Qwest Report Glosses Over Sales Weakness

Qwest Q CEO Joseph Nacchio likes to come across as a tough guy. But he seems to have gone soft when it comes to getting paid by customers.

In fact, second-quarter numbers released Tuesday suggest that Qwest eased payment terms on some big corporate accounts in a bid to ensure that second-quarter revenue and earnings hit their targets. Investors weren't fooled, however, knocking the stock down 5.6% to a 52-week low.

The evidence? Look at the conspicuously large leap in Qwest's second-quarter accounts receivable. Accounts receivable represent completed sales for which cash has yet to be collected. As such, they usually can be expected to rise at roughly the same rate as sales. But during the second quarter, Qwest's accounts receivable jumped 13% from first-quarter levels, dwarfing the 3% rise in sales over the same period. The increase in receivables equaled a hefty 10% of quarterly sales. In the first and fourth quarters, by contrast, receivables were more or less flat with the immediately preceding periods.

We Love Our Customers Qwest's sequential increase in accounts receivable as % of sales (lefthand scale) and DSO* (righthand scale)

*DSO = days' sales outstanding (see article for definition). Source: Detox, Qwest

Looking at such numbers, it's fair to ask whether latest-quarter sales would have been flat to down without the big jump in receivables. Recall that Qwest didn't have a blowout quarter. Second-quarter revenue, at $5.22 billion, and per-share earnings, at 8 cents, were exactly in line with expectations, suggesting the company had little wiggle room to meet numbers. Maybe Qwest was going to miss and decided to entice some big customers with easier payment terms to ensure that it hit expectations.

Qwest's second-quarter lenience can also be illustrated using a ratio that measures how many days on average a company is taking to collect cash from its customers. The ratio is called days' sales outstanding, or DSO. To calculate DSO, take accounts receivable at the end of quarter and divide it by days' sales in the period, which is quarterly sales divided by the number of days in the quarter. The lower the DSO number the better.

DSO hit 84 in the second quarter, up from 77, 78, 82 and 75 in the preceding four quarters.

On its Tuesday morning conference call, a couple of analysts quizzed Qwest about the jump in receivables. Finance chief Robin Szeliga acknowledged the increase and attributed it to allowing some large corporate customers longer payment terms. On the DSO number, she said: "I don't like the fact that it has gone up."

And perhaps investors didn't either. Qwest stock skidded $1.62 in recent trading to $26.94.