Qwest Q2 earnings meet estimates

Qwest Communications reported pro forma earnings for second quarter 2001 of $128 million, or 8 cents per diluted share, which were in line with the consensus estimate of analysts polled by Thomson Financial/First Call. However, earnings were about half the $255 million posted for second quarter 2000.

Earnings before interest, taxes, depreciation and amortization (EBITDA) for the quarter were $2.03 billion, a 13% increase year over year.

The company posted a net loss for the quarter of $3.3 billion, or $1.99 per diluted share, substantially more than the $121 million net loss posted in the same quarter last year. However, Qwest took a one-time charge of $3.72 billion for the quarter, which included $415 million in merger-related charges, and $222 million in additional depreciation charges on access lines targeted for sale to Citizens Communications.

Last week, Qwest terminated the agreement U S West had signed with Citizens for the sale of about 540,000 access lines.

“We believe Citizens breached the agreements by postponing closing without good reason,” said Qwest Chairman and CEO Joseph Nacchio.

Nacchio said he believes Citizen’s motivation for postponing the closing was to squeeze better pricing out of Qwest, which has filed an arbitration proceeding against Citizens to recover damages.

“I don’t fault them for that, but we’re not U S West,” Nacchio said. “So, we essentially held the line.”

The biggest chunk of the write-down--$3.1 billion--concerned the company’s investment in KPNQwest. Nacchio said the company was forced to take a write-up of $7.9 billion on the investment a year ago--at the time of the U S West merger, when KPNQwest’s stock price was $40 per share--because “arcane” purchased accounting rules required it to do so. When Qwest wrote down the investment on June 30 of this year, the stock price was $11 per share.

Nacchio said Qwest doesn’t believe reducing the carrying value of the investment is important “since we do not have any intention, or need, to sell any portion of our investment.” He also said the write-down doesn’t reflect the value of the investment or the company’s confidence in the KPNQwest management team.

“We put in $200 million and today it’s worth over a billion [dollars],” Nacchio said. “We think it’s a great investment … the last time I looked, it’s worth more today than the money we put in. In a very simple way, that’s how I think about creating value.”

Total revenues for the quarter were $5.2 billion, a 51% increase from the $3.5 billion generated in the same quarter last year. Internet and data services revenue grew by about 41% year over year, while commercial revenue grew by 27%. In addition, DSL customers more than doubled to about 360,000.

Nacchio reaffirmed the company’s previous guidance for fiscal 2001 of $21.3 billion to $21.5 billion in revenue and EBITDA of $8.5 billion to $8.7 billion.

“I feel pretty good about the rest of the year as we’re moving ahead. I think we have a path to performance that will allow us to continue to grow and continue to perform in the range of our previous guidance,” Nacchio said.

“A lot of this depends of course on how well the economy continues to perform. Our assessment is the economy is bouncing along the bottom; it may get a little worse, may get a little better, but we’re not looking for a radical shift in the economy in the last two quarters. Under that scenario, we think we can make our numbers as we’ve given guidance.”