Cable Tech

Qwest Backtracks Fast

Not a week seems to go by without another shell-shock to the telecom industry.

Last week, it was WorldCom Inc.'s (Nasdaq: WCOME) filing for bankruptcy (see WorldCom Files for Bankruptcy). Then Qwest Communications International Inc. (NYSE: Q) started off this week with a bang, announcing yesterday that it expects to restate its earnings from 1999 to 2001 due to accounting errors related to optical capacity and equipment sales, as well as to telephone service and the company’s QwestDex directory service (see Qwest May Restate Earnings).

Of course, Qwest’s announcement -- which snuck over the wires late Sunday night -- should come as no surprise. The company is already under Securities and Exchange Commission (SEC) investigation for its accounting practices, and its former auditor is none other than the notorious Arthur Andersen LLP (see Qwest: Ciao Nacchio? and Qwest Gets New Auditor). Following the allegations of fraud at WorldCom last month, Light Reading's own Christopher P. Bulkey, a research analyst with the Optical Oracle, opined that Qwest would likely be the next American company to reveal accounting irregularities (see Carrier Scandals: Who's Next?). Other analysts have shared this sentiment. The question now, however, is whether Qwest's admissions come too late to save the company from bankruptcy.

“I don’t think that it’s completely unexpected,” says Network Conceptions LLC analyst Phil Jacobson. He says that there will probably be more restatements and goodwill writedowns before the SEC's August 14 deadline for CEOs and CFOs to assert that, to the best of their knowledge, previous annual and quarterly reports contain no untrue statements.

"[This is just the] tip of the iceberg," writes Craig Johanson, an independent analyst based in Portland, Ore., in an email to Light Reading.

But while observers agree that revelations of accounting irregularities at Qwest were expected, the market didn’t seem to have seen this coming. In early trading today, the company’s stock lost nearly 23 percent of its value, dropping 34 cents to a 52-week-low of $1.16 a share. Over the past year, the company’s stock has fallen 89 percent.

On a conference call this morning, Qwest CEO Richard Notebaert emphasized that the company is only disclosing that it is investigating the accounting irregularities, and that it is not yet restating its earnings. A restatement is expected, but Notebaert said it’s hard to predict, as the company’s new auditor KPMG is still analyzing the books. “I think everybody’s interested in getting this done as expeditiously as possible,” he said on the conference call, but he continued to say that the analysis would probably take months, rather than days.

“There are obviously not just a couple of transactions,” Jacobson says. “I’ve got a feeling that there’s a lot to clean up.” He points out that KPMG is being extremely tough on former Andersen clients. “When you take over a nuclear waste site,” he says, “you have to be extremely careful to clean it up really well if you don’t want to be blamed for the mess that’s left over.”

At Qwest, there does seem to be a lot of mess to clean up. The company said it improperly accounted for approximately $1.16 billion in recognized revenues from sales of optical capacity on its network, which account for about 18 percent of its total optical capacity sales. The company would not rule out having to restate earnings for all optical capacity sales during the period. In addition, Qwest said that its financial statements would include adjustments relating to its sale of equipment to other companies.

“We’re not disclosing who the customers were,” said Oren Shaffer, Qwest’s CFO, on the conference call.

In addition, the Denver-based telecom said that it may have to make “significant” adjustments to the timing of the recognition of revenues from its QwestDex directory service. Qwest has said that it's received several bids for the service, which is worth approximately $9 billion; according to reports, the company is expected to decide the winning bid sometime this week (see Qwest Gets Bids on Directory). On today’s conference call, Notebaert said that the disclosure of possible accounting irregularities in regards to QwestDex should have a minimal impact on the negotiations.

The company also said that during 2000 and 2001 it received service from third-party telecom providers, which it paid without properly recording the costs for the services. The company has preliminarily estimated that its costs for 2000 were overstated by $15 million, and that its 2001 costs were understated by $113 million.

Shaffer rejected the notion that the misleading accounting could be compared to WorldCom’s allegedly fraudulent misstating of nearly $4 billion, revealed in June (see Qwest: 'We're Different'). “This is purely and simply an accounting error,” he said. “These things happen.”

