No Ringing Endorsement for Qwest

The struggling telco sags 17% even as its local phone rivals post solid gains.
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The Baby Bell renaissance is passing

Qwest

(Q)

by.

The nation's biggest local phone companies --

Verizon

(VZ) - Get Report

,

SBC

(SBC)

and

BellSouth

(BLS)

-- are enjoying a sizzling summer. Their wireless investments are paying off handsomely, and freshly revised phone pricing rules have handed them a cudgel to use on long-distance competitors. Their stocks have been on an overdue roll, up around 10% in the last two weeks.

But if the good times are back for Ma Bell's long-suffering offspring, you'll find no evidence of it at Qwest. The struggling Denver telco sagged 17% Tuesday after posting disappointing second-quarter results.

Losses widened, sales fell, access lines dropped and special charges ballooned. Qwest cut jobs and plans to keep cutting, but the latest quarter's loss still reached into the hundreds of millions of dollars. If all that weren't enough, the company made the humbling admission that it had overcounted its long-distance lines.

The bad news added up to a 67-cent selloff Tuesday that took the stock down to $3.30, putting Qwest within pennies of a 52-week low. Meanwhile Verizon, BellSouth and SBC each rose 1% to 2% in spite of a down day in the broader market.

Slippage

For the second quarter ended in June, Qwest's losses widened to $776 million, or 43 cents a share, from the year-ago $61 million, or 4 cents a share. Sales slipped 4.3% to $3.44 billion.

The heavy latest-quarter red-ink tally was largely attributable to $487 million in one-time charges. Foremost among those were a $300 million increase in legal reserves to pay potential settlements, and $127 million tied to the slashing of 1,550 jobs. Qwest said Tuesday that it plans to cut an added 1,800 jobs by year-end.

The rise in costs comes as Qwest continues to brace for further legal challenges. The company is under investigation by the

Securities and Exchange Commission

and Justice Department over previous management's aggressive business and accounting practices. The company has now set aside a total of $500 million in legal reserves to pay settlements and fines. Tuesday's provision came as a surprise to some on Wall Street who thought they knew Qwest's legal troubles.

Local Setback

To be sure, the news wasn't all bad. Executives on a conference call said improvements are on track and stood by their prediction that the company would reach cash flow breakeven by the December or March quarter. They also said they expect to soon announce a satellite TV partner to broaden its service bundle offering to consumers.

Meanwhile, Qwest added 109,000 subscribers to its digital subscriber line, or DSL, fast Internet access service in the second quarter to end with 853,000 DSL subscribers.

Those issues aside, much of Qwest's second-quarter performance tracks the deterioration of the local phone business.

On the local front, Qwest blamed a seasonal weakness for its drop in access lines. In the past year, Qwest lost nearly 1 million consumer lines, an alarming 9% drop. The company says many of those customers have switched to wireless service.

But unlike the other Bells, Qwest has no wireless growth to help offset the slide. Qwest sold its wireless assets to Verizon last month for $418 million.

In a red-faced gesture, Qwest also restated the number of long distance lines it serves. The company added 733,000 long-distance lines in the second quarter, but it also determined that the number of long-distance lines in the fourth quarter of 2003 was overstated by some 133,000 lines. Accordingly, the total line count as of the fourth quarter of 2003 and the first quarter of 2004 have been adjusted to 2.2 million and 3.4 million, respectively.

Qwest isn't alone in that humbling category. Last month, Verizon blamed a software glitch after it discovered that it had overstated its long-distance lines by 1.5 million. Both companies said the adjustment didn't have any impact on revenue.