Qwest doubles down on FTTN

Qwest Communications today announced plans to reduce its workforce by 3% -- or 1200 people – in the fourth quarter to adjust for softening markets. But although the company reported what it called “mixed” results for the third quarter (and predicted it will come in at the low end of its previously stated expectations for the year), one particularly bright spot was its consumer broadband business.

Qwest roughly doubled its quarterly residential subscriber additions in the third quarter, adding nearly 40,000 new fiber-to-the-node (FTTN) subscribers and giving an early indication of the effectiveness of a primary strategic focus for the company.

“We’re moving the high-speed Internet product to be the anchor of what we’re trying to do here,” said Ed Mueller, Qwest’s chief executive officer.

The $300-million FTTN network Qwest began building a year ago now passes 1.5 million homes and is scheduled to pass 1.8 million by year’s end. By the end of next year, that number could rise to 5 million, Mueller said today, or about 38% of Qwest’s total footprint.

Qwest attributed its broadband performance in the third quarter -- which yielded 13% growth in data and Internet service revenue -- to aggressive promotional campaigns, including an introductory offer of $14.99 per month for 1.5-megabit-per-second speeds. Qwest plans to continue those aggressive advertising campaigns in the fourth quarter. In addition, its take rate for 7-Mb/s services was nearly 70%, which Mueller called “a nice surprise.”

Qwest expects its broadband service to help retain other revenue streams, since it has seen that churn is cut in half when customers subscribe to broadband. “[High-speed Internet] is an anchor,” said Tom Richards, Qwest’s chief operating officer. “It will form our relationship with our customers going forward.”

The company could shift spending efforts to help feed its FTTN growth, Mueller said, but added that he wouldn’t raise the company’s overall capex budget to do so.

Before they rolled out FTTN, Qwest’s managers chose not to market higher speeds to customers who could get them by virtue of their proximity to a central office. But now the company is basing some of its marketing efforts on the higher speeds available to closer customers.

“Before we did FTTN, you could have higher speeds if you’re closer to the CO, but unfortunately, that’s hard to market to and not really productive,” Mueller said. “As marketing and advertising rolls out now, we get a pop from people who may be closer, and we’re having programs against that. So we get the benefit of a prior capex spend.”

Qwest also added 39,000 video subscribers through its satellite partnership, raising its total video base to 761,000, which Qwest said was an industry-leading penetration of 12%. Qwest surprised many in the industry by not including a terrestrial video service with its FTTN plans, unlike AT&T.

Mueller said the company was bringing broadband services to its business and wholesale markets as well, by expanding its nationwide Ethernet backbone network, “to position us for the next evolution of services.”

Despite the healthy broadband results, revenue from Qwest’s consumer base dropped nearly 5% from a year earlier due to declines in voice and wireless revenue. Qwest began migrating non-bundled wireless customers to Verizon Wireless during the quarter and had moved about 5% of them before the quarter was over.

The company also complained of softness in its wholesale business, where price competition has heated up and Qwest’s revenue sank 1% sequentially and 5% from a year earlier. But unlike their peers, Qwest executives claimed to see no evidence of the broader economy impacting spending trends among its enterprise customers.

“In enterprise, we’ve not seen any meaningful, tangible evidence of economic effects, though we’re probably not out of the woods yet,” Mueller said.

Qwest’s revenue from business customers was up 3% sequentially and up 7% from a year earlier to about $1 billion. (AT&T, meanwhile, saw a 1.4% decline.) That growth was driven by data services, whose revenue was up 13% from a year earlier to account for 65% of all Qwest’s business-market revenue. But it was also aided by unusually high sales of equipment, which contributed 15% of the segment’s third-quarter revenue. Qwest also may have been helped by a string of federal government contracts announced recently that Mueller today said could raise the company’s annual revenue 50 basis points over the next two years.

“Where we see the impact of the economy most is in the consumer space, in the ability to make new sales and net adds,” COO Richards said. “That’s why we’re so excited about what [high-speed Internet] did this quarter. It seems like we hit a sweet spot.”

Another mounting issue for the company, however, is debt. Qwest has $390 million in debt maturing in the fourth quarter, more than $800 million maturing next year and another $900 million maturing in 2010. And the current debt market doesn’t make refinancing an attractive option right now. So Qwest will continue to pay down its debt and wait for credit markets to improve before continuing its refinancing efforts, the company said.