Joe Nacchio's done, but few people believe that

Qwest's

(Q)

problems are departing with him.

Qwest said Monday that the well-paid Nacchio, its growth-obsessed CEO and shareholder lightning rod, would step down in favor of former Ameritech chief Richard Notebaert. Qwest Chairman Phil Anschutz also stepped aside as the long-quiescent Qwest board took action to revive the floundering stock. Wall Street applauded, sending shares of the cash-strapped Denver telco up 21%.

But after a Monday morning conference call that featured a question-free question-and-answer session, Qwest watchers were wondering anew what the company could do to emerge from its morass of red ink, debt and an ongoing

Securities and Exchange Commission

investigation. Notebaert's robust Baby Bell background aside, observers say the cash-burning company has few options as it confronts its deteriorating business.

"It's a positive step, but they have to come clean with the SEC issues," says Scott Cleland of the Precursor Group, an independent Washington research firm. Cleland says Notebaert is "highly regarded," but that he must be "more forthright with investors about the SEC issues to try to get past them." Qwest shares rose 88 cents, to $5.03.

Cold Comfort

Investors' enthusiastic reaction Monday stems more from relief at seeing Nacchio out the door than from any sense that Qwest's business is on the road to recovery. Many investors blame the freewheeling culture that Nacchio brought from the old Qwest network operation for the ills that have since befallen the company, which is increasingly being propped up by the cash-cow U S West arm. Adding insult to injury, the brash Nacchio

had continued to pay himself handsomely even as Qwest stock plunged from its Internet boom-era highs.

"There were a lot of credibility questions surrounding him," says Richard Klugman, an analyst at Jeffries.

Some of those questions stem from the SEC probe, which centers on the company's accounting and on the telecom industry's use of network-capacity swap deals. The company has said it believes it was on the right side of the law in those matters, though observers say Qwest was among the most aggressive telcos when it came to recognizing revenue from these so-called IRU sales.

Credibility aside, Qwest has no shortage of worries right now. In the past months Qwest has suffered numerous earnings setbacks and debt downgrades. Nacchio's massive building spree, aimed at making Qwest the leading new-network operator, has failed to produce returns. Weighed down by some $27 billion in debt and struggling desperately to coax positive cash flow out of its core operations, the company recently cut its dividend to save $83 million. Qwest's piggy bank is so light that the company now seeks to sell one of its best profit producers to pay down debt.

While Qwest has reportedly received bids as high as $10 billion for its lucrative directory business, in the end the company is likely get half that, says Drake Johnstone, who covers Qwest for Davenport. He says the business is worth around $4 billion.

"If Qwest sells the directory for the lower value which I have suggested, the company would be in jeopardy of violating its debt covenants because it would no longer have the cash flow from the directory," he says. Qwest has acknowledged that it will have less cash flow without QwestDex, though it contends it has plenty of cash to meet "any maturities over the next several years."

Hot Calls

Also noteworthy was Qwest's handling of the announcement of Nacchio's departure. For a company beset as much with credibility questions as with financial woes, Monday's showing was hardly reassuring.

After learning that major media outlets were running a story predicting Nacchio's ouster, Qwest issued a 4:39 a.m. EDT press release confirming the change at the top. The company then scheduled a 9 a.m. analyst call to discuss the matter -- but one at which analysts couldn't ask questions, analysts say.

Klugman, for one, says he tried to patch in to ask a question, but was denied. He says he talked with three or four other analysts who had the same problem.

"It was a mess," says Johnstone, who has a sell rating on Qwest and whose firm doesn't have a banking relationship with the company. "I tried several times but couldn't get on."

Klugman says Qwest likely had a technical glitch, and hopes the company will have a follow-up call. Qwest didn't immediately return a call seeking comment.

Whatever happened with the communications breakdown, Qwest's got some more cleaning up to do, some analysts say.

"The problem for Qwest is that they still have their other top execs in place," says Johnstone. "As long as they still have Nacchio's lieutenants in place, I still have concerns."