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Qwest Communications International, Inc. (Q)

Q4 2008 Earnings Call

February 10, 2009 9:00 am ET

Executives

Kurt Fawkes – Senior Vice President, Investor Relations

Edward A. Mueller – Chief Executive Officer

Thomas E. Richards - Chief Operating Officer

Joseph J. Euteneuer - Chief Financial Officer

Analysts

David Barden - Banc of America

John Hodulik - UBS

Frank Louthan - Raymond James

Jason Armstrong - Goldman Sachs

Simon Flannery - Morgan Stanley

Tom Seitz – Barclays Capital

Michael Rollins - Citigroup

Peter Rhamey – BMO Capital Markets

Presentation

Operator

Welcome to the Qwest fourth quarter 2008 earnings conference call. (Operator Instructions).

I would now like to introduce your host for today's conference, Mr. Kurt Fawkes. Mr. Fawkes you may now begin your conference.

Kurt Fawkes

Good morning everyone and thank you for joining us on our call this morning. For the agenda of the call, Ed Mueller, our Chairman and CEO, is going to begin our discussion with some high-level observations on our fourth quarter performance and progress on strategic initiatives in 2008. Then Ed’s going to be followed by Tom Richards, our COO, who will discuss operating unit performance. Tom will be followed by Joe Euteneuer, our CFO, who will review consolidated results, discuss the balance sheet and provide our outlook for 2009.

On Slide 3, we have our forward-looking statements. I want to remind everyone we will be providing forward-looking statements this morning which will contain risks and uncertainties that could cause our actual results to differ materially from those expressed or implied during the presentation. These risks and uncertainties are on file with the SEC and of course I strongly encourage you to review them. Also, let me mention that in order to supplement the reporting of our consolidated financial information, we will discuss certain non-GAAP financial measures including adjusted EBITDA, normalized operating income, free cash flow and net debt and a full reconciliation of these measures are available on our website.

Moving on to Slide 4, we summarize our earnings results for the quarter along with adjusted EBITDA and free cash flow. In the fourth quarter our pre-tax income was up 17% from the year-ago period. We reported net income of $185.0 million in the quarter. That’s $0.11 per diluted share. This compares with $366 million or $.20 per diluted share a year ago. Net income this quarter reflects full book tax rates while the year-ago period results included net tax benefit of $106 million. If we had used normal tax rates in the fourth quarter 2007 earnings would have been reduced by $0.11 per share. Additionally, a lower share count and $0.01 per share charge for severance affected our earnings per share results in the current quarter.

Adjusted EBITDA for the quarter was $1.18 billion which is an increase of $42 million from the same period in 2007. During the quarter $19 million in severance related costs was normalized out of our EBITDA results. Finally, adjusted free cash flow for the quarter was $593 million which is a decrease of $47 million from the same period in 2007. Adjusted free cash flow in the period excludes $46 million in one-time payments and those are principally due to a legal settlement.

With that, I am going to turn it over to Ed.

Edward Mueller

Good morning everyone. Thank you for joining us on our call today. My focus this morning will be to recap our operating performance and key strategic accomplishments in 2008. I will conclude my remarks with some thoughts on our areas of focus for 2009. I will then hand it over to Tom and Joe who will discuss the details of our operating results and the specifics on our plans for 2009.

On slide six we provide a recap of the fourth quarter and full-year performance for our key financial metrics. Our results were strong in the fourth quarter and we achieved improved profitability across all business units. Revenue in the quarter was slightly ahead of our expectations. For the full year, revenues of $13.5 billion reflect growth in data and Internet services revenue that was offset by declines in voice and wireless revenue.

Adjusted EBITDA was also ahead of our expectations as we did an excellent job of delivering on the profitability initiatives we outlined in the third quarter. This was particularly noteworthy given the rapidly deteriorating economic climate. We improved our product mix, achieved employee reductions and streamlined operations resulting in strong sequential improvement in margins for all segments.

For the full year adjusted EBITDA declined 1% compared to 2007. We ended the year with adjusted free cash flow of more than $1.4 billion and capital expenditures were just under $1.8 billion for the year.

Now turning to slide seven, I would like to review our progress on the five key strategic initiatives we set out at the beginning of 2008. Over the course of the year we made substantial progress in enhancing our market position by delivering simplified integrated solutions, improving partnerships and expanding broadband capabilities.

Revenues from managed services offered through the Business Market segment increased more than 50% in 2008. In mass markets we [built] the infrastructure for reshaping the customer experience with Qwest. Those efforts include revamping our advertising message, improving back office call center operations and new product developments.

On the partnership front we made significant progress on our best of brand strategy. We continued to have good success in selling DirecTV services and we reached 13% penetration of our residential primary access lines at year-end. In August we launched our Verizon Wireless partnership which provides our customers access to one of the leading wireless platforms in the country. Our migration efforts ramped up during the fourth quarter with the development of bundled billing capabilities.

Read the rest of this transcript for free on seekingalpha.com