Qwest, on Profit Drop, Focuses on Wireless, FTTN

Qwest Communications International Inc. will “take advantage” of nationwide open-access initiatives through its new partnership with Verizon Wireless.

“We’re really excited” about offering open access devices and applications, and 4G technologies, to subscribers, Chairman and CEO Ed Mueller told analysts during Qwest’s first-quarter earnings call on Tuesday. The five-year deal “is just one more good thing for Qwest,” he added.

The Denver-based carrier said on Monday – a day before announcing lackluster earnings – that it was dumping its wireless contract with Sprint Nextel Corp. in favor of Verizon Wireless. On Tuesday, Mueller (pronounced “Miller”) said open access was one reason why Qwest has opted to sell services from the nation’s second-largest cellco. The biggest reason was money. “The economics are much, much better,” said Mueller. Plus, he noted, “We like the attitude of Verizon, we like their openness.”

Verizon Wireless declared last November that it would open its network to third-party devices, applications and software – with certain restrictions, of course. The move was a shock considering the company’s initial fight to block an open-access mandate in the 700MHz spectrum auction, as well as continued, vehement opposition to net neutrality efforts. Open-access developments are underway.

Qwest’s agreement with Sprint expires next February. However, Qwest will start selling Verizon Wireless services and devices beginning this summer. Subscribers can migrate as they please, Mueller said.

To be sure, the timing of the Qwest-Verizon Wireless announcement looked like an attempt to downplay Qwest’s first-quarter earnings results, which were not good. The company on Tuesday reported a 35 percent drop in profit, falling from $240 million in the year-ago period to $157 million. Net income throughout 2008 also won’t compare to 2007’s numbers, said CFO John Richardson.

Sales slumped in the first quarter, too. Revenue declined 1.4 percent to $3.4 billion, down from $3.45 billion one year earlier. The problems stemmed from industry consolidation and wholesale long-distance pricing pressure, Qwest said. Landline losses also kept hitting the carrier. Access lines dropped 9.7 percent in the residential market, compared to 9.1 percent in the fourth quarter of 2007; they were down 5.1 percent in the enterprise market, compared to 4.7 percent in the fourth quarter of 2007.

Investors’ confidence faltered on the news – stocks were trading 30 cents lower, at $5.06, in the early afternoon, nearing the 52-week low of $4.38.

It didn’t help that Tuesday’s call with analysts “was scarce on much new info,” according to a client memo issued by Donna Jaegers, director of research for Janco Partners.

“Mueller is harder to pin down than Greenspan,” Jaegers wrote on May 6. “I think Qwest will revisit its recent price lows until they can show more progress on taking share in the enterprise market.”

Indeed, Mueller is counting on the federal government’s Networx contracts and Qwest’s out-of-region focus to bolster the enterprise, or business markets, division. Activity from Networx has been slow, he said, “but we think the logjam has finally broken loose.”

Networx is the $20 billion federal initiative to update agencies’ networks and capabilities. Qualified bidders were named a year ago and only now are agencies choosing which companies they want to handle the upgrades.

Meanwhile, like its counterparts, Qwest’s wholesale unit floundered somewhat. Income fell 2 percent and sales were down 7 percent, but Mueller said he is encouraged by progress in that branch. For example, data and Internet sales rose 3 percent.

“This is really cooking well,” said Mueller.

There’s still room for improvement. The mass markets unit struggled as voice and wireless declines offset gains of 20.7 percent from residential data, Internet and video sales. Qwest is hoping its $300 million FTTN build-out will help the rest of the year’s financials; Mueller said the company already is seeing results – Qwest added 90,000 net DSL subscribers in the first quarter, 13,000 of whom signed up for the FTTN services. But Jaegers called those totals “anemic,” because they were less than the fourth quarter’s 167,000 DSL net adds.

Meanwhile, Qwest is talking about raising prices and, like its rivals, is dealing with a weakening economy. Consumers will want to keep an eye on their bills – Mueller said price hikes are in the works.

“We believe there is room in the market and where we can, we’re taking them,” he told analysts.

CFO Richardson further said the slowing economy has had little effect on Qwest. Bad debt writeoffs remain in line with third- and fourth-quarter 2007 percentages, he said.

“Our goal is to work through the challenging economic environment that exists nationwide,” Richardson said.

Qwest likely will take more economy and price-increase questions on May 22, when it holds its annual stockholder meeting in Denver.

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