Qwest Reports First Quarter 2010 Results

First Quarter Highlights

·       Strong improvement in revenue comparisons both sequentially and year over year

         Strategic revenue growth of 5 percent year over year driven by demand for enterprise IP and Mass Markets broadband services 

·         Adjusted EBITDA(a) of $1.1 billion on strong margin improvement

·         Consumer line retention continues to improve

·         Initialan id="1273065568854E" style="display: none"> 


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Unaudited (in millions, except per share and margin amounts)



1Q 2010

4Q 2009


1Q 2009


Operating Revenue






Operating Income






Income before Income Taxes






style="margin: 0in 0in 0pt; text-align: right" align="right">  (17.1)%

Net Income







Net Income per Diluted Share







Adjusted EBITDA







Adjusted EBITDA Margin




170 bps


180 bps

Adjusted Free Cash Flow







 (a) See Attachment E for Non GAAP Reconciliations


DENVER, May 5, 2010 Qwest Communications (NYSE: Q) today reported financial results for the first quarter 2010. In the quarter, the company reported solid growth in business and consumer data services, improved margins and continued to make solid progress on key initiatives.

In the first quarter, net income was $38 million. Earnings per share were 2 cents compared to 12 cents in the first quarter 2009. The current quarter&ts include an 8 cent non-cash charge for the disallowance of certain federal income tax deductions under the Medicare Part D program, a charge related to the early retirement of debt, and severance and realignment. Results in the prior-year period include a 1 cent per share charge for severance and realignment. In addition, the prior year includes a 1 cent per share benefit due to a lower effective tax rate.

First quarter consolidated net operating revenues declined 7 percent compared to the first quarter 2009.  After excluding the effects of the company’s transition to a new wireless business model, revenue declined 5 percent year over year. Excluding wireless, revenues declined 7 percent year over year in the fourth quarter 2009. Reported net operating revenues declined 1 percent sequentially from the fourth quarter. Reported revenues declined 2 percent sequentially in the fourth quarter.

Adjusted EBITDA for the quarter was $1.12 billion compared to $1.15 billion in the prior year and $1.09 billion in the fourth quarter. Adjusted EBITDA improved 4 percent sequentially while adjusted EBITDA margin improved 170 basis points to 37.9 percent.  

Qwest continued to make strong progress on key growth initiatives in the first quarter. The Business Markets segment reported strong growth of 33 percent year over year in IP services revenues. Qwest continued to expand its fiber to the node (FTTN) footprint in the quarter, and services are now available to more than 3.8 million residential households. In the quarter, 64,000 customers added high speed Internet services that utilize the fiber network. The company continued to make solid progress on retention efforts in the consumer market with the absolute number of access line losses improving 22 percent from the first quarter 2009. In the current quarter, Qwest continued to see strong demand to deliver fiber-based backhaul services for wireless companies, and initial cell sites were activated.  

“We are off to a great start in 2010,” said Edward A. Mueller, Qwest chairman and CEO. “Our proposed merger with CenturyLink will combine two well run companies to create a stronger competitor. Together, we will enhance the ability to deliver differentiated services for our customers and expand the opportunity to provide substantial value for our shareholders. In the first quarter, we improved our revenue trends and increased margins. The quarter’s results illustrate our disciplined focus on our key strategies and perfecting the customer experience. We are optimistic about continuing this momentum throughout the year.”



Qwest reported consolidated net operating revenue of $3.0 billion in the first quarter. Total strategic services revenue of $1.1 billion increased 5 percent year over year.  Legacy services revenue of $1.6 billion decreased 13 percent year over year. The 1 percent sequential revenue decline was due to a 2 percent increase in strategic revenue that was offset by a 3 percent decline in legacy revenue.


Consolidated operating expenses were $2.4 billion in the quarter, a decrease of 9 percent year over year.  Cost of sales declined 7 percent due to lower volumes, a reduced workforce and the completion of the wireless migration in the fourth quarter 2009. Selling expense declined 19 percent mainly driven by lower bad debt expense, a reduction in workforce, and reduced marketing and advertising expense. General, administrative and other operating expenses were down 5 percent in the quarter, primarily as a result of lower pension and OPEB, realignment and severance costs.  Sequentially, operating expenses declined 6 percent largely due to lower volumes, employee-related expense and severance costs. Total employees at the end of the period were approximately 29,500, down 2 percent from the fourth quarter and 10 percent from the first quarter 2009.

Net Income

The current quarter includes a one-time, non-cash tax impact of $113 million related to the disallowance of certain federal tax deductions.  In addition, the company recognized a pre-tax charge of $53 million due to the early retirement of debt, and severance and realignment. Net income for the first quarter was $38 million compared to $206 million in the prior year. The year-over-year decline was mainly due to the one-time charges in the current quarter. Net income declined $70 million sequentially primarily due to the $113 million tax charge, which was partially offset by increased adjusted EBITDA and lower depreciation expense.  



Business Markets

Business Markets produced stable top-line performance and delivered a solid profit contribution in the quarter. Qwest’s success in the enterprise space continues to be driven by a strong mix of data and IP services, a diverse customer mix and differentiated user support. 

Business Markets reported total revenues of $1.0 billion, a 1 percent decline from the fourth quarter 2009 and flat compared to the year-ago period. Total recurring service revenue was up slightly from the fourth quarter and down 1 percent from a year ago. Strategic revenue growth of 8 percent year over year was driven by growth in IP services. Legacy services declined 9 percent year over year mainly due to lower local voice revenue and the migration from legacy data to IP-based services.