Guzman and Company analyst Patrick Comack says he doesn’t think that Qwest will run into the same kind of problems that WorldCom has -- at least, not yet. “[The revelations] are not anywhere near the magnitude of WorldCom,” he says. “Nor do they indicate any kind of fraud.” If fraud charges do surface, however, he says the company will be in real trouble.

Qwest is clearly not out of the woods yet. The company had expected revenues of as much as $18.4 billion for the year (see Qwest Posts Loss, Preps Asset Sales). Observers say the company’s credit agreements might be in danger if it doesn’t hit that target. Those agreements require that the company maintains a certain ratio of debt to EBITDA (earnings before interest, taxes, depreciation and amortization).

“I think they’re going to have to renegotiate [their credit agreements],” Comack says. However, once the QwestDex deal goes through, he says, the company should have the cash needed to renegotiate. In his opinion, it will probably convert to a secured credit line.

Qwest says it will issue new guidance when it reports its second quarter earnings on August 8.

— Eugénie Larson, Reporter, Light Reading

Editor's Note: Light Reading is not affiliated with Oracle Corporation.
BobbyMax 12/4/2012 | 10:02:02 PM
re: Qwest Backtracks Fast Mr. Notebaert is not forthcoming ia truthful manner. Qwest has lost about 95% of its value. All payments to Nachio, his predecessor, were approved by Notebaert. If Notebaert wanted to display ethical conduct' he could have withheld the parting gifts given to Nachio.

Nachio lead a very corrupt management ever headed by any RBOcs. Under hois leadeship, every junky person became VP or held other fancy titles in spite of having no qualifications.

Employees Qwest could not have risked in engaging fruadulent activities if it was not for the blessings of Nachio. Our children put in jail for stealing a few candies, but these bundits have bilked millions and millions of dollars.

Notebaert has not disclosed his compensation package, stock options and other gifts that he has received. He has also taken steps to remove one of the Directors who was also doing business with Qwest.

Quest does its business in one of the very large areas. For example, it cannot provide broadband services in the remote areas of the 14 states where its provides its services.

For the last three years or so, Qwest become a lab for testing products technologies from junk startup companies. It just wanted to be in the news all the time.

The board members have failed to resign in spite of being incompetent and inept. The corruption is built-in in our system and it will never go away. It has become very risky for the rest of the world to do business with the United States.

In view of the wides[pread corruption, I do not think that any meanigful remedy would be put in place. There would be no prsecution against these robbers who looted the wealth of the company.
buliwyf 12/4/2012 | 10:02:01 PM
re: Qwest Backtracks Fast It's clear that if these policy changes Bush is trying to get through are to carry any weight at all, frauds like Nacchio need to do prison time.

It would never happen but it would also be nice to see their personal assets frozen and donated to funding education. Until this happens some execs will always be willing to run the risk of some prison time in return for a few hundred million during bubble periods.
erbiumfiber 12/4/2012 | 10:02:00 PM
re: Qwest Backtracks Fast This should be interesting- the government is apparently re-stating all kinds of economic figures for the period 99-01. Maybe corporations weren't the only people "cooking the books" (hmm, will members of the US Commerce Department be called to Capitol Hill to testify and be forced to plead the fifth??).

I think the restatement is coming out tomorrow-should make interesting reading (and, of course, something for the CNBC commentators to do all say long...)
BuckStopsHere 12/4/2012 | 10:01:50 PM
re: Qwest Backtracks Fast "Shaffer rejected the notion that the misleading accounting could be compared to WorldComG«÷s allegedly fraudulent misstating of nearly $4 billion, revealed in June (see Qwest: 'We're Different' ). G«£This is purely and simply an accounting error,G«• he said. G«£These things happen.G«•


Is this guy for real? These things don't just "happen", sir. We are talking about $1.6 billion here, probably more. When I break the lead on my pencil, it just "happens". When people like you wipe out the retirement funds of thousands of people in your quest for a bigger swimming pool, it doesn't just "happen". YOU made it happen. If it was an error, which I doubt, YOU failed to install a system to catch it. If it wasn't an error, I hope you and your cohorts pay dearly, just as all of the investors who are going to lose out when QWEST goes Chapter 11 shortly are going to pay dearly.

Your arrogance is disturbing.
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