DENVER, Nov. 1, 2005 - Qwest Communications International Inc. (NYSE: Q) today reported third quarter results that indicate stable performance in revenue, free cash flow and overall financial flexibility. For the quarter, the fully diluted net loss per share was $(0.08), which includes a charge for restructuring, realignment and severance costs of $(0.01), compared with a loss of $(0.31) a year ago, which included special items of $(0.16). See Attachment E for special items.
"Qwest's strategies to pursue growth and to enhance our profitability are working," said Richard C. Notebaert, Qwest chairman and CEO. "We are, in a disciplined way, investing in growth and value for all our stakeholders."
Qwest reported third quarter revenue of $3.5 billion, compared to $3.47 billion in the second quarter and $3.45 billion in the third quarter a year ago. This represents the sixth consecutive quarter of stable revenues, as well as continued year-over-year growth in mass markets and business revenues. Business revenue benefited from the recognition of revenue on a large government contract of approximately $52 million in the quarter. Revenue trends improved as a result of strong sales within Qwest's portfolio of growth products, including high-speed Internet, advanced data products, long-distance, as well as bundles.
"Our significant progress in productivity continues to drive cost reductions and steady margin improvement," said Oren G. Shaffer, Qwest vice chairman and CFO. "We continue to improve our free cash flow, putting us on track to meet our goal for 2005 and for further free cash flow growth in 2006."
Qwest's third quarter operating expenses totaled $3.3 billion, a decline of 9 percent or $326 million compared to the third quarter of 2004. Cost of sales declined $36 million in the third quarter compared with the third quarter of last year. The decrease was driven by continued improvement in productivity and operating efficiency, and by the reduction in fixed and variable costs as a result of our facilities cost initiatives, partially offset by increases in costs associated with a large government contract and wireless usage-based minutes.
Selling, general and administrative (SG&A) expenses decreased $245 million from the same period in 2004. Third quarter 2005 results included $26 million in restructuring, realignment, and severance charges. Third quarter 2004 results included special items, the majority of which was a legal reserve of $250 million. See special items in the Attachment E. SG&A benefited from further productivity improvements and continued cost-containment efforts.
Capital Spending, Cash Flow and Interest
Third quarter capital expenditures totaled $445 million, compared to $418 million in the third quarter of 2004. The company's disciplined approach to capital spending focuses on investment in key growth areas and supporting the highest service levels.
Cash generated from operations of $675 million in the third quarter exceeded capital expenditures by $230 million. Qwest expects consistent operating results to be the main driver in generating improved free cash flow for 2005 in the range of $600 to $800 million before one-time payments.
Interest expense totaled $384 million for the third quarter compared to $374 million in the third quarter a year ago.
Balance Sheet Update
The company reduced total debt less cash and short-term investments by more than $840 million, to $14.3 billion, compared to $15.2 billion in the third quarter of 2004. In the quarter, approximately $218 million in debt matured and was paid.
Qwest ended the quarter with $2.9 billion in cash and short-term investments.
Qwest's improved revenue trends included operational progress in the following key growth areas:
Qwest added 150,000 high-speed Internet lines in the third quarter, bringing total lines in service to 1.3 million - a 12.6 percent increase sequentially and a 40 percent increase over the year-ago quarter. The company's mass markets data and Internet revenues increased 8 percent sequentially and 38 percent year-over-year.
During the quarter, Qwest continued to significantly increase its high-speed Internet footprint, as well as the speeds available to customers. Currently 75 percent of Qwest's households are eligible for broadband services; 96 percent of qualified households are able to purchase broadband speeds of 1.5 Mbps or greater.
Aggressive marketing efforts are paying off for Qwest. Following the launch of new bundles in May and targeted incentives and promotional initiatives kicked off in July, Qwest earned more than 90,000 bundle sales since launch. The company was able to increase average sales per week of its high-speed Internet service 65 percent over pre-July initiative results.
Qwest's full-featured bundled offering includes high-speed Internet access, a national wireless offering, local and long-distance service and integrated satellite TV services through a marketing alliance with DIRECTV, Inc. The company's bundle penetration increased to 50 percent in the quarter, compared to 43 percent a year ago.
Long-distance penetration of total retail lines increased to 36 percent in the third quarter, compared to 32 percent a year ago. Qwest increased total long-distance lines by 74,000 in the quarter. The company ended the quarter with more than 4.7 million long-distance lines, a 2 percent increase from second quarter and a 7 percent increase over a year ago. Mass markets long-distance revenue grew 4 percent sequentially and 13 percent compared to a year ago.
Qwest saw the second sequential quarter of subscriber growth in its wireless unit. Though revenues remained flat because of promotions and incentives, the company's subscriber base grew by more than 4,000 in the quarter, bringing total wireless subscribers to 748,000.
Qwest's data and enhanced features are driving higher wireless ARPU, which increased 9 percent to $51 from $47 a year ago. All of the company's customers are on national plans. The company continues to focus on adding wireless data subscribers and approximately 40 percent of gross additions sign up for a data service.
Local marketing efforts and success with its bundling program led to improved access line trends for Qwest sequentially and year-over-year. Total access lines were down 154,000 in the third quarter, an improvement from a loss of 231,000 lines in the second quarter (excluding the 21,000 UUNet disconnects) and 159,000 lines in the third quarter of last year.
Small-business access lines increased for the fourth consecutive quarter. Business retail access lines declined 14,000 in the third quarter, an improvement from year-ago declines and less than half of the loss last quarter.
Resold access lines declined 52,000 sequentially. Qwest continued its leadership role in working with wholesale customers by signing commercially negotiated agreements. Approximately 96 percent of the company's UNE-P revenue now comes from customers on commercial Qwest Platform Plus (QPP) contracts.
IP Product Suite
Qwest offers a broad array of solutions through its MPLS-based iQ Networking product suite. Qwest iQ NetworkingTM focuses on solving business problems, reducing total cost and delivering an unparalleled service delivery experience for customers requiring an end-to-end wide-area networking (WAN) service. During the third quarter Network Computing Magazine gave Qwest's iQ Networking the "Best Value" award for WAN solutions, citing "excellent reliability" and "a good services offering" for its award.
The Qwest OneFlexTM suite of services including Integrated Access and Hosted VoIP continues to gain traction. OneFlex provides business customers with a range of VoIP options that offer lower total cost of ownership, additional features and functionality, and simplified management. Qwest offers its OneFlex VoIP communication services in more than 250 cities across the U.S.
Qwest's DIRECTV alliance remains a key component of the bundle. Customer net additions continued to grow in the third quarter; subscribers currently total more than 95,000. 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. With DIRECTV service, customers can enjoy a variety of all-digital programming, including news, sports, movies and music. Qwest is marketing and providing front-line customer support for the DIRECTV service and has incorporated it as part of a full suite of bundled communications services. Customers receive an integrated bill, which includes both their DIRECTV service and Qwest services.
See Attachment E for 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 www.qwest.com/about/investor/events.
- 3Q 2005 Attachment A.pdf
- 3Q 2005 Attachment B.pdf
- 3Q 2005 Attachment C.pdf
- 3Q 2005 Attachment D.pdf
- 3Q 2005 Attachment E.pdf
- 3Q 2005 Attachment F.pdf
Qwest Communications International Inc. (NYSE: Q) is a leading provider of high-speed Internet, data, video and voice services. With approximately 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.