DENVER, February 15, 2005 - Qwest Communications International Inc. (NYSE: Q) today reported fourth quarter and full year 2004 results that benefited from improved year-over-year revenue and expense trends and solid growth in free cash flow. For the quarter, the fully diluted loss per share was $0.08 compared with a loss of $0.23 a year ago, which includes special items of $(0.02) and $0.06, respectively. For the full year, the fully diluted loss per share from continuing operations was $1.00 compared with a loss of $0.76 in 2003. See Attachment E for detailed discussion of special items.
"We are pleased with the progress we have made in 2004 and we like the momentum we have entering 2005 to drive additional growth in our key lines of business," said Richard C. Notebaert, Qwest chairman and CEO. "Over the past year, we have focused on improving productivity, extending our financial flexibility and strengthening our competitive position. For the year, we surpassed our growth targets for both DSL and in-region long-distance, deepened our bundle penetration, improved our access line trends, significantly reduced our costs and improved our key customer service metrics."
Qwest's revenue was $3.4 billion in the quarter, a 0.3 percent decline sequentially and a 1.7 percent decrease from fourth quarter 2003 - the lowest year-over-year decline in the past eight quarters. Revenue sequentially benefited from improved trends in consumer local access line losses and solid gains in key growth areas, including long- distance and DSL, as well as further package and bundle penetration. Fourth quarter revenue benefits were offset by continued competitive pressures in the enterprise market and lower wireless revenues associated with the churn from the customer migration program.
For the full year, revenue was $13.8 billion compared to $14.3 billion for 2003, or a decline of 3.4 percent. Revenue gains in consumer and wholesale long-distance, data and Internet were offset by local losses and competitive pressures in the enterprise market.
"Our ability to improve revenue trends and to further reduce costs enabled Qwest to achieve its goal of improving margins during 2004," said Oren G. Shaffer, Qwest vice chairman and CFO. "We believe we have the opportunity to increase efficiency and further reduce costs. Along with targeted capital investments, these efforts should generate ongoing improvements in margins and free cash flow in 2005."
The company further reduced operating costs through continued expense management and ongoing productivity initiatives. During 2004, Qwest reduced its total workforce by approximately 5,500, or 12 percent, with the majority of the reduction in the second half of the year.
Qwest's fourth quarter operating expenses totaled $3.3 billion, compared to $3.6 billion in the fourth quarter of 2003, a decline of 8 percent, with both periods including year-end accrual true-ups. Cost of sales declined $141 million in the fourth quarter compared with the prior year's fourth quarter driven by continued improvement in facilities cost optimization and employee cost savings. Selling, general and administrative (SG&A) expenses decreased $178 million for the same period, as a result of workforce rebalancing and cost containment efforts and include $100 million in legal reserve charges in the fourth quarter of 2003.
Facilities Cost Optimization Initiatives
Qwest continues to make significant progress in its efforts to optimize facilities costs, which decreased by $465 million in 2004. This substantial decline is primarily the effect of the annualized benefit of approximately $410 million from the 2003 renegotiation and termination of certain underutilized purchase commitments. In addition, the company benefited from approximately $260 million in network optimization, as a result of initiatives begun earlier this year to significantly reduce fixed facilities costs.
However, offsetting part of these benefits were two usage based costs: wireless minutes-of-use on the Sprint network and a 62 percent increase in wholesale long-distance minutes-of-use, driving higher variable facilities costs.
Capital Spending, Cash Flow and Interest
Fourth quarter capital expenditures totaled $372 million, compared to $418 million in the third quarter of 2004. For the year, capital expenditures totaled $1.7 billion compared with $2.1 billion in 2003. The company expects 2005 capital expenditures to be comparable to 2004 levels.
Capital expenditures of $372 million in the fourth quarter exceeded cash generated from operations of $239 million by $133 million. However, there were one-time uses of cash that affected the quarter, including a tax payment of $186 million related to the payment of a prior year federal tax and a $125 million payment that was the first of two equal, annual installments of the announced SEC settlement. The company reported cash from operations in excess of capital expenditures of $178 million in the fourth quarter and of $428 million for the year, after adjusting for the tax and SEC payments.
Interest expense totaled $366 million for the fourth quarter and $1.5 billion for the year, representing a savings of approximately $250 million for the year, excluding $22 million of issuance fees associated with the early repayment and termination of the company's credit facility in the first quarter of 2004.
Major drivers of Qwest's revenue included operational progress in key growth areas, as well as improvement in access line losses.
Qwest added 81,000 DSL lines in the fourth quarter and ended the year with over one million DSL lines in service. The one million milestone highlights that the company's four consecutive quarters of significant subscriber growth outpaced the industry average in 2004. Over the last 12 months, Qwest increased subscribers by more than 60 percent, adding nearly 400,000 DSL lines and exceeding its goal of one million DSL lines. Qwest's consumer data and Internet revenues were up nearly 50 percent in 2004.
Qwest deployed over 4,000 remote terminals during the year. The company is now able to deliver DSL to more than 6.6 million households, exceeding its availability target of 65 percent.
In direct response to customer requests, Qwest introduced a series of enhancements to its high-speed Internet offering in 2004:
- Qwest was the first major telecommunications company to launch stand-alone DSL service, allowing customers who do not have Qwest wireline voice services to purchase high-speed Internet access.
- Qwest launched DSL Data-Backer, which provides customers with an on-site trouble location plan for their DSL service and related equipment for a small monthly fee.
- Qwest introduced a wireless-ready modem to support Wi-Fi home networking bundled with security.
