Qwest Posts $142 Million Loss

Voice and data services company Qwest Communications International Inc. on Wednesday posted an unexpected third-quarter loss on flat revenues and warned that fourth-quarter revenues would fall short of Wall Street expectations, sending its stock down 21 percent.

Qwest, which also extended the employment contract of Chairman Joseph Nacchio through 2005, said it suffered as the weak economy dampened sales of basic telephone services to businesses and consumers, and slowed sales of network capacity on its high-speed fiber optic network. 

Shares of the Denver company hit a record low of $12.55, but recovered to $12.67, a drop of $3.33, or 20.8 percent, in heavy New York Stock Exchange trading. The stock has fallen about 68 percent over the past year, underperforming the North American Telecommunications Index by about 47 percent. 

"We're not pleased with these results, but they have to be taken in context of the economy," Nacchio said in a conference call with analysts and reporters. "Revenues fell faster and more unexpectedly than we could react." 

Qwest's lack of 2002 guidance raised concerns it may further cut its recently reduced growth forecast, investors said. Qwest, which last month slashed its growth outlook through 2002, said it would detail its growth forecasts at a Dec. 13 meeting with analysts. 

"They didn't give guidance for next year, which doesn't make a lot of people feel very good. That doesn't provide a lot of comfort. It throws those 2002 estimates up for grabs and provides no visibility," said Tim Ghriskey, president of Ghriskey Capital Partners LLC. 

When pressed by analysts for a ballpark estimate on 2002, Nacchio said revenue growth may be "middle single digit" range, "but it's too early to call." Qwest last month said 2002 revenue growth would be in the "high single digits." 

Qwest Posts Unexpected Loss 

Qwest, which acquired Baby Bell regional phone company U S West Inc. in June 2000, posted a third-quarter net loss of $142 million, or 9 cents a share, compared with a year-earlier loss of $248 million, or 15 cents a share. 

On a pro forma basis, the loss was $138 million, or 8 cents a share, compared with a year-earlier profit of $231 million, or 14 cents a share. The figures are adjusted to eliminate special items associated with the U S West acquisition. 

Estimates from Wall Street analysts ranged from a loss of 2 cents a share to earnings of 9 cents, averaging a 3-cent profit, according to research firm Thomson Financial/First Call. 

Qwest, the dominant local telephone company in 14 states from Minnesota to Washington, said total revenues of $4.77 billion were flat with a year ago and down 12 percent from the second quarter. Analysts had expected revenues of $5.11 billion, according to First Call. 

Qwest Seen as Struggling 

"Qwest is struggling to deliver net income growth," Merrill Lynch analyst Adam Quinton said in a research report. "Net income has now declined for three consecutive quarters." Quinton cut his mid-term rating on Qwest to "neutral" and lowered his long-term rating to "accumulate," both from "buy." Meanwhile, Credit Suisse First Boston analyst Dan Reingold downgraded Qwest to "buy" from "strong buy." 

"Our results reflect the continuing impact of a slowing economy as well as a fundamental shift in the wholesale customer buying behavior for optical capacity asset sales." 

During the third quarter, sales of network capacity dropped as other carriers and corporate customers cut back spending in the soft economy. Customers also shifted their buying habits and leased network space on a month-to-month basis rather than making long-term purchases, Qwest said. 

As a result of the slowdown, Qwest said it expects fourth-quarter revenues to rise only about 3 percent from the third quarter. Analysts surveyed by First Call were expecting revenues of $5.32 billion, an increase of more than 11 percent from the third quarter. 

During the third quarter, optical capacity sales fell to about $130 million from $230 million a year ago. Internet revenue grew nearly 65 percent, while wireless revenues jumped 68 percent to more than $200 million. 

Sales of high-speed digital subscriber line Internet access grew 80 percent in its home 14-state territory, driven by an 84 percent increase in subscribers to 391,000. 

Local service revenues grew only 1.1 percent, after adjusting for nonrecurring equipment revenues, compared with CS First Boston's growth forecast of 5.3 percent. 

The local business suffered from competition from smaller, emerging carriers, and a shift by consumers to wireless telephones from traditional landline phone service. Telephone access lines fell 0.4 percent. Qwest said it gets about 75 percent of its revenues from the local business — or the former U S West operations. 

"Its local phone business should be a steadying influence on the stock and it wasn't here," Ghriskey said. 

Qwest also said it extended Nacchio's employment contract, which had been set to expire at the end of this year, to Dec. 31, 2005, and gave equity incentives to 15 other senior executives. It also said it will allow 24,000 non-union employees to exchange stock options in the wake of sharp drop in Qwest's stock price.