Faced With Stagnant Sales, Qwest Plans Fiber Upgrade
By Roger Cheng
The Wall Street Journal
Tuesday, October 30, 2007
Qwest Communications International Inc.'s third-quarter net
income rose sharply on a one-time tax gain, but investors were
concerned by a lack of clarity and delays in setting a dividend
plan. Shares fell 14%.
Qwest did a remarkable job in climbing back to profitability
last year. But analysts were frustrated with Chairman and
Chief Executive Ed Mueller's insistence on not providing more
information until he completes a strategic review of the
Coupled with another delay in a potential dividend -- Mr.
Mueller wouldn't confirm or deny one was in the works -- and a
$300 million investment in upgrading its network with more
fiber-optic lines with little additional detail, the company's
uncertainty is mounting.
Qwest shares, which are trading near 52-week lows, fell $1.12,
or 14%, to $7.06 on the New York Stock Exchange.
Mr. Mueller, a telecom veteran who took over as Qwest's CEO in
August, acknowledged the nervousness in a conference call with
analysts. "I get that the clouds are over there," he said.
"I get the uncertainty. We will continue to give news as
we get it."
Qwest reported net income of $2.07 billion, or $1.08 a share,
compared with $194 million, or nine cents a share, a year
earlier. Results in the current quarter included a $2.1
billion tax gain and charges of $353 million related to settling
Operating revenue dropped 1.5% to $3.43 billion on declines in
wholesale business. Qwest's revenue has remained flat for
J.P. Morgan analyst Jonathan Chaplin, in a note, said there were
few positives in the results. Earnings and margins on an
earnings before interest, taxes, depreciation and amortization
basis were both disappointing.
Mr. Mueller said the board had deferred any plans to return
value to shareholders until after management has completed its
strategic review at the end of the year. Analysts and
investors had been expecting a pay out.
telecommunications company, which has lost more than a fifth of
its residential customers in the past five years, said it ended
the quarter with 13 million access lines, down 7.2% from a year
ago. Overall voice-services revenue dropped 7.1%.
The company, which serves 14 mostly western states, has relied
on cost cuts and the sale of more data and Internet services to
counter a steady decline in the number of local-phone
subscribers. Qwest added 111,000 Internet subscribers and
62,000 DirecTV subscribers. Total video subscribers
reached 634,000, up 81%. Revenue from data, video and
Internet services jumped 9.7% to $1.28 billion.
The company acknowledged macro factors were hurting the company.
"We believe that the trends in access lines, broadband and video
subscribers have been affected by certain consumer market
pressures including housing starts," Qwest Chief Financial
Officer John Richardson said during the call.
To combat slowing growth, Qwest said it plans to upgrade parts
of its network with fiber-optic lines to increase its speed to
20 megabits per second. Again, management frustrated
analysts with the lack of information on the project,
particularly how the company would get a return on the
Mr. Mueller said he the project wouldn't change its relationship
with satellite TV partner
DirecTV Group Inc., and that this wasn't necessarily a
precursor to an Internet-based TV model similar to
AT&T Inc.'s U-Verse service or
Verizon Communications Inc.'s FiOS service.
"It's our belief that there will be plenty of products and
services flowing down the network," Mr. Mueller said, adding
that he didn't know all of the future services that would run on
--Kathy Shwiff contributed to this article.
Write to Roger Cheng at