Qwest heading in a profitable direction

The new-age network firm is finally starting to see profits overtake the huge costs of constructing its new high-speed national phone network.

John Borland Staff Writer, CNET News.com
John Borland
covers the intersection of digital entertainment and broadband.
John Borland
3 min read
Qwest Communications International is finally starting to see profits overtake the huge costs of constructing its new high-speed national phone network.

The company reported earnings in the black for the first time today, boosted by a combination of rising demand for See special report: When worlds collide its own high-speed data and voice services, as well as benefits from last year's acquisitions.

As one of the most aggressive of the new network firms, Qwest has spent billions of dollars in building out a national high-speed fiber optic network, and in acquiring other U.S. long distance phone companies and Internet service providers.

It's now close to finishing construction on its planned 18,500-mile network. The company has about 15,000 miles currently in operation, with another 2,000 miles of fiber optic cable laid, and says it is on schedule to complete the entire network by mid-year.

When it completes its network, Qwest will have placed itself in an ideal position to serve older telephone companies looking for new long distance and data capacity, or even provide the core of their long distance strategy.

Nevertheless, perhaps as much as half of the company's revenues still come from last year's acquisition of LCI International, analysts say.

That long distance company, which had been in operation for nearly five years when it merged with Qwest in 1998, posted close to $450 million in revenue for the first quarter of last year.

"Even if the LCI revenue base didn't diminish at all, that's clearly more than half [of Qwest's earnings]," said Tom Friedeberg, a financial analyst with Janco Partners.

Sharing the wires Qwest's posted $878 million in revenue last quarter, with more than $140 million coming from the sale, construction, or lease of its fiber-optic networks to other companies.

But Qwest's highly touted high-speed network is finally beginning to pay dividends. The company said that revenue from data transport and Internet services rose 23 percent from last quarter, representing 17 percent of the company's total earnings.

Analysts say cash flow will continue to grow steeply as initiatives like its Q.Commerce virtual Web storefront venture is embraced by the marketplace.

The company has already sold or leased millions of dollars worth of "dark fiber"--extra fiber optic capacity laid but not "lit" with traffic--to companies like GTE and MCI WorldCom.

And this week, BellSouth agreed to buy 10 percent of the company, with plans to use Qwest's network as the cornerstone of its long distance strategy once regulators allow it into the lucrative markets.

In the meantime, analysts say Qwest's revenues will continue to climb as it completes its network and is able to reduce its dependence on outside companies' cables.

Nationsbanc Montgomery Securities analyst Henry Woo said he expects the company to hit $3.7 billion in total revenue for the year, and see gross margins climb to close to 50 percent.

Qwest's stock was up more than five points to $95.75 today. That gave the company a market capitalization of more than $33 billion, or more than US West, the smallest of the big Baby Bell local phone companies.