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.
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.”
Qwest also will benefit from a revised merger condition handed down to AT&T in March by the FCC. This condition will offer carriers such as Verizon and Qwest a 15% discount on special access circuits in AT&T territory.
Qwest has a high mix of out-of-region special access costs given its small in-region footprint, with more than 50% of that cost incurred in AT&T’s region, analysts say. The discount should allow Qwest to continue to expand its profit margins, UBS Warburg analyst John Hodulik predicts.
The FCC also recently eased its regulations on Qwest’s long-distance business, a move Hodulik believes could further expand the carrier’s profit margins and lead to positive revenue and ARPU trends. The FCC relieved Qwest from adherence to Section 272 of the Telecommunications Act of 1996, which required Qwest and the other former BOCs to run their long-distance operations separately from local operations.
Qwest claimed this requirement hindered its ability to deliver service to customers by requiring separate contracts for local and long-distance services for large customers.
Qwest also is making strides in broadband access/IPTV. Analysts do not expect a substantial increase in capital spending for Qwest to extend its fiber footprint for IPTV deployment as the carrier already reaches 25% of its lines with fiber-fed terminals 4,000 feet end users.
These are reasons why analysts expect Qwest’s revenue to grow — albeit slightly — from $13.923 billion in 2006 to $14 billion in 2007, and then to $14.1 billion in 2008. Likewise, earnings per share are expected to increase from 30 cents in 2006 to 42 cents this year and 51 cents in 2008.
All of which is fine with Qwest, which is anxious to put the Nacchio era behind it.
“The jury has rendered its verdict and we will respect the decision,” a Qwest spokesman says. “Our focus is on the future as well as what we have accomplished in the past five years.”
