Qwest Reports Fourth Quarter and Full Year 2009 Results Fourth Quarter and Full Year Highlights
- Full year adjusted free cash flow of $1.9 billion, up 34% from prior year(a)
- Full year adjusted EBITDA of $4.4 billion
- Adjusted EBITDA margin of 36.2% in the fourth quarter on strong contributions from each segment; margin improves 220 basis points for the full year
- Fourth quarter strategic revenue growth of 4% driven by demand for enterprise IP and mass markets broadband services
- Completed successful migration to wireless reseller model
- Strengthened balance sheet and improved financial flexibility
Qwest Communications (NYSE: Q) today reported financial results for the fourth quarter and full year 2009. In the quarter, the company reported solid growth in business and consumer data services, continued to produce strong cash flows and made significant progress on key initiatives.
In the fourth quarter, net income was $108 million. Earnings per share were 6 cents compared to 10 cents in the fourth quarter 2008. The current quarter’s earnings per share results include a 2 cent charge for severance cost. Results in the prior-year period include a 1 cent charge for severance. Full year 2009 earnings per share were 38 cents compared to 37 cents in 2008. Full year 2008 earnings per share results include 3 cents of net one-time charges. One-time items had a net neutral impact on 2009 full year results.
Fourth quarter consolidated net operating revenues declined 10 percent compared to the fourth quarter 2008. After excluding the effects of the company’s transition to a new wireless business model, revenue declined 7 percent year over year. Reported net operating revenues declined 2 percent sequentially from the third quarter and declined 1 percent sequentially after adjusting for the change in the wireless business model. Full year 2009 revenues declined 9 percent on a reported basis and decreased 6 percent after adjusting for the change in the wireless business model.
Adjusted EBITDA for the quarter was $1.09 billion compared to $1.18 billion in the fourth quarter 2008. The current quarter’s results include $44 million of incremental non-cash pension and OPEB expenses compared to the fourth quarter 2008. Full year adjusted EBITDA was $4.4 billion compared to $4.5 billion in 2008. After eliminating the impacts of an incremental $210 million in non-cash pension and OPEB expense in 2009, adjusted EBITDA increased 2 percent compared to full year 2008.
The adjusted EBITDA margin was 36.2 percent in the quarter, an improvement of 60 basis points compared to the fourth quarter 2008 and a 40 basis point sequential improvement. Full year 2009 adjusted EBITDA margin of 35.9 percent is a 220 basis point improvement from 2008. Excluding the impacts of incremental non-cash pension related expenses, full year consolidated margin improved 390 basis points.
In the fourth quarter, adjusted free cash flow was $506 million. Full year adjusted free cash flow totaled $1.93 billion compared to $1.44 billion in 2008. The increase in adjusted free cash flow in 2009 was due to both higher cash from operating activities and lower capital expenditures. Full year adjusted free cash flow performance in 2009 was at its highest level since Qwest’s merger with U S WEST in 2000.
Qwest continued to make strong progress on key initiatives in the fourth quarter. The Business Markets segment again reported strong growth in IP services revenues. The company completed a successful migration of its wireless services from the Sprint network to the Verizon Wireless platform, finishing the quarter with nearly 850,000 wireless users. Qwest continued to aggressively deploy fiber to the node (FTTN) capabilities in the quarter, and services are now available to more than 3.5 million residential households. In the quarter, 80,000 customers added high speed Internet services that utilize the fiber network. The company made good progress on retention efforts in the consumer market in the quarter with the absolute number of access line losses at their lowest level in two years. In the fourth quarter, Qwest also signed contracts to deliver fiber-based backhaul services for wireless companies. In total, the company has nearly 2,000 cell sites under contract with most of these expected to be built out in 2010.
