|(in millions, except per share amounts)|
|2007||2006||Y over Y
|Q4 2007||Q4 2006||Y over Y
|Earnings per Basic Share||$1.59||$0.31||nm||0.20||0.10||100.0%|
|Earnings per Diluted Share||$1.52||$0.30||nm||0.20||0.10||100.0%|
nm – Percentages greater than 200% and comparisons between positive and negative values or to/from zero values are considered not meaningful.
DENVER, Feb. 12, 2008 — Qwest Communications International Inc. (NYSE: Q) today reported fourth-quarter and full-year 2007 results highlighted by substantial free cash flow, net income and earnings per share growth. The quarter also marked the 13th consecutive quarter of year-over-year adjusted EBITDA margin expansion. For the quarter, Qwest reported earnings of $366 million, or $0.20 per diluted share, compared to $194 million, or $0.10 per share, in 2006. Normalizing for $106 million of income tax benefits, net income for the quarter was $260 million, or $0.14 per diluted share.
“Over the past year, Qwest achieved many significant accomplishments that will drive its future success – being awarded a stake in the federal government’s Networx program, accelerating the deployment of fiber-to-the-node and further rewarding shareholders in the form of a quarterly dividend,” said Edward A. Mueller, Qwest chairman and CEO. “We have an opportunity to continue to deliver value to all our constituencies through our focus on simplified, integrated solutions, deeper partnerships, increased broadband speeds and productivity improvements.”
For the full year, Qwest reported revenue of $13.8 billion. After taking into account revenue from a large equipment contract in 2006 and the de-emphasis of the dial business in 2007, full-year revenue was essentially flat compared to the prior year.
Qwest’s total fourth-quarter revenue of $3.4 billion reflected continued positive trends in strategic products. Fourth-quarter revenue declined 1.5 percent year over year and was flat sequentially. Total data, Internet and video revenue – which now represents 39 percent of Qwest’s total revenue – grew 8.7 percent year over year.
Business revenue grew slightly on an adjusted basis described above, for the full year as data, Internet and video revenue growth offset declines in local and long-distance revenue. Fourth-quarter Business revenues increased 2.6 percent year over year and increased sequentially for the third consecutive quarter. MPLS-based products continue to outpace declines in legacy data platforms as customers migrate to value-enhancing IP solutions. Strategic products continue to reshape the channel, growing 29 percent in the fourth quarter year over year, and now representing 27 percent of total business revenues.
Full-year Mass Markets revenue grew by 1.1 percent, driven by growth in consumer ARPU, bundle penetration and increased take-rates for higher broadband speeds, which offset the impact of access-line losses. Mass Markets fourth-quarter revenue remained stable year over year and declined 1 percent sequentially.
Wholesale revenue declined 4.5 percent for the full year as industry consolidation moved carrier traffic off the network and as reduced demand for access lines contributed to lower access and local revenue. Increases in data traffic, demonstrated by our 5.6 percent increase in Wholesale data revenue for the full year, continue to moderate consolidation impacts as Qwest continues its focus on profitable growth. For the quarter, Wholesale revenue declined 9.2 percent over 2006 and 2.3 percent sequentially.
“Our consistent practice of financial discipline, combined with our drive to create profitable growth, is clearly reflected in our results from 2007,” said John W. Richardson, Qwest executive vice president and CFO. “We are pleased to report significant improvement in free cash flow for the year, as well as growing our EBITDA margins towards our goal of mid-30 percent.”
Qwest’s operating expenses totaled $12.0 billion for the year including $393 million in litigation charges. After adjusting for litigation charges, operating expenses were down $739 million, or 6.0 percent, from 2006. Improvements in productivity, reductions in benefit and pension expenses, lower depreciation and amortization and savings in facility costs drove the decline. Fourth-quarter operating expenses declined $192 million, or 6.2 percent, year over year through lower facility costs and a non-recurring compensation-related charge in 2006.
Qwest’s adjusted EBITDA margins for the year were 33.4 percent compared to 31.5 percent for 2006. The company made consistent strides throughout 2007 toward its goal of mid-30 percent margins, posting year-over-year margin improvements in each quarter.
For the year, Qwest reported net income of $2.9 billion, which included the recognition of $2.25 billion in income tax benefits and $393 million in litigation charges. Normalized for income tax and litigation impacts, adjusted earnings was $1.1 billion or $0.55 per diluted share.
Cash Flow, Capital Spending and Interest
Adjusted free cash flow for the year totaled $1.8 billion, an increase of $405 million, or 29 percent, from 2006. The company generated adjusted free cash flow of $640 million in the quarter, resulting from continued improvement in operating results relative to the prior year and balance sheet contributions.
