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Qwest stages comeback

Troubled telecom confidently pursues long-distance service

Six months ago, the line on Qwest Communications International was that it was on the ropes and about to be knocked out of the ring.

It faced mounting quality-of-service issues. It was beset by a plethora of Enron-worthy accounting questions. Joe Nacchio, its chief executive officer, had been shown the door for allegedly using questionable bookkeeping practices to fudge the company's revenues.

The U.S. Securities and Exchange Commission and the U.S. Department of Justice were breathing down its neck. And the company's stock was in free fall. It had plunged to a split-adjusted $1.11 per share last August from the $91 peak it had reached in May 1999.

The shadow of bankruptcy clearly was stalking Qwest.

While it's too early to say that Qwest is back, reports that its demise was imminent were hasty, it appears, if not ill-founded. The company's stock crept above $5 a share lately. Its cash flow has moved back into positive territory for the last two quarters, and its debt has been trimmed nearly 15 percent.

But Ñ with Qwest, there's always a 'but'Ñ each kick is qualified. Shareholders, many of whom are local US West retirees dependent on their 401(k)-driven pensions, were expected to lose $1.31 per share in 2002. Qwest acquired US West in July 2000. The positive cash flow stemmed largely from Qwest's sale of its QwestDex directory assistance division.

And its debt load, while much lower, remains in a $22 billion nether region that regularly attracts red flags.

'Management is doing a decent job of trying to clean up their mess, and certainly their stock is reacting well,' said Pat Comack, a telecom analyst with Miami-based Guzman & Co. 'But they're not out of the woods yet.'

Still, 2003 promises sunnier times for Qwest, mainly because the company plans to introduce long-distance services for customers in its 14 service states. In so doing, the company could attract at least one-third of the $10 billion yearly long-distance market in those states.

If successful, Qwest could pay for its mammoth ($3 billion-plus) long-distance investment in about a year.

Qwest filed a formal application Jan. 15 with the Federal Communications Commission to offer long-distance phone service within Oregon. The company now has filed to offer the service in 12 of the 14 states in which it offers local phone service.

Before filing, Qwest passed a series of tests to show that it will not use its local service market presence to dominate the long-distance field.

Qwest believes that customers will benefit because it can consolidate telephone options Ñ primarily local and long-distance Ñ onto one bill. The company believes that such 'bundling' of services will make them cheaper.

Its competitors, which include heavy hitters such as AT&T, argue that Qwest will hold an advantage as it attempts to convert waves of local phone customers into its long-distance fold.

'Given their poor quality of service, we've thought that, unless they really clean up their act, they shouldn't be able to offer long-distance here in Oregon,' said Steve Dixon, consumer advocate for the Oregon State Public Interest Research Group.

The Telecommunications Act of 1996 dictated that the Regional Bell Operating Cos., including the former US West, had to divest their long-distance services within states in which they offer local phone service. The so-called 'Baby Bell' companies could only again offer long-distance options in their service states if they ensured that local companies remain competitive in the long-distance arena.

'This has been a multiyear process, and for the past three years we've been proving that our networks and systems were open to competitors at the local levels,' said Judy Peppler, Qwest's top Oregon executive. 'We're very optimistic about getting FCC approval.'

The FCC will rule on the Oregon request by late April.

The Oregon Public Utility Commission, which administered the Telecommunications Act tests to Qwest, believes that the company will win easy FCC approval, said PUC Chairman Roy Hemmingway.

If so, it probably will do well with long-distance. Daryl Schoolar, a senior analyst for In-Stat/MDR in Scottsdale, Ariz., noted that Qwest is the only Baby Bell with long-distance infrastructure in place in all 50 states. As such, it already may have enlisted a healthy cadre of business customers for its service.

'They'll do very well because of their existing relationships with their customers, which is ironic because it's something that the company has traditionally undervalued,' agreed Marshall Runkel, an aide to city Commissioner Erik Sten who has grappled with Qwest on various telecommunications issues.

The comeback kid

Qwest's long-distance foray certainly won't hurt the company's image with investors. Foremost, it will replace the revenue stream that the telecom subtracted when it sold QwestDex. If Peppler's market share projections prove to be accurate, it could even substantially lighten Qwest's formidable debt load.

The long-distance developments, as well as recent moves to reduce the debt by Richard Notebaert, who replaced Nacchio as CEO last summer, have helped boost Qwest's overall stock price. Some, like Comack, though, believe that it's still overvalued. He offers a target of $1.50.

Brendan Connaughton, a San Francisco-based senior portfolio manager for Wells Fargo, isn't confident that Qwest can keep its current minisurge going.

'I still don't think the chairman who's there now (Notebaert) is the one you'll see 12 months from now, and I don't think you'll see the same company then, either,' he warned.

But Tavis McCourt, an analyst with the securities firm Morgan Keegan based in Memphis, Tenn., counts the company's continued existence by itself as an achievement that has amazed telecom watchers.

Peppler plans in coming months Ñ when she isn't occupied by the long-distance issue Ñ to devote her energies to helping the company complete a series of five fiber-optic 'rings' that will ensure continuous service in rural areas.

Qwest also must resolve a lawsuit with the city of Portland over right-of-way fees. Qwest's refusal to pay the city for maintaining landholding telephone poles and wires put a $6 million hole in the city's budget.

Then there are Qwest's perennial service issues. Hemmingway, noting that complaints to his commission about Qwest are mostly down, believes that the company must demonstrate its financial fitness before it can offer top-notch service.

'Generally, they've earned a gold star on the reliability of their systems,' Hemmingway said, referring to Qwest's voice and data networks. 'But if their financial difficulties continue, we're afraid those systems could deteriorate.'

Peppler said the company has made concerted efforts to reduce wait times and incorrect bills.

'We're seeing impact from those changes, and we're getting fewer (PUC) complaints,' she said.

In other words, Qwest might be getting things together.

Contact Andy Giegerich at This email address is being protected from spambots. You need JavaScript enabled to view it..