Segment operating expense declined 3 percent both year over year and sequentially.  The Business Markets income contribution increased 5 percent year over year and 2 percent from the fourth quarter. Segment income margin of 40 percent improved 180 basis points from a year ago.  The margin improvement mainly is due to improved customer acquisition efficiencies and lower facility costs.

Mass Markets

In the quarter, Mass Markets continued to achieve success from its move to a more localized go-to-market approach. This included continued success in selling higher broadband speeds, improving access line retention and additional cost efficiencies. Consumer ARPU was $62 in the quarter, a 7 percent increase compared to the first quarter 2009.

Mass Markets segment revenues of $1.2 billion declined 11 percent from the first quarter 2009. Revenues declined 7 percent after adjusting for the wireless business model transition.  Strategic revenues grew 5 percent year over year while legacy revenues decreased 11 percent due to continued line losses. Sequentially, revenue declined 1 percent from the fourth quarter.

Segment expenses decreased 13 percent from the year-ago period -over-year improvement mainly was due to lower sales and marketing expenses and lower wireless costs. Segment income for the quarter declined 9 percent compared to the year-ago period and declined 3 percent from the fourth quarter. Segment income margin percentage improved 110 basis points compared to the year-ago quarter.

Total broadband customers reached 3 million in the quarter, including 2.9 million Mass Markets subscribers.  Total net mass markets broadband subscribers increased by 40,000 in the quarter. Once again, demand within the FTTN footprint fueled subscriber growth. The FTTN subscriber base reached approwest’s Mass Markets high-speed Internet customers.

Qwest continues to see success from its key business partnerships.  Total Verizon Wireless subscribers at the end of the quarter were 922,000, up 84,000 from the end of the fourth quarter. Qwest added 11,000 net video subscribers in the quarter, bringing the total to 951,000.  

Wholesale Markets

Wholesale Markets reported improved revenue comparisons in the quarter.  Segment revenue declined 11 percent year over year compared with a 14 percent annual decline reported in the fourth quarter.  Sequentially, revenue decreased $10 million, or 1 percent.  Wholesale Markets revenue continued to be impacted by lower long-distance volumes and a decline in access revenue.

Wholesale segment income declined $11 million, or 2 percent, from the first quarter 2009 and improved 4 percent from the fourth quarter.  Wholesale segment income margin percentage improved 590 basis points year over year, mainly due to continued benefits from profitability initiatives, lower facility costs and improved bad debt expense.

Cash Flow and Capital Investment

In the first quarter, adjusted free cash flow was $335 million.  Cash flow from operating activities increased $65 million compared to the first quarter 2009 due to improved working capital partially offset by lower EBITDA. Capital expenditures for the quarter were $387 million.   

Balance Sheet

In the quarter, the company continued to strengthen its balance sheet. Net debt was $11.7 billion at the end of the quarter compared to $12.8 billion at the end of the first quarter 2009 and $11.8 billion in the fourth quarter. Overall cash and cash equivalent and short-term investments increased to $1.9 billion from $547 million a year ago.  The company’s net debt-to-adjustes, which is equal to the fourth quarter and an improvement from 2.8 times in the year-ago quarter.

In February 2010, Qwest called $525 million in notes early, and in March 2010, the company successfully completed a cash tender for $960 million in notes. As a result of the tender, the company expects to have annual interest expense savings of approximately $50 million.  In February, the company announced plans to reduce debt by $3.5 billion through the first quarter of 2011, and, to date, the company has reduced debt by $1.5 billion. 

Shareholder Returns

Qwest returned $138 million to shareholders in the first quarter through a dividend of 8 cents per share.   On April 15, Qwest’s board of directors announced the payment of a second quarter dividend of 8 cents per share.  The dividend will be paid on June 11, 2010, to shareholders of record as of May 21, 2010. This marks Qwest’s 10th consecutive quarterly dividend.

CenturyLink Merger Agreement

On April 22, 2010, Qwest and CenturyLink announced an agreement for CenturyLink to merge with 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.

The transaction is expected to close in the first half of 2011, and is subject to certain governmental consents and approvals as well as approval by both companies’ shareholders.

GuidanceQwest continues to expect to report improving revenue comparisons over the course of 2010 with the year-over-year reported decline improving to a low- to mid-single digit rate by the fourth quarter.  Qwest continues to expect to achieve full year 2010 adjusted EBITDA in a range of $4.3 to $4.4 billion.  In 2010, Qwest expects full year non-cash pension and post-retirement benefit expenses to be approximately $130 million, a decline of approximately $70 million from 2009 levels. The outlook for full year 2010 capital investments is $1.7 billion or lower. Similar to 2009, the company may continue to use lease financing in 2010 for some of its capital investments. Full year adjusted free cash flow is expected to be $1.5 to $1.6 billion.

Conference Call Today

As previously announced, Qwest will host a conference call for investors and the media today at 9 a.m. EDT. A live webcast, including a simultaneous slide presentation, and replay of the call is available at investor.qwest.com. Additional quarterly historical financial information can be found at http://investor.qwest.com/overview.


About Qwest

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 Internet service, high-speed Internet solutions, as well as digital home phone, wireless service available through Verizon Wireless and DImp;nbsp; Qwest is also the choice of 95 percent of Fortune 500 companies, offering a full suite of network, data and voice services for small businesses, large businesses, government agencies and wholesale customers. 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 by 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; 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 and our respective stockholders; 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’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 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. 

Contact Information

Media Contact:
Diane Reberger

Investor Contact:
Kurt Fawkes


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