The Association of U S West Retirees



Qwest Seen Facing Cross-Platform Competition
Thursday, January 18, 2006

Deutsche Bank Securities research analyst Viktor Shvets downgraded Qwest Communications International to "sell" from "hold" following recent big gains for the stock.

"We emphasize that Qwest is not a stable, highly-leveraged RLEC [reseller local exchange competitive] with a high dividend pay-out," wrote the analyst in a research note Tuesday.

Shvets believes investors are beginning to value Qwest as a large RLEC, with limited forward capital expenditure requirements and relatively protected operating margins.

"In our view, nothing could be further from the truth," he said.  "On almost every operating parameter, Qwest is much closer to the RBOCs [regional Bell operating companies] than the RLECs."

Given the highly concentrated nature of its U.S. West business (top five states account for more than 80% of revenue), Qwest has a similar degree of access line concentration to other RBOCs, and is likely to face the same degree of cross-platform competition, Shvets noted.

The research analyst believes it is unlikely that U.S. West operating earnings can be protected without any significant acceleration in capex, as many investors seem to be assuming.

Instead, Shvets anticipates that over the next two years Qwest will follow other RBOCs on the path of accelerating line losses, declining core profitability and rising investment.

In addition, the Deutsche Bank analyst believes Qwest Classic is coming toward the end of its cost-cutting program, and its business model will remain challenged.  Qwest also has limited wireless exposure, he added, and is unlikely to benefit from expected further improvement in wireless industry cash flow generation.