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Qwest's Profit Is Helped by Gain
By Roger Cheng
The Wall Street Journal
Friday, February 9, 2007

Qwest Communications International Inc.'s aggressive cost cuts helped the company turn a profit, but it wasn't enough to satisfy Wall Street expectations.

The Denver telecommunications service provider reported its first full year of profit since 2003, as it regains its financial footing.  In that time, the company has faced an accounting scandal with its former chief executive, questions about the viability of its business and heavy debt, and a failed attempt to acquire MCI Inc.

Despite its progress, fourth-quarter results will likely be received negatively as results were propped up by one-time items.

"Results were disappointing," said Donna Jaegers, an analyst for Janco Partners.

The company reported fourth-quarter net income of $194 million, or 10 cents a share, which was helped by a $61 million gain on the sale of real estate assets.  A year earlier, the company posted a loss of $528 million, or 28 cents a share, weighed down by a $430 million charge for paying down debt.

The company, which provides telecommunication services throughout the Western and Northwestern U.S., saw revenue inch up to $3.49 billion from $3.48 billion a year earlier, as growth in key data products and services offset customer migration away from the company's legacy products and pricing pressure from voice services.

The company has been aggressively cutting jobs and other costs and increasing productivity in an effort to regain its profitability.  Fourth-quarter operating expenses declined $156 million, or 4.8%, from a year earlier, driven by lower facility costs, depreciation expense and realignment costs, the company said.  Heavy storms in the West and Pacific Northwest also added to fourth-quarter costs.

While margins on an earnings before interest, taxes, depreciation and amortization basis rose from a year earlier, they slipped compared with the third quarter.  That's a cause for concern, Standard & Poor's analyst Todd Rosenbluth said.

"They're taking a step back," he said.  "We're seeing margin expansion from other telecom carriers even as they put upfront costs related to their network upgrade.  We're disappointed by this."

He expressed his concern that Qwest may struggle to find ways to further cut costs to drive growth.

Helping drive the turnaround has been the company's aggressive push of bundled services -- which include traditional telephone and high-speed Internet, along with television through a partnership with DirecTV Group Inc. and wireless through a deal with Sprint Nextel Corp.  The additional services help the company retain customers from cable competition.

By grouping multiple services to a customer, the company can generate a higher amount of revenue per household.

While Qwest added 259,000 Internet, video and wireless subscribers, the company continues to lose customers in its traditional access line business.  It ended the year with 13.8 million connections, down 6.4% from a year earlier.

Qwest's debt level continues to be a concern for Wall Street.  The company said it had lowered it to $13.4 billion, a decrease of $1.1 billion from a year earlier.  It also ended the year with $1.5 billion in cash and short-term investments.

The company's high debt level was one of the reasons it eventually lost out to Verizon Cpmmunications Inc. in its bid to acquire MCI.

--Mike Barris and Jonathan Vuocolo contributed to this article

Write to Roger Cheng at