|Unaudited (in millions, except per share amounts)|
|Q1 2008||Q4 2007||Seq.
|Q1 2007||Y over Y
|Income before Income Taxes||256||260||(1.5%)||242||5.8%|
|Net Income per Diluted Share*||0.09||0.20||(55.0%)||0.12||(25.0)%|
Net income and net income per diluted share in the first quarter of 2008 reflects income tax expense at normal effective rates different from those in 2007.
a See attachment E for Non GAAP Reconciliation for EBITDA, EBITDA Margins, Adjusted EBITDA, Adjusted EBITDA Margins and Free Cash Flow
DENVER, May 6, 2008 — Qwest Communications International Inc. (NYSE: Q) reported steady operating results for the first quarter of 2008. Adjusted EBITDA totaled $1.14 billion with adjusted EBITDA margins of 33.6 percent as data, Internet and video revenue grew by 9 percent compared to the first quarter of 2007. Reflecting the firstquarter of recording income tax expense at normal effective rates since 2001, Qwest reported earnings of $157 million, or $0.09 per diluted share in the first quarter 2008, compared to $240 million, or $0.12 per diluted share, in the first quarter 2007.
While maintaining steady financial performance, Qwest made significant strides executing on its strategic initiatives. Among the milestones reached since the beginning of the year were an agreement with Verizon Wireless that represents a fundamental shift in how Qwest provides wireless services to its customers; the launch of two new fiber-optic Internet services for Mass Market customers; and the continued acceleration of Business Markets revenue growth on a year-over-year basis. Other accomplishments included an initiative to further reduce costs through a voluntary separation program, changes to the company’s segment reporting structure and continued progress on the $2 billion share repurchase program.
“Since the beginning of the year, we have demonstrated notable progress on our strategies for success, including announcing a new wireless model and executing on our fiber-to-the-node build-out, which is ahead of plan for the year,” said Edward A. Mueller, Qwest chairman and CEO. “In addition, we continue to effectively compete for customers in a challenging economic climate.”
Qwest reported total operating revenue of $3.4 billion for the first quarter 2008. Total revenue declined 1.4 percent year over year. Results reflect the impact of industry consolidation and long-distance pricing pressure in Wholesale Markets offset by 3.1 percent growth in Business Markets while Mass Markets revenue was flat.
Continuing customer demand for higher speeds and greater functionality in data products, such as consumer broadband and enterprise iQ Networking services, contributed to total data, Internet and video services revenue growing 9 percent year over year to $1.3 billion. Total data, Internet and video services revenue now represents nearly 40 percent of operating revenue.
Total operating expenses declined by 1.6 percent to $2.9 billion compared to the first quarter of 2007 while absorbing investments in brand development and Business Markets sales force. General, administrative and other operating expenses led expense reductions with a year-over-year decline of 6.9 percent as a result of lower headcount and one-time litigation charges in 2007. Depreciation and amortization for the quarter declined year over year by $36 million, or 5.9 percent, due to the continuation of disciplined capital expenditures relative to historic levels.
Adjusted EBITDA and Net Income
Qwest reported adjusted EBITDA of $1.14 billion in the quarter, which was flat sequentially and down $30 million from the first quarter of 2007. Adjusted EBITDA margin expanded nearly 50 basis points during the quarter to 33.6 percent vs. 33.1 percent in the fourth quarter of 2007. Adjusted EBITDA results exclude $45 million in severance charges mostly related to the voluntary separation plan offered in March to certain local network employees supporting the traditional telephone business.
Net income for the quarter was $157 million compared to $240 million in the prior year. As a result of the reversal of the valuation allowance against deferred tax assets in 2007, Qwest began recording income tax expense at normal effective rates in the first quarter resulting in $99 million of income tax expense compared to $2 million in the first quarter of 2007. As a result, income tax expense impacts on net income differ year over year. Income before income taxes was $256 million for the quarter, an increase of 5.8 percent compared to the first quarter of 2007.
“I am pleased with our financial progress in the quarter,” said John W. Richardson, Qwest executive vice president and CFO. “Changes to our reporting segments and cost detail will aid stakeholders in following our progress as we continue to focus on selling into our strategic product set, stemming access line losses and driving costs out of the business resulting in expanded EBITDA margins.”
To reflect the way the company now manages its business and provide increased visibility to results, as of the first quarter, Qwest changed its segment reporting from legacy segments, wireline, wireless and other, to three market-based segments – Business Markets, Mass Markets and Wholesale Markets.
To summarize, the financial and operating results for the company’s three segments during the quarter were:
Business Markets reported revenue of $995 million in the first quarter, up 3.1 percent year over year as data and Internet revenue grew 6.9 percent. Data and Internet revenue growth continues to be driven by Qwest’s strategic products, which grew 29 percent over the same period a year ago. Sequentially, strategic products were down 3.6 percent due to typical procurement cycle impacts on data equipment revenue.
Investment in an expanded sales force led to higher Business Markets segment expenses. As a result, year-over-year segment income declined by 4.1 percent to $379 million. The year-over-year increase in facility, network and other expenses tracked with revenue growth at 3.1 percent. Sequentially, segment income expanded by 4.4 percent on lower expenses associated with lower equipment revenue.