Bundles and Retail Operations
The company's bundle penetration, defined as consumer retail lines with at least one additional service, including wireless, DSL or long-distance, increased to 46 percent compared to 43 percent last quarter and 24 percent a year ago. The company is launching additional bundling initiatives in the first half of 2005 to deliver an expanded product offering to customers, including a national wireless offering, high-speed Internet access, long-distance service and integrated satellite TV services through a marketing alliance with DIRECTV, Inc.
As part of the planned region-wide retail expansion, Qwest ended the year with 70 retail solution centers in 12 states. The company plans to open more than 25 additional locations in the first half of 2005.
Total long-distance lines increased by 144,000 in the fourth quarter. Qwest ended the year with 4.6 million long-distance lines, more than double the 2.2 million lines a year ago. In the fourth quarter, long-distance penetration of total retail lines increased to 34 percent, compared to 15 percent a year ago. Consumer long-distance revenues grew 20 percent sequentially, largely attributable to the benefit of pricing initiatives introduced during the previous quarter on customer mix and average revenue per user (ARPU).
Wireless subscribers declined 24,000 in the fourth quarter to 754,000, an improvement from the decline of 36,000 last quarter. Wireless revenues declined 6.1 percent sequentially. Over 95 percent of Qwest's wireless customers are now on the usage-based network. The company expects the migration to be completed in the first quarter of 2005. While the migration is driving an increase in churn, Qwest's new wireless plans, robust product offerings, and the introduction of data and enhanced features are driving a more profitable customer mix. Nearly 80 percent of gross additions are signing up for high-end national plans, and the penetration of the subscriber base is up to 35 percent on these plans.
The company reduced its rate of consumer access line losses in the fourth quarter. Qwest benefited from increased package and bundle penetration, win-back initiatives and Qwest's "Feet on the Street" customer acquisition program, as well as the reduction in UNE competition. Qwest's wireline retail consumer base declined by 88,000 in the fourth quarter - a substantial improvement from declines of 136,000 in the third quarter and over 227,000 in the fourth quarter of 2004.
Business retail access lines declined by 42,000 in the fourth quarter, an improvement from year ago declines of 70,000, but above the rate of loss in the third quarter. The company attributes the increase in the sequential rate of loss to continued competitive pressures, partially offset by growth in small-business lines.
The company continues to make significant inroads in stemming competitive loss from facilities-based competitors. Resold lines declined 28,000 sequentially as changes in the regulatory environment have reduced competition from UNE resellers.
During the fourth quarter, the company launched OneFlexTM Integrated Access. The service enables business customers to bundle their voice and data services over one high-bandwidth Internet connection so they can simplify their communications. It also allows businesses to take advantage of the features and flexibility of VoIP. OneFlex Integrated Access simplifies customers' ordering, billing, and customer-care experience by giving them one provider for their entire solution.
Qwest expanded its OneFlex VoIP communication services to more than 200 additional cities across the U.S. allowing small, medium and enterprise business customers to benefit from Qwest's own reliable and secure VoIP solution. Qwest now offers the service to these cities, in addition to 26 key metropolitan areas, which includes 14 cities within the company's local service region and 12 major national markets.
Qwest and DIRECTV's previously announced strategic relationship allows Qwest to offer DIRECTV digital satellite television services to residential customers across the western United States. In the first quarter of 2005, Qwest will market and provide front-line customer support for the DIRECTV service and incorporate it as part of a full suite of bundled communications services.
Balance Sheet Update
The company continued to demonstrate balance sheet improvements during the year by improving total debt less cash and marketable investments by more than $225 million to $15.3 billion. The company ended the year with $2.0 billion in cash and investments.
During the quarter, Qwest continued to improve financial flexibility by placing $250 million in notes yielding 6.5 percent due September 1, 2011, at its Qwest Corporation subsidiary.
Wireless Asset Sale Update
As previously announced, the company's wireless asset sale of PCS licenses and related wireless network assets to Verizon Wireless for $418 million in cash is on track to close in early 2005.
The company incurred net charges of $(36) million in the fourth quarter, or $(0.02) per share. See Attachment E for a more detailed description of special items.
Conference Call Today
As previously announced, Qwest will host a conference call for investors and the media today at 9 a.m. EST with Richard C. Notebaert, Qwest chairman and CEO, and Oren G. Shaffer, Qwest vice chairman and CFO. The call can be heard on the Web at at www.qwest.com/about/investor/meetings.
- 4Q04 Attachment A.pdf
- 4Q04 Attachment B.pdf
- 4Q04 Attachment C.pdf
- 4Q04 Attachment D.pdf
- 4Q04 Attachment E.pdf
- 4Q04 Attachment F.pdf
Qwest Communications International Inc. (NYSE: Q) is a leading provider of voice, video and data services. With more than 40,000 employees, Qwest is committed to the "Spirit of Service" and providing world-class services that exceed customers' expectations for quality, value and reliability. For more information, please visit the Qwest Web site at www.qwest.com.
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; our substantial indebtedness, and our inability to complete any efforts to de-lever our balance sheet through asset sales or other transactions; any adverse outcome of the current investigation by the U.S. Attorney's office in Denver into certain matters relating to us; adverse results of increased review and scrutiny by regulatory authorities, 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, including any adverse outcome of current or future legal proceedings related to matters that are the subject of governmental investigations, and, to the extent not covered by insurance, if any, our inability to satisfy any resulting obligations from funds available to us, if any; potential fluctuations in quarterly results; volatility of our stock price; intense competition in the markets in which we compete including the likelihood of certain of our competitors emerging from bankruptcy court protection or otherwise reorganizing their capital structure and competing effectively against us; 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; and changes in the outcome of future events from the assumed outcome included in our significant accounting policies.
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 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 Qwest logo is a registered trademark of Qwest Communications International Inc. in the U.S. and certain other countries.