'Solid quarter' at Qwest

Telco reports third consecutive profit; revenues remain flat

Jeff Smith, Rocky Mountain News

Wednesday, November 1, 2006

Qwest Communications posted its third consecutive quarterly profit Tuesday, driven mainly by tight expense control and a tax settlement.

Revenues in the third quarter ending Sept. 30 remained flat overall at $3.5 billion, and traditional land lines declined at a steeper rate of around 6 percent annually. But the Denver telco enjoyed strong growth in sales of high-speed Internet and data services, and communications "bundles."

Profits totaled $194 million for the third quarter, or 9 cents a share. That compared with a loss of $144 million, or 8 cents a share, during the same period a year ago.

"I think it was a solid quarter," Qwest Chief Executive Dick Notebaert said in a telephone interview.

Qwest said it is on track to record a profitable 2006, and Chief Financial Officer Oren Shaffer noted to analysts that operating margins have improved in nine consecutive quarters.

Still, Qwest shares slid by 4.2 percent to $8.63 on heavy trading after rising Monday in anticipation of a better report.

Donna Jaegers, a telecommunications analyst at Janco Partners in Greenwood Village, said investor enthusiasm may have been dampened by the fact that Qwest didn't raise its cash-flow projections and experienced larger phone line losses.

"They are losing more to competition," Jaegers said, noting both Comcast and Cox are ramping up their digital phone offerings. "I think Comcast is a big threat."

The third-quarter results included a gain of $92 million from a tax settlement. Operating expenses declined 6.3 percent to $3.1 billion.

Qwest added more than 175,000 high-speed Internet lines in the quarter, representing a 47 percent year- over-year increase.

The percentage of customers who subscribe to more than one service increased from 50 percent a year ago to 56 percent.

Jaegers and telecommunications consultant Tom Friedberg both wondered if Qwest has reached its peak in terms of generating cash, given in part the increased competition from Comcast.

Friedberg characterized Qwest as having a "degrading" local-phone franchise "that has no wireless protection," referring to the fact Qwest resells Sprint wireless services rather than operating its own wireless network.

Jaegers said Qwest is effective in its marketing, illustrated by its success in attracting new video customers by promoting partner DirecTV's NFL Sunday Ticket sports package. But she said Qwest may pay the price for not going on the offense in building its own TV infrastructure while Comcast is "hogging the road" with its network and such new offerings as video on demand.

Qwest

Q:NYSE

$8.63

- 38 cents

smithje@RockyMountainNews.com or 303-954-5155