The gist of the downgrade is concerns over Qwest's free cashflow. In other words, Hodulik doesn't see any new revenues coming in and has lowered his guidance from revenues increasing by 0.6 percent in 2007, to decreasing by 0.1 percent. This pretty much echos our own concerns about Qwest for the past three quarters: Where is new revenue going to come from with fixed-line subscribers defecting and no new growth services like wireless or video? (See Carrier Scorecard: Impressed With Qwest?, Carrier Scorecard: Ma Bell's Metamorphosis, and Carrier Scorecard: Verizon Makes the Grade.)
But speaking of video, one interesting thing to note from Hodulik's downgrade is his belief that the new management at Qwest may pursue an IPTV strategy after all. But just as FiOS killed Verizon Communications Inc. (NYSE: VZ)'s stock after its initial announcement in 2005, the same could happen to Qwest:
"While we believe IPTV is the right strategic option for the company and should help lower line loss and increase ARPU, a large scale build would have a negative impact on near-term cash flow and margins," writes Hodulik in the report.
— Raymond McConville, Reporter, Light Reading