GROWTH-CONSCIOUS QWEST TAKES CONSERVATIVE ROUTE

Once the poster child of telecom''s next generation, Qwest Communications posted a surprising third quarter loss that provides evidence that today''s tough market is much different from the future the carrier once envisioned.

The sizable pro-forma loss of $138 million — 8¢ per share — is a stark contrast to the 3¢ per-share profit expected by First Call analysts. More staggering is Qwest''s loss of $3.49 billion, or $2.10 per share, during the first nine months of the year after posting a small profit for the same period last year.

Chairman and CEO Joe Nacchio — the recipient of a new four-year contract extension — blamed the loss on the deteriorating economy and a decline in optical capacity sales and IP equipment sales. After months of claiming Qwest could maintain its growth rates amid the telecom slump, Nacchio said the carrier will focus on cutting costs and curbing spending. On Friday, the carrier instructed its contract installers to halt on its worldwide network.

Many financial firms immediately downgraded Qwest''s stock, which lost 30% of its value during the week, as its per-share price dipped below $12 after exceeding $40 just six months ago. Not helping matters is the growing discord between Nacchio and influential Wall Street analysts who continue to express doubt about the methods Qwest uses to account for long-term asset sales.

One analyst''s pointed question during the earnings call was emblematic of that distrust: “What are we hiding here?”

Nacchio responded, “We''re not hiding anything. We have local equipment sales like any other RBOC.”

Indeed, Nacchio remains steadfast in his belief of the company''s strengths, particularly its pursuit of top enterprise customers. He even took time to note competitors'' weaknesses, perhaps to detract attention from Qwest. “AT&T announced they''ll sell themselves to any Bell who''s interested or to anyone else,” Nacchio said, confirming speculation.

But now that Qwest''s stock price is so low, it also could be an acquisition target, although finding a buyer in the current market would be difficult.

WorldCom President and CEO Bernie Ebbers has maintained the carrier will not enter into any new transaction for another year and a half, while Sprint may be too small. “The only potential might be Verizon,” said Cary Robinson, analyst for US Bancorp Piper Jaffray.

But as for Qwest doing the buying, Robinson doesn''t see it happening. That would force it to part with more stock, and it can''t use cash because it would hurt the company''s debt ratings.

Some have suggested the combination of BellSouth, AT&T and Qwest, according to Glen Macdonald, vice president for Adventis. “It''s a question of whether there is enough currency from a financial perspective,” Macdonald said.

But considering a merger isn''t likely, Qwest''s only choice may be to execute as Nacchio outlined: Cut costs and spending immediately and wait out the downturn. Unfortunately for Qwest, while it was spending capital to grow, other incumbents weren''t. “Verizon, SBC and BellSouth have focused on maximizing the growth of their monopoly by protecting their share,” Robinson said.