Data, Internet Drive Qwest Q2 Results
Qwest earnings shot up, despite stagnant revenue, due to reduced operating expenses and increased data and Internet income, the company said in Q2 results reported Wednesday morning. Exiting CEO Richard Notebaert used Qwest’s Q2 conference call to detail CEO replacement plans, as well as the company’s future selling bundled wireless and video services.
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Qwest reported $3.5 billion in Q2 revenue, down 0.3 percent from last year, but a $127 million reduction in operating costs drove the company’s net income up 110.3 percent year over year to $246 million. Notebaert called Qwest’s $829 million free cash flow “low,” and said there’s much opportunity to grow. For Q3, the company expects modest revenue growth, increased earnings and increased cash flow, said John Richardson, chief financial officer.
Qwest’s data and Internet products drove Q2 revenue, Richardson said. Data and Internet created $1.2 billion, or 36 percent of total revenue, and combined data, Internet and video revenue increased by 11 percent year over year. Qwest’s broadband subscriber base grew to 2.4 million, up 34 percent from last year. Offering “locked-in” rates for broadband has helped much with penetration, Notebaert said. But broadband adds may not be the statistic to watch in the future, he said, predicting customer migration to higher speed packages will soon become more important for providers.
Bundles will continue to be a Qwest emphasis, Notebaert said. Sixty percent of primary access lines were bundles in the second quarter, up 4 percent from last year, Richardson said. Wireless is a big part of the bundle, Notebaert said: “We are in wireless for bundling.” In a move similar to what T-Mobile did with its Hotspot@Home offering, Qwest will release handsets in Q1 2008 that can link to 802.11 Wi-Fi networks in the home, Notebaert said. The Wi-Fi capability will save users 25 percent of their minutes, and the “nomadic” offering “will be a boon to us,” he said.
A Qwest IP-TV service is unlikely, Notebaert said. “Why in the world would you go do that and incur all that expense when you've got YouTube… and you can still do the broadcast model with more HD than anybody else has got with DirecTV?” he said. “I can’t see any logic for us doing it.” Qwest added 66,000 DirecTV subscribers in Q2 and now has 572,000; video penetration hit 8 percent, up 3 percentage points from last year.
Qwest’s business market channel stayed flat since last year, but industry consolidation, new technology and fewer rivals create growth opportunity, Notebaert said. June was a great sales month for the channel, and revenue should grow in Q3, he said. Wholesale stayed flat despite AT&T’s buy of BellSouth, a major Qwest customer, Notebaert said. There would have been “pretty good growth” if not for that migration, he said.
The Qwest board’s search to find a new CEO is on track, Notebaert said. A decision should come “sooner rather than later,” he said, indicating he wouldn’t want the new CEO to come in only a few days before signing off on quarterly results. Notebaert, who announced in June his intention to retire (CD June 12 p7), said he will stay until his replacement is “sitting in [his] office.” Responding to reduced stock performance since his announcement, Notebaert said he was confident that the successor will do right by the company, and that it would show in five years. “I don’t believe I've misled,” he said. The next board meeting is scheduled for mid-August.
“No meaningful changes” have yet come from the Qwest forbearance petition approved by the FCC last February to let Qwest combine its long distance and local operations without triggering tariff filing and other “dominant carrier” rules (CD Feb 22 p4), Richardson said. Qwest expects to see “real effects” in 2008, he said.