(Source: Business Wire)
Qwest
Communications (NYSE: Q):
Unaudited (in millions, except per share and margin amounts)
3Q 2009 2Q 2009 Change 3Q 2008 Change
Operating Revenue $3,054 $3,090 (1.2 )% $3,379 (9.6 )%
Operating Income 485 491 (1.2 )% 454 6.8 %
Income before Income Taxes 211 217 (2.8 )% 218 (3.2 )%
Net Income 136 212 (35.8 )% 145 (6.2 )%
Net Income per Diluted Share $0.08 $0.12 (33.3 )% $0.08 0.0 %
Adjusted EBITDA((a)) 1,093 1,092 0.1 % 1,083 0.9 %
Adjusted EBITDA Margin 35.8 % 35.3 % 50 bps 32.1 % 370 bps
Adjusted Free Cash Flow 428 657 (34.9 )% 330 29.7 %
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(a) See Attachment E for Non GAAP Reconciliations
Third Quarter Highlights
Achieves strong adjusted EBITDA and free cash flow(a)
Improved revenue mix and efficiencies drive adjusted EBITDA margin
of 35.8 percent
IP revenue growth supports continued market share gains in
enterprise space
Growing demand for high-speed services on fiber to the node network
Completion of wireless migration on track
Updates financial guidance
Qwest
Communications (NYSE: Q) today reported financial results for the
third quarter 2009. In the quarter, net income was $136 million.
Earnings per share were 8 cents, which was equal to prior-year results.
Current quarter earnings per share results include a 1 cent charge for
severance, realignment and restructuring cost and litigation expense.
The prior-year results include a 1 cent charge for severance,
realignment and restructuring. The third quarter, net operating revenue
of $3.1 billion includes 36 percent growth in IP services. Overall
reported revenues declined 10 percent compared to the prior-year period.
Excluding the effects of the company's transition to a new wireless
business model, revenue declined 7 percent year over year. Total
operating revenues declined 1 percent sequentially.
In the quarter, adjusted EBITDA increased 1 percent from the year-ago
period as substantial cost improvements offset lower revenue. Adjusted
EBITDA for the quarter of $1.1 billion includes nearly $60 million of
incremental non-cash pension and OPEB expenses compared to the third
quarter 2008. The adjusted EBITDA margin of 35.8 percent is an
improvement of 370 basis points compared to the third quarter 2008 and a
50-basis-point sequential improvement. For the quarter, adjusted free
cash flow was $428 million. Year to date, adjusted free cash flow
totaled $1.4 billion compared to $846 million through the third quarter
2008.
Qwest continued to make strong progress on expanding broadband
capabilities in the third quarter. Fiber to the node (FTTN) was deployed
to more than 500,000 additional homes during the quarter. Qwest's FTTN
footprint now reaches more than three million homes. In the quarter,
71,000 customers added broadband services that utilize the fiber
network. To support growing demand for enterprise broadband services,
Qwest announced it will begin developing its next generation of backbone
facilities with Alcatel-Lucent. This development will provide 100 Gbps
speeds across the network when fully implemented over the next year.
These strategic investments provide customers with enhanced
functionality and support delivery of future simplified services.
"Our focus on perfecting the customer experience while maintaining
strong financial discipline again enabled us to deliver solid results in
the quarter." said Edward A. Mueller, Qwest chairman and CEO. "The
ability of the Qwest team to steer through difficult market conditions
has been exemplary. This is evident in key measures of our performance
including strategic revenue growth, reduced operating expenses, stable
EBITDA, strong free cash flow and an improving leverage ratio. As a
result of our stronger-than-expected performance to date, we are raising
our full year 2009 free cash flow outlook. We are optimistic about our
prospects as the economy begins to improve in the quarters ahead."
CONSOLIDATED FINANCIAL RESULTS
Revenue
Qwest reported total operating revenue of $3.1 billion in the third
quarter. Strategic services revenue of $1.1 billion increased by 5
percent year over year and 1 percent sequentially reflecting higher
demand for IP services. Legacy services revenue of $1.7 billion
decreased 14 percent annually and 3 percent sequentially. Fewer access
lines, from a weak economy and competition, and efforts to improve
Wholesale long-distance profitability pressured legacy voice revenue.
