Cash Cow U S West Comes to Qwest's Rescue

Other optical network operators plunge, but Qwest hangs in despite trimming guidance.
By Scott Moritz ,

Even as the telecom industry staggers,

Qwest

(Q)

stands tall on Wall Street.

That fact was borne out yet again Tuesday, when Qwest CEO Joe Nacchio shared his regular telecom tongue-lashing with analysts. Nacchio reined in sales guidance for the year, but Qwest rallied 6% as the Street did as it was told and focused on the company's considerable cash-generating capacity. Meanwhile, Qwest's fiber-optic network operator rivals saw their shares plunge, as liquidity worries continue to gnaw at debt-laden companies in all industries.

Downward
Qwest's 2001

Nacchio's presentations tend to focus on how his company, which combines a fiber-optic network with a local service cash cow, is like no other. During Tuesday's hourlong conference call, he disputed the notion that the market is awash with communications overcapacity, a charge that he says grows out of industry pessimism. That said, he still trimmed his financial targets for coming quarters.

"We still believe the guidance we have given is attainable," Nacchio said on Tuesday. Qwest has forecast 2001 revenue in the $21.3 billion to $21.7 billion range. The consensus revenue estimate among analysts is $22.2 billion, according to

Thomson Financial/First Call

. "I would expect, if the economy continues to slow, we would be at the low end of that guidance."

The executive trimmed the top of Qwest's 2001 earnings target, before interest, taxes, depreciation and amortization, to $8.6 billion from $8.7 billion. EBITDA is a measure of cash flow used to gauge the performance of companies in capital-intensive businesses.

Pep Talk

Tuesday marked the second time in two weeks that Nacchio has addressed Qwest's outlook, as investors grow increasingly concerned about slumping demand amid a perceived glut of capacity. Last time, Qwest reaffirmed guidance and acknowledged what

TheStreet.com

had reported a week prior, that it was cutting back equipment spending by $400 million.

Qwest shares benefited from the pep talk, rising 6% to $31.76. Meanwhile, fiber-optic network rivals

Level 3

(LVLT)

,

Global Crossing

( GX) and

Williams Communications

(WCG) - Get Report

each hit 52-week lows, dropping 11%, 6% and 6%, respectively, Tuesday.

These stocks have been under pressure as revenues shrink while debt service costs and liquidity concerns continue to mount. Level 3

dealt a blow to the bandwidth merchant sector Monday, when it warned that its loss for the year would widen to $7.50 a share, wider than the previous estimate of $7.25.

Nacchio, a former

AT&T

(T) - Get Report

executive who charmingly clings to his New Jersey accent even as he works in faraway Colorado, made every attempt to distance Qwest from industry peers. Nacchio stressed that Qwest straddles the revenue-rich local phone business, with its former

U S West

assets, and yet has its future firmly planted in a vast coast-to-coast, high-capacity optical network.

Nacchio held out a few highlights for investors, including a projected 20% increase in second-quarter digital subscriber line customers, against first-quarter levels. Nacchio also said he was creating 600 business services and consumer sales positions in the coming months, but added that the move won't expand the payroll, as many positions will be filled internally. A Qwest spokesman declined to give the total size of the sales staff for "competitive" reasons, but put the figure in the thousands.

Sixth Sense

Nacchio bristled at the comparison to crosstown rival Level 3 in a story Monday in

The Wall Street Journal

, even though Qwest was portrayed as the best of a bad lot. He objected to the assertion that the tens of thousands of miles of optical fiber buried in the ground means there is an overabundance of capacity. He said buried, unused fiber is "irrelevant" to capacity because, without installed network gear to use the fiber, it is of no immediate use.

"There's been an overaggressive pessimism in our industry; everyone has been painted by the same brush," says Nacchio.

Wall Street relishes Nacchio's seemingly off-the-cuff though often-scripted attacks on any number of prejudices against Qwest or the mere association of Qwest with the other "dummies" in the sector.

Dresdner Kleinwort Wasserstein

analyst Bill Klein, who issued a bullish report on Qwest last week, said after the call Tuesday that he may have to "tweak down" his 2001 revenue expectations from the $21.5 billion target. Klein has a buy on Qwest, and his firm has no underwriting ties to the company.

Invoking the line from the movie

The Sixth Sense

, Klein wrote, "I see dead people everywhere," referring to the collapse and potential collapse of so many telecom service providers. Klein hopes his timing is right in picking Qwest as one of the survivors and credits Nacchio for his ongoing ability to remain confident in a time of panic.

"Joe deserves credit for holding it together when others are faltering," says Klein.

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