-based services. Qwest transitioned nearly 100,000 customers from its wireless MVNO operation to the Verizon Wireless resale platform in the quarter and reported 30,000 net wireless additions. Qwest has announced that it expects to terminate its wireless MVNO services in October of this year. Qwest also reported strong growth in video subscribers, adding 34,000 customers in the quarter through its partnership with DIRECTV.
“Disciplined execution and focus on cost controls have produced a strong start to the year given the current economic climate”, said Edward A. Mueller, Qwest Chairman and CEO. “We are seeing tangible results from our focus on our key strategies to perfect the customer experience, including demand for our leading data services and strong results from our partnerships. We continue to tightly manage spending and investments to preserve financial strength and mitigate near-term economic pressures.”
CONSOLIDATED FINANCIAL RESULTS
Unaudited (in millions, except per share amounts)
1Q 2009 4Q 2008 Change 1Q 2008 Change
Operating Revenue $3,173 $3,315 (4)% $3,399 (7)%
Income before Income Taxes 298 290 3% 245 22%
Net Income 206 177 16% 150 37%
Net Income per Diluted Share $0.12 $0.10 20% $0.08 50%
Revenue
Total revenue for the first quarter of $3.2 billion reflects 5 percent year-over-year growth in data, Internet and video revenue, which was offset by a decline of 11 percent in voice revenue and lower wireless revenue. Data and Internet revenue growth was the result of strong service revenue growth in both Business Markets and Mass Markets. Voice revenue results reflect lower access lines and the company’s efforts to improve the profitability of its wholesale long-distance business, while wireless results include the impact from the migration to the resale platform.
Expense
First-quarter operating expenses of $2.6 billion decreased 9 percent compared to the year-ago period. Expense reductions were broad based including both facility and employee-related costs. At the end of the period, Qwest had approximately 32,800 employees compared to 36,500 at the end of the first quarter of 2008, a 10 percent reduction.
Net Income
Net income for the quarter was $206 million compared to $177 million in the fourth quarter and $150 million in the first quarter of 2008. Net income this quarter reflects an effective income tax rate of 31 percent compared to 39 percent in the year-ago period. The lower rate is primarily due to the reversal of reserves for uncertain tax positions. Qwest currently expects its effective income tax rate will return to more normal levels in the remaining quarters of the year.
SEGMENT FINANCIAL RESULTS
Business Markets
The Business Markets segment delivered solid performance under more challenging market conditions in the quarter. Business Markets revenue totaled $1.0 billion, an increase of 3 percent year over year and a decline of 3 percent from the fourth quarter. Top-line performance reflects continued growth in recurring services revenue offset by lower equipment revenue. Excluding equipment revenue, Business Markets revenue increased 2 percent annually and 1 percent over the fourth quarter. Strategic product revenue increased by 23 percent year over year while voice revenue declined 5 percent.
Segment income was $396 million in the quarter, a 6 percent increase year over year and in line with the fourth quarter. Operating expenses were up 1 percent year over year but decreased 5 percent from the fourth quarter mostly due to lower employee-related expenses and lower equipment costs. The segment income was 38.9 percent of revenues in the quarter, compared to 37.8 percent in the first quarter of 2008 and 37.5 percent in the fourth quarter.
Mass Markets
The Mass Markets segment produced solid broadband and video subscriber growth, and strong progress on expense initiatives largely offset revenue pressures. Revenue for Mass Markets was $1.3 billion, a decrease of 11 percent year over year and a decline of 4 percent sequentially. Revenue results were impacted by continued access line losses and the wireless migration. Excluding wireless MVNO services, Mass Markets revenue decreased 6 percent year over year and 1 percent sequentially. In the first quarter, data, Internet and video revenues improved 5 percent annually on continued subscriber growth.
At the end of the first quarter, Qwest was serving 2.9 million broadband subscribers, which is an increase of 7 percent from the year-ago period. The video subscriber base was 832,000 at the end of the period, an increase of 21 percent from the first quarter of 2008. Mass market access lines were 7.5 million at the end of the quarter and declined at an annual rate of 11.4 percent in the period. The total wireless base at the end of the first quarter was 747,000, with about 60 percent of customers being served on the Verizon Wireless platform.
Mass Markets segment income was $724 million, which was flat with the year-ago period and a decline of 2 percent sequentially. Operating expenses declined 21 percent compared to the first quarter of 2008 and 6 percent sequentially due to lower marketing expenses, reduced wireless MVNO operating costs and lower network operations costs. Segment margin percentage of 54.7 percent increased from both the 48.6 percent reported in the year-ago period and 53.5 percent reported in the fourth quarter.
Wholesale Markets
Wholesale Markets segment revenue was lower in the quarter due to lower long-distance volumes and a decline in access revenue. Revenue was impacted by the company’s continued focus on improving wholesale profitability. Wholesale reported first quarter revenue of $752 million, a decline of 11 percent compared to the first quarter of 2008 and a 5 percent decline from the fourth quarter. Compared to the year-ago period, data and Internet revenue was essentially flat, while voice revenue declined 19 percent.
A more profitable revenue mix and strong expense controls largely offset the impact of lower revenue. Wholesale segment income for the quarter was $475 million, a decline of 2 percent from the first and fourth quarter of 2008. Segment income was 63.2 percent of revenues in the first quarter, an increase from 57.5 percent in the first quarter a year ago and 61.7 percent in the fourth quarter.
