Qwest Communications Reports Third Quarter Results

Third quarter results compared to third quarter 2000:

Reported earnings per share (EPS) narrowed from a third quarter loss a year ago of ($0.15) to a third quarter loss of ($0.09)

Reported revenue of $4.8 billion equaled last year?s level

  • Internet revenue grew nearly 65 percent
  • Wireless revenue increased 68 percent to over $200 million
  • Optical capacity asset sales and non-recurring Internet-Protocol (IP) equipment revenue decreased approximately $200 million

Recurring revenue grew 4.5 percent

  • Recurring long-distance data, voice and IP revenue grew 17.9 percent, while recurring local service revenue grew 1.4 percent
  • Internet, data and IP services recurring revenues grew 20 percent

Pro forma normalized EPS was a loss of $(0.08) for the third quarter of 2001 compared to earnings of $0.14 per diluted share in the prior year

Pro forma normalized EBITDA decreased 5.3 percent to $1.8 billion driven by the decrease in optical capacity asset sales and non-recurring IP equipment revenue

  • Pro forma normalized recurring EBITDA increased approximately one percent

Third quarter results compared to second quarter 2001:

Reported EPS narrowed from a loss of ($1.99) to a loss of ($0.09)

Days sales outstanding (DSO) decreased from 85 days to 81 days

Optical capacity asset sales and non-recurring IP equipment revenue decreased more than $400 million to 2.8 percent of revenue

Note to investors: ?Recurring revenue? reflects adjustments made for optical capacity asset revenue and non-recurring IP equipment sales in the periods presented. For the three months ended September 30, 2001 and September 30, 2000, the recurring revenue adjustments were $133 million and $330 million, respectively. Additionally, ?pro forma normalized? information regarding Qwest?s results from operations is provided as a complement to ?reported results? provided in accordance with accounting principles generally accepted in the United States (GAAP). The condensed consolidated pro forma normalized statements give retroactive effect as though the merger of Qwest and U S WEST, Inc., the (?Merger?), had occurred as of the beginning of the periods presented. Shares outstanding and earnings per share have been restated to give retroactive effect to the exchange ratio resulting from the Merger. In addition, results have been adjusted to eliminate the impact of Merger-related and one-time charges, asset write-offs and impairments, a depreciation adjustment on access lines returned to service, gains/losses on the sale of investments, change in the market value of investments, the write-down of investments, elimination of in-region long-distance activity, and a tax true-up on merger-related expenses. Certain reclassifications have been made to prior periods to conform to the current presentation. The term ?long distance? is meant to always include voice, data and IP services and reflects the ?classic Qwest? business, while the term ?local services? is meant to include all of the ?classic U S WEST? local business.

DENVER, October 31, 2001 ? Qwest Communications International Inc. (NYSE: Q), the broadband communications company, today announced its financial results including revenue and earnings before interest, taxes, depreciation and amortization (EBITDA) for the third quarter of 2001. Third quarter reported revenue of $4.77 billion equaled third quarter revenue a year ago while pro forma normalized EBITDA decreased 5.3 percent from $1.86 billion in the third quarter a year ago to $1.77 billion in the third quarter 2001.

In addition, Qwest reported a net loss of ($142) million, or ($0.09) per share in the third quarter of 2001 compared to a reported net loss of ($248) million or ($0.15) per share in the third quarter a year ago. On a pro forma normalized basis, the company recorded an ($0.08) loss per share for the third quarter compared to earnings of $0.14 per diluted share a year ago. The decrease reflects the impact of lower EBITDA and the related cumulative adjustment to the annual effective tax rate as well as increases in both interest expense and depreciation driven by Qwest?s capital plan.

The results reflect relatively strong recurring revenue growth of 4.5 percent and a decline in optical capacity asset sales and non-recurring IP equipment revenue of approximately $200 million compared to the prior year period and $400 million since the second quarter of 2001. The decline in optical capacity asset sales and non-recurring IP equipment revenue resulted from softening wholesale demand and a shift in customer purchasing behavior away from network asset purchases to shorter-term monthly operating leases.

?Our results reflect the continuing impact of a slowing economy as well as a fundamental shift in the wholesale customer buying behavior for optical capacity asset sales,? said Joseph P. Nacchio, Qwest chairman and CEO. ?We are continuing to focus on retail revenue growth and the generation of free cash flow from operations. Our blend of assets, products, and expanding distribution channels positions us well for the economic recovery, and we continue to be the model to which the industry will eventually evolve.?

Excluding optical capacity asset sales and non-recurring IP equipment revenue, commercial services revenue grew 7.0 percent compared to the third quarter of last year. This increase was fueled by recurring Internet and data services growth of 20 percent. Separately, Internet services grew nearly 65 percent as demand for dedicated and dial Internet access, digital subscriber line (DSL), professional services, and hosting remained strong.

