program aids Qwest's recovery
Denver Business Journal
Friday, August 11, 2006
With quarterly earnings
reports showing a profit for two consecutive quarters and
its stock gaining traction on Wall Street, the questions
about Denver-based Qwest Communications International Inc.
have swung from "will it survive?" to "how'd they do it?" in
the past five years.
"The recovery is behind us," said Oren Shaffer, chief
financial officer of Qwest. "Now, we're building on the
But true recovery, as they say in various 12-step programs,
is an ongoing process.
While few would dispute that Qwest's turn from the brink of
bankruptcy has been impressive, observers differ on how --
or if -- the telecommunications company can keep the
As one of the area's few big flagship companies, Qwest's
vitality remains critical to the Denver economy.
Qwest employs 40,000 people -- including 10,000 in
Colorado. Many local businesses -- from vendors who deal
directly with Qwest to restaurants that serve the company's
employees -- also rely on the company's financial health.
In talking to analysts and Shaffer about Qwest's recovery,
the Denver Business Journal identified 12 steps Qwest took
-- and must continue to take -- to ensure its relevance in
the rapidly consolidating telecommunications universe:
Step 1: Admit
there's a problem -- Joe Nacchio's "voluntary" resignation
in mid-2002 set the stage for Qwest's recovery.
Indeed, Qwest's then-plummetting stock actually rose more
than 20 percent to $5 a share on the day Nacchio resigned.
He left Qwest under a pall of scandal that's still playing
out in court.
The former Qwest CEO is awaiting a trial for 42 counts of
insider trading for allegedly selling $101 million in stock
based on inside information that the Baby Bell wouldn't be
able to meet revenue targets.
But Nacchio's Qwest also earned a reputation for poor
service, low morale and dismal market performance that
managed to disenchant customers, shareholders, debtholders,
vendors and employees.
"Qwest was just one step away from becoming WorldCom," said
Eric Paulak, a Boulder-based analyst for Gartner Inc.,
referring to the troubled long-distance telecommunications
company that eventually emerged from bankruptcy, changed its
name back to MCI and sold to Verizon in 2005.
Recruit new executive leadership to restore sanity --
Immediately after Nacchio's resignation, Qwest's board
unanimously elected Dick Notebaert its chairman and CEO.
A stark contrast to the brash Nacchio, Notebaert guided
Ameritech's purchase by SBC Communications (now AT&T) in
Upon getting the Qwest job, Notebaert declared he would
focus on repairing the company's balance sheet and damaged
Some, including Scott Cleland, president of the Precursor
Group, a telecom research firm based in McLean, Va., doubted
that even an executive with Notebaert's skills could fix
Qwest's dire situation.
"I didn't believe he could turn it around, but I was dead
wrong," Cleland said. "The fact that they did is a
testament to Notebaert and Shaffer's leadership."
A self-described "raging fan" of Notebaert, Cleland said the
CEO solved Qwest's financial problems "the old-fashioned
"He did it with smart, ethical performance," Cleland said.
"Clearly, he had a long-term vision."
To repair Qwest's fractured balance sheet, Notebaert tapped
Shaffer, a trusted colleague from his Ameritech days, as
Qwest's chief financial officer.
Shaffer replaced Robin Szeliga, who recently was sentenced
to two years probation, six months of home detention and a
$250,000 fine for her role in Qwest's accounting scandal.
Szeliga is expected to be a key witness in the government's
insider-trading case against Nacchio.
Step 3: Make
amends with employees -- Qwest workers, particularly those
from the US West era, were completely demoralized by the
time Notebaert came on board.
Cleland said Notebaert was wise in tackling concerns from
Qwest employees early on.
"The first thing he did was to calm down all the irate
constituencies and buy himself time," he said. "After that,
he rallied the employees and company around his new 'Spirit
of Service' vision. He basically rallied the company around
the new idea and ideal."
Step 4: Make
amends with customers -- Given the magnitude of Qwest's
problems, Shaffer said it would have been easy for Notebaert
to focus on the company's internal trappings. But that
wouldn't have improved the company's public image.
The company set out to improve its customer service scores,
which Shaffer claims are now "higher than they've ever
Qwest also established online feedback forums, giving
employees ways to determine what customer service glitches
need to be fixed.
"We believe it's much more economical to hold on to the
customers," Shaffer said.
Step 5: Make
amends with shareholders and debtholders -- Notebaert
credits Qwest's financial team with being "very creative" in
restructuring its debt.
On Shaffer's watch, Qwest's debt has shrunk to $14 billion
from a high of $19 billion. The company expects to lower
that number even more as its finances improve.
"We're on a tremendous run now," Shaffer said. "We've
demonstrated value in our organization and expanded
But Brian Hamilton, CEO of Profitcents, a market research
firm based in Raleigh, N.C., said while Qwest has good
cash-flow management, he's concerned about the company's
static liquidity, which he called "kind of soft."
"If operations fell off, that could create some problems,"
Step 6: Make
a fearless and searching inventory of the organization -- In
Notebaert's time, Qwest has eliminated 11,000 positions
(largely through attrition) and dramatically reduced the
company's operating expenses.
