|Unaudited (in millions, except per share amounts)|
|Q1 2006||Q4 2005||Seq. Change||Q1 2005||Y over Y Change|
|Net Income (Loss)||88||(528)||nm||57||54.4%|
- Positive Earnings Per Share
- Adjusted EBITDA Margin Advances to 30.7 Percenta
- Fourth Consecutive Quarter of Year-Over-Year Revenue Improvement
- Free Cash Flowa — Before Anticipated, One Time — Items On Track
DENVER, May 3, 2006 Qwest Communications International Inc. (NYSE: Q) today reported solid first quarter results highlighted by positive earnings per share, revenue growth, and continued margin expansion. For the quarter, Qwest reported earnings of $88 million, or $0.05 per fully diluted share, compared with $57 million, or $0.03 per share in the first quarter 2005, which included a $257 million, or $0.14 per share, gain on the sale of wireless assets.
“Qwest has started the year with strong momentum, posting both solid operating and financial performance for the first quarter and achieving important operating milestones resulting in positive earnings per share,” said Richard C. Notebaert, Qwest chairman and CEO.
Qwest's first quarter revenue of $3.5 billion increased 0.8 percent compared to the first quarter a year ago. Revenue trends improved as a result of strong sales within Qwest's portfolio of mass market bundles and growth products, including high-speed Internet, advanced data products, long distance and wireless.
"Revenue growth, improved ARPU and continued cost containment have resulted in a 200 basis point improvement first quarter over first quarter in our adjusted EBITDA moving the margin to 31 percent," said Oren G. Shaffer, Qwest vice chairman and CFO.
Qwest's operating expenses declined 4 percent to $3.1 billion for the first quarter of 2006 over the first quarter of 2005 as a result of improvement in productivity and operating efficiencies, optimization initiatives in facility costs and lower depreciation.
Capital Spending, Cash Flow and Interest
First quarter capital expenditures totaled $390 million, compared to $313 million in the first quarter of 2005, with a continued increase in the proportion spent on broadband, enabling higher speeds and footprint expansion. Capital spending in 2006 is expected to be at or slightly above 2005 levels as the company continues to focus in a disciplined fashion on investment in key growth areas and to support the highest service levels.
Free cash flow benefited from improved operating results, offset by anticipated seasonal and one-time items in the quarter. Cash generated from operations was $140 million in the first quarter, which includes a one-time previously announced payment of $100 million for shareholder litigation, as well as $250 million related to employee bonuses and payroll timing. Qwest continues to expect to grow free cash flow by an incremental $450 to $600 million in 2006 (before one-time payments), benefiting primarily from improved operating results and reduced interest expense.
Interest expense totaled $296 million for the first quarter compared to $381 million in the year-ago quarter. As a result of successfully tendering for and retiring high coupon legacy debt in the fourth quarter of last year, interest expense is expected to be reduced by approximately $300 million in 2006.
Balance Sheet Update
The company ended the quarter with total debt of $15.4 billion, a decline of $1.9 billion compared with the first quarter a year ago, and $740 million in cash and short-term investments.
Qwest's improved revenue trends included operational progress in the following key growth areas:
Qwest's customer connections – which include consumer and small-business primary and secondary access lines, high-speed Internet subscribers, wireless and video customers – grew 253,000 from the year-ago quarter, marking the third sequential quarterly increase. Customer connections were up over 330,000 since new bundling and localized sales initiatives began in May 2005.
Total retail line losses improved to a decline of 4.2 percent year-over-year, compared to a decline of 5.3 percent a year ago, excluding 53,000 UUnet and affiliate disconnects in the prior year. Continued and anticipated pressure from the decline in the number of access lines resold by Qwest's competitors offset the improvement. As a result, total switched access lines declined 4.8 percent from a year ago, excluding the disconnects referenced above.
Qwest maintained its leadership role in working with wholesale customers by signing commercially negotiated agreements on the company's Qwest Platform Plus contracts. However, wholesale line losses continued from competitive pressures and technology substitution.
