Qwest Reports Second Quarter Results

Qwest Communications International Inc. (www.qwest.com) reported second quarter results that benefited from improved revenue trends, increased operating income and growth in free cash flow. See reconciliation in Attachment F. For the quarter, the fully diluted net loss per share was $0.09, which includes special items of $(0.02), compared with a loss of $0.43 a year ago, which includes special items of $(0.25). See Attachment E for special items.

"Qwest's second quarter results demonstrate that our business and marketing strategies work," said Richard C. Notebaert, Qwest chairman and CEO. "We continued to steadily improve performance, free cash flows and financial flexibility and are pursuing, in a disciplined way, opportunities to drive future growth and value for all of our constituents."

Qwest reported second quarter revenue of $3.47 billion compared to $3.45 billion in the first quarter and $3.44 billion in the second quarter a year ago. This represents the fifth consecutive quarter of stable revenues, as well as year-over-year growth in mass markets and business revenues. Wireline revenues benefited from an improvement in business local, data and Internet revenues, mass markets growth products, such as long-distance and high-speed Internet, as well as wholesale settlements.

"Improved operating results are driving meaningful expansion in free cash flow," said Oren G. Shaffer, Qwest vice chairman and CFO. "Our ongoing improvement in cash flow generation, coupled with our recent financing transactions, advances us in our goal to reduce debt and invest in growth."

Qwest's second quarter operating expenses totaled $3.2 billion, a decline of 15 percent or $555 million compared to the second quarter of 2004. Cost of sales declined $52 million in the second quarter compared with the second quarter of last year.

Selling, general and administrative (SG&A) expenses decreased $441 million for the same period. Second quarter 2004 results included $393 million in special items. In addition, SG&A benefited from further productivity improvements and continued cost-containment efforts.

Revenue less cost of sales and SG&A for the second quarter totaled $991 million compared with $470 million for the second quarter of 2004, including special items.

Second quarter capital expenditures totaled $352 million including a sales tax refund of $33 million, compared to $486 million in the second quarter of 2004. The company's disciplined approach to capital spending focuses on investment in key growth areas and supporting the highest service levels.

Cash generated from operations of $570 million in the second quarter exceeded capital expenditures by $218 million. Qwest expects consistent operating results to be the main driver in generating improved free cash flow for 2005 of $600 to $800 million before one-time payments.

Interest expense totaled $380 million for the second quarter, a decline of four percent compared to the second quarter a year ago.

The company reduced total debt less cash and marketable investments by more than $850 million to $14.7 billion compared to $15.5 billion in the second quarter of 2004.

The company has approximately $240 million in remaining maturities in 2005, of which $179 million was paid in July. The remainder will be paid at maturity.

Liquidity continued to improve through a series of transactions in the quarter, including the issuance of $1.95 billion in notes due 2013 and beyond, as well as tender offers for high coupon debt and the early retirement of other maturities totaling $1.5 billion. Qwest ended the quarter with $2.9 billion in cash and short-term investments.

Broadband represents a key growth opportunity for Qwest. Qwest added 68,000 high-speed Internet lines in the second quarter bringing total lines in service to 1.2 million.

The company expects that network deployment, newly launched bundles, promotions and pricing initiatives will increase penetration and growth of its high-speed Internet services. As of the close of the quarter, 73 percent of households within the company's operating region could purchase high-speed Internet services.
Customers are responding to Qwest's introduction of higher speed broadband services; approximately 60 percent of the company's new subscribers are choosing higher speed service, including premium Internet access that reaches speeds of up to 5 megabits per second (Mbps).

The company successfully launched new bundles in the second quarter, which drove a 30 percent increase in marketing driven call volume during the first few weeks of advertising alone.

Qwest's robust bundled offering to customers includes a national wireless offering, high-speed Internet access, local and long-distance service and integrated satellite TV services through a marketing alliance with DIRECTV, Inc. The company's bundle penetration increased to 48 percent in the quarter compared to 42 percent a year ago.

Long-distance penetration of total retail lines increased to 35 percent in the second quarter, compared to 29 percent a year ago. Qwest increased total long-distance lines by 41,000 in the quarter. The company ended the quarter with over 4.6 million long-distance lines, a one percent increase from first quarter and a 14 percent increase over a year ago.

Wireless revenues increased five percent sequentially while wireless subscribers grew to 744,000 in the second quarter. This is the first increase in subscribers since the second quarter of 2002. Qwest's new wireless plans, robust product offerings, and the introduction of data and enhanced features are driving higher ARPU, which increased nine percent to $50 from $46 a year ago.

Increased package and bundle penetration, win-back initiatives and Qwest's "Feet on the Street" customer acquisition program, and reduction in UNE competition have delivered benefits to the company. Qwest's consumer access lines were down 172,000 in the second quarter - a nearly 40 percent improvement from the year-ago rate.