Qwest Communications announced it has reported financial results for the third quarter 2009.
In an October 28 release, Qwest Communications reported that for the quarter, net income was $136 million. Earnings per share were 8 cents, which was equal to prior-year results. Current quarter earnings per share results include a 1 cent charge for severance, realignment and restructuring cost and litigation expense.
The prior-year results include a 1 cent charge for severance, realignment and restructuring. The third quarter, net operating revenue of $3.1 billion includes 36 percent growth in IP services. Overall reported revenues declined 10 percent compared to the prior-year period. Excluding the effects of the company's transition to a new wireless business model, revenue declined 7 percent year over year. Total operating revenues declined 1 percent sequentially.
In the quarter, adjusted EBITDA increased 1 percent from the year-ago period as substantial cost improvements offset lower revenue. Adjusted EBITDA for the quarter of $1.1 billion includes nearly $60 million of incremental non-cash pension and OPEB expenses compared to the third quarter 2008. The adjusted EBITDA margin of 35.8 percent is an improvement of 370 basis points compared to the third quarter 2008 and a 50-basis-point sequential improvement. For the quarter, adjusted free cash flow was $428 million. Year to date, adjusted free cash flow totaled $1.4 billion compared to $846 million through the third quarter 2008.
Qwest continued to make progress on expanding broadband capabilities in the third quarter. Fiber to the node (FTTN) was deployed to more than 500,000 additional homes during the quarter. Qwest's FTTN footprint now reaches more than three million homes. In the quarter, 71,000 customers added broadband services that utilize the fiber network. To support growing demand for enterprise broadband services, Qwest announced it will begin developing its next generation of backbone facilities with Alcatel-Lucent. This development will provide 100 Gbps speeds across the network when fully implemented over the next year. These strategic investments provide customers with enhanced functionality and support delivery of future simplified services.
Qwest reported total operating revenue of $3.1 billion in the third quarter. Strategic services revenue of $1.1 billion increased by 5 percent year over year and 1 percent sequentially reflecting higher demand for IP services. Legacy services revenue of $1.7 billion decreased 14 percent annually and 3 percent sequentially. Fewer access lines, from a weak economy and competition, and efforts to improve Wholesale long-distance profitability pressured legacy voice revenue. Customer transitions to IP services impacted legacy data revenue.
Operating expenses in the quarter were $2.6 billion, a decrease of $356 million, or 12 percent, year over year. Cost of sales, selling and depreciation and amortization expense all declined over the period. The largest components of these savings were facility costs, due to lower long-distance volumes and the wind down of the wireless MVNO platform, as well as a reduced workforce. General, administrative and other operating expense increased principally due to higher pension and OPEB expense and one-time lease termination benefits in the year-ago period. Sequentially, operating expenses declined 1 percent due to lower selling and facility costs. This was partially offset by increased network expense. Total employees at the end of the quarter were approximately 31,300, a decline of 3,400 or 10 percent, from the prior year.
Net income for the third quarter was $136 million, a 6 percent decline from the year-ago period. In the third quarter 2008, net income reflected lower interest expense and a one-time benefit in other income. Net income declined by 36 percent sequentially due primarily to a one-time tax benefit recorded in the second quarter.
In the quarter, Qwest had success in selling bundled service offerings, and the company continued to make progress in moving to a more localized go-to-market approach. However, wireless substitution, increased unemployment, low business formation and soft housing trends in Qwest's 14-state region continue to impact voice revenues. Substantial cost savings mitigated bottom-line impacts.
Mass Markets segment revenues of $1.2 billion declined 14 percent on a reported basis and were down 8 percent after normalizing for the wireless business model transition. Sequentially, revenue declined 3 percent on a reported basis and 2 percent after adjusting for wireless. Strategic revenue growth of 3 percent year over year was offset by legacy revenue declines of 12 percent.
Segment income for the quarter was flat year over year and declined 3 percent compared to the second quarter. Expenses declined 26 percent from the year-ago period. These improvements included elimination of certain MVNO activities, force-to-load measures, enhanced network efficiencies and lower selling cost. Segment income margin percentage improved 760 basis points compared to the year-ago quarter.
Total net broadband subscribers increased by 28,000 in the quarter bringing total subscribers to nearly 3 million. Once again, demand within the FTTN footprint fueled subscriber growth. Total FTTN subscribers reached 340,000 or more than 11 percent of Qwest's total high-speed Internet customers.
Total wireless subscribers at the end of the quarter were 786,000, up 23,000 from the end of the second quarter. Qwest will stop providing MVNO services effective Oct. 31.
Qwest added 15,000 DIRECTV subscribers in the quarter. At the end of the period, approximately 15 percent of Qwest's primary access line customers also were subscribing to DIRECTV services.
Wholesale Markets posted its fourth consecutive quarter of segment margin improvement while revenue pressures moderated on a sequential basis. Initial construction of fiber to the cell site began in the quarter, positioning Qwest to benefit from ongoing growth in wireless data services.
Segment revenue of $700 million declined 14 percent vs. the prior year mainly due to lower long-distance revenue. Sequentially, revenue was down $12 million, or 2 percent. Profitability measures that were undertaken in the second half of 2008 enhanced segment margins but impacted revenue. In addition, ongoing peer grooming efforts and access line trends continue to challenge revenue performance.
Wholesale segment income essentially was even with both the second quarter and the year-ago period. Lower facility costs, bad debt expense and operational efficiencies were responsible for improvements in the segment cost structure. Reflecting the elimination of low-margin revenues, Wholesale segment income margin percentage improved 920 basis points year over year.
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