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Qwest earnings ring in healthy growth

In its first quarter since absorbing US West, the company posts a profit topping Wall Street expectations, buoyed by strong growth for data and Internet services.

In its first quarter since acquiring local-phone giant US West, Qwest Communications International posted a profit that topped Wall Street expectations Tuesday, buoyed by strong growth for commercial--particularly data and Internet--services.

Stock price from October 1999 to present.  
 Source: Prophet Finance
Excluding one-time, merger-related items, Qwest reported net income for the third quarter, ended Sept. 30, of $231 million, or 14 cents a share. It posted profits of $195 million, or 12 cents per share, for the comparable year-ago quarter.

Analysts expected the company to earn 9 cents a share, according to a consensus compiled by First Call/Thomson Financial.

Quarterly revenue grew by more than 12 percent to nearly $4.8 billion from more than $4.2 billion a year ago. Those numbers met or exceeded most analysts' expectations, no small task considering that Qwest has been in the process of integrating US West since closing that acquisition June 30.

As expected, Qwest, which offers long-distance and local voice service as well as Web hosting and other Internet services for businesses and consumers, also cut 4,500 jobs during the quarter.

"I'm proud of the Qwest team for producing these results while in the middle of a complex merger," Qwest chief executive Joe Nacchio said in a statement. "Our results for the quarter reflect Qwest's continued execution and ability to exploit revenue opportunities in key sectors of our industry."

Qwest continued to show strong demand for its Internet and data services and opened five new CyberCenter data hosting facilities during the quarter. Internet and data revenues grew by more than 50 percent and account for nearly 23 percent of total revenue and about two-thirds of revenue growth, the company said.

Analysts were watching the revenue growth numbers closely for signs of how hard the merger with US West, a traditional Baby Bell local-phone provider, would put on the brakes at Qwest. The company's 12 percent year-over-year revenue growth declined from 18 percent last quarter, but the strong data and Internet businesses should pacify many analysts.

"Qwest is clearly following the industry trend of moving away from low-margin voice offerings and targeting the much more lucrative data services," according to a recent Goldman Sachs research report. "Qwest had used voice to get a 'foot in the door' with new customers in the past but now is leading with their extensive data and (Internet) offerings."

Other analysts also believed the third quarter would provide critical clues into the new company and were confident about the outcome. Investment banks Banc of America Securities and Credit Suisse First Boston reiterated "strong buy" ratings last week and set price targets of $69 and $68, respectively.

Banc of America Securities analyst Andrew Hamerling in a research report indicated that Qwest could "substantially exceed Street expectations" because the company's executive management may have provided Wall Street with conservative guidance during the merger.

Qwest shares, which closed Monday at $45.38, have traded as high as $66.81 and as low as $41.75 in the past year. But stock in the company has not been pounded nearly as hard as that of AT&T, WorldCom and other, smaller communications providers, as investors worry about their long-distance profits and slowing capital investment markets.

Qwest also worked quickly to reduce expenses by cutting 4,500 jobs three months ahead of schedule. The company plans to trim 11,000 workers from the payroll by the end of next year, part of Nacchio's plan to "right-size" the company and change the corporate culture.

The company said its profit margins increased, and Qwest executives believe the company remains on track for revenue of $18.8 billion to $19.1 billion this year. Qwest raised its revenue targets and outlined other plans for combining with US West during a conference call last month.