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Qwest's Profit Rises On Lower Expenses
By Shawn Young
The Wall Street Journal
Thursday, May 4, 2006

Lower depreciation and strong sales of high-speed Internet connections lifted first quarter earnings and margins for Qwest Communications International Inc., the smallest of the nation's major regional phone companies.

Qwest, based in Denver, reported net income of $88 million, or five cents a diluted share, compared with $57 million, or three cents a share, the first quarter of 2005. Revenue edged up 0.8% to $3.48 billion from $3.45 billion a year earlier. The income was better than most analysts had predicted, with the lower depreciation expenses accounting for most of the improvement.

Qwest has struggled in recent years with a massive debt load, accounting problems and strategic challenges. Unlike the other regional phone giants, Qwest doesn't own a cellphone business, which is a key source of growth. And it is much smaller than its peers: Verizon Communications Inc., AT&T Inc. and BellSouth Corp., which is being acquired by AT&T. In response, Qwest has been whittling down its debt, cutting costs, using Sprint Nextel Corp.'s network to sell wireless service, and promoting high-speed Internet service.

Qwest would have reported a loss in the year-ago quarter if it had not sold some assets. This was the first quarter in years in which Qwest made a profit without relying on a gain from an asset sale, said Chairman and Chief Executive Richard Notebaert in an interview.

"We haven't been profitable before so that's a huge step," Mr. Notebaert said. "We also think it's very important that it's sustainable."

Qwest's debt dropped to $15.4 billion at the end of the first quarter from $17.3 billion a year earlier, and the company's interest expense dropped 22% to $296 million also as a result of a debt restructuring last year. The company added 198,000 high-speed Internet customers in the quarter, significantly more than analysts expected, for a total of 1.7 million broadband customers, a 50% increase from a year ago. Wireless revenue grew 10% to $139 million and the company ended the quarter with 784,000 wireless customers.

But, like other phone companies, Qwest continued to lose traditional land line customers to cable operators and Internet phone offerings. The company finished the quarter with 14.5 million phone lines in operation, down 5.2% from one year earlier.

Depreciation and amortization costs dropped to $691 million from $774 million a year ago as a result of ongoing cutbacks in spending on the network.

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