Economy catches up to Qwest

Even Bell companies aren't immune to the economy, as Qwest Communications proved last week by becoming the first to announce layoffs during the downturn. Qwest will cut 4000 people — or 6% of its work force — during the next few quarters to conserve resources in the face of slower-than-expected growth.

In fact, the layoffs are just part of financial measures that include Qwest reducing its revenue and cash flow estimates for the year as well as slashing its capital expenditure budgets for the next two years.

The announcement seems ominous for the Bell company, especially because Qwest previously had been the overperformer in the RBOC clique. While other Bell companies had battened down their budgets, preparing for inclement economic conditions, Qwest's revenues and earnings have increased the last two quarters and the company was projecting that growth to continue into the third quarter.

Chairman and CEO Joseph Nacchio has maintained that Qwest's western region has fared better in the rest of the country in the economic downturn and that its data and long-distance businesses have consistently taken market share from competitors. A slightly humbled Nacchio, however, said last week that the economy is deteriorating more rapidly than Qwest expected.

“I'm disappointed we can't outrun the economy forever,” Nacchio said. “It's now time to steer Qwest more conservatively.”

The acknowledgement left Nacchio eating crow as he has consistently lashed out at any criticism of Qwest's projections. This summer, Nacchio accused Morgan Stanley of holding a “personal vendetta” against Qwest for questioning the carrier's numbers. Even after lowering his company's outlook, Nacchio remained defensive, saying the firm's analyses are completely unrelated to Qwest's re-evaluation of its finances.

While it is impossible to predict whether other RBOCs will cut staff, it wouldn't come as a big surprise, said Courtney Quinn, senior analyst for The Yankee Group. Because they are heavily regulated and rely on highly unionized work forces, Bell companies are the most stable companies in the telecom world, but they also have bloated management structures. It is also difficult to compare Qwest and other Bell companies because the former U S West comprises only part of its business, she said.

“The RBOCs are in a pretty solid position compared to the rest of the industry,” Quinn said. “Qwest, however, is involved in lines of business that the other RBOCs aren't involved in. The ‘Qwest’ part of the business is seen as a more innovative business, but it's also the most exposed.”

Verizon Communications, SBC Communications and BellSouth have announced significant cost-cutting measures. While not commenting on Qwest's problems, a BellSouth spokeswoman said her company has made the necessary preparations for a stagnant economy.

“We have not announced any layoffs,” she said. “Obviously, there are some challenges in the current economic market, but we are sticking to our game plan and remain focused on our agenda.”

Qwest may just be following the other Bell companies' lead instead of the other way around. A report from Lehman Brothers downgraded revenues and earnings estimates for all of the RBOCs but said the companies generally have taken actions needed to survive in a lousy economy.

“We believe the RBOCs are most able to weather the slowdown and will be the best positioned post the industry shakedown due to cost/capex-cutting capability, strong balance sheets, managements' focus on core activities and improving [2002] returns on capital despite a revenue-growth slowdown,” the Lehman Brothers report said.