Tribe Called Qwest Changes Its Tune

Telco trash-talker Nacchio backs down on an accounting treatment but insists it's Wall Street that's wrong.
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For many of us working stiffs, the weekend is thetime to change ourminds about whatever decisions we made overthe prior few days.

The executives at

Qwest

(Q)

are noexception.

After concerns about an accounting treatmentknocked 15% off Qwest's stock last Thursday, thecompany said Monday it had reconsidered how thetransaction would appear on its books.

The Denver-based telco also explained Monday howit was reorganizing to improve its chances of gettingbusiness from big North American and Europeancustomers. But investors remain wary, perhaps becauseQwest's name has come up before over accountingissues, or perhaps because of the uncertainty that CEOJoe Nacchio described in the wake of the Sept. 11terroristattacks on the U.S. The stock dropped 20 cents Mondayto $16.50.

The revised accounting approach -- which Nacchiosaid came after the company consulted with outsideauditors over the weekend -- relates to

an outsourcing deal that Qwest isdoing with a startup fiber optic firm calledCalpoint. As part of the deal, Qwest hasagreed to purchase at least $10 million a month overthe nextfive years of what are known as managed wavelengthservices. Meanwhile,Qwest has also agreed to sell Calpoint equipment forthose services(which Calpoint won't be operating over Qwest'snetwork).

Last Friday, Qwest said it would be recognizingabout $200 million in equipment sales up front, likelyin the third and fourth quarters of theyear. To assuage investors, the company added it wouldbreak out the Calpoint transaction from its revenuenumbers and its earnings beforeinterest, taxes, depreciation and amortization. But,in a bit of Mondaymorning backtracking resulting from the weekend'sreconsideration,Qwest now says it won't be recognizing the sale asupfront revenue thisyear. Rather, the sale will be recognized within thecompany's expensecalculations over the course of the five-year deal,which is expectedto go operational in early 2002.

On the call with analysts, Nacchio wasunapologetic about the deal,saying it enabled the company to accelerate by two orthree quartersthe deployment of these new managed wavelengthservices, which he describedas a step forward for the optical private lineservices Qwest alreadyoffers. He said the deal, which also commits Calpointto bringing in $130million of additional revenue to Qwest, has a netpresent value to Qwest of$250 million. Nacchio also said his salesforcebelieved it could bring inrevenue for the new service that was triple Qwest'smonthly cost forleasing the capacity.

In fact, Nacchio seemed outright combative towardpeople who mightquestion the propriety of the Calpoint transaction.Addressing what hecalled suspicions that Qwest was manufacturingrevenues, Nacchio said:"I don't know what manufacturing revenues means. Ifthat means you try tohave more revenues than you had in the prior period, Ithink that's a greatidea."

Toward the call's close, Nacchio made anotherreference to deals that he said made the company "look like what thefuture of the industrywill become." Said Nacchio, "If some of you don't likethose deals, andyou'd rather have us just have access lines growing inMontana or NorthDakota or Louisiana or New York state, there are othercompanies that areprobably more suited for your portfolio. We will havepredictable cash flows, wewill continue to do creative deals, we will continueto grow theindustry."

In a discussion of the Sept. 11 attacks on thecompany's business,Nacchio described mixed signals from the market. Callvolumes are up 8%to 10% over what would be expected normally, he said.Incoming calls fornew business from consumers appeared to be recovering,with calls fromconsumers on Sept. 24 at stronger levels than wouldusually beexpected. But calls from businesses have yet to returnto normalvolumes. The last time the company gave guidance tothe market was the daybefore the attacks.

"It's too early to tell if we should be modifyingourguidance," Nacchio said.