Qwest Needs 2.6 Million Wireless Customers to Match Prior Year Results

Implications: Qwest’s 2nd quarter results show increased business and broadband revenues, but wireless subscribers would have to reach 2.6 million to match the prior year’s total revenues.

Analysis:

For the 2^nd quarter results, Qwest exceeded or matched Verizon and AT&T for increases in business and broadband revenues.  Qwest’s business revenue had increased by 5% from the year-earlier quarter.  In comparison, Verizon had a 1% decrease and AT&T reported a 1.4% decline in enterprise revenue and 1.6% increase for SMBs partly due to tariff increases.  Allowing for a smaller local-service base, Qwest’s net broadband subscriber growth of 31,000 customers matches Verizon’s and AT&T’s net additions across DSL, FiOS and U-verse.  Qwest’s total data, Internet and video services are 40% of operating revenue to help offset the 9% decrease in voice services from the prior year.  The difference of AT&T and Verizon growth is wireless revenue that is 39% of AT&T’s total revenue and about 50% for Verizon.

Qwest’s operating revenue for this second quarter was $3.382 billion compared to $3.463 billion for the same quarter in 2007.  To replace the $81 million revenue shortfall through wireless, Qwest would need about 2.6 million subscribers instead of its current 894,000 base on the Sprint Nextel network.  Assuming a successful Verizon transition and applying Verizon’s $51.53 ARPU, the 2.6 million subscribers would generate $402 million in wireless revenue.  Verizon reported a 45.6% margin for the last quarter.  If Qwest can earn a 20% margin from reselling Verizon network, the $402 million wireless revenue would replace this quarter’s $81 million revenue decline over last year. 

The first challenge for Qwest is the migrating of the current customers from Sprint to Verizon’s network.  For past mergers and take-over of wireless customers, the success has been based on aggressively providing better handsets and rate incentives.  And Qwest will have a significant challenge to activate another 2 million new wireless subs with a customer base of only 12.2 million access lines and the saturated U.S. market of 85% penetration.