On Tuesday Feb. 10, 2009, Qwest reported earnings for 4Q08 and full year 2008. The company's results are impressive, given the current economic climate and the associated challenges most businesses face. Among the Qwest highlights in 4Q08 - earnings exceeded analysts' consensus estimate.
As you finalize your assessment of Qwest, particularly its overall ability to serve U.S. operations, the Qwest account team respectfully requests that you factor this very relevant information into your evaluation.
Financial Results: Qwest's Business Markets
- Revenue grew 4 percent year-over-year* and 1 percent sequentially
- Data and Internet revenues grew 9 percent in 4Q08
- Strategic products** make up approximately 2/3 of business revenues (better than peer group)
- Segment income grew $394M in 4Q08, a 9 percent YOY increase and 7 percent sequentially
- 4Q08 segment margin improved 150 basis points to 37.5 percent year-over-year;
- 37.5 percent segment margin represents sequential improvement of 220 basis points
- Thirty-nine percent of federal government RFPs and Statements of Work decided in 2008 were awarded to Qwest
* The services proposed by Qwest are the same services fueling Qwest's nationwide revenue growth.
** Qwest Business Markets unit outperformed (revenue growth) AT&T, VZ and Level 3 in 4Q08.
2. Corporate Performance
- Income before taxes grew 17 percent in the year-over-year quarter and 66 percent in 2008
- Adjusted Free Cash Flow was $593M in 4Q08; $1.44B in all of 2008
- Adjusted EBITDA was $1.14B, up 4 percent year-over-year and 9 percent sequential growth
- Adjusted Free Cash Flow was $593M in 4Q08; Adjusted FCF in 2008 was $1.44B
- 2008 Net Income was $681M; 4Q08 Net Income was $185M*
* The 49 percent year-over-year (4Q08 to 4Q07) decline in net income reflects an increased tax expense in 4Q08 as the company began recording income tax at normal effective rates beginning in 2008. Due to the company's net operating losses (NOLs), Qwest does not generally pay income taxes until the NOLs are used.
** The 77 percent decline in full-year comparisons reflects the recording of income tax at normal effective rates beginning in 2008 AND a one-time tax benefit of $2.1 billion in 2007 as Qwest was able to reverse the valuation allowance against the majority of our deferred tax assets, including NOLs.
3. Qwest's Strong Financial Picture:
- Cash Position Is Solid
- Cash and cash equivalents totalled $565M in 4Q08
- Adjusted Free Cash Flow in 4Q08 was $593M; $1.44M for the full year 2008
- Qwest paid four dividends in 2008 ($560M), further demonstrating the company's overall confidence in its ability to perform
- Manageable Debt Maturity Profile
- Investment grade treatment for the majority of debt
- Removed $420M in debt from Balance Sheet in 4Q08; $600M in all of 2008
- Prepaid $250M in 2009 debt maturities
- As of 4Q08, total debt was $13.7B; Total Net Debt dropped to $13B
- Cash on hand, solid Free Cash Flow and an $850M undrawn revolver are sufficient to cover Qwest's upcoming debt obligations
- Debt ratio improved to 2.9 from 3.0; proof that Qwest is managing debt effectively
4. Other Relevant Information To Consider
- Industry analysts assert enterprise customers desperately want service provider options beyond AT&T and VZ
- Gartner analyst Ted Chamberlin welcomes a call* from anyone at to discuss Qwest's ability to serve as primary U.S. carrier
- Significant growth in Qwest's flagship iQ Networking (MPLS) services
- Qwest is taking share from its competitors
- Positive customer experiences differentiate Qwest in the business market
- 2008 customer references grew 92 percent; video customer testimonials grew 257 percent!
- Qwest is the national service provider alternative to T and VZ
Summary
The strength of the financial results reported on Feb. 10, 2009 compelled the Qwest account team to share this information with as quickly as possible. We trust you will agree Qwest's 4Q08 results are impressive, given the current state of the U.S. and global economies. Moreover, considering the major telecom service providers that reported 4Q08 earnings, only Qwest reported revenue growth from its business market operations. We urge the management team to examine Qwest's Business Markets results and the reasons for that growth (which appear above). We are confident you will find the Qwest story even more compelling. To that end, this performance overview provides ample justification as to Qwest's ability to serve current and future networking needs in the U.S.