Customer transitions to IP services impacted legacy data revenue.
Expense
Operating expenses in the quarter were $2.6 billion, a decrease of $356
million, or 12 percent, year over year. Cost of sales, selling and
depreciation and amortization expense all declined over the period. The
largest components of these savings were facility costs, due to lower
long-distance volumes and the wind down of the wireless MVNO platform,
as well as a reduced workforce. General, administrative and other
operating expense increased principally due to higher pension and OPEB
expense and one-time lease termination benefits in the year-ago period.
Sequentially, operating expenses declined 1 percent due to lower selling
and facility costs. This was partially offset by increased network
expense. Total employees at the end of the quarter were approximately
31,300, a decline of 3,400 or 10 percent, from the prior year.
Net Income
Net income for the third quarter was $136 million, a 6 percent decline
from the year-ago period. In the third quarter 2008, net income
reflected lower interest expense and a one-time benefit in other income.
Net income declined by 36 percent sequentially due primarily to a
one-time tax benefit recorded in the second quarter.
SEGMENT FINANCIAL RESULTS
Business Markets
Business Markets continued to outperform its peer group in the quarter
and produced a strong annual gain in segment income. Qwest's success in
the enterprise space continues to be driven by a strong mix of data and
IP services, a diverse customer mix and differentiated user support.
Recognition of Qwest's nimble, customer-focused approach was reflected
in Atlantic-ACM's 2009 excellence awards. Business Markets received
eight individual awards including best-in-class data and voice value and
network performance. In October, Qwest announced the opening of its 16th
CyberCenter in Albuquerque, N.M., to support growing demand for hosting
services.
Business Markets reported revenues of $1.0 billion, a decrease of 1
percent from the third quarter 2008 but an increase of 1 percent
sequentially. Propelled by strong growth in IP services, strategic
revenues increased 11 percent year over year. Legacy revenues decreased
9 percent from the prior-year period. Strategic revenue was 39 percent
of total segment revenue, up from 35 percent a year ago.
The segment income contribution from Business Markets increased 11
percent year over year and was steady with the second quarter. Segment
income margin percentage of 39.6 improved 430 basis points from a year
ago. The margin improvement is due to lower network costs and improved
channel expense efficiencies.
Mass Markets
In the quarter, Qwest had success in selling bundled service offerings,
and the company continued to make progress in moving to a more localized
go-to-market approach. However, wireless substitution, increased
unemployment, low business formation and soft housing trends in Qwest's
14-state region continue to impact voice revenues. Substantial cost
savings largely mitigated bottom-line impacts.
Mass Markets segment revenues of $1.2 billion declined 14 percent on a
reported basis and were down 8 percent after normalizing for the
wireless business model transition. Sequentially, revenue declined 3
percent on a reported basis and 2 percent after adjusting for wireless.
Strategic revenue growth of 3 percent year over year was offset by
legacy revenue declines of 12 percent.
Segment income for the quarter was flat year over year and declined 3
percent compared to the second quarter. Expenses declined 26 percent
from the year-ago period. These improvements included elimination of
certain MVNO activities, force-to-load measures, enhanced network
efficiencies and lower selling cost. Segment income margin percentage
improved 760 basis points compared to the year-ago quarter.
Total net broadband subscribers increased by 28,000 in the quarter
bringing total subscribers to nearly 3 million. Once again, demand
within the FTTN footprint fueled subscriber growth. Total FTTN
subscribers reached 340,000 or more than 11 percent of Qwest's total
high-speed Internet customers.
Total wireless subscribers at the end of the quarter were 786,000, up
23,000 from the end of the second quarter. Qwest will stop providing
MVNO services effective Oct. 31.
Qwest added 15,000 DIRECTV subscribers in the quarter. At the end of the
period, approximately 15 percent of Qwest's primary access line
customers also were subscribing to DIRECTV services.
