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Qwest's Nacchio Pipes Up, Again

The latest efforts of Qwest Communications International Corp. (NYSE: Q) to stay ahead of broadband service demand landed it in the midst of a mini-maelstrom of media and analyst reaction over the weekend.

CEO Joseph Nacchio took to the phones this morning to announce a reorganization at Qwest and to set the record straight about the carrier's pending deal with startup Calpoint LLC (no Web site).

"We're not going to make a habit of this," said Joseph Nacchio, explaining public discussion. He said that recent events, plus misinformation and a slide in his company's stock price late last week, warranted the unusual move of having a conference call with analysts and media prior to the company's quarterly earnings report October 31.

Nacchio began by announcing that Qwest's business markets unit is being divided in two, in part to "double down our efforts" to home in on key market changes since the September 11 attacks.

Over the last three weeks, he said, customers have moved to a focus on security, reliability, and network redundancy. They're concerned about keeping their data up and running and protected. And as a result, Qwest is regrouping to meet these requirements.

One group will be devoted to "top global 1,000" customers. This group will focus exclusively on delivering complicated, long-term service contracts to the largest businesses and carriers in North America and Western Europe. It will be led by Joel Arnold, who is presently executive vice president of global business markets at Qwest.

A second group will take over Qwest's national business accounts in North America. This group will focus on all other business customers falling outside the "top 1,000." It will be lead by Cliff Holtz, who is now Qwest's VP of small business markets.

Nacchio said the new units will increase Qwest's marketing and distribution capabilities by "about a third." Staffed in part with the additional 1,000 new Qwest salespeople he announced during his interim guidance call September 10 (see Qwest Slashes Workforce, Outlook), the groups will be involved in a marketing campaign aimed at wresting business primarily from AT&T Corp. (NYSE: T) and secondarily from other carriers such as WorldCom Inc. (Nasdaq: WCOM) and Sprint Corp. (NYSE: FON).

During his presentation, Nacchio seemed intent on squelching any rumors that Qwest's local exchange business might be up for sale to the old Ma Bell.

He also rankled against what he called "the old chestnut" concerning executive defections -- an apparent reaction to newspaper reports last week of the departures of Lew Wilks and Marc Weisberg, the former head of Internet strategies and executive VP of corporate development, respectively.

Nacchio said all executive departures over the past 15 months have been for the best. "I am telling you I'm not sorry; in no circumstances are we weaker for any of the changes made." Some execs were asked to leave, others left because they couldn't get the job they wanted in the reorg, and still others felt it was time to retire.

Nacchio went on to clarify what he sees as widespread "misinformation" about a recent five-year agreement with Calpoint. In short, that agreement includes the following key points:

  • Qwest will sell $300 million worth of optical networking equipment to Calpoint.
  • Calpoint will use the equipment to launch a managed wavelength service for resale by Qwest.
  • Qwest will lease back the capacity for this and other services from Calpoint over a five-year period, after which Qwest will have successfully integrated the new service on its own network backbone.

According to Nacchio, the Calpoint agreement is an effort to speed up delivery of reliable distributed computing services based on optical wavelengths. Basically, Qwest is hiring Calpoint to set up the service and get it operational. "If we did this ourselves, it would take at least three quarters," Nacchio maintained. Calpoint also has access to some key defense and government accounts, the nature of which Nacchio didn't explain.

Apparently, the proposed arrangement raised hackles among analysts who saw signs of questionable accounting practices -- ever a sensitive issue for Qwest. Specifically, some worried publicly that Qwest might be seeking to bump up its revenues by selling its own equipment -- reportedly DWDM boxes from Ciena Corp. (Nasdaq: CIEN).

Others seemed concerned that Calpoint, which remains a mysterious entity, could be bankrolled in part by Qwest -- making for some hairy conflicts of interest.

Indeed, at one confusing point on today's call, one of Nacchio's advisors told analysts that "principals in this venture" were involved in a business called MySmart.com -- an Internet startup whose Web site still exists, but whose office apparently isn't taking calls.

MySmart, founded in 1999, was funded in part by a company owned by Qwest. Now, apparently, MySmart has evolved into another kind of firm, one that Nacchio's associate indicated is involved in Calpoint and intent on expanding its deal with Qwest, as well as buying a "very large ISP."

Nacchio assured Wall Street that Qwest is not backing Calpoint in any way, won't assume its liabilities, and won't record the initial Calpoint transaction as revenue. Instead, it will subtract from expenses any profit made from the sale of the equipment to Calpoint.

Qwest will see "no effect" from the Calpoint transaction in the third or fourth quarter of this year, Nacchio said.

Analysts seemed satisfied with this explanation. "It's clear that [the Calpoint deal} is not a material item," says Patrick Comack of Guzman and Co.. "It's also significant that Qwest is sensitive to market concerns. Joe Nacchio has better things to do than get on the phone every two weeks to answer analysts' questions. I think investors appreciate the effort."

Still, questions remain. "It's another sign of an aggressive company trying to find ways to grow in this market," says Vik Grover of Kaufman Bros. LP. He says he's not as concerned with the Calpoint deal as with Qwest's position as an RBOC, or its plans to go into long-distance services in several states.

But that's another story.