“In the quarter, we continued to create innovative approaches to drive efficiency and perfect the customer experience” said Edward A. Mueller, Qwest chairman and CEO. “Throughout 2009, the Qwest team stood up to the challenges of a tough economy and highly competitive markets to deliver value for our shareholders. In particular, we did an excellent job of generating cash flows and strengthening the balance sheet. In 2010, our goal is to continue to excel in these areas while adding improved revenue performance to our list of achievements. We continue to be optimistic about our prospects in the coming year.”
CONSOLIDATED FINANCIAL RESULTS
Revenue
Qwest reported consolidated net operating revenue of $3.0 billion in the fourth quarter. Total strategic services revenue of $1.1 billion increased 4 percent year over year, driven by 7 percent growth in Business Markets and a 4 percent increase in Mass Markets. Legacy services revenue of $1.7 billion decreased 13 percent annually. The decline in legacy services is due to lower demand for voice services, efforts to improve wholesale profitability and customer transitions to newer generation data services.
Expense
Consolidated operating expenses in the quarter were $2.5 billion, a decrease of 8 percent year over year. Cost of sales declined 10 percent due to lower volumes, a reduced workforce and the wireless migration. Selling expense declined 17 percent mainly because of reduced marketing spend, a reduction in workforce and lower bad debt expense. Reported general, administrative and other operating expenses were flat in the quarter. However, these expenses improved 14 percent after adjusting for the impacts of higher severance charges and increased pension and OPEB expense. Sequentially, operating expenses declined 1 percent as lower channel expenses were offset by increased severance costs. Total employees at the end of the period were approximately 30,100, down 4 percent from the third quarter and 8 percent from the end of 2008.
Net Income
Net income for the fourth quarter was $108 million, a 39 percent decline from the year-ago period. The decline is due to lower operating income, driven by lower revenues and increased interest expense, which were partially offset by lower expenses. Approximately two-thirds of the decline is related to increased non-cash pension expense and higher severance charges. Net income declined $28 million sequentially in the fourth quarter primarily due to increased severance.
SEGMENT FINANCIAL RESULTS
Business Markets
Business Markets produced top-line performance that again led its major peers and delivered a solid profit contribution in the quarter. Qwest’s success in the enterprise space continues to be driven by a strong mix of data and IP services, a diverse customer mix and differentiated user support.
Business Markets reported total revenues of $1.03 billion, a 2 percent drop from the fourth quarter 2008 and a 1 percent sequential decline. Total recurring service revenue decreased 1 percent from the year-ago period and was flat with the third quarter. Strategic revenue growth of 7 percent was driven by 24 percent growth in IP services. Legacy services declined 8 percent year over year.
The segment income contribution from Business Markets increased 3 percent year over year but declined 1 percent from the third quarter. Segment income margin of 39.5 percent improved 200 basis points from a year ago. The margin improvement is mainly due to improved channel expense efficiencies.
Mass Markets
In the quarter, Qwest achieved some early success from its move to a more localized go-to-market approach. This included continued success in selling bundled service offerings, improving access line retention and additional cost efficiencies. However, wireless substitution, increased unemployment, low business formation and soft housing trends in Qwest’s 14-state region continued to impact voice revenues.
Mass Markets segment revenues of $1.20 billion declined 13 percent from the fourth quarter 2008 on a reported basis. Revenues declined 7 percent after normalizing for the wireless business model transition. Strategic revenues grew 4 percent year over year while legacy revenues decreased 11 percent due to continued line losses. Sequentially, revenue declined 2 percent on a reported basis and declined 1 percent after adjusting for wireless.
Segment income for the quarter declined 7 percent compared to the year-ago period but improved 2 percent from the third quarter. Expenses were down 20 percent from the year-ago period and 7 percent sequentially. The year-over-year improvement was mainly due to lower sales and marketing expenses and lower wireless costs. The sequential improvement is primarily related to lower sales and marketing costs. Segment income margin percentage improved 360 basis points compared to the year-ago quarter.
