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Qwest Slashes Workforce, Outlook

Qwest Communications International Corp. (NYSE: Q) has announced a reduction in its financial expectations through the end of this year, while outlining a plan to cut its capital expenditures and reduce its workforce by six percent come the first quarter of 2002.

"Over the past thirty days, we've seen a worse economic downturn than expected," CEO Joseph Nacchio told reporters and analysts on a conference call this morning. This is causing Qwest to reduce guidance and cash flows, he said.

"This is a reflection of the times, it's not easy to do," he said. "I'm disappointed that we couldn't outrun the [economic slowdown] forever."

So where's the good news? It may be the fact that, upon the news, Qwest's stock actually rose. At press time, Qwest shares were trading at $19.36, up 1.22 (6.73%). This may be a reflection that investors have already assumed the worst of the gloomy telecom sector.

In a now-familiar litany, complete with metaphors of boats, tides, and low-water marks, Nacchio said Qwest's wholesale and regional businesses are suffering, as consumers tighten their budgets and carriers who buy capacity from Qwest shift their buying patterns to reduce their short-term costs and long-term commitments.

"We're seeing a lowering water table," he said. "On the 'old Qwest' side of the business, we're seeing mid-teens to double-digit growth in revenues. For the US West side, we're seeing mid-single digits. You put that together, we're seeing high single digits, okay?"

This won't be sufficient, he says, to give Qwest the level of sales it had hoped for during the second half of 2001. Specifically, Qwest has reduced its year 2001 revenue guidance about 5 percent, from approximately $21.5 billion to $20.5 billion. EBITDA (earnings before interest, taxes, depreciation, and amortization), a generally accepted measure of liquidity, is expected to be $8 billion for the year.

During its second quarterly report back in June (see Qwest Gives Market a Boost), Qwest forecast its 2001 revenues would fall between $21.3 billion and $21.7 billion, with EBITDA between $8.5 billion and $8.7 billion.

Qwest also will be cutting its 2001 capital budget from $7.5 billion to $5.5 billion -- a move that Nacchio insists won't cut into the carrier's competitive position.

Nacchio won't give further guidance, but says 2002 revenues are now expected to be "flat." Qwest's debt levels will also remain flat, although Nacchio hinted that Qwest may be interested in "going back to the capital markets" to obtain an infusion of $500 million to $750 million.

Qwest is also cutting about 4,000 people from its present staff of 66,000. About 20 percent of the cuts will occur through attrition, Nacchio said. About one-third of the cuts will take place in Colorado, where the company's RBOC business is centered.

Qwest isn't just laying off, though. It's also revamping its sales staff, swapping out 1,000 existing staffers for 1,000 "quota-bearing sales executives" in the global business markets unit, all focused on increasing national accounts.

This strategy is clearly aimed at beefing up what Nacchio calls the ongoing "delicate balance" between Qwest's nationwide wholesale capacity business and its regional sales. It's this balance that's been credited with Qwest's ability to ignore the wolf at the door until now (see Qwest (NYSE: Q)).

Nacchio said the current economic slowdown is hitting at Qwest's businesses across the board. But particularly hard-hit, Nacchio said, is Qwest's wholesale capacity business, in which fiber and connectivity -- including optical wavelength services -- are sold to other service providers.

Typically, carriers make multi-year commitments in this part of the business several months in advance, Nacchio says. But now, economic pressures have caused many of these carriers to call for new terms on their contracts.

"In many instances, customers have gone through the process and now want to buy capacity month to month," he notes. "They're hedging, saying, 'I'll buy capacity for five to six months to meet my engineering forecasts, instead of five to ten years.'"

Nacchio bristled at one analyst's suggestion that Qwest's reduced revenue outlook has anything to do with its accounting practices -- specifically, rumors that Qwest may have been tweaking its reporting of long-term capacity sales to bulk up its quarterly figures.

"There is no accounting issue!" Nacchio asserted. He indicated that rumors originated with Wall Street sell-side analysts who failed to understand the way fiber is sold amongst carriers. He reiterated that Qwest continues to follow generally accepted accounting principles and said that he's "sick" of suggestions otherwise.

In reply to one analyst's question about reduced capex on wavelength division multiplexing (WDM) gear, Nacchio refused to say exactly what kinds of equipment would be most affected by the capex cuts. "It's pretty much across the board," he said. "Let me just leave it there."

Throughout the call, Nacchio remained upbeat about the long-term prospects for Qwest and telecoms in general. "Broadband, IP, distributed computing... we're going to continue hammering away to take customers and grow our market share," he said.

— Mary Jander, Senior Editor, Light Reading

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