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Qwest investors rattled over Q3 report
By Jeff Smith
Rocky Mountain News
Tuesday, October 30, 2007

Qwest's third-quarter profits soared on a one-time tax gain today, but revenues were down 1.5 percent and shares fell by more than 10 percent in early trading amid investor concerns over the Denver telco's strategy.  The stock decline also appeared to be driven by the fact that Qwest's board has delayed a decision on a possible stockholder dividend until new CEO Edward Mueller has completed his strategic review of the company.

"I understand the frustration.  But I think a complete holistic plan from a new CEO is the right thing to do," Mueller told analysts in a conference call.  "We are going to produce.  We are going to have a great company."

Mueller did announce plans to set aside up to $300 million next year to expand Qwest's fiber network into neighborhoods.  That will help Qwest deliver higher Internet speeds and perhaps video services in competition against cable TV (although Mueller said Qwest plans to stick to reselling DirecTV).

Donna Jaegers, a telecommunications analyst with Janco Partners in Greenwood Village, liked the initial glimpse of Mueller's thinking.

"I think strategically Mueller is putting the company in a better position, but he's disappointing the short-term bulls that were hoping for a payout," Jaegers said.  "He has people spooked that Qwest is going to spend all of its free cash flow and none will go to shareholders (in the form of a dividend)."

She said investors also may be anxious about reports that Qwest bid for Covad Communications, an indication Qwest could get more aggressive in the mergers and acquisition front under Mueller.

But Jaegers said she thinks Mueller is doing the right thing for the long-term future of the company, and said she was comfortable with her decision Monday to upgrade Qwest from a "sell" to a "market perform."

The third-quarter results represented the first quarter under Mueller, who replaced the retiring Dick Notebaert in August.

Qwest reported third-quarter net income of $2.07 billion, or $1.08 a share, compared with $194 million, or 9 cents a share, for the same period of 2006.

The results included a one-time tax gain of $2.1 billion.  Earnings were affected negatively by a $353 million charge related to settling shareholder litigation that stems from the era of former CEO Joe Nacchio.

Revenues were off 1.5 percent to $3.43 billion and included declines in Qwest's wholesale business.

Qwest, which is a local telephone provider in 14 states, continues to lose traditional land lines, a trend exacerbated by the housing slowdown.  Total land lines were down 7.2 percent year-over-year to 13 million.

The company reported that it had 37,026 employees as of Sept. 30, a 5.5 percent decline from 39,163 a year ago.

On the positive side, Qwest's high-speed Internet business continues to post strong growth, up 27.5 percent since last year to 2.5 million subscribers.  And the average monthly customer bill is up 10 percent to $55 in the past year.,2777,DRMN_23910_5735066,00.html