Qwest Swings to Profit on Asset Sale

Qwest Communications International Inc., (Q) which lost a bidding war for MCI Inc. (MCIP) this week, said on Tuesday it posted a first-quarter profit due to the sale of assets from its wireless business.

Qwest (search), the fourth-largest U.S. local telephone company, did not immediately provide an update on its next moves following MCI's agreement to be bought by Verizon Communications Inc. (VZ) for $8.5 billion. Analysts said an MCI deal was Qwest's best hope for reworking its business, which is burdened with $17 billion in debt and weak cash flow.

Merrill Lynch analyst David Janazzo said the bid for MCI, "while spirited, highlights Qwest's difficult strategic position." Janazzo reinstated his "sell" rating on the company on Tuesday in a research note, saying it was expensive relative to its peers.

Qwest said its first-quarter net profit totaled $57 million, or 3 cents a share, compared with a net loss of $310 million, or 17 cents a share, a year earlier.

Excluding a gain of $257 million from the sale of licenses and other wireless network assets to Verizon Wireless (search), Qwest posted a loss of $200 million, or 11 cents a share — missing the average analyst estimate on Reuters Estimates by a penny.

Revenues were down less than 1 percent to $3.45 billion. Qwest had said last week that its revenues would be flat.

Qwest, which has local telephone networks in 14 states from Minnesota to Washington, chased MCI through four rejected bids over the past three and a half months, finally withdrawing its $9.9 billion final offer on Monday.

It has struggled for the past few years to manage debt and its cash-burning long-haul voice and data business. Unlike Verizon and other dominant U.S. local telephone companies, Qwest does not have a cash-generating directory business or its own wireless arm, reselling service from Sprint Corp. (FON) instead.

Qwest said its free cash flow for the quarter, which it defines as cash from operations minus capital spending, totaled $30 million, down from $105 million a year earlier. It said it still expects to boost free cash flow this year before one-time payments.

Qwest said it added 85,000 high-speed Internet lines and 82,000 long-distance lines during the first quarter, but lost 183,000 access lines. Its wireless subscribers declined 11,000 to 783,000.

As the bidding war for MCI escalated, Qwest's shares have fallen, and are down 21 percent since the beginning of the year. Its shares closed Monday at $3.47, up 5 cents on the New York Stock Exchange.