Qwest Earnings Rise 37% as it Culls Low-End Customers
By Roger Cheng
The Wall Street Journal
Wednesday, April 29, 2009

Qwest Communications International Inc.'s first-quarter profit rose 37% through cost cuts, but the telecommunications provider faced intense pressure on its land-line operations.

The Denver company continues to see a drop in revenue, underscoring the difficulties that traditional phone services face as consumers and businesses increasingly cut the cord, opting instead for just a cellphone or cable phone service.

"Revenue performance missed muted expectations owing to greater deterioration in the mass-markets and wholesale-business segments," said Goldman Sachs analyst Jason Armstrong.

Qwest, however, pointed to the improvement in earnings.  Chief Executive Edward Mueller said the company was willing to lose lower-end customers to boost earnings.  "Half of our annual decline in revenue was due to initiatives to improve profitability and reduce low-margin revenue," Mr. Mueller told analysts in a conference call.

Qwest on Wednesday posted net income of $206 million, or 12 cents a share, up from $150 million, or eight cents a share, a year earlier.

Revenue decreased 6.6% to $3.17 billion.  The company recently said revenue would come in "modestly" below Wall Street expectations, which at the time, were $3.25 billion.

Executives on Wednesday touted free cash flow of $339 million, which widely beat Wall Street and company expectations.  Stronger cash flow suggests continued confidence in its dividend, balance sheet, and continued ability to make capital investments.

Qwest, unlike rivals AT&T Inc. and Verizon Communications Inc., doesn't have its own television or wireless offerings.  It bundles its core Internet and phone services with television service from DirecTV Group Inc. and cellphone service from Verizon Wireless.

And like its two larger peers, Qwest is losing ground with land lines.  Its number of lines fell 10% to 11.2 million in the first quarter.  Qwest added 42,000 high-speed Internet customers, which was below Wall Street expectations.

The weak housing market also hurt Qwest as it quashed demand for phone lines.  The company is hoping to combat its loss of land lines through growth in data and Internet services and a slow investment to upgrade its network with faster fiber-optic cables.

It also is hoping to extend cost cuts, including a reduction in its work force and reductions in facility and corporate expenses.

The number of orders from business customers fell, yielding less revenue, said Chief Operating Officer Thomas Richards.  He expressed confidence in the improving sales cycle this quarter.

Wholesale-data and phone service was the weakest link from a revenue perspective.  But Mr. Richards pointed to a targeted elimination of certain customers that were no longer profitable.

Last year, Qwest began a transition of its stand-alone wireless customer base to Verizon Wireless, a joint venture between Verizon and Vodafone PLC.  Qwest moved nearly 100,000 customers to Verizon Wireless in the first quarter.  The company previously had a wireless agreement with Sprint Nextel Corp., and plans to shut down that service in the fourth quarter.

— Kerry E. Grace and Kevin Kingsbury contributed to this article.  Write to Roger Cheng at roger.cheng@dowjones.com

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