Weak Economy, Charges Slam Qwest Earnings

Qwest Communications International

A significant portion of the loss resulted from a $536 million charge related to its investment of $462 million in KPNQwest.

Joe Nacchio, CEO of Qwest, said the only remaining commitment to KPNQwest was a contract to buy $41 million in network capacity from the company and that Qwest would not make any further investment in KPNQwest unless it made sense for Qwest shareholders.

Excluding charges, Qwest lost 10 cents per share.

First Call estimates were for a loss of 4 cents. For the year ago quarter, Qwest reported a loss of $46 million, or 3 cents per share.

Weakness in spending and competitive pressures, such as customers switching to wireless and cable, also contributed to the loss and caused revenue to drop 13.5 percent for the quarter, the company said. Qwest recorded revenue of $4.37 billion for the quarter, compared with $5.05 billion for the year ago period.

"The results reflect very difficult economic and industry conditions that have been slow to improve so far this year; however, we want to stress that we remain determined to continue reducing our costs and better scaling our business operations to current market realities," Nacchio said.

Those realities have resulted in a de-leveraging strategy to offset debt. Nacchio said Qwest has in excess of $10 billion in assets under consideration for sale. These assets include its yellow-pages business, a wireless unit, a cable operation in Nebraska, access lines, wireless towers and other non-strategic assets, he said.

The results only added to what has been a rough year so far for Qwest. The carrier's accounting practices are under scrutiny by the Securities and Exchange commission and several states are investigating the carrier for allegedly cutting secret deals with rivals who agreed not to oppose the company's efforts to expand its long-distance business, according to a report in The Wall Street Journal.

Nacchio declined to give an update on where the SEC investigation stands, saying only that Qwest was fully cooperating with the investigation.

He also addressed the Wall Street Journal article, which accused the carrier of signing secret deals with competitors, giving the competitors better terms for the use of parts of Qwest's local-phone network, in exchange for not opposing Qwest's bid to extend its long-distance business.

"We weren't trying to hide anything," Nacchio said. "The lawsuit is old news for us. We disclosed it in our 10k [filing. The issue raised by the Department of Commerce petition is whether 11 contracts out of hundreds signed between us and individual wholesale customers should have been filed with the state."

Qwest reiterated its lowered guidance for the year of $18 billion to $18.4 billion and said it expects to be cash-flow positive in the second quarter and to be break-even or be slightly profitable for 2002.