Qwest Completes Turnaround, Breaks Even in Q4
Qwest’s break-even 4th quarter and its first fiscal year revenue increase since 2001 capped a 2005 turnaround for the carrier, which reported $3.5 billion in revenue at its Q4 investor conference call Tues. Q4 was Qwest’s 3rd straight quarter of year-over-year revenue improvement, while its annual revenue was up modestly to $13.9 billion. The carrier reversed a long trend of running operating losses and broke even in Q4 after adjusting for special items and one-time expenses, and most analysts were cautiously optimistic 2006 would be a good year not only for Qwest, which was the last of the Bells to file, but for the industry as a whole.
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Qwest’s quarterly reports were complicated by one-time expenses related to debt refinancing, realignment and severance costs, which totaled $528 million and, according to both Qwest and independent analysts, will go a long way in bringing the company into the black. Excluding those expenses, Qwest’s operating income broke virtually even in Q4, compared to an adjusted loss of $144 million in Q3 and $139 million in Q4 2004. The company attributed the growth to a dramatic increase in high-speed customer additions and “improving wireless trends with subscriber growth, lower churn and increased ARPU.” Operating expenses were also down 7% for Q4, Qwest said.
Qwest’s “strategies are working,” said CEO Dick Notebaert. He pointed to the elimination of legacy debt through aggressive refinancing as a key to the company’s positive cash flow and long-term positive outlook; the move “significantly improved” Qwest’s financial position, he said. High customer demand for “growth products” offset the slow, steady loss of land lines, he said, saying Qwest is on track to become profitable in 2006 and that some of that profit can be written of because of tax losses in the past year.
Analysts said Qwest’s performance was met or slightly exceeded expectations for the year, adding that in general the company’s 2006 outlook is strong. Dennis Saputo of Moody’s said the carrier was “in line, maybe a little better” than it’s predictions. John Hodulik of UBS said it’s his “impression” Qwest will use some of its modest projected increase in capex to initiate a fiber-to-the-node project “of some kind” in the vein of the other Bells. With higher margins, strong cash-flow guidance, and big savings on the refinancing, “'06 is gonna be a good year for these guys,” he said.
Hodulik said the Bells in general are enjoying a resurgence, mostly cyclical, that will continue through 2006. Competition from cable hasn’t had as much impact as expected, he said, and BellSouth and the new AT&T’s aggressive movement in emerging niche markets has really driven the Bells, said Hodulik, whose firm UBS has Qwest as one of its financial clients. He said each of the Bells except Verizon has had encouraging earnings revisions in the last 6 months.
“This is a much better situation than we saw Qwest in 5 years ago,” analyst Jeff Kagan said, noting Qwest “has been looking better and better” over the past several quarters. Kagan, far from dismissing the competitive threat from cable, said this kind of growth is precisely what Qwest needs as that competition looms closer; he said Qwest has been particularly good at keeping its company value up and paying off debts while investing in high-speed broadband and data deployment. He also said Qwest’s focus on the customer experience is paying off.
Wireless revenue was better than expected, but data was weak, said Victor Shvets of Deutsche Bank. Q4 land line losses, though slightly less drastic than expected at 5%, are still accelerating, Shvets said. And while DSL growth for the year was strong, Q4 additions were slightly down to 140,000, vs. 165,000 in Q4 2004. Though he praised the company’s break-even performance and positive 2006 guidance, he said a key issue remains the sustainability of the company’s 2005 turnaround with the current deployment model.