Qwest Rises, but Core Business Keeps Shrinking

As Qwest (Q Quote - Cramer on Q - Stock Picks) dutifully scrubs away at its shady past, investors are pondering how its bottom line will look in the future.

The scandal-plagued Denver Baby Bell continued its recent resurgence as the release of third-quarter financial results revealed nothing untoward. Qwest shares, which rose 3% Wednesday to $3.27, have put on a steady rally since this summer's liquidity-deprived low of $1.07.

But even as new management wins plaudits for cleaning house, the numbers tell a different story. Qwest's core keeps shrinking: Third-quarter business services revenue fell 5% from a year ago, while consumer services revenue fell 9%. Meanwhile, Qwest remains under the cloud of numerous investigations and its accountants still haven't finalized their audit of 2000 and 2001 numbers.

But most jarringly, Wednesday's report underlined the stark reality of the company's future: Without the cash-generating buoyancy of its soon-to-be-sold directory unit, Qwest's core phone service business will struggle to stay afloat.

Tall Order

Analysts and investors sneaking a peek at Qwest's future got that sinking feeling again Wednesday as the company discussed its 2002 projections. The company trimmed its year-end revenue target only modestly, to $17.1 billion from a $17.2 billion consensus Wednesday. But that guidance projects $4.6 billion in sales for the fourth quarter -- a hefty 8% sequential increase. This at a company that hasn't seen revenue rise from previous-quarter levels since June of 2001.

If a sudden revenue surge at a weak company in a soft economy isn't a tall enough order, consider that any rise the company does manage to report will be attributable at least in part to revenue from a business Qwest won't have for much longer -- the soon-to-be-departed Qwest Dex directory business. Without Dex, which is being sold in two parts to private investors, Qwest's fourth quarter would look flat at best.