Growing demand for Qwest High-Speed Internet was a highlight for the quarter. The company added 198,000 high-speed Internet lines in the first quarter, which includes 18,000 subscribers added in previous periods but not recognized in prior subscriber counts. The company benefited from strong demand, particularly in the conversion of customers from dialup to broadband, as well as reduced churn. These record net additions brings the total subscribers to 1.7 million – a 13 percent increase sequentially and a 50 percent increase year-over-year. The company's mass markets data and Internet revenues increased 11 percent sequentially and 34 percent year-over-year. The company sees a significant potential revenue opportunity by increasing the current broadband penetration to industry benchmark levels.
Qwest continued to invest in its high-speed Internet footprint, as well as increase the speeds available to customers. Currently, 78 percent of Qwest's households are eligible for broadband services, up from approximately 67 percent at the end of 2004. About 98 percent of qualified households are able to purchase broadband speeds of 1.5 Mbps or greater and more than 50 percent are able to purchase service at speeds in excess of 3.0 Mbps. In addition to its focus on availability and speeds, Qwest was able to increase retention by devoting attention to the customer service and support experience.
In the quarter, Qwest announced a new home and small-business modem-based wireless networking solution that included availability of extended around-the-clock customer support and service. The solution delivers customers a second layer of security, as well as a selection of applications, including remote access and content control options.
Qwest has been rewarded for its aggressive focus on bundle packaging and sales. Since the launch of new bundles a year ago, followed by targeted incentives and promotional initiatives, the company has significantly increased the number of products available in its bundled offerings. Sales of voice packages plus three products are up over 100 percent, and sales of packages plus four products are up nearly seven times since launch. Customer demand for value-added services has contributed to increased consumer average monthly revenue per wireline customer by 6 percent to $49 from $46 a year ago.
Qwest's full-featured bundled offering includes high-speed Internet access, a national wireless offering, local and long-distance service and integrated TV services through Qwest's own ChoiceTV or its marketing alliance with DIRECTV, Inc. The company's bundle penetration increased to 53 percent in the quarter, compared to 47 percent a year ago.
Long-distance penetration of total retail lines increased to 38 percent in the first quarter, compared to 34 percent a year ago. Qwest increased total long-distance lines by 46,000 in the quarter. The company ended the quarter with more than 4.8 million long-distance lines, a 5 percent increase over a year ago.
Wireless revenue grew 10 percent compared to the prior year as a result of promotions and successful bundling efforts. Qwest saw the fourth sequential quarter of growth in its wireless subscribers. The company's subscriber base grew by 14,000 in the quarter, bringing total wireless subscribers to 784,000. The company continues to benefit from wireless in the bundle with approximately 75 percent of wireless subscribers on an integrated bill with at least one other service. This has contributed to significantly lower churn this year.
Qwest's data and enhanced features are driving higher wireless ARPU, which increased 9 percent to $50 from $46 a year ago. The company continues to focus on adding wireless data subscribers and approximately 50 percent of new customers sign up for a data service.
Customer net additions for DIRECTV service grew 33 percent in the first quarter. Qwest and DIRECTV's strategic relationship allows Qwest to offer DIRECTV digital satellite television services to residential customers across the Western United States.
Enterprise and Wholesale
Revenues from Qwest's enterprise channel, which includes business and government customers, increased 3.3 percent over last year's results – a benefit of continued growth in data and IP sales. In the quarter, Qwest announced new or expanded networking and voice and data agreements with NASA, Allina Hospitals and Clinics and the State of Wyoming.
Qwest is pleased the industry analyst community is beginning to recognize the company's progress. In the Forrester Research 2005 North American MPLS Services Wave Report (Feb. 14, 2006), Forrester analysts highlighted Qwest's revenue and customer growth, and gave Qwest its top ranking in overall MPLS strategy.
Qwest continued to advance its MPLS-based networking capabilities into the marketplace with news that it would offer to its wholesale customers Qwest IP SolutionsTM – a wide-area networking solution that simplifies complex data communications.