Consumer and small-business revenue increased 3.4 percent over the prior year period reflecting strong growth in wireless and DSL services. Wireless revenue increased 68 percent to over $200 million while in-region DSL revenue grew approximately 80 percent, reflecting an 84 percent increase in DSL subscribers to 391,000. Offsetting this growth was a decline in local service revenue resulting from the slowing economy, competitive losses and technology displacement.

The local service revenue component of Qwest totaled approximately $3.7 billion in the quarter. Adjusting for non-recurring IP equipment revenue, local services revenue grew approximately 1.4 percent. Growth in both wireless and DSL were offset by the impact of the slowing economy. Access lines decreased 0.4 percent reflecting economic weakness in Qwest?s local service business.

Qwest?s long-distance operations generated revenue of approximately $1.1 billion, fueled by growth in recurring revenue of approximately 17.9 percent. Optical capacity asset sales decreased from approximately $230 million in the third quarter of last year to just over $130 million in the current quarter. Recurring long-distance revenue benefited by continued strong IP sales and growth in voice services as Qwest continued to take share in the national enterprise market.

Third quarter pro forma normalized EBITDA decreased 5.3 percent to $1.77 billion compared to the third quarter a year ago. This decline resulted mainly from the decrease in optical capacity asset sales, product mix shifts, costs related to long-distance re-entry and the introduction of product platforms including Qwest?s Internet dial and hosting infrastructure. While the introduction of these product platforms impact margins in the near term, they position the company well for revenue growth and margin expansion in the future.

?The challenges of a softening economy this quarter were not unique to Qwest,? said Robin R. Szeliga, Qwest executive vice president of finance and CFO. ?We are continuing to streamline the company?s cost structure and tightly control capital spending on our way to positive free cash-flow.?

Qwest recently announced a reduction in workforce of 4,000 employees and the redeployment of 1,000 staff positions to quota bearing sales positions. Additionally, Qwest is focusing on key cost savings initiatives including vendor management, domestic and international network efficiencies and corporate structure and work flow processes in order to reduce operating costs and improve financial performance. These initiatives have increased pro forma normalized EBITDA per employee from $99,500 at the time of the Merger to $108,000 at the end of the third quarter.

For the quarter, accounts receivable decreased by $389 million compared to the end of the second quarter 2001 due to a continued focused on collections activity. DSO decreased from 85 days in the second quarter of 2001 to 81 days in the third quarter of 2001.


Recurring commercial services revenue grew 7.0 percent compared to the third quarter 2000 and was led by IP services growth, including dedicated Internet access (DIA), virtual private network (VPN) services, and dial-up Internet access.

In the quarter, the company aligned its business market units to expand its focus on large global and national accounts. Qwest continued to grow its market share of national accounts and secured new customers signing first-time contracts including, American Hospital Association, BlueLight.com ? Kmart?s dial-up Internet Service, GE Medical Systems, Perot Systems Corporation, and Entergy. The company also secured additional contracts in the third quarter from existing customers such as AOL Time Warner and in October from Microsoft and Fifth Third Bank. In addition, Qwest was awarded more than $120 million in data, Internet and Web hosting contracts from the government and education sectors.


Qwest launched a new broadband bundle, ?Connected Home,? which is the first solution to include Qwest?s high-speed DSL service for always-on access to the Internet and a residential telephone line for simultaneous voice communication. More than 33 percent of Qwest consumer customers subscribe to a package of services that may include Internet access, wireless, voice messaging, caller identification and additional lines ? a 27 percent increase over the third quarter of 2000.

Qwest wireless had approximately 1.1 million customers at the end of the quarter. Wireless services revenue grew more than 12 percent sequentially and 68 percent year-over-year to more than $200 million in the third quarter of 2001. Average revenue per user increased to $55 from $52 in the second quarter of 2001 as Qwest focused on high-value customers. Qwest wireless sales in bundles increased to 30 percent, up from 17 percent at the end of the second quarter of 2001.


Third quarter recurring Internet, data and IP services revenues grew 20 percent over the third quarter of 2000. Internet, data and IP services revenues represent more than 23 percent of total revenue. Growth occurred in the following areas: Web hosting and related services, DIA, DSL, VPN, and Internet professional services. DSL subscriber growth increased nearly 90 percent annually to approximately 405,000 customers and includes 14,000 customers outside of Qwest?s local service area.

Qwest was the first incumbent local exchange carrier (ILEC) to complete a large-scale voice over data deployment in its network. A trial of the next-generation, packet-switched network is underway in one market where Qwest provides local service, with plans to expand into six additional markets soon.