Wholesale Markets
Wholesale Markets posted its fourth consecutive quarter of segment
margin improvement while revenue pressures moderated on a sequential
basis. Initial construction of fiber to the cell site began in the
quarter, positioning Qwest to benefit from ongoing growth in wireless
data services.
Segment revenue of $700 million declined 14 percent vs. the prior year
mainly due to lower long-distance revenue. Sequentially, revenue was
down $12 million, or 2 percent. Profitability measures that were
undertaken in the second half of 2008 enhanced segment margins but
impacted revenue. In addition, ongoing peer grooming efforts and access
line trends continue to challenge revenue performance.
Wholesale segment income essentially was even with both the second
quarter and the year-ago period. Lower facility costs, bad debt expense
and operational efficiencies were responsible for improvements in the
segment cost structure. Reflecting the elimination of low-margin
revenues, Wholesale segment income margin percentage improved 920 basis
points year over year.
Cash Flow and Capital Investment
Adjusted free cash flow was $428 million for the quarter, an increase of
$98 million from the third quarter 2008. Lower capital expenditures and
working capital improvements contributed to strong free cash flow
results.
Capital expenditures for the quarter were $341 million bringing the
year-to-date total to $1.0 billion. A reduction in projected network
volumes, lower maintenance capital requirements and fewer
project-specific requirements have contributed to lower capital
expenditures throughout 2009.
Balance Sheet
In the quarter, the company continued to strengthen the balance sheet by
reducing net debt while improving liquidity. Net debt fell to $12.1
billion from $12.3 billion at the end of the second quarter. Overall
cash and cash equivalent balances increased to $2.1 billion from $1.8
billion. The company's net debt-to-adjusted EBITDA leverage ratio was at
2.7 times, which is equal to the second quarter but down from 3.0 times
in the third quarter 2008. During the quarter, the company successfully
issued approximately $550 million of debt at the parent company at a
coupon rate of 8 percent.
Shareholder Returns
Qwest returned $138 million to shareholders in the third quarter through
an 8 cent-per-share dividend. On Oct. 14, Qwest's board of directors
approved the payment of a fourth quarter dividend of 8 cents per share.
The dividend will be paid on Dec. 11, 2009, to shareholders of record as
of Nov. 20, 2009. This marks Qwest's eighth consecutive quarterly
dividend.
Guidance
Based on results through the third quarter, Qwest now expects to achieve
full year adjusted EBITDA at the upper end of its prior guidance, which
called for a range of $4.25 billion to $4.4 billion. The outlook for
full year 2009 capital investments is now $1.6 billion or lower vs. the
prior outlook of $1.7 billion or lower. The full year adjusted free cash
flow is now expected to be $1.6 billion to $1.7 billion. Prior guidance
called for annual adjusted free cash flow of $1.5 to $1.6 billion.
Conference Call Today
As previously announced, Qwest will host a conference call for investors
and the media today at 9 a.m. EDT. A live webcast, including a
simultaneous slide presentation, and replay of the call is available at www.qwest.com/about/investor/events.
Additional quarterly historical financial information can be found at www.qwest.com/about/investors/financial/index.
About Qwest
Customers coast-to-coast turn to Qwest's industry-leading national
fiber-optic network and world-class customer service to meet their
communications and entertainment needs. For residential customers, Qwest
offersa new generation of fiber-optic
Internet service, high-speed
Internet solutions, as well asdigitalhome
phone, wireless service available through Verizon
Wireless and DIRECTVservices.
Qwest is also the choice of 95 percent of Fortune 500 companies,
offering a full suite of network, data and voice services for small
businesses, large
businesses, government
agencies and wholesale
customers. Additionally, Qwest participates in Networx,
the largest communications services contract in the world, and is
recognized as a leader
in the network services market by a leading technology industry analyst
firm.