For the full year, capital expenditures totaled $1.67 billion compared to $1.63 billion in 2006. Approximately 50 percent of the full-year capital spend was directed toward increasing speeds across the network. Fourth-quarter capital expenditures totaled $505 million, compared to $406 million in the prior year, as capital allocated for increasing broadband speeds to the home was deployed. Timing on real estate projects and one-time items also impacted capital spending in the quarter.
Interest expense totaled $267 million for the fourth quarter, down from $284 million for the fourth quarter a year ago due to the retirement of higher coupon instruments.
Balance Sheet Update
Qwest continued to improve the balance sheet in 2007, reducing net debt (gross debt less cash and investments) to $13.1 billion, down $259 million from a year ago. The company continued to maintain liquidity at targeted levels, ending the year with cash and investments of $1.1 billion.
Dividend and Share Repurchases
During the quarter, the company demonstrated confidence in the ability to sustain profitability and free cash flow by declaring a quarterly dividend payment of $0.08 per share for all shareholders as of Feb. 1, 2008. Payable on Feb. 21, 2008, the dividend will be the first distribution by the company to shareholders since 2001.
As of January 31, 2008, Qwest had completed 74 percent of its $2 billion stock repurchase program. Approximately, 1.8 billion shares were outstanding as of the end of the year.
Customers continue to respond to the value of Qwest’s full-featured bundle offerings, which include voice services and features, high-speed Internet access, a national wireless offering and integrated TV services through Qwest’s own ChoiceTV or its partnership with DIRECTV, Inc.
The company’s bundle penetration increased to 62 percent in the quarter, compared to 57 percent a year ago. Sales of voice packages with three or more products continue to reduce churn and drive growth. Customers adding more features and services or increasing broadband speeds drove higher consumer ARPU, which increased 7.8 percent to $55 from $51 a year ago.
At the end of 2007, Qwest had a total of 11.5 million retail access lines. While retail access lines declined 6.5 percent from the end of 2006, the company’s mass market connections – including broadband, video, wireless and voice customers – remained flat compared to the prior year at 12.8 million.
Qwest Broadband subscribers grew 95,000 in the fourth quarter compared to an increase of 165,000 in the fourth quarter 2006. For the full year 2007, Qwest added 473,000 subscribers to end the year with a total of 2.6 million – a 22 percent increase over 2006.
During the year, Qwest accelerated its deployment of fiber-to-the-node in the first of 20 markets the company is targeting through the end of 2008. Initial results include a significant increase in take-rates for Qwest’s highest speed broadband offering. By the end of 2008, Qwest expects to reach 1.5 million homes with more robust speeds up to 20 Mbps.
Qwest added 44,000 net DIRECTV subscribers in the quarter to end the year with a total of 649,000 video subscribers, an increase of 58 percent in total video customers from the end of 2006. Qwest and DIRECTV’s strategic partnership allows Qwest to offer DIRECTV digital satellite television services to residential customers across the entire Qwest 14-state region.
Enterprise and Government Sales
During the quarter, Qwest signed new or expanded agreements with a number of enterprise and government customers for national voice, data and IP solutions, including the Government of the District of Columbia, Scottrade, United States Cold Storage, Kforce Professional Staffing, National Auto Warranty Services and, recently, the National Labor Relations Board under the Networx Universal contract.
In October, Qwest received multiple best-in-class honors from enterprise customers in ATLANTIC-ACM's 2007 Metro Carrier Report Card. In the survey, customers rated Qwest Business Markets first among incumbent carriers for customer service, sales representatives, service level agreements, provisioning and network reliability. On the product side, enterprise customers scored Qwest's Dedicated Internet Access (DIA) and IP virtual private networking services highest, earning Qwest a total of seven Enterprise Metro Carrier Excellence Awards.
In addition, Qwest received its seventh consecutive ranking as the top performer in the local telecommunications carrier segment, and a number one ranking in the long-distance segment for directory-assistance services, according to the Paisley National Directory Assistance Performance Index (SM).
Conference Call Today
As previously announced, Qwest will host a conference call for investors and the media today at 9 a.m. EST with Edward A. 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 at www.qwest.com/about/investor/events.
Qwest offers a powerful combination of award-winning broadband, video and voice solutions for residential customers, businesses and government agencies. Customers coast to coast turn to Qwest's industry-leading national fiber optic network to meet their evolving communications and entertainment needs. Qwest employees are the driving force behind the company’s nationally recognized Spirit of Service. Qwest is a participant in Networx, the largest communications services contract in the world, to provide innovative voice, data and video services, and is recognized as a leader in the network services market by a leading technology industry analyst firm. For more information on Qwest please visitwww.qwest.com. For information about the products and services Qwest is offering in the Networx contract, visitwww.gsanetworx.com.