AUSWR
The Association of U S West Retirees
 

 

 

Qwest CEO has telco on solid fiscal footing
Dick Notebaert is fulfilling promises to improve company
By Jeff Smith
Rocky Mountain News
Wednesday, July 5, 2006

Qwest Chief Executive Dick Notebaert took over for ousted Joe Nacchio in June 2002 and invited employees to talk to him through e-mails.  It created a bit of resentment.  One manager sent him a note and asked Notebaert to "please stop" answering his employees' e-mails.  The manager was frustrated because his staff was waiting only 24 hours for answers before turning to Notebaert.

Notebaert said his response to the manager was:  "So the answer is not for me to not respond but for you to get it done in 23 hours."

It has been four years since Notebaert, 58, walked into Qwest's corporate auditorium to a standing ovation.  By most accounts he has done what he promised to do from day one:  focus on customer service, build the long-term value of the company for its stockholders and repair employee relations -- partly through his "talk to me" attitude.

Progress came in fits and starts, but today it's clearly noticeable.

Qwest, which provides local phone service in 14 states and high-speed communications services nationwide, recently recorded its first true profit in six years.

Its revenues, which total about $14 billion a year, are growing, though slightly.  Debt has been cut from $26.5 billion to $15 billion.  Customer service has steadily improved by most measures.  And employee morale appears to be positive overall -- despite the fact that the company, like others in the industry, has shed thousands of jobs.  Qwest now employs fewer than 40,000.

Notebaert has shown no favorites -- he has cut the managerial ranks as deeply as the rank and file.

"They weren't used to a flat, transparent organization," Notebaert said of managers taken aback by his desire to communicate directly with employees.  "When we got here, we had over 180 VPs (vice presidents) and above.  Today, we've got 71."

The changes haven't gone unnoticed, even by some of Notebaert's toughest critics, such as Nelson Phelps, executive director of the Association of U S West Retirees, who regularly complains about the lack of a pension increase, eight years and counting.

"The pall and negativity have gone away, and I attribute that to Mr. Notebaert," Phelps said.  "He has really made the Qwest image much more trustworthy.  You just don't hear the general public running the company down the way they did under Sol Trujillo and Joe Nacchio. . . . I've heard several employees say that it's a fun place to work again."

Perhaps indicating employees are taking more pride, Qwest in 2005 sold $1.3 million of branded merchandise at its company store, up from $380,000 in 2002.

Daunting list of problems

Under Trujillo, then-U S West was known as U S Worst for its customer service.  During Nacchio's final days, Qwest faced an accounting scandal, shaky finances and a stock price that had slid from $66 at its peak in March 2000 to $4.10.

During a recent interview in Qwest's corporate headquarters in downtown Denver, Notebaert entered the room wearing a light green dress shirt with a Qwest logo, enthusiastically waving a checklist of the problems he faced when he arrived and a checklist of how they were resolved.

The problems were daunting: government investigations, a liquidity crisis, a pending bank-loan default, declining operating results, low employee morale, a corporate culture focused on short-term targets rather than long-term value.

Even with his research beforehand, Notebaert said he was caught by surprise by the depth of the accounting issues.  Eventually more than $2.5 billion would be erased from the company's 2000 and 2001 books.

Several executives Notebaert initially retained and thought highly of -- including former Chief Operating Officer Afshin Mohebbi -- eventually would be swept up in the Securities and Exchange Commission's case against the company.

How close Qwest was to bankruptcy has been debated.

"To me, we were never close because we had a plan," Notebaert said.  But he acknowledged Qwest would have been "very close" to bankruptcy had the plan not been properly executed.

In his first nine months, Notebaert's new Qwest management team was able to renegotiate the company's bank loan, restructure billions of dollars of debt, sell the Dex Yellow Pages business for $7.05 billion, reduce the cash burn rate, and work with regulators to clean up financial statements and tighten accounting controls.

To be fair, Nacchio already had decided to sell Dex.

Notebaert also credits Qwest's board of directors for some of the decisions that led to the Denver telco's regaining its financial footing.

Qwest changed its motto from "Ride the Light" to "Spirit of Service," drawn from a painting depicting New England lineman Angus Macdonald trudging on snowshoes to keep phone lines maintained during the Great Blizzard of 1888.  Notebaert to this day still sends out "Spirit of Service" cards picturing Macdonald.

"The only reason this company exists is for the customers," Notebaert said.  "This (Spirit of Service) isn't the flavor of the month."

Classic turnaround

Some at the time likened Notebaert, formerly chief executive of Ameritech, to a "Bellhead" who would turn the fiber-optic network upstart back to a U S West-like stodginess.

But Notebaert privately had long been a fan of Phil Anschutz's Qwest, which built a fiber-optic network along rail rights of way in the 1990s.

Anschutz went to Chicago in the mid-1990s to meet with Notebaert and see if he could get Notebaert interested in investing in the company.

"I thought it was a great concept," Notebaert recalled last week.  "I wanted to buy (the company)."

Jeffrey Halpern, a telecommunications analyst for Sanford C. Bernstein & Co., calls Qwest a classic turnaround story under Notebaert.

