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Qwest Comes on Strong

Light Reading
News Analysis
Light Reading
10/24/2000

Down on telecom services? Take a look at the third-quarter earnings of Qwest Communications International Corp. (NYSE:Q), announced this morning.

Among the highlights:

  • 12.4 percent increase year-to-year in total revenue to $4.77 billion

  • 14.3 percent growth in EBITDA (earnings before interest, taxes, depreciation, and amortization) to $1.86 billion (helping to increase the revenue-to-expense margin to 39.1 percent)

  • earnings per share of $0.14, a 16.7 percent increase compared to the same time last year

Qwest executives credit "more than two-thirds" of this growth to its data and Internet services offerings. Total revenue for those parts of Qwest's business were up more than 50 percent, the carrier said.

Qwest is aggressively pursuing optical networking technology to support these services, and it has agreements in place with a number of optical suppliers, including Avici Systems Inc. (Nasdaq: AVCI; Frankfurt: BVC7), Ciena Corp. (Nasdaq: CIEN), Corvis Corp. (Nasdaq: CORV), and Tellium Inc. (see Avici's Qwest for a Contract and Tellium Triumphs).

The carrier also reiterated its expectations to achieve $18.8 billion to $19.1 billion in revenues and $7.4 billion in EBITDA for the year 2000 overall.

Analysts say this is an impressive showing at a time when AT&T Corp. (NYSE: T) is restructuring; Williams Communications Group (NYSE: WCG) is suffering fits and starts (see Wall Street says 'Whoa' to Williams, Williams Loses Key Staff , and Shareholders Sue Williams ); and Wall Street is generally bearish on telecom stocks.

Qwest's secret? Organization and focus, experts say. "Qwest's had a very metered rollout plan," says Fred McClimans, managing director at McClimans Technology Partners. The carrier has picked its spots, acquiring partnerships and acquisitions as needed, and generally taken a focused, staged approach to the market, instead of rushing in and trying to take over, he says.

"Qwest hasn't overplayed its hand. When you look at AT&T, you ask 'Just what do they do?' or 'What don't they do?' " Qwest's market positioning is clearer, McClimans says.

But the same qualities that generate clarity and focus in the overall market make for internal growing pains. Qwest is on track to eliminate 4,500 jobs by the end of the year, plus 6,500 more jobs by the end of next year. Qwest's also eliminating 1,800 contractor jobs in the same timeframe.

Qwest's also instituted a compensation program that's based on performance, in order to make "employees more entrepreneurial and accountable for accomplishing strategic priorities." Not a lot of laughs at the water cooler, even though Qwest is reportedly a rewarding environment for those who enjoy competition.

All this could hinder Qwest's efforts to digest its acquisition of US West, a deal that closed on June 30. A new organization, Qwest Global Business, is set to result from the merger. According to some analysts, Qwest's "Young Turks" culture, job cuts, and aggressive pursuit of big business accounts could be hard to meld with US West's RBOC traditions and local-services emphasis. "It's just a different business model. It could potentially dilute the carrier's focus," says Seth Spalding, director at Epoch Partners.

Qwest's stock price jumped nearly three points to $48.31 in Tuesday's early afternoon trading.

-- Mary Jander, senior editor, Light Reading http://www.lightreading.com

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