OUR TAKE
No Answers to the Qwest-ion

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By Robert Brokamp (TMF Bro)
July 29, 2002

"[T]he company may conclude that the company recognized revenue inappropriately with respect to the transactions identified in the initial analysis and other optical capacity sales, and that the amount of the additional revenue adjustments may be significant."

Now that's something you don't want to hear from your friendly neighborhood investor relations department. But that's what Denver, Colo.-based telecom Qwest (NYSE: Q) announced last night (thankfully, after The Simpsons). The monopoly local phone-service provider in 14 states will restate its financial reports from 1999-2001 because it may have inappropriately booked $1.16 billion in revenue. Oops.

Qwest is insisting that this was an error in judgment, one that was discussed both with inside and outside accountants. We might be willing to give a company with a reputation for clean accounting the benefit of the doubt. But not Qwest, which is currently under criminal investigation for its accounting practices. And once again we ask the question: Whatever happened to the concept of outside accountants insisting on the pessimistic case for company financials?

Will this be the final cleaning-of-house for Qwest, or the bale that broke the camel's back? The Securities and Exchange Commission is investigating the company for selling capacity on its fiber-optics network to other carriers, and then repurchasing similar amounts -- which is like a smoker giving up buying packs of cigarettes and instead buying singles from a buddy. A month ago, the company fired Joseph Nacchio as its chairman, and replaced him with Dick Notebaert, who once headed up another Baby Bell, Ameritech.

The company is also backing off revenue projections made in April for $18.4 billion in sales for 2002. In a conference call this morning, Qwest officials said they would provide guidance when it releases quarterly results on Aug. 8. "I've heard people predict we're hitting the bottom for the past few quarters and there's been a lot of errors. When I look at the general economy, I don't feel confident making any predictions about recovery," said Notebaert.

The company will also review the way it recognized some expenses and its writedown of goodwill, and announced that it would not meet the Aug. 14 SEC deadline for certifying results. No word on whether there will be a rearranging of deck chairs.

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