Qwest's Future Qwestionable
As a result of the restated reports, Qwest shows sizeable differences in "before" and "after." It now has $2.53 billion more in net losses for 2000 through 2002, and its revenue has been reduced by $2.48 billion for the same period.
Qwest said it would restate its results after questions were raised about its accounting practices, including “swaps” of long-distance capacity (see SEC Qwestions Qwest, Qwest Prepared to Answer Feds, Qwest Faces Fed's Fist).
Back in the boom years, carriers routinely traded IRUs (indefeasible rights of use) -- capacity on fiber, conduits, or wavelengths leased to other providers -- for equal bandwidth on another network, and treated the incoming cash as revenue while charging the outlay as a capital expenditure over a longer period of time. Such treatment improved the company's revenue picture very nicely.
The new numbers have analysts wary of what might happen next. Qwest is still under investigation by the SEC and the U.S. Department of Justice, and it has disclosed that it's in settlement talks with the SEC regarding alleged accounting irregularities. The new twist might not help its cause.
”At MCI (Nasdaq: WCOEQ, MCWEQ) accounting irregularities turned into a case of massive and deliberate accounting fraud... Right now, there are no such allegations against Qwest, but there is this lingering question of whether the same underlying corruption that existed at MCI also exists at Qwest,” says Tom Nolle, president of CIMI Corp.
Earlier this month, Joseph Nacchio, former president and CEO of Qwest, agreed to pay $400,000 to settle claims from New York Attorney General Eliot Spitzer that he violated securities laws in receiving shares of hot initial public offerings. The company’s founder, Philip F. Anschutz, has also coughed up fines to settle allegations of the same practice of profiting from so-called IPO spinning (see Nacchio to Pay $400K in IPO Suit, Qwest Founder to Fork Over $4.4M).
Qwest claims it has cleaned up its act and put a new management team in place to move the company forward.
Meanwhile, it faces growing competition from RBOCs such as Verizon Communications Inc. (NYSE: VZ), whose territories have always yielded more opportunity than some of Qwest's less-populated home turf. “Qwest has always been the poor stepchild of the RBOCs,” says Nolle.
The new worries generated by the restatement won't help Qwest in its struggles, analysts say. The ongoing revelations and questions are a distraction, hindering the company's focus at a crucial time. “It’s hard to see how they can get into a space where they can be competitive,” says Farooq Hussain, general partner at Network Conceptions LLC.
Shares of Qwest were trading down 1.62 percent to $3.64 a share at press time.
— Jo Maitland, Senior Editor, Boardwatch