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Qwest Communications International Inc. (NYSE: Q)

Qwest Communications International Inc. (Q) is a provider of data, Internet, video and voice services. Q operates in three segments: business markets, mass markets and wholesale markets. Most of the Company’s products and services are provided using its telecommunications network, which consists of voice and data switches, copper cables, fiber optic broadband cables and other equipment. It provides various data and Internet services, including private line, multi-protocol label switching, broadband, and data integration services, as well as Web hosting and related services comprising provision space, power, bandwidth and managed services in data centers; and server and application management, back-up, disaster recovery, and Web design services. The majority of the Company’s network is located in its local service area. Within its local service area, Q’s network serves approximately 11.6 million access lines in 14 states and forms a portion of the public switched telephone network.

The Company operates its business within its local service area, which consists of the 14-state region of Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, New Mexico, North Dakota, Oregon, South Dakota, Utah, Washington and Wyoming.

Qwest Communications International was founded in 1983 and is based in Denver, Colorado.

Source: Reuters.com, SEC Filings.

Financial Summary

Second-quarter revenue declined to $3.09 billion, down 8.6% from its $3.38 billion total in the year-ago quarter. Operating revenue decreased due to continued access line losses, decreased long-distance volumes and rates and fewer wireless subscribers as the Company was transitioning to selling Verizon Wireless services. The Company paid $5 million in income tax in the quarter, compared with $118 million in the same period a year ago. The one-time tax savings helped it to report a quarterly profit of $212 million, or 12 cents a share, up from $180 million, or 10 cents a share, in the same quarter of 2008.

Due to lower capital spending, adjusted free cash flow for the quarter was $657 million, nearly a $200 million improvement from prior year levels. At June 30, 2009, the Company held cash and cash equivalents totaling $1.796 billion, and it had $910 million available under its currently undrawn revolving credit facility. In July 2009, in connection with a $35 million increase in commitment by an existing lender to the Credit Facility, the amount available to Q under the Credit Facility increased from $910 million to $945 million. The Company has a significant amount of debt maturing in the next several years, including $2.168 billion maturing in 2010, $2.151 billion maturing in 2011 and $1.500 billion maturing in 2012. As of June 30, 2009, the consolidated debt was approximately $14.1 billion.

Recently, Q reaffirmed fiscal 2009 guidance for EBITDA to be in the range of $4.25 to $4.4 billion. It expects to spend at most $1.7 billion this year, down from a previous view of $1.8 billion. According to Reuters Estimates, analysts on an average are expecting the Company to report EBITDA of $4.35 billion for 2009.

Source: Yahoo! Finance, SEC Filings.

Analyst Consensus

Seventeen analysts polled by Thomson Reuters consider the “Hold” strategy for Qwest.

Source: http://markets.ft.com/tearsheets/analysis.asp?s=Q

Investment Highlights

For residential customers, the Company offers a new generation of fiber-optic Internet service, high-speed Internet solutions, as well as home phone, Verizon Wireless, and DIRECTV® services.  Qwest is also the choice of 95% of Fortune 500 companies, offering a full suite of network, data and voice services for small businesses, large businesses, government agencies and wholesale customers. Additionally, Qwest participates in Networx, the largest communications services contract in the world, and is recognized as a leader in the network services market by a leading technology industry analyst firm.

The Company underwent a technology transformation over the past year, in order to provide faster access for its customers. In particular, Qwest’s Fiber to the node initiative has raised the bar for broadband speed in the Qwest footprint. This year the Company transitioned from ADSL 2+ to VDSL2 that allowed Qwest to change dramatically the upload speeds. In September, 2009 the Company launched its new fiber-based, Ethernet backhaul service designed for wireless service providers (WSPs). By leveraging Qwest’s fiber-to-the-node (FTTN) deployment, Qwest Mobile Ethernet Backhaul extends fiber to cellular sites in order to accommodate the increasing demands of next-generation mobile technologies such as smart phones, laptops, netbooks and other bandwidth-demanding devices.

During the second quarter, the Company continued to see steady demand for high-speed Internet products including fiber to the node and reported significant progress on most of its key subscriber metrics in the quarter.

Qwest added 34,000 broadband customers for a total of 2.9 million. The second quarter was Qwest’s best ever for fiber to the node with net subscriber additions of 65,000, bringing total fiber subscribers to 269,000. Wireless subscribers grew for the second consecutive quarter to 763,000. Video subscribers improved to 853,000 for the quarter, reaching a 15% penetration rate of primary consumer access lines.

In 2008, Qwest announced plans to exit its wireless business and began offering Verizon Wireless service to Qwest customers. Under the agreement, Verizon Wireless phones and services were offered to Qwest’s residential and business customers. On October 31, 2009, Qwest discontinued all Qwest Wireless service. According to the Company’s fact sheet, Qwest started transitioning Qwest Wireless customers to Verizon Wireless in August 2008 and has since switched tens of thousands of customers.

Qwest has taken a number of key steps to strengthen its competitive position for the long run. Among others, these steps include announcement of several developments on the partnership front. In July, Qwest signed a five-year extension to its existing strategic partnership that allows it to continue to offer DIRECTV services to residential customers. In addition to the new agreement, Qwest and DIRECTV have launched a new suite of integrated services. In June, the Company and IBM Corporation announced a five-year agreement to deliver highly proactive managed services to mid-size businesses. Qwest and IBM will go to market with network management services that simplify complex technology operations and enable customers to optimize their IT networks, while minimizing capital expenditure. Qwest also launched a Wi-Fi feature for all HSI customers in April through an agreement with AT&T.

Recently, Memorial Practice Management (MPM) has selected the Company to provide an advanced communications network solution to connect seven MPM-managed health care clinics in central Washington. MPM provides services, including staff recruitment, administration, billing, and technical support designed to help physicians and their staffs manage the time-consuming aspects of running their practices.

In September, Qwest priced a bond offering of $550 million at 98.244% of the full value with an interest rate of 8% per year. The notes are due in 2015 and pay interest semiannually on April 1 and October 1. The net proceeds of the offering will be used for general corporate purposes, including repayment of indebtedness, and funding and refinancing investments in the company and its subsidiaries’ telecommunications assets.

Internet traffic is doubling approximately every 19 months; each year, individual Internet users consume approximately 43% more bandwidth than the previous year. The networking world is now at a cross roads with increasing demands for more bandwidth while at the same time trying to deal with effects of a global recession. The 40 gigabit backbone is already not sufficient and carrier networks are set to move to 100 gigabit networking technology in 2010 as the technology becomes available. Qwest will also be upgrading its nationwide network into 2010 to achieve the higher speeds.

Technical Analysis

Source: http://stockcharts.com/h-sc/ui

Qwest is below its 13-day moving average. This bearish sign is even more significant because the moving average is also trending lower.

The MACD for the Company currently indicates a strong bearish signal for two reasons. First, the MACD is below the signal line, a 9-day moving average. Second, the MACD is below the critical level of 0, which implies that the underlying moving averages are trending lower.

Qwest is trading within its Bollinger Bands. This is a normal condition and suggests that the stock is neither overbought nor oversold relative to the recent price action.

Comparative Analysis

Qwest’s revenue is declining in the past quarters, but that is to be expected in a challenging economy. However, the Company is continuously maintaining and enhancing its network infrastructure. In addition, its key strategic investments include continued deployment of fiber to the node, IP backbone capacity and enhancements, enterprise services development, and metro fiber. Qwest’s management is optimistic about the Company’s future and its ability to achieve the goals that were set.

Source: Thomson Financial, Yahoo! Finance, Analyst estimates.

Insider Trading Activity

Net Share Purchase Activity

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