Cash Flow and Capital Spending
Adjusted free cash flow for the quarter of $339 million was substantially ahead of the year-ago period and was particularly strong in light of typical first quarter seasonal effects including annual bonus payments and semi-annual debt interest payments. These impacts were more than offset by improved cash from operations, lower capital investment spending and reduced working capital requirements due to improved collections and extended days payable outstanding.
Capital spending in the quarter was $334 million, a decrease of 20 percent from the year-ago quarter and 7 percent sequentially. The decline in capital expenditures was mostly due to project timing. A significant portion of capital investment continues to be focused on broadband expansion, including fiber to the node.
Balance Sheet
In the first quarter, Qwest retired approximately $230 million of maturing debt. At the end of the quarter, the company had gross debt outstanding of $13.3 billion. With cash and cash equivalents of $541 million, net debt was $12.8 billion, a decline of nearly $200 million from the fourth quarter of 2008. The ratio of net debt to annualized adjusted EBITDA for the quarter was approximately 2.8 compared to a ratio of 2.9 in the year-ago period and the fourth quarter.
Earlier this month Qwest sold 8.375 percent, 7-year notes at its Qwest Corporation subsidiary. The debt securities have an aggregate principal value of $811 million and the sale netted $738 million in cash proceeds for Qwest. The company also expanded its undrawn revolving credit facility to $910 million, an increase of $60 million.
Shareholder Returns
During the first quarter, Qwest paid a dividend of 8 cents per share, returning nearly $140 million to shareholders. On April 15, Qwest’s Board of Directors approved the payment of a second quarter dividend of 8 cents per share. The dividend will be paid on June 12, 2009, to shareholders of record as of May 22, 2009.
Guidance
Qwest continues to expect full year 2009 adjusted free cash flow will be $1.4 to $1.5 billion. Full year adjusted EBITDA is expected to be $4.2 to $4.4 billion, inclusive of an expected increase in non-cash pension and OPEB expense of $200 million. Capital expenditures are expected to be $1.8 billion or lower.
Conference Call Today
As previously announced, Qwest will host a conference call for investors and the media today at 9 a.m. EDT. A live webcast, including a simultaneous slide presentation, and replay of the call is available at www.qwest.com/about/investor/events. Additional quarterly historical financial information can be found at www.qwest.com/about/investors/financial/index.
(Click here for financial tables)
About Qwest
Customers coast to coast turn to Qwest's industry-leading national fiber-optic network and world-class customer service to meet their communications and entertainment needs. For residential customers, Qwest offers a new generation of fiber-optic high-speed Internet service, as well as digital home phone, Verizon Wireless, and DIRECTV services. Qwest is also the choice of 95 percent of Fortune 500 companies, offering a full suite of network, data and voice services for small businesses, large businesses, government agencies and wholesale customers. Additionally, Qwest participates in Networx, the largest communications services contract in the world, and is recognized as a leader in the network services market by a leading technology industry analyst firm.
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Forward-Looking Statement Note
This release may contain projections and other forward-looking statements that involve risks and uncertainties. These statements may differ materially from actual future events or results. Readers are referred to the documents filed by us with the Securities and Exchange Commission, specifically the most recent reports which identify important risk factors that could cause actual results to differ from those contained in the forward-looking statements, including but not limited to: access line losses due to increased competition, including from technology substitution of our access lines with wireless and cable alternatives, among others; our substantial indebtedness, and our inability to complete any efforts to further de-lever our balance sheet; adverse results of increased review and scrutiny by media and others (including any internal analyses) of financial reporting issues and practices or otherwise; rapid and significant changes in technology and markets; any adverse developments in commercial disputes or legal proceedings; potential fluctuations in quarterly results; volatility of our stock price; intense competition in the markets in which we compete including the effects of consolidation in our industry; changes in demand for our products and services; acceleration of the deployment of advanced new services, such as broadband data, wireless and video services, which could require substantial expenditure of financial and other resources in excess of contemplated levels; higher than anticipated employee levels, capital expenditures and operating expenses; adverse changes in the regulatory or legislative environment affecting our business; changes in the outcome of future events from the assumed outcome included in our significant accounting policies; our ability to utilize net operating losses in projected amounts; and continued unfavorable general economic conditions, including the current financial crisis.
The information contained in this release is a statement of Qwest’s present intention, belief or expectation and is based upon, among other things, the existing regulatory environment, industry conditions, market conditions and prices, the economy in general and Qwest’s assumptions. Qwest may change its intention, belief or expectation, at any time and without notice, based upon any changes in such factors, in Qwest’s assumptions or otherwise. The cautionary statements contained or referred to in this release should be considered in connection with any subsequent written or oral forward-looking statements that Qwest or persons acting on its behalf may issue. This release may include analysts’ estimates and other information prepared by third parties for which Qwest assumes no responsibility.
Qwest undertakes no obligation to review or confirm analysts’ expectations or estimates or to release publicly any revisions to any forward-looking statements and other statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
By including any information in this release, Qwest does not necessarily acknowledge that disclosure of such information is required by applicable law or that the information is material.
The marks that comprise the Qwest logo are registered trademarks of Qwest Communications International Inc. in the U.S. and certain other countries.
Contact Information Media ContactDiane Reberger303-992-1662diane.reberger@qwest.com Investor ContactKurt Fawkes800-567-7296
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