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Qwest Takes a Beating

Shares fall as sales tumble.

Qwest (Q) shares dropped 8% after the telco's core phone business took another beating.

The Denver phone giant posted third-quarter net income of $2 billion, or $1.08 a share, which included a $2.1 billion tax benefit and a charge of $353 million for legal settlements. Excluding these one time items, Qwest's adjusted profit was about 14 cents a share. Analysts were looking for a pro forma profit of 15 cents, according to Yahoo! Finance.

Sales in the quarter ended last month were $3.43 billion, down from $3.48 billion in the second quarter and down from the $3.46 billion level a year ago. Analysts expected revenue of $3.49 billion.

Weak areas for Qwest included sales to businesses and a drop in wholesale orders. The company also saw more alarming declines in its core business as total phone lines fell 7.2% as customers flee to cable and wireless offerings as well as a slowdown in housing starts in the West, says Qwest.

"Through exceptional customer service, profitable growth and capital and cost discipline, I am confident that Qwest is well-positioned to build on a foundation of ongoing value creation," CEO Ed Mueller said in a press release.

All the big telcos are losing landline customers, but rivals

Sprint

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Verizon

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are more cushioned than is Qwest because of their big in-house wireless businesses, which Qwest notably lacks.

Qwest did not provide sales or earnings guidance, but did offer some hint at where the business was going during a discussion with analysts on an earnings call.

"We saw revenue increasing in the second half," CFO John Richardson said on the call, referring to Qwest's previous projections. "Now we are seeing our revenue is decreasing slightly."

The new CEO, Ed Mueller, started a strategic review of the company and says he will not comment on questions like a dividend until the review is complete at the end of the year.

The previous Qwest management had run the company to conserve cash with the goal of returning money to shareholders in the form of share buybacks and dividends.

The concern among analysts and investors is that Qwest will instead burn through the cash on expensive network initiatives. The uncertainty around Qwest's plans has help drive the stock down to a new 52-week low at one point Tuesday.

Mueller said he understood the concerns, but asked for patience while the strategic review continued.

"I get that there are clouds over there. We are willing to put up with that. We'll give news as we get it," Mueller said on the call.

Qwest shares fell 67 cents to $7.51.