Qwest Investors Unhappy with Revenue, Earnings, & Dividend Deferral

Qwest (Q) shareholders are not happy Tuesday, not happy at all.

Tuesday morning, Qwest announced revenue for the third quarter of $3.43 billion, with earnings per share, before a large tax credit and a charge related to a shareholder litigation settlement, of about 14 cents. The Street had been looking for $3.49 billion and 15 cents. The company also lowered its OIBDA (operating income before depreciation and amortization) estimate for 2007 to $250 million, from $400 million.

There were two other key items disclosed by Qwest Tuesday. One, the company did not announce a dividend, disappointing many investors who had expected that Qwest would begin making a payout. On the company’s conference call with analysts Qwest CEO Ed Mueller, who recently took the reins at the company from long-time chief Dick Notebaert, said the company’s board “has agreed to defer any future shareholder return decisions” pending completion of a “strategic review process” expected to be completed by year-end. “This is the prudent course to follow,” he said.

Secondly, the company said it now expects to spend up to $300 million next year to expand its fiber-to-the-node build-out. That is about triple what Qwest had previously expected to spend.

The combination - no dividend news, higher spending on fiber - is frustrating the Street.

“I understand the frustration you’re putting out here,” Mueller said at the end of the conference call. “I get that you’d like us to or me personally to give you more answers and I’m holding until the end of the year…I understand the frustration, but I think a complete holistic plan from a new CEO is the right thing to do.”

In brief, some reaction from the Street:

• Frank Louthan, Raymond James, downgraded the stock to Market Perform from Outperform. “Qwest reported results below expectations across most financial and operational metrics as revenue, EBITDA and xDSL adds missed our estimates, partially offset by better-than-expected data revenue growth,” he wrote in a note. “Given the change in direction of numbers and uncertainty regarding revenue growth and returns of cash, we no longer believe an Outperform rating is appropriate.”
• Greg Miller, Deutsche Bank: “We expect investors will be disappointed with third quarter results, the lower EBITDA outlook for 2007 and the authorization for capital spending to support faster broadband speeds that reduces the amount of capital available for the dividend that bullish investors have been hoping for.”
• Jennifer Fritzsche, Wachovia: “We see the dividend delay weighing on the shares in the short term and we all remain concerned with the access-line loss trend [down 7.2 year-over-year], which again, was worse that AT&T’s losses of 6.9%.”
• Todd Rosenbluth, Standard & Poor’s: We remains bearish on the shares. We believe revenues will remain sluggish and see cost savings efforts having only a modest impact on EBITDA in ‘08.” He lowered his 12-month price target to $7, from $7.50.

Qwest Tuesday is down $1, or 12.2%, at $7.18.