Qwest CEO on the Defensive in Call with Analysts

The biggest change announced by Mueller in Qwest’s Q3 financials call was that Qwest will spend $200 million on fiber to the node this year, a slight rise in fiber buildout spending. Next year spending will hit $300 million, allowing Qwest to serve 1.5 million more homes with Internet speeds of up to 20 Mbps. Qwest said capital spending this year remains at the same level as 2006 -- $1.6 billion. Qwest hasn’t announced 2008 capital spending.

Qwest’s low share price “reflects a greater level of uncertainty on where the business is going than there’s probably been in a year, even when there wasn’t a CEO here,” said David Barden, a Bank of America analyst during Tuesday’s call. “It seems to be in part driven by the fact that there’s the strategic review, which is kind of coming at the end of the year.” Barden noted that Mueller, formerly CEO of retailer Williams-Sonoma, is the only new top executive at Qwest, with Notebaert’s team still in place. “There’s a question of what are you attempting to bring to the table that’s so significant that it’s worth kind of taking this six-month period to not talk to the market and go into a review mode and reassess everything that the business is doing,” he said.

“I am the only new guy here, I guess that’s true -- however, I think it’s prudent,” Mueller responded. “We were at a plateau… I get the uncertainty. I appreciate that. But I think I'd rather live with uncertainty and then give a strategic review time to go… We have a good management team here. They're not going off and doing something crazy. I'm not sending them in different directions.”

At call’s end, Mueller repeated that he understood the “frustration” he sensed in some analysts’ questions. “I get that you'd like us, or me personally, to give you more answers,” he said. “I'm holding [off] till the end of the year. I appreciate your patience. I do think this is the right way to go.”

Mueller played down the fiber buildout announcement’s significance, saying it doesn’t reflect a strategy change. “I don’t think that the fiber to the node announcement really is different than anything than we've been doing, other than we escalated it a bit,” he said. “We have invested $70 to $100 million this year [in fiber]. We squeezed our capital program to put into the new product.”

Qwest reported net income of $2.07 billion for the quarter, compared with $194 million a year earlier. But the increase arose from two large one-time items, both of which Mueller called good news for investors. The company reported a tax benefit of $2.15 billion, but also paid $353 million to settle remaining opt-out shareholder litigation. “Putting this uncertainty behind us is a significant milestone for Qwest,” Mueller said. Without the one-time items, earnings would have been $269 million.

Revenue was down slightly to $3.43 billion from $3.49 billion. Qwest said the drop resulted from declining revenue in its wholesale business. Total phone lines fell 7.2 percent. Unlike fellow Bells Verizon and AT&T, Qwest has no wireless affiliate to insulate it against line loss. Qwest said it is liquid, with about $1.1 billion cash on hand, and has completed 62 percent of its two-year, $2 billion share buyback program.

Mueller said Qwest will decide in its strategic review whether to restore a shareholder dividend. Analysts expected a decision as early as this month. “We think that a shareholder return strategy follows our strategic review and we will have that later,” he said.