Qwest Seeking Wireless Partner to Build Market Share
A wireless partnership and broadband expansion could slow access line loss, CEO Ed Mueller told investors as the Bell released Q4 results Tuesday. In Q4, retail access lines declined 6.5 percent year-over-year to 11.5 million. That’s “arguably one of the worst rates of decline in the industry,” Bear Stearns analyst Mike McCormack said during a Q4 conference call. The Q4 loss is “more of the same” for Qwest, Mueller said. The slowing economy had “some impact,” but cable competition hasn’t increased, he said.
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Qwest is “working really hard” to get a wireless partner, Mueller said. The company has “much to do in wireless” and “will be assessing every avenue,” Mueller said. “We need a partner not only for voice, but for data and broadband data.” Qwest has a joint venture with Sprint Nextel, but “will be looking at everybody including Sprint” so it can move “right up front with everybody else” in wireless, he said.
Mueller “sounded fairly unhappy” with Sprint, Janco analyst Donna Jaegers said afterward. The executive might feel that Sprint doesn’t have the “latest and greatest data products,” she said. Sprint doesn’t have a strong business position and Qwest could use leverage to sign a favorable wireless deal, she said, but it might also look to partner with Verizon or AT&T, which have comparable and in some areas better coverage than Sprint.
Qwest revenue dropped 1.5 percent year-over-year to $3.4 billion in the fourth quarter, but cost savings drove net income up 88.7 percent to $366 million. “We experienced revenue and volume declines in our wholesale channel, and a tough December in retail,” Mueller said. Continued industry consolidation had the most adverse impact on wholesale, while a worsening housing market hurt retail, he said. Not including litigation costs, Qwest reduced full-year capital spending $739 million from 2006. Qwest cut 4 percent of its employees in 2007, ending the year with 37,000, said John Richardson, chief financial officer. It also trimmed employee benefits, he said. More staff reductions are planned for 2008, he said.
Broadband and video subscriber growth, increased average revenue per user and higher bundle penetration offset access line loss, Mueller said. Data, Internet and video revenue comprised 39 percent of total Qwest revenue, the Bell said, growing 8.7 percent year-over-year to $1.33 billion. In Q4, Qwest added 95,000 net broadband subscribers and 44,000 net DirecTV video subscribers. Qwest expects to cover 1.5 million homes with fiber-to-the-node by year-end, it said.
Bundle penetration was 62 percent in the quarter, a 5 percentage point increase from the same period last year. Customers increasing broadband speeds and adding more features and services drove ARPU up $4 year-over-year to $55.
It’s unclear whether the economy is hurting Qwest, Mueller said. Qwest saw some softness in its retail business in December, but is unsure if it was economic conditions or competition that drove it, he said: “One month does not make a trend.” Mueller wouldn’t say if the economy was affecting Q1 2008, but noted Qwest is “watching it very closely.” Qwest Q4 results don’t raise concerns about the economy, Bank of America said in a note. “Market fears of a strong business slowdown, which we believe has shown itself in stock performance, appear misplaced.”
A low stock price means Qwest could be an acquisition target, Egan-Jones Ratings said Tuesday. In a year, Qwest share price has slipped about $4.50, the analyst firm said. “The combination of [AT&T] and [BellSouth] increases the probability that [Qwest] will eventually be acquired.” A takeover is “very unlikely,” Jaegers countered. Before he resigned last year, ex-CEO Richard Notebaert tried to get the company acquired, she said: “Nobody wanted to dance.” If a takeover were to happen, T-Mobile parent Deutsche Telekom or France Telecom would most likely be the buyers, she said. But “no one wants to deal with 14 states of regulators,” she said.
Mueller reiterated December comments on a Qwest strategic review completed Q4 (CD Dec 18 p5). Qwest plans to give more details at a Feb. 25 investor day.