Qwest posts profit on data growth

Qwest posted a five cent per share or $88 million profit in the first quarter and is on track to be profitable for 2006, as the company manages its costs while seeing growth in data revenues and sales of service bundles.

The profit exceeded analysts’ expectations by far – Thomson First Call’s survey had anticipated a one-cent per share profit. The quarter also marks Qwest’s return to profitable status based on its operations. A one-cent per share profit in the first quarter of 2005 had included a $257 million or 14-cent per share boost on the sale of wireless assets.

“This was a major milestone – another chapter for us in our journey and a major accomplishment for our team,” Qwest Chairman and CEO Richard Notebaert said on an analyst call to review the results. “Our strategies are working, our progress is demonstrable, we have momentum that is tangible and a positive outlook.”

On the same call, Qwest CFO Oren Schaeffer said that while the company is “very pleased with the progress we made in the first quarter with revenue trends improving and margins and income showing solid growth,” the real news is that the company is “positioned to build on these trends” throughout 2006.

Notebaert also told analysts that Qwest will share its good fortune with its shareholders in some way this year, but declined to say whether that would come in the form of a stock buy-back or other method.

Qwest’s first quarter revenue was up only 0.8 percent to $3.5 billion from the first quarter of 2005, but the company was able to both control costs and increase its average revenue per user in order to post a 54% increase in net income.

Some of that increase was based on record sales of high-speed Internet access, Schaffer said, as well as increased bundle penetration and growth in small business sales. Customer connections for consumer and small businesses were up 253,000 from the first quarter of 2005, and more than 330,000 since Qwest launched new bundling and localized sales initiatives in May of 2005. Qwest added 198,000 high-speed Internet lines to reach 1.7 million total, or 13% market penetration. Mass markets data and Internet revenues grew 11% over the fourth quarter of 2005 and 34% over the first quarter of 2005.

“We see strong upward service migration – 90% of our new subscribers sign on for 1.5 megabit service or higher,” Schaeffer said. “Plus we see accelerated migration from dial to broadband.”

Qwest bundled sales include a quad play that packages DirecTV and MVNO wireless services with voice and data. Schaeffer said 53% of customers bought a service bundle in the first quarter, compared with 47% a year ago. ARPU is up 6% from $46 to $49 a customer as a result of aggressive sales of bundles, he said.

On the wholesale side, Qwest was able to overcome the loss of business from AT&T and Verizon as they migrated long-distance lines on-net following the merger of AT&T with SBC and MCI with Verizon, Notebaert said.

“With the megamergers, a lot of the wholesale minutes we were getting from those large carriers moved on-net,” he said. “So wholesale group which had flat revenue, but increased margins, was able to make up the majority of that loss of business by finding new business, with rebuilders, etc. If we wouldn’t have had those mergers, we would have had significant growth. I think this is a pretty darn good accomplishment for our wholesale team and now we expect to see growth there.”