During the quarter, the company lost $1.14 billion, or 68 cents a share, compared to a loss of $3.31 billion, or $1.99 a share for the year-ago quarter. The loss included a number of charges, including the writedown of the company’s remaining $740 million investment in bankrupt European carrier KPNQwest NV (Nasdaq/Amsterdam: KQIP); bad debt reserves of $119 million associated with the WorldCom Inc. (OTC: WCOEQ) bankruptcy; and asset impairments on real estate held for sale of $59 million (see KPNQwest Ready to Kick the Bucket? and WorldCom Files for Bankruptcy).
Some other highlights:
- On what it calls a "normalized basis," Qwest says it lost 13 cents a share this past quarter. Analysts surveyed by First Call were expecting a loss of 7 cents per share on that basis. For the same period last year, the company made a profit of 8 cents a share. The company’s revenue plunged 17 percent year over year to $4.32 billion.
- Qwest posted adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) for the period of $1.26 billion, down from $2 billion a year ago.
- On the all-important capital expenditure (capex) front, Qwest executives said the company would cut annual capex expectations to a range of $3 billion to $3.1 billion from the previous range of $3.1 billion to $3.3 billion. Qwest’s capital spending during its second quarter this year was 75 percent lower than for its year-ago quarter, dropping to $618 million from $2.62 billion.
- While chopping its capital spending is bad news for the vendors that serve the company, the move has helped Qwest achieve positive free cash flow. The company reported free cash flow of $320 million for the second quarter and says that it expects to have free cash flow through the end of the year. Free cash flow is defined as operating cash flow minus capital spending.
"I think there are fundamental strengths [in our business]," Qwest CEO Richard Notebaert said on a conference call this morning. "We just have to get the leverage under control."
But that might not be an easy task. Despite the free cash flow, observers worry that Qwest won’t be able to avoid violating its debt covenants. Since the company is required to keep its $25 billion debt load from exceeding four times its cash flow, any reduction in the company’s cash flow could put it in violation of the covenants.
"They will clearly be in violation of their covenants in the December quarter," predicts Davenport & Co. LLC analyst F. Drake Johnstone. “There is certainly a pretty good chance that the company will file for bankruptcy by the year end." (Neither Davenport nor Johnstone own any shares in Qwest.)
The company said today that it has not violated any of its debt covenants but that it’s in talks with its lenders. Once the company restructures its credit facilities, Notebaert said, “cash flow from operations and available debt financing will be sufficient to satisfy our liquidity needs for at least the next 12 months."
Notebaert also tried to ease investor fears that the company’s current difficulties could lead to deterioration of its services. “Everybody at this company… [is] doing this from a perspective of service,” he said on the call, “and we will not let that service deteriorate in any way.”
Any news of a sale of Qwest’s QwestDex directory business would probably have put investors more at ease. Although the company promises an announcement very soon, it has yet to report anything concrete. Qwest is hoping that the sale of the business, which it claims could bring it as much as $10 billion, will help leverage its debt (see Qwest Gets Bids on Directory).
Johnstone, however, expects Qwest will get far less than it claims for the business. "$4.5 to $5 billion would be generous,” he says. “They won’t get enough money from the directory business to help them with their covenants.”
For the year, Qwest, which recently said that it will soon restate the accounting for about $1.16 billion in recognized revenues from sales of optical capacity on its network, lowered both its revenue and earnings forecasts by about $1 billion from the forecast the company provided in its first-quarter earnings release in April (see Qwest Backtracks Fast and Qwest Posts Loss, Preps Asset Sales). The company now expects revenues of $17.1 billion to $17.4 billion, and earnings of $5.4 billion to $5.6 billion for the year.
Qwest says it will give more information about the quarter in a Securities and Exchange Commission (SEC) filing on August 19 but that it will not file this quarter’s results by the deadline.
Following this morning’s call, Qwest’s stock price jumped more than 10 percent to $1.33 a share. Johnstone, however, warns against giving the positive movement in the stock too much credence: “When a stock is trading that low, you have a lot of people just speculating.”
— Eugénie Larson, Reporter, Light Reading