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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 company.

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 shareholder litigation.

Operating revenue dropped 1.5% to $3.43 billion on declines in wholesale business.  Qwest's revenue has remained flat for three years.

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.

The Denver 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 investment.

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 the network.

--Kathy Shwiff contributed to this article.

Write to Roger Cheng at roger.cheng@dowjones.com

http://online.wsj.com/article/SB119374358235076120.html?mod=telecommunications_primary_hs