Qwest ( Q) posted a steep second-quarter loss, reduced its financial guidance and said it wouldn't file its next quarterly report with regulators by the deadline. The company said in a Thursday morning press release that it had reached its long-stated goal of achieving positive free cash flow, as defined by operating cash flow minus capital spending, in the period. Qwest reached this milestone in part by slashing capital spending by more than 75% from year-ago levels, to $618 million. But investors are likely to be unnerved by news of the company's inability to file a quarterly report covering the period, possibly until much later, along with scant information about Qwest's highly anticipated sale of its directory business. Qwest, whose shares have lost more than 90% of their value this year as Wall Street has worried about its liquidity along with the possible impact of various criminal and regulatory investigations, closed Wednesday at $1.20.
For the second quarter ended June 30, Qwest lost $1.14 billion, or 68 cents a share, narrowing from the year-ago $3.31 billion, or $1.99 a share. The latest-quarter loss included a number of charges, including the writeoff of the company's remaining investment in KPN Qwest, a European network operator. On what it called a normalized basis Qwest said its loss was 13 cents a share, reversing a year-ago normalized profit of 8 cents, as revenue plunged 17% to $4.32 billion. Qwest posted adjusted earnings before interest, taxes, depreciation and amortization for the period of $1.26 billion, down from $2 billion a year earlier. The company also trimmed its revenue and EBITDA guidance for the year, citing the continuing deterioration of the telecom business. Qwest said it remains in compliance with its debt covenants but that it is talking with its lenders. As analysts point out, any reduction in Qwest's cash flow is likely to put the company in violation of its loan covenants. Qwest is required to keep its debt, which has ballooned to $25 billion, from exceeding four times its cash flow. But depending on the timing and total of the restatement, Qwest may already be in violation of its 2001 debt covenants. The company said it would provide more detailed disclosure about the second quarter in an Aug. 19 form 8-K filing but wouldn't be able to file its scheduled 10-Q until some time later, as it continues its internal accounting probe. Qwest's new CEO Richard Notebaert -- on a mission to clean up the company's books -- said last month he planned to restate at least $1.16 billion in network capacity sales recorded over the past three years.
But Qwest provided little information on the long-awaited, ever-pending sale of QwestDex, the company's directory business. The company had said it would have a sale of the unit by this month, but the press release Thursday said only that "the company is in late stage negotiations with bidders to sell all or part of QwestDex." Any sign that Qwest is indeed close to getting its hands on the proceeds of a Dex sale could go a long way toward pacifying antsy creditors. The company has said bids for the unit have ranged as high as $10 billion, though many observers are skeptical of that claim. More to the point for stockholders, cash raised in a sale of the directory unit will also help keep a looming liquidity crisis at bay a little longer. With $1.4 billion in cash on hand as of March and $1.1 billion in loan payments alone coming due in the next five months, Qwest is cutting its funding margins dangerously close. Though the company says it plans to be free cash flow positive for the year, it will still need to raise cash to stay in the good graces of its lenders. And without the sale of QwestDex in hand, the company will have a difficult time negotiating favorable terms with its creditors, say analysts. "Sale of a significant portion of the directory business appears to be the only event that can keep the company from a technical default on its bank agreement," Piper Jaffray debt analyst Cory Jackson wrote in a note Wednesday. "Outside of a directory sale, Qwest's bank group holds the cards."