"You have a business that when he took the helm from Joe Nacchio it internally was in chaos, financially on the brink of ruin, and not performing in any way that shareholders and customers and employees could be proud of," Halpern said.

What Qwest did, Halpern said, was "shore up the finances, remove the tremendous amount of waste, shore up the relationships with the employees and customers.  And today it now garners a (20 percent to 25 percent) premium in the market related to its peer group."

Since January alone, Qwest shares have shot up more than 35 percent to more than $7.50 -- outstripping even the most optimistic analysts' target prices.  Halpern himself has a price target of $6 and now rates the stock a "market perform."

Reed Roberts, the Qwest bargaining agent at District 7 of the Communications Workers of America, said the corporate culture is much better than during Nacchio's regime.

"Employees never liked being referred to as clowns," Roberts said, alluding to the story that Nacchio called some U S West employees clowns.  (Nacchio, through his attorney, has denied doing this.)

"We're not going to go bankrupt," Roberts added.  "The health of the company -- everyone is happy to see that."

But, he said, tougher performance standards on field technicians have been affecting morale.  He said Qwest seems to be trying to apply the kind of standard one would have at a call center to workers in the field.

"I appreciate where they're coming from -- one more job per technician per day (could save a lot of money every year).  But the average in the field has been four to five tickets a day for two decades, and I think there's a reason for that," he said.

Barry Allen, executive vice president of operations, said the company is "pleased to have a positive, constructive relationship with the unions.  There is no question we are continuing to evolve our business to improve service.  Our focus must remain on customers."

Challenge from cable

Notebaert is running a lean machine to boost cash flow by an additional $450 million to $600 million this year, despite the increasing competitive challenge from cable-TV providers.

Analysts call that challenge the biggest Qwest faces.  Comcast just announced a $99-a-month deal for video, phone and high-speed Internet bundles in four of Qwest's biggest markets:  Denver, Seattle, Portland, Ore., and St. Paul, Minn.

Analysts say Qwest and all of the Bells across the United States are likely to lose a chunk of their business to the onslaught from cable.

The number of land lines Qwest serves in its 14-state Western region already has been dropping at a rate of nearly 5 percent a year.

Notebaert said "we have a lot of work to do," including increasing customer satisfaction.  But he doesn't openly sweat the competition.

"You can say it's a threat," he said.  "I see it as a welcome opportunity to compete and show how good you are."

He points out that Qwest is "very competitive," offering bundles of its own for less than $100 a month, and steadily is increasing the speeds of its Internet service.

Of course, Notebaert is paid to be upbeat and is enthusiastic by nature.  But Qwest also has shown itself to be innovative, being the first in the industry to offer stand-alone or "naked" DSL Internet service and being ahead of Comcast in offering wireless services resold from Sprint's network.

Analysts say Qwest still needs to put more customers on its nationwide fiber-optic network, which until recently was a money drain.  Acquiring MCI would have accomplished that, but Verizon prevailed.

"We went after MCI, and that was fun," Notebaert said.  "We weren't desperate at all;  it just looked like a good transaction and we walked away (when the price got uncomfortably high).  And it didn't hurt our stock price to walk away."

He said he believes Qwest got about $60 million to $70 million worth of free publicity and also gained credibility with stockholders for its discipline to know when to quit bidding.

Halpern said he believes Qwest has looked at a number of possible acquisitions since then, including possibly Douglas County-based Time Warner Telecom, and that even a Qwest-Level 3 deal might make some strategic sense.

Notebaert won't comment about specific transactions but said Qwest is "scanning constantly a broad spectrum of opportunities" and will act if it is convinced the deal would pay off for investors.

Meanwhile, he continues to keep his door open for employees as well.

Notebaert estimates he has received a couple of hundred thousand e-mails since arriving at Qwest, and "I answer every one" that requires a response.

But he said he gets fewer than he used to, in part because employees have found that other senior managers are similarly open.

"Four years later what's happened is there's almost an understanding within the organization that there's no retribution -- that the push-back, the debate, the input is encouraged," Notebaert said.  "That's cascaded through the group and made this an organization that's pretty tight with itself.  Well-disciplined and pretty tight."

Highlights of Notebaert's tenure

June 2002: Dick Notebaert, former Ameritech chief executive, takes over as Qwest CEO, replacing ousted Joe Nacchio.

July 2002: Qwest admits to accounting errors totaling $1.16 billion between 1999 and 2001.

August 2002: Qwest agrees to sell Dex, its phone directory business, for $7.05 billion in two stages.

September 2002: Qwest renegotiates bank loans.

October 2003: Qwest completes its financial restatement, erasing more than $2.5 billion of revenues from its 2000 and 2001 books.

October 2004: Qwest settles accounting-fraud allegations with the Securities and Exchange Commission for $250 million.

Winter/spring 2005: Qwest loses to Verizon in a bid to acquire MCI.

November 2005: Qwest settles the bulk of its shareholder lawsuits for $400 million. Court approval still needed.

December 2005: Qwest stock surpasses its 1997 initial public offering price of $5.50 for the first time in years.

May 2006: Qwest posts a profit for the first time since the Qwest-U S West merger in 2000 (excluding quarters in which profits were made from asset sales).

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