Qwest, Nacchio: A study in contrasts

Carrier continues to move past former CEO’s misdeeds, conviction

The conviction of ex-CEO Joe Nacchio officially ends a difficult era for Qwest Communications, the fortunes of which have brightened considerably since Nacchio was forced out of the company five years ago.

Nacchio this week was found guilty on 19 of 42 counts of insider trading by a federal jury. He faces as many as 10 years in prison and a $1 million fine on each count, plus forfeiture of assets.

Sentencing is slated for July 27.

While Nacchio awaits his fate, Qwest continues to put more distance between itself and the legacy of its former CEO.

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The conviction of ex-CEO Joe Nacchio officially ends a difficult era for Qwest Communications, the fortunes of which have brightened considerably since Nacchio was forced out of the company five years ago.

Nacchio this week was found guilty on 19 of 42 counts of insider trading by a federal jury. He faces as many as 10 years in prison and a $1 million fine on each count, plus forfeiture of assets.

Sentencing is slated for July 27.

While Nacchio awaits his fate, Qwest continues to put more distance between itself and the legacy of its former CEO.

In 2002, Nacchio left Qwest a beleaguered and battered company that lost 98% of its value in two years and had to restate $2.5 billion in revenue after fraudulent accounting practices.

Today, Qwest is a much different company. Its stock has been climbing back steadily from those bleak days of the summer of 2002, when it was trading for just more than a dollar, to April 19’s closing price of $9.07.

Qwest also is one of the winners of the $20 billion to $48 billion Networx Universal telecom contract awarded last month by the U.S. General Services Administration (GSA). It posted its fourth consecutive profitable quarter in the fourth quarter of 2006 (as well as a profitable year); its business is growing across virtually all markets -- bundles, average revenue per user (ARPU) and high-speed Internet -- as it continues to cut costs; and analysts are bullish on the carrier’s prospects going forward under the leadership of CEO Dick Notebaert and recently retired CFO Oren Shaffer.

“The whole trial is an interesting contrast to the company now,” says John Byrne, an analyst at Technology Business Research. “The decision to install well-respected industry vets in the wake of the accounting/Nacchio scandals allowed the company to restore investor confidence. They weathered the worst of the storm, and now they’re posting increasing revenue and margins. Most recently they landed one of the key slots when the [GSA] announced its Networx Universal contract for the next 10 years. Clearly the company has come back from the brink in the past five years.”

Analysts are bullish on the carrier, expecting more positive momentum for fiscal 2007 and beyond, especially as the 10-year Networx project rolls along.

“This deal probably means the most for Qwest looking at the size and scope of the providers,” says telecom analyst Jeff Kagan, referring to joint winners AT&T and Verizon. “This is the kind of deal carriers lose sleep over trying to win. It is big and it is profitable.”

Kagan says Networx also will help Qwest and the other carriers win enterprise business. Proficiency at handling the global and national telecom requirements across all agencies and geographies of the federal government will help convince enterprises that they, too, should look to these carriers for telecom services.

“It’s a great big award the carriers can point to as they negotiate with business customers,” Kagan says. “If they can handle the federal government…they can of course do the same for a business.”