During the quarter the company expanded its domestic network by adding 5,500 miles of fiber routes, giving Qwest more than 25,500 route miles of broadband network facilities across the U.S. Coupled with the company?s fiber assets in Mexico and Canada, Qwest?s North American network spans more than 33,500 route miles.

In a transaction with a significant business customer, Qwest purchased approximately $300 million of assets - including the 5,500 miles of domestic fiber routes, co-location space and power - to diversify and extend its network and provide backup facilities. This customer also has agreed to purchase high-speed, optical network capacity from Qwest, with approximately $86 million of revenue recognized in the third quarter and additional future contracted revenue.

As part of Qwest?s global expansion efforts, the company acquired more than 20,000 route miles of fiber-optic capacity in South America for approximately $67 million. These new routes will link to Qwest?s other global facilities and provide access to Panama, the U.S. Virgin Islands and Peru, among other South American locations.

In Europe, Qwest will have access to an additional 6,200 route miles of fiber-optic capacity as a result of KPNQwest?s pending purchase of Global TeleSystems, Inc.?s Ebone and Central Europe businesses. The transaction, which is scheduled to be completed in March of 2002, extends KPNQwest?s broadband network into new markets including seven United Kingdom cities, Madrid and Dublin. Following the purchase of these facilities, the KPNQwest network will connect 18 countries and stretch more than 15,000 route miles. Earlier this month Qwest announced an agreement to increase its ownership of KPNQwest to 47 percent by purchasing approximately 14 million shares from Koninklijke KPN N.V. The purchase of these shares is expected to close in December of 2001.

As a result of this expansion and the acquisition of some additional international fiber-optic assets, Qwest has completed its network expansion and now has a global network totaling more than 190,000 route miles, with broadband facilities to six continents.


Qwest?s residential and small-business customers continued to see improved customer service results during the quarter. The number of customers who had been waiting more than 30 days for the installation of their first telephone line reached their lowest level in seven years, and in nine states, there were no delayed orders greater than 30 days. Ninety-nine percent of installation commitments were met on time. Ninety-five percent of total repair commitments were met on time. Eighty-eight percent of outages were repaired in less than 24 hours, up from 81 percent a year ago.


During the quarter the company announced the completion of long-distance re-entry workshops in 12 of the 14 states where it provides local service. Arizona, Colorado, Oregon, Nebraska and Washington state finished the 14-point checklist workshop process necessary for the company?s re-entry into the long-distance business. Additionally, seven states working together in a collaborative effort - Iowa, Idaho, Montana, North Dakota, New Mexico, Utah and Wyoming - have completed their workshops. The seven-state collective effort is unique in that it will speed final long-distance approval, allowing Qwest to file with the FCC for approval for the seven states almost simultaneously.

The Chairman of the Regional Oversight Committee (ROC) said earlier this month that the 13-state testing process is approximately 80 percent complete and Qwest expects the ROC testing to conclude by mid to late December. The operational support systems (OSS) test completion and subsequent reports are the final component of the 14-point checklist. Qwest expects OSS tests in Arizona to be complete in the next few days.


The company said that its board of directors has extended the employment contract for Nacchio from December 31, 2001 through December 31, 2005 and provided additional equity incentives to 15 other senior executives to drive long-term shareowner value. The board also has approved a voluntary stock option exchange offer for approximately 24,000 full-time, non-union employees, designed to increase equity-based performance incentives across the company. A separate news release on this matter was issued this morning.


As previously announced, Qwest will host a conference call for investors and the media today at 9 a.m. (EST)? featuring Nacchio and Szeliga. The call may be heard on the Web at www.qwest.com/about/investor/meetings.


About Qwest

Qwest Communications International Inc. (NYSE: Q) is a leader in reliable, scalable and secure broadband data, voice and image communications for businesses and consumers. The Qwest Macro Capacity® Fiber Network, designed with the newest optical networking equipment for speed and efficiency, spans more than 190,000 miles globally. For more information, please visit the Qwest Web site at www.qwest.com.

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 Qwest 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 potential fluctuations in quarterly results, volatility of Qwest's stock price, intense competition in the communications services market, changes in demand for Qwest's products and services, dependence on new product development and 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, rapid and significant changes in technology and markets, adverse changes in the regulatory or legislative environment affecting Qwest's business and delays in Qwest's ability to provide interLATA services within its 14-state local service territory, failure to maintain rights of way, and failure to achieve the projected synergies and financial results expected to result from the acquisition of U S WEST timely or at all and difficulties in combining the operations of Qwest and U S WEST. 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.

The Qwest logo is a registered trademark of, and CyberCenter is a service mark of, Qwest Communications International Inc. in the U.S. and certain other countries.

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