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Qwest Communications International Inc. (Q)

Q1 2010 Earnings Call

May 5, 2010 9:00 a.m. ET

Executives

Kurt Fawkes - SVP, IR

Ed Mueller - Chairman and CEO

Teresa Taylor - COO

Joe Euteneuer - EVP and CFO

Analysts

James Ratcliffe - Barclays Capital

Christopher Larsen - Piper Jaffray

Michael Rollins - Citi Investments

David Barden - Bank of America

John Hodulik - UBS

Frank Louthan - Raymond James

David Coleman - RBC Capital Markets

Peter Rhamey - Capital Markets

Simon Flannery - Morgan Stanley

Timothy Horan - Oppenheimer

Presentation

Operator

At this time, I would like to welcome everyone to the Qwest conference call. (Operator Instructions) Mr. Fawkes, you may begin your conference.

Kurt Fawkes

Thank you. Good morning and welcome, everyone, to Qwest first quarter earnings call. Today I am joined by Ed Mueller, our Chairman and CEO; Teresa Taylor, our COO; and Joe Euteneuer, our CFO.

We will begin today's call with a few comments on the quarter from Ed followed, followed by a review of segment results from Teresa. Joe will conclude our prepared remarks with the discussion of our consolidated financial results and outlook. We will then open it up for your questions.

As we begin our call, let me point you to slide three and remind everyone that today's discussion contains forward-looking statements. These statements are subject to significant risk and uncertainties. These risks and uncertainties are discussed in detail in our periodic filings with the SEC and I strongly encourage you to thoroughly review them. Additionally, we do not adopt analyst estimates nor do we necessarily commit to updating forward-looking statements that we will be making this morning.

To supplement the recording of our consolidated financial information, on our call today we will be discussing certain non-GAAP financial measures, including adjusted EBITDA, adjusted free cash flow, and net debt. A full reconciliation of these measures is available on our web site.

Moving on to slide four, earnings per share for the quarter was $0.02 compared to $0.12 in the first quarter of 2009. The current quarter earnings include a $0.06 charge for tax changes under the Medicare Part D program and $0.02 for the early retirement of debt and severance and restructuring charges.

The year-ago period includes a $0.01 charge for severance, which was offset by a $0.01 benefit for a lower tax rate. In addition to these adjustments, reported earnings had been affected by dilution from incremental, non-cash, pension and OPEB expenses. In the current quarter, this dilution was $0.01 per share and in the year-ago period it was $0.02 per share.

Turning to slide five, we have made some changes this quarter in our continual efforts to improve the transparency of our recording. These recording changes include revised definitions for cost of sales, selling and administrative expenses, expanded detail disclosure of segment expenses and additional assignment of overhead costs to our segments where management accountability exists. As a result, segment expenses have been restated to include the assignment of real estate, procurement and insurance costs.

The six new categories of expenses that we are now providing at the segment level, will give added insight into the variable, fixed and acquisition cost leverage that we pull in managing EBITDA and free cash flow.

On the income statement, these costs along with costs for fleet operations and posting centers have been reclassified from general and administrative expense to cost of sales. We have also revised our subscriber and access line metrics to align with our revenue recording.

As a result, we have removed approximately 400,000 affiliate access lines. We have also aligned our recorded video subscribers to fully capture all billing subscribers under our agreement with DIRECTV.

Finally, we removed business and wholesale subscribers from our reported high-speed internet units in our mass markets group. We have provided results with these new classifications for the past 12 quarters on our website.

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

Ed Mueller

Thanks Kurt and good morning, everyone, and thank you for joining us today. I want to begin by saying I'm very pleased with our continued execution and results in the quarter. We are off to a solid start in 2010 with improving revenue trends and expanding EBITDA margins.

Our performance in the quarter is a demonstration of the sharp focus we have on our key initiatives to drive the top-line, while maintaining disciplined expense management to improve operating efficiencies. We continue to see strong growth in our strategic revenues and we are aggressively pursuing broadband based initiatives.

In the quarter, Qwest again strengthened the balance sheet and enhanced financial flexibility. We clearly have solid momentum across our businesses and we intend to maintain this momentum throughout the year and leading up to the close of our planned merger with CenturyLink.

I'm very excited about the prospects that arise from our combination of CenturyLink and Qwest; with this transaction, the combined company will become an even stronger competitor as a national player with substantially increased scale and broader scope. The increased scale will allow us to invest in and deliver differentiated products and services that our customers will demand in the future.

The combination creates new strategic opportunities with other industry participants, including marketing partners and network suppliers. This transaction will provide several benefits for our shareholders. At the exchange rate of 0.1664, it provides a 15% premium from the closing price of our stock on the day before the announcement. Qwest shareholders can also participate in a future upside that will be supported by strong operating synergies.

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