Forward-Looking Statement Note
This release may contain projections and other forward-looking
statements that involve risks and uncertainties. These statements may
differ materially from actual future events or results. Readers are
referred to the documents filed by us with the Securities and Exchange
Commission, specifically the most recent reports which identify
important risk factors that could cause actual results to differ from
those contained in the forward-looking statements, including but not
limited to: access line losses due to increased competition, including
from technology substitution of our access lines with wireless and cable
alternatives, among others; our substantial indebtedness, and our
inability to complete any efforts to further de-lever our balance sheet;
adverse results of increased review and scrutiny by media and others
(including any internal analyses) of financial reporting issues and
practices or otherwise; rapid and significant changes in technology and
markets; any adverse developments in commercial disputes or legal
proceedings; potential fluctuations in quarterly results; volatility of
our stock price; intense competition in the markets in which we compete
including the effects of consolidation in our industry; changes in
demand for our products and services; acceleration of the deployment of
advanced new services, such as broadband data, wireless and video
services, which could require substantial expenditure of financial and
other resources in excess of contemplated levels; higher than
anticipated employee levels, capital expenditures and operating
expenses; adverse changes in the regulatory or legislative environment
affecting our business; changes in the outcome of future events from the
assumed outcome included in our significant accounting policies; our
ability to utilize net operating losses in projected amounts; and
continued unfavorable general economic conditions, including the current
financial crisis. The information contained in this release is a
statement of Qwest's present intention, belief or expectation and is
based upon, among other things, the existing regulatory environment,
industry conditions, market conditions and prices, the economy in
general and Qwest's assumptions. Qwest may change its intention, belief
or expectation, at any time and without notice, based upon any changes
in such factors, in Qwest's assumptions or otherwise. The cautionary
statements contained or referred to in this release should be considered
in connection with any subsequent written or oral forward-looking
statements that Qwest or persons acting on its behalf may issue. This
release may include analysts' estimates and other information prepared
by third parties for which Qwest assumes no responsibility. Qwest
undertakes no obligation to review or confirm analysts' expectations or
estimates or to release publicly any revisions to any forward-looking
statements and other statements to reflect events or circumstances after
the date hereof or to reflect the occurrence of unanticipated events. By
including any information in this release, Qwest does not necessarily
acknowledge that disclosure of such information is required by
applicable law or that the information is material.
The marks that comprise the Qwest logo are registered trademarks of
Qwest Communications International Inc. in the U.S. and certain other
countries.
Exception caught in main.
nmPercentages greater than 200% and comparisons between positive and
negative values or to/from zero values are considered not meaningful.
(1) We have reclassified certain prior year amounts to conform to the
current quarter presentation.
(2)Effective January 1, 2009, we adopted FSP APB 14-1(Accounting
Standards Codification ("ASC'') 470). The adoption of this FSP resulted
in us retrospectively adjusting previously reported net income, interest
expense on long-term borrowings and capital leasesnet and income tax
expense for all periods presented.
Exception caught in main.
(1)We have reclassified certain prior year amounts to conform to the
current quarter presentation.
(2)Effective January 1, 2009, we adopted FSP APB 14-1(ASC 470). The
adoption of this FSP resulted in us retrospectively adjusting previously
reported long-term borrowingsnet, other assets and liabilities and
stockholders' deficit for all periods presented.
