Updated from 10:55 a.m. EST

Qwest

(Q)

continues to clear the decks in an attempt to right its foundering ship.

The phone-and-data-service provider Tuesday predicted a first-quarter revenue shortfall and reported weaker-than-expected fourth-quarter results. Perhaps more ominously, Qwest served notice that it is hellbent on raising cash to lighten its massive debt load, whether via the capital markets or by selling assets.

Qwest shares, already 70% off their 52-week high, slipped 70 cents Tuesday to $11.65 as investors fretted about the future for this onetime New Economy highflier.

Reversal

Qwest once rode the tech boom to great heights; its buoyant share price enabled the new age network builder to acquire big telcos like cash cow

U S West

. Once upon a time, slow-growing U S West was even seen as the dead weight on the Qwest franchise, which pushed some of the same Brave New World buttons that

Enron

and other New Economy favorites did.

But recent quarters have suggested that even U S West's formidable cash flow isn't enough to sustain Qwest's sizable appetite, and the company has recently moved to sharply cut back on expenses. The attrition trend continued Tuesday, as Qwest made a further cut in its 2002 capital spending budget, to $4 billion from $4.2 billion; the company spent twice that much on network equipment and the like a year ago. Qwest also firmed up plans to cut 7,000 additional jobs. The Denver-based company has about 67,000 workers.

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The cost-cutting is looking more and more crucial because Qwest says the first quarter will be the worst financial period for the coming year. A sagging economy in the Western U.S. took sales at Qwest's core local phone business down by 2% from year-ago levels. Overall, revenue fell 6% from a year ago.

Weakness in the cash-generating local phone service business undermines the confidence investors have in the whole company because U S West is widely seen as the financial backbone of an otherwise increasingly speculative tech play.

"It's the thing everyone seems to be focused on today," said Donna Jaegers, money manager at Invesco Funds Group.

Notably, Qwest also told investors and analysts on a conference call Tuesday that two major contracts, valued at between $50 million and $60 million, were pushed out to future quarters, accounting for possibly 1% of latest-period revenue declines.

'Black Hole'

With the collapse of rival next-generation optical-network builder Global Crossing Monday, Wall Street has been particularly sensitive to the burden that Qwest's own cash-burning national broadband network puts on the company.

According to Jaegers, the Street values Qwest's local business at between $11 and $14 per share. "That means the market values broadband as a black hole," said Jaegers.

That said, Qwest was pushing the focus forward and away from the cash-burning hole the company appears to have stumbled into. CEO Joe Nacchio sought to deflect concerns about the red ink, saying the heavy spending on both the local and broadband networks is in the rearview mirror. "We spent heavily to pivot the franchise," said Nacchio, trying to cast the first quarter as a turning point.

Jaegers is inclined to give the company the benefit of the doubt, for now. "There's a good long-term opportunity for Qwest," said Jaegers, who holds a position in the stock. But since Qwest stopped booking network capacity sales to the tune of $4 billion or so annually, year-over-year comparisons will be pale.

Weakening

For the fourth quarter ended Dec. 31, Qwest lost 7 cents a share on a pro forma basis, excluding certain costs. That result reversed the year-ago pro forma profit of 16 cents a share. Revenue slid 6% to $4.7 billion from $5.02 billion a year earlier. Both figures were short of Wall Street's estimates.

In a conference call following the release of fourth-quarter earnings, Nacchio said 2002 revenue would be "at, or near, the low end of our previously issued guidance," of $19.4 billion to $19.8 billion. Qwest reported 2001 revenue of $19.74 billion.

Qwest has some $25 billion in outstanding debt, and investors have worried that debt service and the costs of building its new era phone and data network could tax even the robust cash flow of U S West.

The company said it is "committed to the health of our balance sheet," adding that it would consider issuing equities-backed securities as well as selling wireless assets, telephone access lines or its DEX directory publishing business. Finance Chief Robin Szeliga said the company will likely pursue several options, and the moves will reduce debt by about $1.5 billion to $2 billion.

All things told, "There's no clear catalyst until revenue comparisons in the fourth quarter start to show growth," Jaegers said. But she is optimistic that if Qwest can book steady sales of its broadband services, those comparisons will look more favorable, and the next-generation network will start earning its keep.