Qwest Slows Slide, but Pain Awaits

Investors know the struggling telco must do something about the cost side of its business.
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Qwest

(Q)

execs didn't get where they are today by being pessimists.

Sure, the latest quarter showed that revenue is still falling and the number of phone lines is still shrinking. Even wireless subscriber totals fell, despite the breakneck growth taking place throughout the cell-phone industry.

Lucky for investors, Qwest executives have discovered an angle that makes all this look encouraging.

The decline's "trajectory has improved," Qwest CFO Oren Shaffer told analysts on a first-quarter earnings call Tuesday. The executives discussed plans to shave costs in long distance by driving down access charges. They also promised to correct a faux pas in which their struggling wireless operation charges for night and weekend calling -- even though those calls are a known freebies elsewhere in the industry.

Those who weren't mesmerized by the improving trajectory were busy gawking at the latest steeper-than-expected losses from Qwest. The company also posted its 11th consecutive drop in quarterly revenue.

Analysts aren't inclined to judge Qwest too harshly, though. Unlike rival Bells

Verizon

(VZ) - Get Report

,

SBC

(SBC)

and

BellSouth

(BLS)

, Qwest has done well in recent years just to avoid bankruptcy and keep on going. On Tuesday, Qwest slipped a penny to $4.01.

Former CEO Joe Nacchio nearly ran Qwest into the ground in 2002 after aggressively pushing for sales growth at all costs. The fallout after Nacchio was ousted included civil and criminal investigations into accounting and business practices, the restatement of $2.5 billion in misbooked revenue and a fire sale of assets to keep creditors at bay.

"I think management did a good job of fixing the balance sheet. It's only now in the last couple quarters that they have been working to fix the income statement," says UBS analyst John Hodulik.

Analysts have long pointed to Qwest's neglect of the digital subscriber line, or DSL, opportunity, and the company's cash-incinerating long distance network as two prime opportunities.

Qwest CEO Dick Notebaert touted the company's investment in DSL network expansion last quarter. On Tuesday, he sheepishly called the high access costs it pays other phone companies to carry its traffic "embarrassing."

"Access charge costs are so high, there's almost no margin," says Hodulik. This means that the cost of providing phone and data services to some business customers is higher than the amount Qwest charges for the service.

Previous management's focus on revenue growth often ignored costs and priced contracts unrealistically low, say analysts.

Hodulik says Qwest can try to get out of unprofitable service contracts and onerous access fees. More likely, it'll try to lower costs by building more network hubs closer to customers to avoid using other telcos' networks.

Qwest says it will spend the better part of the year trimming things like access expenses. The company says it expects to have breakeven results from its long distance business service by year-end. Qwest also plans to start heavy marketing of its cell-phone service on Friday, presumably matching free night-and-weekend calling packages common in the industry. The company sells service on the

Sprint

(FON)

network under the Qwest name.