Total net broadband subscribers increased by 23,000 in the quarter, bringing total subscribers to nearly 3 million. Once again, demand within the FTTN footprint fueled subscriber growth. Total FTTN subscribers reached 420,000, or 14 percent of Qwest’s total high-speed Internet customers.
Total wireless subscribers at the end of the quarter were 850,000, up 64,000 from the end of the third quarter. Qwest concluded MVNO services on Oct. 31, 2009.
Qwest added 23,000 DIRECTV subscribers in the quarter. This was offset by the elimination of 5,000 Qwest legacy video customers. At the end of the period, approximately 15 percent of Qwest’s primary access line customers were subscribing to DIRECTV services.
Wholesale Markets
Wholesale Markets top-line continued to be impacted by industry facility consolidation efforts and access line trends that are pressuring demand. In the quarter, Wholesale achieved segment margin improvement and reported a sequential gain in strategic revenues.
Segment revenue of $679 million declined 14 percent compared to the prior year mainly due to lower long-distance revenue. Sequentially, revenue decreased $21 million, or 3 percent.
Wholesale segment income declined $40 million, or 8 percent, from the fourth quarter 2008 and declined 3 percent from the third quarter. Reduced facility costs and lower channel expenses partially offset the lower revenues. Wholesale segment income margin percentage improved 410 basis points year over year, mainly due to an improved revenue mix.
Cash Flow and Capital Investment
Adjusted free cash flow was $506 million for the quarter and $1.93 billion for the full year 2009. Improved cash from operating activities and lower capital expenditures contributed to the strong free cash flow results.
Capital expenditures for the quarter were $386 million bringing the total for 2009 to $1.4 billion. In addition, the company leased capital equipment in 2009 with a value of approximately $107 million. Lower network volumes, reduced customer demand and unit purchasing costs, and fewer housing starts contributed to lower capital spending throughout the year.
Balance Sheet
In the quarter, the company continued to strengthen its balance sheet. In total, Qwest reduced its net debt by $1.2 billion in 2009. Net debt was $11.8 billion at the end of the quarter compared to $12.1 billion at the end of the third quarter and $13.0 billion at the end of 2008. Overall cash and cash equivalent balances increased to $2.4 billion from $2.1 billion at the end of the third quarter. The company’s net debt-to-adjusted EBITDA leverage ratio was 2.7 times, which is equal to the third quarter but an improvement from 2.9 times at the end of 2008.
In early January 2010, the company successfully issued $800 million of debt at the parent company at a coupon rate of 7.125 percent. The company currently plans to redeem all debt maturing over the next twelve months and may call the Convertible Senior Notes due 2025. In addition, the company has called for the early redemption of $525 million of notes that were scheduled to mature in February 2011.
Shareholder Returns
Qwest returned $138 million to shareholders in the fourth quarter through a dividend of 8 cents per share. On Dec. 16, Qwest’s board of directors approved the payment of a first quarter dividend of 8 cents per share. The dividend will be paid on March 12, 2010, to shareholders of record as of Feb. 19, 2010. This marks Qwest’s ninth consecutive quarterly dividend.
Guidance
Qwest expects to report improving revenue comparisons over the course of 2010 with the year-over-year decline improving to a low- to mid-single digit rate by the fourth quarter. Qwest expects to achieve full year 2010 adjusted EBITDA in a range of $4.3 to $4.4 billion. In 2010, Qwest expects full year pension and post-retirement benefit expenses to be approximately $130 million, a decline of approximately $70 million from 2009 levels. The outlook for full year 2010 capital investments is $1.7 billion or lower. The company may continue to use lease financing in 2010 for some of its capital investments. Full year adjusted free cash flow is expected to be $1.5 to $1.6 billion.
Conference Call Today
As previously announced, Qwest will host a conference call for investors and the media today at 9 a.m. EST. A live webcast, including a simultaneous slide presentation, and replay of the call is available at www.qwest.com/about/investor/events. Additional quarterly historical financial information can be found at www.qwest.com/about/investors/financial/index.
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