Qwest Posts Q4 Loss, Cuts 2002 Outlook

PHILADELPHIA – Qwest Communications International Inc. Tuesday posted a fourth-quarter loss on weaker-than-expected revenues, and warned that its 2002 revenues would be at the low-end of its earlier target.

The company blamed the soft economy, saying it hurt sales of telephone access lines and long-distance transmission services.

Shares of Qwest , the dominant local telephone company in 14 states from Minnesota to Washington, fell 70 cents, or 5.67 percent, to $11.65 in midday trading on the New York Stock Exchange. The stock has fallen about 70 percent over the past 12 months, underperforming the North American Telecommunications Index by about 57 percent.

In the fourth quarter, Qwest said the weak economy caused residential customers to disconnect telephone lines, and businesses to delay or reduce spending on long-distance services. Even once-booming segments such as data services saw slower growth.

Qwest and other fiber-optic network operators have been hurt by a glut of network capacity, slack demand and declining rates for voice and data transmission services. Rival Global Crossing Ltd. filed for bankruptcy protection, while Level 3 Communications posted a $3.3 billion loss in the fourth quarter.

"I'm hoping we will see the worst behind us, although Q1 will still probably be a light quarter," Qwest Chairman Joseph Nacchio said in a conference call with analysts and reporters. "We have some modest signs that the economy in our 14 state region is bottoming out."

FOURTH QUARTER FALLS SHORT OF FORECASTS

In the fourth quarter, Qwest reported a net loss of $516 million, or 31 cents a share, compared with a net loss of $116 million, or 7 cents a share, a year earlier.

On a pro forma basis, it had a deeper-than-expected loss of 7 cents a share, compared with a profit of 16 cents a share a year before. The results are adjusted for its acquisition of U S West Inc. and exclude one-time restructuring charges and other items.

Wall Street analysts had expected Qwest to post a loss of 6 cents a share, according to research firm Thomson Financial/First Call.

Revenues dropped 6 percent to $4.70 billion from $5.02 billion, mainly due to reduced sales of fiber optic capacity on its network and Internet equipment. Analysts had expected revenues to be $4.78 billion, according to First Call.

"As with the other RBOCs (regional local telephone companies) reporting thusfar, results were disappointing mostly due to the economy but also wireless substitution," said CS First Boston analyst Dan Reingold.

"It is clear the operating environment in both local and LD (long distance) remains tough given the slow economy and continued competitive pressures in LD," Reingold said.

REVENUES WILL BE AT LOW-END OF GOAL

In a conference call with analysts and reporters, Nacchio said 2002 revenues would be "at, or near, the low end" of the $19.4 billion to $19.8 billion forecast it gave just six weeks ago. Qwest had 2001 revenues of $19.74 billion.

Qwest has seen a sharp and fast decline in its business. As recently as September the company expected 2002 revenue growth in the high single digits. It previously predicted growth of 14 percent to 15 percent.

The expected weakness in revenues could call into question the rest of Qwest's growth targets, analysts said.

Qwest's goal to have 2002 EBITDA (earnings before interest, taxes, depreciation and amortization) of $7.1 billion to $7.3 billion "will be tough to achieve," said Merrill Lynch analyst Adam Quinton.

Qwest said it would tightly control expenses, and futher cut its 2002 capital spending budget to to a range of $4.0 billion to $4.2 billion. That is slightly lower than its previous forecast of $4.2 billion to $4.3 billion, and down sharply from its original spending forecast of $7.5 billion. Qwest's capital spending was $8.54 billion in 2001.

Michael Bowen, an analyst with SoundView Technology Group, said "there may be more cuts in store" as the company tries to control spending and reach its goal of being free-cash-flow positive in the second quarter of 2002 and beyond. Bowen expects Qwest's capital expenditures will be only $3.7 billion for the year.

In addition to cutting expenses, Qwest said it may sell wireless assets, telephone access lines, or its DEX directory publishing business to help cut debt by $1.5 billion to $2 billion. Excluding these sales, Qwest expects to end the year with $24.9 billion in debt.

TELEPHONE LINES DROP, LONG-DISTANCE SALES PLUNGE

During the fourth quarter, local services revenue fell 2 percent. The company said it failed to complete the network installation for two large state contracts and could not book those revenues in the fourth quarter. Sales of long-distance voice and data services plunged 19 percent.

Consumer revenues rose more than 3 percent, or $48 million, compared with the fourth quarter of 2000, with growth in DSL and wireless services, offset by a decline in access lines of 3 percent. Commercial services revenue fell 14 percent due to a decline in sales in optical network capacity Internet equipment sales.

It ended the year with 448,000 high-speed digital subscriber line (DSL) customers, a nearly 74 percent increase from the end of 2000 and slightly above the company's target of 430,000. Nacchio said DSL growth would have been even stronger if it had not faced problems coordinating installations with its Internet partner Microsoft Corp.'s MSN.

Wireless telephone services revenues rose 42 percent from a year earlier to $211 million in the fourth quarter. Qwest added 40,000 wireless subscribers in the fourth quarter, according to analysts, and ended the year with 1.11 million customers, which was in line with Wall Street forecasts.