ATTACHMENT C
QWEST COMMUNICATIONS INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
2009 2008
(Dollars in millions)
Cash provided by operating activities $ 2,431 $ 2,023
Cash used for investing activities (1,016 ) (1,343 )
Cash provided by (used for) financing activities 94 (996 )
Increase (decrease) in cash and cash equivalents $ 1,509 $ (316 )
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ATTACHMENT D
QWEST COMMUNICATIONS INTERNATIONAL INC.SELECTED CONSOLIDATED DATA (1)(UNAUDITED)
Three Months Ended
September 30,
2009 2008 % Change
(Dollars in millions)
Operating revenue (2):
Total segment revenue $ 2,958 $ 3,286 (10.0 )%
Other revenue (primarily USF surcharges) 96 93 3.2 %
Total operating revenue $ 3,054 $ 3,379 (9.6 )%
Total segment results (2) (3):
Total segment revenue $ 2,958 $ 3,286 (10.0 )%
Total segment expenses 1,417 1,782 (20.5 )%
Total segment income $ 1,541 $ 1,504 2.5 %
Total segment margin percentage 52.1 % 45.8 %
Revenue, expenses, income and margin percentage by segment (2) (3):
Business markets:
Revenue:
Strategic services (4) $ 402 $ 361 11.4 %
Legacy services (4) 477 525 (9.1 )%
Total strategic & legacy services 879 886 (0.8 )%
Data integration (4) 153 158 (3.2 )%
Total revenue 1,032 1,044 (1.1 )%
Expenses:
Direct segment expenses 300 339 (11.5 )%
Assigned facility, network and other expenses 323 336 (3.9 )%
Total expenses 623 675 (7.7 )%
Income $ 409 $ 369 10.8 %
Margin percentage 39.6 % 35.3 %
Mass markets:
Revenue:
Strategic services (4) $ 346 $ 335 3.3 %
Legacy services (4) 860 975 (11.8 )%
Total strategic & legacy services 1,206 1,310 (7.9 )%
Wireless services (4) 20 116 (82.8 )%
Total revenue 1,226 1,426 (14.0 )%
Expenses:
Direct segment expenses 250 323 (22.6 )%
Assigned facility, network and other expenses 303 428 (29.2 )%
Total expenses 553 751 (26.4 )%
Income $ 673 $ 675 (0.3 )%
Margin percentage 54.9 % 47.3 %
Wholesale markets:
Revenue:
Strategic services (4) $ 303 $ 309 (1.9 )%
Legacy services (4) 397 507 (21.7 )%
Total revenue 700 816 (14.2 )%
Expenses:
Direct segment expenses 35 45 (22.2 )%
Assigned facility, network and other expenses 206 311 (33.8 )%
Total expenses 241 356 (32.3 )%
Income $ 459 $ 460 (0.2 )%
Margin percentage 65.6 % 56.4 %
ATTACHMENT D(CONTINUED)
QWEST COMMUNICATIONS INTERNATIONAL INC.SELECTED CONSOLIDATED DATA(UNAUDITED)
September 30,
2009 2008 % Change
(Amounts in thousands, except for employees)
Operating metrics:
Total employees 31,292 34,656 (9.7 )%
Access lines:
Business markets 2,468 2,680 (7.9 )%
Mass markets 7,045 8,022 (12.2 )%
Wholesale markets (5) 1,048 1,167 (10.2 )%
Total access lines 10,561 11,869 (11.0 )%
Mass markets connections:
Access lines:
Consumer primary lines 5,375 6,134 (12.4 )%
Consumer additional lines 459 573 (19.9 )%
Small business lines 1,211 1,315 (7.9 )%
Total access lines 7,045 8,022 (12.2 )%
Other connections:
Broadband subscribers (6) 2,951 2,793 5.7 %
Video subscribers 858 761 12.7 %
Wireless subscribers (6) 786 772 1.8 %
Total other connections 4,595 4,326 6.2 %
Total mass markets connections 11,640 12,348 (5.7 )%
Three Months Ended
September 30,
2009 2008 % Change
Capital expenditures (in millions) (7): $ 341 $ 466 (26.8 )%
Consumer ARPU (in dollars) (8): $ 59 $ 56 5.4 %
Wholesale minutes of use from carriers and CLECs (in millions) 8,274 9,770 (15.3 )%
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(1) We have reclassified certain prior year amounts to conform to the
current quarter presentation.
(2) We centrally manage revenue from USF (Universal Service Fund)
surcharges, consequently, it is not assigned to any of our segments.
(3) Segment margin percentage represents segment income as a percentage
of segment revenue. Segment income is net of direct costs incurred by
the segment, such as segment specific employee-costs, bad debt,
equipment sales costs and other non-employee related costs.
Additionally, we assign other expenses to the segments using an
activity-based costing methodology. Assigned expenses include network
expenses, facility costs, and various other costs.
(4) Our strategic services are primarily private line, broadband, Qwest
iQ Networking®, hosting, video, VoIP and Verizon Wireless services.
Our legacy services are primarily local, long distance, access,
traditional WAN, ISDN, and other more traditional telecommunications
services.
Data integration is telecommunications equipment located on customers'
premises and related professional services. These services include
network management, installation and maintenance of data equipment and
building of proprietary fiber-optic broadband networks for our
governmental and business customers.
