Shares of service provider Qwest Communications International Corp. (NYSE: Q) fell as much as 20 percent today after the company surprised Wall Street with poorer than expected third-quarter earnings. The company reported flat revenue growth and surprisingly large losses (see Qwest Reports on Q3).

"Everyone knew that the revenues would be pretty light," says Tavis McCourt, a senior analyst with Morgan Keegan & Company Inc.. "But no one expected the declines in the wholesale business to be to this degree."

The grim news brings back the gloomy prospects that the worst is not yet over for the telecommunications sector, as Qwest is one of the largest carriers, made up of an optical long-haul network and traditional RBOC business.

At midday Qwest was trading down 3.34 (20.88%) to 12.66.

This morning the company reported a net loss of $142 million, or 9 cents a share, compared to a year ago when the company reported a loss of $248 million, or 15 cents a share. On a pro forma basis, the loss was $138 million, or 8 cents a share. Analysts' prognoses had ranged between a loss of 2 cents and earnings of 9 cents. The average consensus on Wall Street reported by First Call was for a 3 cent profit. Last year, Qwest reported a third-quarter profit of $231 million, or 14 cents a share.

Revenues for the quarter came in at $4.77 billion, flat with a year ago. And even though the carrier cut its revenue forecasts last month, analysts were still expecting revenue of $5.11 billion. The company also said it expects fourth-quarter revenue to remain flat with its third quarter.

Qwest also reported that during this past quarter it saw optical capacity sales fall to about $130 million from $230 million last year. Optical capacity asset sales and non-recurring IP equipment revenue decreased more than $400 million to 2.8 percent of revenue.

The company said it has seen a decline in wholesale demand and that customers had shifted purchases away from network asset purchases to shorter-term monthly operating leases. Some of this change comes from the fact that smaller carriers leasing capacity from Qwest are using their own networks much more efficiently by grooming traffic. They are also anticipating lower growth rates themselves and therefore not buying extra capacity, says Morgan Keegan’s McCourt.

While Qwest did not formally lower capital spending forecasts for 2002, executives said it's likely they will spend less than the previously stated $5.5 billion they had budgeted for next year. Once again, this is bad news for equipment providers that have seen Qwest’s capital budget already fall some 35 percent from last year’s $8.5 billion amount.

"I wouldn’t think this would be a good sign for equipment suppliers," says McCourt. "Qwest seems more economically sensitive than ever before, and I wouldn’t expect them to build out their long-haul network much more. Instead, I see them cutting more costs."

On a bright note, the carrier reported Internet revenue grew nearly 65 percent, while wireless revenues jumped 68 percent to more than $200 million. Sales of high-speed digital subscriber line Internet access grew 80 percent, driven by an 84 percent increase in subscribers to 391,000. But despite this growth in DSL, the company expects DSL to weaken in the coming quarters.

Companies most likely to be hit by Qwest’s news are optical long-haul transport and switching companies like Ciena Corp. (Nasdaq: CIEN), Corvis Corp. (Nasdaq: CORV), Tellium Inc. (Nasdaq: TELM), Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA), and Nortel Networks Corp. (NYSE/Toronto: NT), each of which counts Qwest as an important customer. On the DSL side, Cisco Systems Inc. (Nasdaq: CSCO) and Lucent Technologies Inc. (NYSE: LU), which provide DSL aggregation and subscriber management products, could also be affected, writes Alex Henderson, an analyst with Salomon Smith Barney, in a note sent to investors this morning.

But some analysts covering these systems companies say that Qwest’s earnings didn’t provide any new news that would affect the current outlook for these companies.

“We’re already anticipating the low water mark for long-haul equipment providers in the first quarter of 2002,” says Rick Schafer, an analyst with CIBC World Markets. “I’m not saying we will see great sequential growth after that. But it’s really tough to say that, based on Qwest’s earnings today, it will be negative for Ciena or ONI or any of the other optical companies. But who knows? Maybe investors will shoot first and ask questions later.”

Ciena was trading down slightly by 0.23 (1.38%) at 16.44 at midday. Tellium was also down 0.15 (2.19%) to 6.70. But other optical companies that supply gear to Qwest were up. Nortel was up 0.10 (1.73%) to 5.88 and Corvis was up 0.02 (0.97%) to 2.09.

— Marguerite Reardon, Senior Editor, Light Reading
http://www.lightreading.com