Qwest is serving as the official telecommunications provider for the 2008 Democratic National Convention to be held in August in Denver. The company also will be the official communications provider for the 2008 Republican National Convention to be held in September in Minneapolis-Saint Paul.
In April 2008 Gartner, Inc., released its, “1H08 U.S. Network Service Providers Magic Quadrant,” in which Gartner positioned Qwest in the leaders quadrant for national network services.
Mass Markets revenue was $1.48 billion in the quarter, a 0.7 percent decline compared to the prior year. Data, Internet and video revenue growth of 20.7 percent was offset by declines in both voice and wireless services revenue due to competition and economic pressures, particularly in markets most affected by the housing industry.
Sequential revenue was essentially flat, reflecting similar trends among voice, wireless and data revenues. Mass Markets segment income was $717 million for the quarter, up $21 million, or 3.0 percent, sequentially. Segment expenses declined resulting in segment margins of 48.4 percent, steady to first quarter 2007 results.
Increased bundle penetration and a growing number of customers taking higher broadband speeds drove improvements in consumer ARPU, which increased 7.8 percent to $55 from $51 a year ago.
Qwest Broadband subscribers increased 90,000 in the quarter to reach 2.7 million, up 17.2 percent from a year ago. In April, the company launched Qwest Connect® Titanium (connection speeds up to 12 Mbps) and Qwest Connect® Quantum (connection speeds up to 20 Mbps), the latest Internet services powered by Qwest's ongoing fiber-to-the-neighborhood (FTTN) network expansion. Details regarding these new services can be found at www.qwest.com/residential/internet/fiber-optics.html. The new services will be rolled-out in 23 of Qwest's top markets across 10 states throughout the year.
Qwest added 50,000 net DIRECTV subscribers in the quarter for a total of 699,000 video subscribers – an increase of 42 percent from the end of the first quarter 2007.
Yesterday, Qwest and Verizon Wireless announced a 5-year agreement for Qwest to market and sell the complete line of Verizon Wireless services to Qwest’s consumer, business and government customers. Beginning this summer, Qwest’s consumer customers will be able to buy Verizon Wireless products and services via Qwest’s call centers, retail stores and kiosks and online at Qwest.com.
Wholesale Markets reported revenue of $841 million in the quarter, down 7.0 percent year over year largely due to long-distance revenue impacted by industry consolidation and pricing. Data and Internet revenue was up 3.0 percent year over year, reflecting Wholesale’s increased focus on data products. Sequential revenue was flat as voice services revenue declines stabilized.
Segment income was $493 million, down 2.0 percent year over year as a result of revenue declines of 7.0 percent during the same period. Sequentially, segment income was down $28 million largely due to a favorable one-time settlement in the fourth quarter of 2007. Segment margin improved by more than 300 basis points year over year, reflecting efforts to maximize Wholesale Markets margin.
In February, Qwest tied for top honors in customer service, network quality and voice pricing from wholesale customers in Atlantic-ACM’s “2008 Domestic Wholesale Report Card” survey. This was the fourth consecutive Atlantic-ACM survey that recognized Qwest Wholesale as best-in-class for customer service.
CASH FLOW, CAPITAL SPENDING AND INTEREST
Adjusted free cash flow for the quarter was $56 million compared to $150 million during the first quarter of 2007. Cash flow contributions by operating activities were offset by higher capital spending, including the continued deployment of fiber-to-the-node in targeted markets. Total capital investment for the quarter was $416 million compared to $318 million in the prior year. Sequentially, capital expenditures were down $89 million due primarily to timing on real estate construction and IT software purchases.
Interest expense declined 7.4 percent year over year to $261 million for the first quarter as a result of retiring higher coupon debt instruments during 2007.
Due to the agency nature of our new wireless partnership, we will recognize revenues on a net basis. As a result, wireless revenue could be lower than under our previous arrangement. Excluding the impact of wireless revenues, Qwest expects full-year revenue results in line with prior guidance. We continue to be comfortable with previously stated goals for EBITDA, capital expenditures and free cash flow for the year.
Qwest reduced net debt by $304 million to $13.5 billion compared to the first quarter of 2007. Net debt increased $310 million sequentially as a result of cash and investments declining from $1.1 billion at the end of 2007 to $800 million at the end of the first quarter.
RETURNS TO SHAREHOLDERS
During the first quarter, Qwest paid its first dividend to shareholders in six years of $0.08 per share. Total dividend payments were $142 million. Combined with continued progress on its $2 billion share repurchase program, Qwest has returned in excess of $370 million to its shareholders through May 1 of this year.
On April 17, Qwest announced that a dividend of $0.08 per share will be paid on May 30, 2008, to all stockholders of record at the close of business on May 9, 2008.
Conference Call Today
As previously announced, Qwest will host a conference call for investors and the media today at 9 a.m. EDT with Edward Mueller, Qwest chairman and CEO, and John W. Richardson, Qwest executive vice president and CFO. A live webcast and replay of the call is available atwww.qwest.com/about/investor/events.
Customers coast to coast turn to Qwest's industry-leading national fiber-optic network and world-class Spirit of Service to meet their communications and entertainment needs. For residential customers, Qwest’s powerful combination of award-winning high-speed Internet,home and wireless voice solutions and digital TV includes a new generation of fiber-optic Internet 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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