Our Qwest-branded wireless products and services are wireless products
and services that we provide through our mass markets segment under a
pre-existing arrangement with a different wireless provider. This
arrangement will end on October 31, 2009.
(5) Wholesale markets access lines include UNE (Unbundled Network
Elements) lines.
(6) Broadband and wireless subscribers include an immaterial amount of
business markets customers.
(7) Capital expenditures exclude assets acquired through capital leases.
(8) Consumer ARPU(Average Revenue Per Unit)ismeasured as consumer
revenue, which includes revenue from strategic and legacy services in
the period divided by the average number of primary access lines for the
period. We believe this metriccan bea usefulmeasure of therevenue
performance of our consumer business within our mass markets segment on
a per-customer basis.We use ARPU internally toassess the revenue
performance of our consumer business within our mass markets segment and
the impact on this business of periodic customer initiatives and product
roll-outs.ARPU is not a measure determined in accordance with
accounting principles generally accepted in the United States of
America, or GAAP, and should not be considered as a substitute forour
mass markets segment revenue or any other measure determined in
accordance with GAAP.
Exception caught in main.
(1) We have reclassified certain prior year amounts to conform to the
current quarter presentation. Effective January 1, 2009, we adopted FSP
APB 14-1. The adoption of this FSP resulted in us retrospectively
adjusting previously reported net income and long-term borrowingsnet
for all periods presented.
(2) EBITDA and EBITDA margin percentage are non-GAAP financial measures.
Other companies may calculate these measures (or similarly titled
measures) differently. We believe these measures provide useful
information to investors in evaluating our capital-intensive business
because they reflect our operating performance before the impacts of
non-cash items and are indicators of our ability to service debt, pay
taxes and fund discretionary spending such as capital expenditures.
Management also uses EBITDA for a number of purposes, including setting
targets for compensation and assessing the performance of our operations.
(3) EBITDAas adjusted and EBITDA margin percentageas adjusted are
non-GAAP financial measures that reflect our operating performance
before the impacts of certain non-cash items and after removing the
effects of items that we believe are not representative of our core
ongoing telecommunications operations, such as severance charges,
restructuring charges and charges for securities-related litigation. We
provide this information to supplement our GAAP financial measures
because we believe that investors commonly use this information to
analyze the results of our core operations, to identify financial trends
in these results and to compare our operating performance to that of our
competitors. Management also uses these measures for a number of
purposes, including setting targets for compensation and assessing the
performance of our operations.
(4) Free cash flow and adjusted free cash flow from operations are
non-GAAP financial measures that indicate cash generated by our business
after operating expenses, capital expenditures, interest expense and
income tax expense/benefit. We believe these measures provide useful
information to our investors for purposes of evaluating our ability to
satisfy our debt and other mandatory payment obligations and because
they reflect cash flows available for financing activities and voluntary
debt repayment. This is of particular relevance for our business given
our significant debt balance. We also use free cash flow and adjusted
free cash flow from operations internally for a variety of purposes,
including setting targets for compensation and budgeting our cash needs.
These measures are not determined in accordance with GAAP and should not
be considered as a substitute for "income before income taxes" or "cash
provided by operating activities" or any other measure determined in
accordance with GAAP. Due to the forward-looking nature of expected free
cash flow amounts for 2009, information to reconcile this non-GAAP
financial measure is not available at this time.
(5) Net debt is a non-GAAP financial measure that we calculate as our
total borrowings (current plus long-term) less our cash and cash
equivalents. We believe net debt is helpful in analyzing our leverage,
and management uses this measure in making decisions regarding potential
financings. Net debt is not a measure determined in accordance with GAAP
and should not be considered as a substitute for "current portion of
long-term borrowings" or "long-term borrowings" or any other measure
determined in accordance with GAAP.
(6) The ratio of net debt to EBITDAas adjusted is a non-GAAP financial
measure that we calculate as net debt divided by a rolling four quarters
of EBITDAas adjusted. Other companies may calculate this measure
differently. We believe this measure provides useful information to our
investors about our debt level relative to our performance and about our
ability to meet our financial obligations.
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