o Revenue trend continues steady improvement
o Strategic revenue growth of 7 percent driven by enterprise IP services, carrier demand and residential fiber-based services
o Adjusted EBITDA(a) margin expands 170 basis points to 37.9 percent in the quarter
o Full year adjusted free cash flow again exceeds $1.9 billion
o Fiber-to-the-node customers now 25 percent of total residential HSI base
o Total broadband, video and wireless connections exceed 5 million
Adjusted EBITDA Margin
Adjusted Free Cash Flow
(a) See Attachment E for Non GAAP Reconciliations
DENVER, Feb. 15, 2011 – Qwest Communications (NYSE: Q) today reported financial results for the fourth quarter and full year 2010. For the quarter, the company reported improved year-over-year revenue comparisons, expanded adjusted EBITDA margin and strong free cash flow. Qwest also continued to strengthen its balance sheet.
For the fourth quarter, the company reported a loss of 9 cents per share compared to positive earnings of 6 cents per share in the fourth quarter 2009. Special items reduced reported earnings per share by 21 cents in the fourth quarter 2010 and by 2 cents in the year-ago period. For the full year, the company reported a loss per share of 3 cents compared to positive earnings per share of 38 cents in 2009. Special items reduced reported earnings per share by 47 in the prior year. Special items for the quarter are discussed in the Consolidated Financial Results section below.
Revenue trends continued to improve in the fourth quarter and for the full year. Reported revenue declined 3 percent year over year for the fourth quarter. Full year 2010 revenues declined 5 percent on a reported basis. After adjusting for the change in the company’s wireless business model, revenues for the year declined 4 percent compared to a decline of 6 percent in 2009.
Adjusted EBITDA of $1.1 billion for the fourth quarter increased 1 percent compared to the fourth quarter 2009, while margin increased 170 basis points to 37.9 percent. Full year adjusted EBITDA was $4.4 billion, up slightly from 2009, and full year adjusted EBITDA margin of 37.8 percent expanded 190 basis points. This follows a 220 basis point adjusted EBITDA margin improvement for full year 2009 compared to full year 2008.
The company generated adjusted free cash flow of $426 million in the fourth quarter compared to $506 million in the prior year. For the full year, Qwest generated $1.9 billion in adjusted free cash flow, which is steady with 2009.
In the quarter, the Business Markets segment reported annual growth of 18 percent in IP services revenues. Mass Markets continues to expand its fiber-to-the-node (FTTN) footprint, ending the year with speeds of 12 Mbps or higher available to approximately one-third of the company’s residential households. During the quarter, 92,000 customers added high-speed Internet services that utilize the fiber network, bringing total users to 713,000. At the end of the quarter, the Wholesale Markets segment had constructed fiber-based backhaul services to approximately 2,000 wireless towers.
“We continued to make solid progress, and I am pleased with the results we delivered in the fourth quarter and for the full year,” said Edward A. Mueller, Qwest chairman and CEO. “We improved revenue trends, expanded margins and generated significant free cash flow, while aggressively deploying fiber-based services to meet the needs of our customers. We also made substantial progress toward the completion of our merger with CenturyLink having received approval in 18 states with approvals pending in four additional states and the FCC. While the timing of the receipt of these approvals cannot be predicted with certainty, we currently expect to receive all required approvals in the first quarter and are planning toward an April 1 closing date.”
CONSOLIDATED FINANCIAL RESULTS
Qwest reported consolidated net operating revenue of $2.9 billion in the fourth quarter. Strategic services revenue increased 7 percent on a year-over-year basis, and data integration revenue increased 15 percent. This growth was offset by an 11 percent annual decline in legacy services revenue.
For the fourth quarter, consolidated operating expenses decreased 3 percent year over year to $2.5 billion. Excluding special items, total expenses declined 5 percent, as cost of sales declined 6 percent driven by lower network facilities expense and staffing reductions, and selling expense improved 6 percent mainly due to lower workforce levels. Normalized for special items, general and administrative expense declined 4 percent. Total employees at the end of the period were approximately 28,300, a decrease of 1 percent from the third quarter and 6 percent from the prior year.
Net (Loss) Income
Net loss for the fourth quarter was $161 million compared to net income of $108 million in the prior year. The current quarter includes s totaling $117 million for accelerated stock-based compensation, severance and realignment, a legal settlement, and merger-related expenses as listed in Attachment E. The current quarter also includes a $267 million pre- and post-tax charge to other income (expense) related to the conversion option on convertible notes that were redeemed in the fourth quarter. This charge is due to strong appreciation of Qwest’s stock price during the fourth quarter. The prior-year period includes pre-tax charges totaling $56 million for severance and realignment.
SEGMENT FINANCIAL RESULTS
Business Markets revenue increased 1 percent year over year and was flat sequentially. The unit benefited from continued enterprise demand for IP services and strong data integration sales.
In the quarter, new enterprise sales were up modestly from the prior-year quarter and down sequentially due to seasonal factors. Retention performance continued to be solid in the quarter.hile legacy services declined 9 percent year over year mainly due to lower local voice revenue and migration to newer generation data services.
Segment operating expense declined 3 percent year over year and 1 percent sequentially. The expense decrease is primarily due to improved sales productivity.
Business Markets income contribution increased 6 percent year over year and was steady with the third quarter. Segment income margin expanded to 41.0 percent, an increase of 210 basis points from the year-ago period.