— Mary Jander, Senior Editor, Light Reading
http://www.lightreading.com
lambdaswitching 12/4/2012 | 7:47:30 PM
re: Qwest's Nacchio Pipes Up, Again GǣOver the last three weeks, he said, customers have moved to a focus on security, reliability, and network redundancy. They're concerned about keeping their data up and running and protected. And as a result, Qwest is regrouping to meet these requirements.Gǥ

Sounds like Qwest will be out selling GǣDark FiberGǥ as means to achieve diversity routing at the physical fiber layer. Sort of how to design a physical topography of pipes connecting LA to NY with one path via Omaha and one path via Dallas as an example. Maybe some of QwestGs Fortune 1000 customers just got a wake-up call on the effects of man-made or natural disasters on their ability to effectively communicate.

Good business moves on QuestGs part to recognize the concern and respond.

@lambdaswitching
lambdaswitching 12/4/2012 | 7:47:29 PM
re: Qwest's Nacchio Pipes Up, Again GǣI don't see anything that indicates that their response to the issues (basically QOS stuff) is the sale of dark fiber or simple 1:1 protection. With equipment available today, 1:many protection schemes are possible providing same degree of QOS with much more network efficiency and reduced cost.Gǥ

You may be right, I was reading a bit between the lines. However one model of network topography used by government type users is one of diversity physical routing along with redundant processing capabilities, the old Gǣsingle point of failureGǥ prevention approach. While government levels of funding allows this sort of approach, do commercial entities (read that company bean counters) approve a level of protection for a major disaster?

As a hypothetical, say there is GǣGreat QuakeGǥ in either SF or LA. How would you go about constructing a network topography or access to network services that would allow an alternate operating facility to rapidly resume some level of business operation post disaster? I think this sort of disaster planning is a bit beyond QOS, but then again, they pay people big bucks at Qwest and other places to think about this stuff.

@lambdaswitching
optical_guy 12/4/2012 | 7:47:29 PM
re: Qwest's Nacchio Pipes Up, Again I don't see anything that indicates that their response to the issues (basically QOS stuff) is the sale of dark fiber or simple 1:1 protection. With equipment available today, 1:many protection schemes are possible providing same degree of QOS with much more network efficiency and reduced cost.

Qwest has never been in the business of selling protected circuits before...seems that they are now.
cfaller 12/4/2012 | 7:47:26 PM
re: Qwest's Nacchio Pipes Up, Again lambdaswitching is absolutely correct about government and defense department's obsession with diversity- some of the details specified in those RFPs are unbelievable.

The question remains- is Qwest qualified to provide this level of support? I don't doubt that Qwest can provide superior diversity and redundancy inside the USWest region, but does anyone really believe Qwest would be better able to handle a San Fran earthquake than, say, WorldCom, AT&T, or Sprint (the companies named as targets by Nacchio)?

I highly doubt that Qwest is engineering anything special here. This sounds like a marketing ploy, which it just so happens is Nacchio's specialty...
cfaller 12/4/2012 | 7:47:25 PM
re: Qwest's Nacchio Pipes Up, Again I'm very curious about this Calpoint deal. It looks like Qwest is outsourcing the entire wavelength service to Calpoint. The motivation behind doing that might be interesting.

There are lots of reasons to outsource, but I think it's a signal to the rest of the Bell ship. He made a comment about how it would take too long if they did it internally- that is a not-too-subtle cut against his Bell employees.

I think he's really making a strong effort at streamlining USWest and turning it into a leaner company, ready for the future. Contrast his actions with the merger nightmares going on over at SBC and Verizon, and you get the picture. As much as I dislike Nacchio personally, I think these strong moves bode well for Qwest.

Now, if only he could turn up circuits on time...
77thlightguy 12/4/2012 | 7:47:22 PM
re: Qwest's Nacchio Pipes Up, Again Look, the issues are security and reliability. Physical and otherwise, the whole gambut.

We are at war, remember?

Has to be robust to intelligent attack, not just single point natural disasters. Intelligent physical and soft attack. Overt and covert. So this usually means physical separation of lines, physical diversity and physical contol of crossover nodes to the public interent...if any. A very complex job. Which is why they hired a systems engineering group with government experience.

Unlike commercial, this is no joke survival of the country stuff...has to be six nines reliable to all points, 24/7/365. It's about time the govies got serious, 'stead of getting cheap and dirty.

Qwest, AT&T, Unisys, others will benefit with bucks, country will benefit with military and government that can communicate in wartime, making natural disaster look like a piece of cake.

That's what DARPA-net was supposed to do, if I remember right.

Back to the future.

-77
lambdaswitching 12/4/2012 | 7:46:53 PM
re: Qwest's Nacchio Pipes Up, Again GǣLook, the issues are security and reliability. Physical and otherwise, the whole gambut. Gǣ
GǪGǪ Qwest, AT&T, GǪ military and government that can communicate in wartime, GǪmaking natural disaster look like a piece of cake.

That's what DARPA-net was supposed to do, if I remember rightGǥ

Indeed DARPA-Net was an artifact of the cold war, designed in part to allow government communications in a post nuclear war scenario. That having been said, the US Government is pretty good at figuring out how to construct communications capabilities, which like the energizer bunny GǣKeep going and goingGǪ.Gǥ

But I believe that recent events have forced commercial businesses into revaluating at the enterprise level, their ability to deal with disasters, man-made or natural.

As to Qwest being a technology leader in this arena or just marketing driven, whatGs the difference? If youGve got the goods or solutions, marketing tells your customers about them, if your stuff stinks thereGs always someone around to point it out, probably here on LR...LOL.

@lambdaswitching
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