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The Association of U S West Retirees
 

 

 

Qwest's Quest For Financial Health
By Almar Latour
The Wall Street Journal
Saturday, February 11, 2006

When Qwest Communications International Inc. reports fourth-quarter results Tuesday, it will be with some sense of accomplishment.

Shares of the Denver-based company are up nearly 40% over the past 12 months.  Investors have been cheering its success at re-engineering its $15.5 billion debt load to cut yearly interest costs by $300 million and at keeping capital expenditures in check.

Attention now will be focused on whether Qwest can continue cutting costs, which would free up cash flow and allow it to accelerate paying down its debt.  The company's debt now exceeds its market capitalization by roughly $4 billion.

Qwest also says it may turn profitable in 2006.  The company, which lost a bitter takeover fight with Verizon Communications Inc. for long-distance carrier MCI Inc. last year, is still recovering from an accounting scandal several years ago that forced it to restate billions of dollars of revenue.

But while cost-cutting is helping the company in the short term, longer-term challenges remain.

During the past year, cable companies have been poaching Qwest's phone customers in Phoenix, Seattle and other large metropolitan areas, and they are expected to accelerate their efforts in the coming year.  Omaha, Neb., today has more consumers subscribing to phone service from their cable company than from Qwest, the city's local phone company.

Investors closely watch land-line losses for all local phone companies.  Such lines are more important to Qwest than they are to Verizon or AT&T Inc. because most of Qwest's revenue is linked to land-lines.  Its peers own stakes in large and growing wireless operations that help offset losses on land-line services.  Qwest only resells wireless service from Sprint Corp.

A more aggressive attack from cable companies may force Qwest to start slashing prices for its high-speed Internet service -- something it has been reluctant to do.  Other phone companies locked in competition with cable have been cutting broadband rates significantly in the past year.

Investors have been applauding Qwest's relatively low capital expenditures.  But while this strategy helps the company report healthy cash flow, it may hurt Qwest's competitiveness in the long term if the company falls behind its rivals in investing in network upgrades and rolling out new services.

Write to Almar Latour at almar.latour@wsj.com

http://online.wsj.com/article/SB113960438963270983.html?mod=article-outset-box