Qwest also got out of the publishing business in November
2002 by selling its Yellow Pages division to two private
equity firms for $7.1 billion.
Cleland credited Notebaert and Shaffer for taking an
across-the-board, "penny-pinching" approach to running Qwest
-- not out of design but out of necessity.
"All local telephone companies have a history of bloated
cost structures," Cleland said. "Qwest is involved in a
two-decade transition from a former monopoly to a
competitive convergence player. They had to transform from
a caterpillar to a butterfly. It's not an easy trick to
pull, especially when you're transforming from a narrow-band
base into a broadband future."
Hamilton also applauded Qwest's cost-cutting measures.
"What's neat about [Qwest] is they've become profitable
while their revenue has declined, which can only mean
they've managed their costs better."
Recognize weaknesses and build on strengths -- As demand for
traditional phone services, which remains Qwest's main
revenue source, slowly declines, the Baby Bell continues to
build its broadband customer base.
Qwest added 120,000 new DSL customers in the second quarter
-- up 51 percent from the previous year -- as more people
converted from dial up.
While revenue from DSL didn't grow proportionally, Shaffer
said the growth of broadband is critical for Qwest to lock
in customers as the company expands its offerings --
including its planned expansion of TV service.
Paulak said Qwest is well-advised to build on DSL because of
its low customer churn rate of only 4 percent a year.
"Once they get the customers, they don't go away," he said.
Step 8: Build
partnerships -- Because Qwest sold its wireless business and
doesn't have a strong presence in TV yet, the company
provides cellular and satellite TV services through resale
agreements with Sprint Nextel Corp. and DirecTV.
"We were losing a lot of money [on wireless] while our
customers were telling us they wanted a national footprint,"
Notebaert told the DBJ on Aug. 1. "Our goal is not to be
T-Mobile. Now we offer wireless in the bundle, [which] you
can include on the same bill as your wireline and DSL
Step 9: Build
on other markets -- Paulak fears Qwest may be missing an
opportunity to provide voice and data services for business
-- particularly in the area of managed hosting services.
"Qwest has not done well in adding incremental revenue in
managed service," Paulak said. "AT&T gets a third of its
revenue from leasing out managed services; Qwest only gets
He claimed Qwest has pursued the business market only in
"half steps," while conceding that building the market means
beefing up its sales force to sell the services. But making
the investment may pay off in the long run.
"Now is the perfect time to do this kind of thing," Paulak
said. "There won't be another major technology migration
for four or five years. Qwest could end up waiting until
2012 for the next transition."
Shaffer said revenue for Qwest data and Internet services
for businesses grew 8 percent in the second quarter to $1.1
billion, but he also said the success of its enterprise
business has been "overshadowed" by its success in DSL.
Step 10: Find
new efficiencies -- Qwest cut its total operating expenses
to $3 billion in the second quarter of 2006 from $3.2
billion the same time last year (a 6 percent reduction) --
part of an ongoing effort to reduce costs.
But the company's initial efforts to cut costs by
outsourcing customer service operations hurt the company's
customer satisfaction, forcing it to retreat on offshoring.
"There's only so much you can do in squeezing margins in
consumer service," he said.
Shaffer said Qwest invested more money on technology and
software to help customer service representatives and
technicians do their jobs more effectively and efficiently.
"To drive our broadband abilities, we needed to invest in
customer service," Shaffer said.
Qwest beefed up its online presence, giving customers more
opportunities (and discount incentives) to order or upgrade
service on the Internet -- eliminating a go-between while
improving convenience for customers.
Step 11: Put
the past behind -- Though Qwest's new leadership has
distanced itself from the Nacchio era with a proposed $400
million class-action settlement for shareholders and $250
million settlement with the Securities and Exchange
Commission (SEC), Paulak said the company's stock will
continue to be weighed down by bad publicity until the trial
"Until the business with Nacchio is done, there's still a
dark cloud hanging over the company through no fault of its
own," he said.
Surrender to a higher power (or become the higher power) --
Depending on who's talking, Qwest's failed bidding war for
MCI either made investors take Qwest seriously or undermined
the company's recovery.
The fact that Qwest lined up backing for the proposed $9.7
billion deal illustrated the confidence financial
institutions had in the company, analysts said at the time.
But Paulak said little good came out of the incident.
"Qwest's attempt to buy MCI was a fiasco," he said, adding
the effort actually hurt Qwest's creditability with business
In May, Qwest announced it would buy OnFiber Communications
Inc. of Austin, Texas, a competitor for Time Warner Telecom
Inc. of Littleton, for $107 million.
Analysts note there's no shortage of second-tier telecom
companies available for consolidation, but Shaffer said
Qwest will consider only those that add shareholder value.
Most analysts agree it's unlikely that Qwest will be
acquired by the two other remaining Baby Bells -- Verizon
and AT&T -- since both companies have their hands full with
recent acquisitions, and Qwest's debt and sparsely populated
coverage area is still considered too much baggage.
"I'd question whether Verizon really wants the state of
Montana," Cleland said.
Cleland said Qwest more likely will "stay on course" and
pursue "opportunistic" acquisitions.