Qwest Says No, and Preps for Growth

By Gregory S. Davis | June 07, 2006 AAA

Qwest Communications' (Q) former executives are approaching their day in court for charges related to fraudulent financial statements and insider trading violations that punished the stock from its high of $64 in March 2001 to a low of $1.11 in August in 2002.

The embattled Qwest's new "Spirit of Service" mantra is driving the company forward at a time when demand for broadband to support media and information delivery continues to grow. Qwest recently demonstrated its new commitment to customers by refusing to release telephone records to the National Security Agency, pointing out that doing so would violate federal privacy laws.

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Qwest has its roots in providing local service to its customers in Western states like Arizona, Colorado, and Wyoming. While local voice and long distance totaled more than $2 billion, or 61% of revenues for the first quarter ending March 31st, Qwest realizes that both wireline services are shrinking as customers continue to turn to wireless and voice over IP solutions like Skype (EBAY) and Vonage (VG). Qwest reported net income of $88 million for the first quarter, up 54% from a year ago. The improvement in earnings was driven by savings in operating and interest expenses as sales remained relatively flat. In order to combat expected wireline losses, Qwest has begun offering bundles of voice, wireless and broadband service to customers.

Competitors like Level 3 (LVLT) have made acquisitions a priority to hedge against the risk of not being prepared to meet future capacity demands in metropolitan areas. In May, Qwest announced the acquisition of the metropolitan Ethernet service supplier OnFiber Communications. Qwest expects the Ethernet market to grow 50% annually, driven by commercial and consumer demand. The deployment of 3G wireless by service providers Verizon (VZ), Cingular and Sprint Nextel (S) has been a key driver of growth. OnFiber has built a highly profitable business that focuses on commercial high-speed data transmission in major U.S. cities, from San Francisco to Boston, and down to the beaches of Miami.

While net income has been negative for the past 2 years, Qwest's focus on broadband technologies broadens its reach outside of its familiar Western states and gives them a new revenue stream that will supplant its fading wireline service model.

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Early investors who plunged in while the stock was pegged at $4 have much to celebrate now that the stock has surged above $7. Qwest insiders have begun to get into the spirit, putting their dollars behind the vision by acquiring over 1 million shares since the beginning of the year. In addition, value investing pioneer Bill Miller of Legg Mason's Value Trust Fund lists Qwest Communications as one of its largest holdings along with competitor Sprint Nextel. As the enhanced communication infrastructure build-out continues to gather steam, and as telecom technology continues to evolve, Qwest appears to be moving beyond its litigious history and forward into profitability.

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