Updated from 11:37 a.m. EDT
Qwest Communications International
reported Tuesday that its third-quarter earnings rose 18.5%, easily surpassing Wall Street's estimates because of strong demand for its Internet and data services.
The results, as expected, pleased Wall Street. Shares of Qwest were trading up $2.19, or 5%, to $47.56 Tuesday afternoon following the earnings announcement. The company's stock hit a 52-week high of $66.81 in early spring.
Qwest said that excluding merger-related costs and other non-recurring items, it earned $231 million, or 14 cents a share, in the quarter ended Sept. 30, compared with $195 million, or 12 cents a share, in the third quarter of last year.
Qwest again defied the forecasts of Wall Street analysts, who had predicted earnings of 9 cents a share, according to
First Call/Thomson Financial
, a research firm. Qwest said the results marked the 14th consecutive quarter the company has met or surpassed analysts' expectations.
Denver-based Qwest said revenue rose 12.4%, to $4.8 billion in a quarter in which the company opened five new Web hosting centers across the country and recorded more than $450 million in revenue from new contracts with companies including
. In the comparable quarter of 1999, the company posted revenue of $4.2 billion.
Qwest, meanwhile, said it still expects to reach its 2000 revenue target of $18.8 billion to $19.1 billion. Joseph Nacchio, Qwest's chairman and chief executive, said in a statement that he was "proud of the Qwest team for producing these results while in the middle of a complex merger."
Qwest, which provides long-distance and Internet services over its fiber-optic network, gained about 25 million local telephone customers in 14 states after completing its acquisition of Baby Bell
at the end of June.
"It's really obvious that they are doing well in terms of integration," said Andrew Hamerling, whose firm,
, rates Qwest stock a strong buy and has not done any underwriting for the company. "I'm very pleased with the results across the board."
Web Hosting, DSL Key Earnings
Concentrating more on rapidly growing areas like Web hosting and high-speed Internet access, Qwest had managed to shelter itself from the heightened competition and sluggish sales growth affecting traditional long-distance carriers.
In the latest quarter, Qwest opened Web hosting facilities, which house servers that manage Web sites and facilitate e-commerce transactions, in Georgia, Ohio, Florida and Colorado, bringing its number of centers to 14. It added that it intends to open an additional 10 sites by the end of 2001.
But revenue from Internet and data services, which include Web hosting and digital-subscriber-line, or DSL, Internet access, grew by more than 50% over the same period of last year, compared with a 150% rise posted in the second quarter before the merger was finished, according to the company.
"It's a natural law of numbers," said
Dresdner Kleinwort Benson
analyst Bruce Roberts. The marriage between Qwest, an upstart fiber optic networking company, and
, a slowly growing local telephone giant, was expected to put the brakes on data and Internet services sales, said Roberts, who rates Qwest's stock a buy.
Internet and data sales now account for nearly a quarter of the company's total revenue, according to the company, while most of the remaining sales come from voice services. In the second quarter, before the merger was completed, the sector generated about a third of total revenue.
In addition, the company said it now offers DSL high-speed Internet service in 72 markets in 14 western states, a mark it initially said it would not achieve until the end of the year. It now has 213,000 DSL subscribers and hopes to increase that number to 250,000 by 2001.
Yet from quarter to quarter, growth in the company's DSL subscriber base slowed in the three-month period ending Sept. 30, prompting concern with at least one analyst who follows the company. The number of DSL subscribers the company signed up rose 22% from the previous quarter, but a healthier 29% from the first quarter to the second quarter.
"Just because they hit the target doesn't mean it's an impressive number," said Patrick Comack, an analyst at
Guzman & Co.
, which rates Qwest's stock a buy and hasn't done any underwriting for the company.
The digital-subscriber-line number was not a surprise, though, said Roberts, the analyst at Dresdner Kleinwort Benson, which has not done any underwriting for Qwest. Aware of Wall Street's scrutiny, Qwest perhaps wanted to avoid the expense of boosting its high-speed Internet business, he added.
In early September, Nacchio said the company planned to increase its capital expenditures for the rest of 2000 and 2001 in an effort to double the customer base of its digital-subscriber-line and wireless businesses and expand its Web hosting activities.
Trying to make itself more nimble as it integrated US West, the company said more than a month ago that it planned to lay off 11,000 employees, more than 15% of its workforce, and 1,800 contractors. Qwest noted Tuesday that it had eliminated 4,500 positions in September, three months ahead of schedule.