MARKET CUTS NOTEBAERT SLACK ON LATEST QWEST EARNINGS

Qwest Communications' first quarterly earnings under new CEO Richard Notebaert missed estimates by a wide margin, but few are holding it against the new boss. In fact, the change in company leadership is proving to be an asset.

Notebaert succeeded Joe Nacchio just two weeks before the end of the quarter. Having spent so little time at the helm, most analysts had no intention of blaming poor earnings on Notebaert. In fact, many were expecting the company to leverage the situation by taking significant write-downs for the period, clearing the way for subsequent quarters. With non-operating items contributing some $926 million to the company's $1.14 billion loss, the analysts weren't far off.

During its earnings call, Qwest said it is in the process of renegotiating its bank credit facility in a way that would extend its maturity and loosen its financial covenants.

“Once we restructure our credit facility, we believe that cash flow from operations and available debt financing will be sufficient to satisfy our liquidity needs for at least the next 12 months,” Notebaert said.

Just last March, the company completed a renegotiation of the same credit facility. If it were Nacchio approaching the banks for a second time in less than five months, reworking the facility would be more difficult, said Tavis McCourt, senior telecommunications analyst with Morgan Keegan & Co.

“[The change] makes it easier than having the same management team going back,” he said. “In this kind of environment, it's not a place I'd want any management team to have to go.”

Not everyone is willing to give Notebaert a clean slate, though. According to one analyst, not much has changed at Qwest since he took control. “It's not as if he's come in there and they've stabilized their business,” said Drake Johnstone, an analyst with Davenport & Co. “The business continues to deteriorate.”

Most analysts, though, are willing to give Notebaert the benefit of the doubt in earnings and other key areas. For example, Qwest said that it would not file its 10-Q quarterly report with the SEC on time because of its internal audit. While this would normally scare analysts in the current economic climate, most calmly accepted Qwest's situation at face value.

“These guys are in a situation where CEOs are being scrutinized and want to be extra careful on their financial statements,” said Tom Friedberg, senior vice president at Brean Murray & Co. “Ten of 12 weeks out of this quarter were not theirs.”

Don't expect the sympathy to last long if Notebaert doesn't deliver soon. His most pressing task is to close the sale of Qwest DEX, the company's directory unit, which analysts agree must go through if Qwest is to avoid bankruptcy.

Qwest has been in the process of selling the unit most of this year, and for months it has been reporting progress in the negotiations. Notebaert said the company is continuing with these negotiations and anticipates making an announcement soon.

If the carrier does not announce a sale this quarter, the credibility Notebaert has as a former RBOC chief will suffer, and more analysts will predict the company will go bankrupt.

“The only way to [avoid bankruptcy] is by a swift and successful sale of DEX,” said Friedberg.