Qwest Seen Posting First Profit in Four Quarters

The up-and-coming telecom company posts earnings Wednesday morning.
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SAN FRANCISCO -- Qwest Communications (QWST) is expected to report its first profit in four quarters when it announces earnings on Wednesday morning, analysts and money managers say.

The Denver-based broadband behemoth is expected to post a profit of 2 cents a share for the three months ended Dec. 30, according to the consensus of 18 analysts surveyed by

First Call

. Qwest reported a 2-cent-per-share loss in the previous quarter and a 6-cent profit in the fourth quarter of last year.

"I'm not expecting any big surprises," says Michele Wolf, an analyst with

Bear Stearns

.

John Schaeffer, vice president of research with

Hanson Investment Management

, which manages $1.5 billion in assets, says he expects positive news. "Cash flow will be excellent," he says. "I expect gross margins to be excellent. But if they weren't, we wouldn't care."

Schaeffer adds, "We know there is a huge bandwidth bottleneck. If you own bandwidth, you're going to win."

Qwest, a leading provider of high-speed Internet connections for businesses and consumers, is betting the farm on broadband. The company is in the midst of building an 18,500-mile-long new fiber-optic broadband network, and says it has completed more than half of the project.

The networks continue to draw in new business. Last week, Qwest said

America Online

(AOL)

had awarded it a $13 million multi-year contract to provide a national IP backbone. Qwest also announced last week the launch of its first dial-up Internet service for consumers.

Qwest has also closed two high-profile partnerships recently that promise to extend its leadership position. The first, with

Microsoft

(MSFT) - Get Report

, is set to roll out in the second quarter of 1999. Qwest has promised to set aside a portion on its high-speed network that will support a variety of Web hosting services built on Microsoft's NT platform. In return, Microsoft will license its software to Qwest and become a shareholder in the company, purchasing $200 million of Qwest's common stock at $45 per share.

The second deal, announced last November, is with

KPN

(KPN)

, the privately held Dutch telecommunications company. The two companies plan to build and operate a high-capacity fiber-optic Internet Protocol-based network in Europe, which will be linked to Qwest's North American network for data, video and voice services. The equally owned joint venture, called KPNQwest, has started offering high-speed service to large businesses.

In early January, Leslie Stonestreet, an analyst with

NationsBanc Montgomery Securities

, raised Qwest's 12-month price target from $58 to $65. Since then,

Lehman Brothers

downgraded the stock to outperform from buy, citing high expectations and valuations.

Some money managers expect Qwest to announce soon a partnership with an Asian telco to extend its reach into the Pacific Rim. "I think that's the next biggest announcement," says Schaeffer.

Following that deal, word on the Street has it that Qwest is either an excellent takeover target, or more likely, a potential high-profile partner for a Baby Bell.

"I think the Bells need Qwest but not exclusively," says Schaeffer. "There are plenty of other places they can get bandwidth from. Frankly, I don't see any compelling reason why Qwest should sell."