For the full year, Business Markets revenue increased modestly from the prior year to $4.0 billion, driven by 24 percent growth in IP services and 8 percent growth in data integration. Segment income improved 3 percent to $1.6 billion, and segment margin increased 120 basis points to 40.2 percent.
Mass Markets continued to benefit from the company’s fiber-to-the-node deployment while maintaining a solid segment income margin to offset legacy voice top line pressures in the quarter. Collectively, broadband, video and wireless total connections now exceed 5 million. Consumer ARPU increased to $66, a 10 percent increase from the fourth quarter 2009.
Mass Markets segment revenue of $1.1 billion declined 4 percent from the fourth quarter 2009 and was down 1 percent sequentially. Strategic revenues, which represent one-third of total segment revenues, increased 8 percent year over year due to growth in broadband services, while legacy voice revenues decreased 9 percent.
Segment expenses decreased 3 percent from the year-ago period and 1 percent sequentially. The year-over-year improvement is mainly due to lower network operations, facilities costs and staffing.
Segment income for the quarter declined 6 percent compared to the year-ago period and 2 percent from the third quarter. Segment margin of 52.9 percent declined 80 basis points compared to the year-ago quarter and was flat sequentially.
Wholesale Markets reported improved year-over-year revenue trends and strong margin expansion. The segment is benefiting from increased carrier demand for strategic services and an improved product mix. Strategic services were approximately one-half of segment revenue in the quarter.
In the fourth quarter, segment revenue declined 7 percent year over year compared to an 8 percent annual decline reported in the third quarter. Sequentially, revenue was down 2 percent.
Segment expenses decreased 18 percent from the year-ago period and 2 percent sequentially. The year-over-year improvement is primarily due to lower facilities costs and reduced staffing.
Wholesale Markets segment income remained flat with the fourth quarter 2009 and declined 2 percent from the third quarter. Wholesale segment income margin of 68.0 percent increased 470 basis points year over year and 20 basis points sequentially, mainly due to improved product mix.
For the full year, segment revenue declined 9 percent primarily as growth in strategic services was offset by lower long-distance and local voice revenue. Segment income declined 1 percent, while margin expanded 540 basis points to 67.6 percent.
The company continued to make solid progress in deploying fiber services to wireless cell sites. Construction has been completed on approximately 2,000 sites and the company has another 2,000 sites under contract to be deployed in future periods.
Capital expenditures requiring cash were $398 million for the quarter and $1.5 billion for the full year. The company financed $192 million of additional capital investment through leasing in 2010, including $87 million in the fourth quarter. Capital investment in the quarter was focused on key strategic projects including broadband services and fiber-based initiatives.
The company continued to strengthen its balance sheet and improve financial flexibility. During the quarter, Qwest redeemed the remaining $1.1 billion outstanding convertible senior notes due 2025 and settled the convert option with $616 million of cash. Net debt was $11.6 billion at the end of the quarter, an improvement of $219 million compared to year-end 2009. Cash was $372 million at year end. The company’s net debt-to-adjusted EBITDA leverage ratio was 2.6 times, an improvement from 2.7 times at the end of 2009. Following the payment of $180 million maturing today, the company will have achieved the $3.5 billion debt reduction target that it announced in February 2010.
CenturyLink Merger Agreement
On April 22, 2010, Qwest and CenturyLink announced an agreement for CenturyLink to acquire Qwest in a tax-free, stock-for-stock transaction. Under the terms of the agreement, Qwest shareholders will receive 0.1664 CenturyLink shares for each share of Qwest common stock they own at closing. On Aug. 24, 2010, shareholders of both companies overwhelmingly approved all proposals related to the merger between CenturyLink and Qwest.
In addition to approvals by CenturyLink and Qwest shareholders, the companies have received clearance from the U.S. Department of Justice and approval from 18 regulatory utility commissions. Reviews continue in 4 other states and at the Federal Communications Commission. The companies are planning toward an April 1 closing date.
Qwest returned $139 million to shareholders in the fourth quarter through a dividend of 8 cents per share. In 2010, Qwest paid common stock dividends totaling $555 million. On Jan. 24, the Qwest board of directors declared a first quarter dividend of $0.08 per share. The quarterly dividend is payable on Feb. 25, 2011 to shareholders of record as of Feb. 18, 2011.
Conference Call Today
As previously announced, Qwest will host a conference call for investors and the media today at 9 a.m. EST. A live webcast, including a simultaneous slide presentation, and replay of the call is available at http://investor.qwest.com. Additional quarterly historical financial information can be found at http://investor.qwest.com/overview.
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-fast Internet service, high-speed internet solutions, as well as home phone, Verizon Wireless, and DIRECTV® services. Fortune 500 companies and other large businesses and wholesale customers, as well as small businesses and governmental agencies, choose Qwest to deliver a full suite of network, data and voice services. 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 leading technology industry analyst firms.
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 bternal 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. In addition, actual results could be affected by factors relating to our pending merger with CenturyLink, including but not limited to: the ability of the parties to timely and successfully receive the required approvals of regulatory agencies; the possibility that the anticipated benefits from the acquisition cannot be fully realized or may take longer to realize than expected; the possibility that costs or difficulties related to the integration of our operations into CenturyLink will be greater than expected; the ability of the combined company to retain and hire key personnel; and other risk factors and cautionary statements as detailed from time to time in each of CenturyLink’s and our reports filed with the Securities and Exchange Commission.
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’sntention, 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.
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