Facebook Twitter

Qwest chief fields complaints

Nacchio called on to raise revenue after demand slows

SHARE Qwest chief fields complaints

DENVER — Qwest Communications International Inc. Chief Executive Joseph Nacchio is being called on to prove to investors he can raise revenue amid slowing demand for phone-and-data services without using equipment sales.

Qwest in July had the highest forecast for 2002 sales growth among big local-phone providers. Now, it expects to lag peers. The company said in October it would not count some equipment sales in last year's results after analysts questioned whether Qwest tried to use one-time sales of gear, rather than service, to hit targets. The shares fell 83 percent from the peak.

"At the beginning of last year, he had the highest amount of credibility in the telecom space," said Paul Wright, a telecommunications analyst at Loomis Sayles & Co., which owned 1.4 million Qwest shares in September. "I would say he ranks near the bottom now."

The company on Tuesday reported a wider fourth-quarter loss as customers disconnected phone lines. The loss widened to $516 million, or 31 cents a share, from $116 million, or 7 cents, a year earlier. Sales fell 6.3 percent to $4.7 billion.

Qwest provides local-phone service in 14 states, including Utah. The company, which also sells data-transmission to businesses, has been hurt by lower prices after new companies built too much fiber-optic capacity when stocks were soaring.

Denver-based Qwest, which also sells long-distance phone service and Web-site management, lowered sales forecasts twice and announced the elimination of 11,000 jobs since September.

Qwest shares fell 24 cents to $12.35 in early trading. In November, they touched a four-year low of $11.08, having dropped from the record high of $66 in March 2000.

Qwest's accounting practices have been questioned since a June research report from Morgan Stanley. After buying local-phone company US WEST Inc., Qwest wrote off $2.1 billion before taxes in tangible net assets without disclosing it, analysts including Simon Flannery wrote in the report. Qwest boosted income by changing pension plan assumptions, they said.

Though Nacchio called the report "hogwash" and said Qwest's accounting of the US WEST purchase was proper, the questions failed to go away.

Qwest last year agreed to sell Calpoint LLC $300 million of network gear and then pay the closely held company $10 million a month for five years to lease capacity. Qwest shares fell 15 percent Sept. 27 after some analysts suggested the company was trying to use the agreement to avoid missing its reduced 2001 sales forecast.

Nacchio said on a later conference call with analysts that in the third or fourth quarters Qwest wouldn't count revenue from the transaction, which had caused "concern, anxiety and misinformation."

Doubts lingered, and erupted during an Oct. 31 conference call to discuss third-quarter results.

Nacchio was pressed by top-ranked telecommunications analyst Dan Reingold for details on equipment sales. Nacchio said he didn't have the information at hand.

"What are we hiding here?" asked Reingold, a Credit Suisse First Boston analyst who lowered his rating to "buy" from "strong buy" that day. Reingold ranked first in Institutional Investor Magazine's annual survey of money managers. Nacchio told Reingold he was hiding nothing.

Nacchio "needs consecutive quarters of hitting his numbers without excuses. He can't have any more one-off deals to do that," said Robert Rock, a fixed-income analyst at John Hancock Funds, which owns Qwest bonds, part of the phone company's $24.8 billion in debt as of September.

Nacchio had been praised for using a soaring stock to buy US WEST for $44 billion in June 2000. Combining with the biggest local-phone operator in 14 Western U.S. states gave Qwest an investment-grade credit rating and direct connections to 25 million customers.

Nacchio should now sell his company, said Loomis' Wright. A potential buyer is BellSouth Corp., the biggest local-phone provider in nine southeastern U.S. states. Nacchio, who made $3.9 million in 2000, would be willing to sell the company for $20 a share or less, predicted Wright.

"If they stay where they are, they're destroying value," Wright said. "They've got to get to a level where they can have stable margins. They're too small a player now to do it."

BellSouth spokesman Jeff Battcher declined to comment on any potential combination involving the Atlanta-based company.

In an interview following a speech at a Salomon Smith Barney conference in Arizona this month, Nacchio said the company could be bought by a rival.

"If the right deal came, I'd support it," said the 52-year-old Nacchio. "My obligation if somebody comes and wants to buy us is to consider it seriously, present it to the board with my recommendation about does it advantage our shareowners."