Qwest stays on profitability track

Despite a second dip in revenues, Qwest Communications posted its third straight profitable quarter, based on improved sales of higher value products and continued cost containment.

The Denver-based company made $194 million, or 9 cents a share, compared to a year-ago loss of $144 million, or 8 cents a share. Revenue slipped to $3.49 billion from $3.5 billion a year earlier.

“This performance demonstrates that our value-creation strategies are working and driving continued steady improvement in our fundamentals,” Qwest Chairman and CEO Richard Notebaert told financial analyst on the earnings call this morning.

Notebaert and Oren Shaffer, vice chairman and CFO, repeated reiterated what have become familiar themes for Qwest: The company has been disciplined in containing costs while it continues to invest in extending the reach of its high-speed Internet service, improving its customer care, and selling more high-value services and service bundles. This is all being done against a back-drop that includes bringing the once-ailing company up to industry benchmarks for service penetration, quality of service and margins.

“We have set and achieved many interim goals,” Notebaert said. “I believe that 2006 will represent a milestone year for us in our long-term strategy to build sustainable growth and profitability along with revenue and free cash flow.”

Qwest now sells a service bundle to 56% of consumer customers, up from 50% a year ago, and has increased Average Revenue Per User (ARPU) by seven percent to $50 over the year-previous quarter’s $47. High-speed Internet service sales grew 47% and a growing percentage of those customers are taking higher-speed services, Notebaert said.

“Ninety percent of our customers can now get higher speed service at 1.5 Megabits per second and up, while half can get 3 Meg, and a quarter can get 7 Meg or more,” he said. “Our goal is to continue to upgrade this capacity. We have done this while maintaining a consistent level of investment for access lines since 2003.”

More than half of Qwest’s Internet customers are on the higher-speed offerings, Shaffer said.

“The migration to higher priced offerings in wireless and Internet services are driving customer ARPUs higher,” he said. “We are upselling existing bundled customers with more products in our quad play – HIS [high-speed Internet] has doubled, video in the bundle has more than tripled and video penetration rate is well above peer average. Mass market data and Internet revenue grew 47% year over year and 10% sequentially. In October, we hit the two million subscriber milestone.”

The increase in sales for high-speed Internet and other data products more than made up for access line loss, Shaffer added. Mass-market access lines were down 5.4%. Overall customer connections, including business lines, Internet and video links, grew by 344,000 over the third quarter of 2005.

Total data and Internet revenue grew 4% while total voice service revenue was down 2.7%.

Qwest cut its capital expenses by 11.5% and reduced its employee headcount by 2.9%.

That was accomplished, Notebaert said, while improving the company’s J.D. Power & Associates customer satisfaction rating.

Despite considerable consolidation in the wholesale business, Qwest was able to grow its voice service revenues by 6.1% and its data revenues by 6.7%.

“Our wholesale channel continues to drive growth by focusing on high-value customers – growth in revenues was 6.1%, growth in minutes of 2.4 percent,” Shaffer said. “We continue to drive more profitable minutes onto our long haul network through strategic pricing. That is able to more than offset loss to consolidation.”

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