Qwest Communications International Inc's first-quarter profit nearly tripled, beating market expectations, as the phone company cut costs and gained high-speed Internet subscribers. The stock rose more than 2 percent on the results.
But some analysts said weak sales figures showed Qwest's long-term growth prospects were still limited, particularly since the company had not invested in wireless and video businesses.
"Cost control was the main driver," said Donna Jaegers, an analyst at Janco Partners Inc Jaegers noted, however, that the cost cuts were not accompanied by sales growth. "You can't keep shrinking to nothing ... It could be more balanced if they could grow revenue," she said.
Qwest, which mainly serves the Midwest United States, said quarterly net profit rose to $240 million, or 12 cents per share, from $88 million, or 5 cents per share, a year earlier.
Excluding a one-time litigation charge, earnings per share totalled 14 cents, exceeding Wall Street's expectation of 9 cents, according to Reuters Estimates. Qwest shares rose 15 cents, or 1.7 percent, to $9.03 on the New York Stock Exchange.
Revenue fell slightly to $3.45 billion from $3.48 billion in the year-ago quarter. Analysts on average had expected revenue of $3.49 billion, according to Reuters Estimates. Operating expenses fell 6.2 percent to $2.9 billion, as Qwest focused on cost-cutting and improved productivity.
The company, which has struggled over the past few years to reduce its debt after the burst of the global tech bubble, said total net debt fell to $13.8 billion, down $940 million from a year earlier.
Free cash flow totalled $150 million, an improvement of $300 million year-over-year. Qwest, like its bigger peers AT&T Inc and Verizon Communications Inc, has been helped by a rise in Internet subscribers amid a decline in traditional phone subscribers. The company said it added more than 167,000 high-speed Internet users in the first quarter. It had gained 165,000 such users in the fourth quarter.
Unlike the bigger players, however, Qwest does not have a wireless business and has not been launching advanced video services requiring expensive fiber-optic networks.
The lower exposure has helped it to hold back spending but have also raised concerns on whether Qwest can remain viable in the long term as consumers switch to wireless and other phone alternatives, such as cable and Internet-based services. Domestic access lines fell 6.8 percent from a year earlier to 13.6 million, Qwest said.
"Revenues are going to continue to be flat or slightly down. There's nothing there. The old wireline losses are going to continue, you don't have a wireless presence that you can call your own, and no fiber build-out for ultra high-speed Internet," said Greg Gorbatenko, an analyst at Jackson Securities. He also said investors may begin selling Qwest once AT&T and Verizon show strong growth in their video businesses.
"They'll see Verizon start to grow at a very quick clip, and AT&T continue to do well, and all of the sudden they'll get sick of zero growth at Qwest," he said. "That will turn up the heat on the management, to start to invest in that area."
Chief Executive Officer Richard Notebaert said the company is satisfied for now with its DirecTV Group Inc alliance, through which it offers digital satellite television services.
He reiterated that Qwest will watch to see whether AT&T and Verizon succeed with their video services before deciding whether to follow in their footsteps. "We will continue down this path and then, as we watch the success of other people based upon return on invested capital, we'll make a decision," he said. Capital spending in 2007 is expected to be around the same levels as 2006, the company said.
It also said that it is continuing to execute its previously announced $2 billion share repurchase program, and that it will consider additional shareholder rewards as its finances improve.