Qwest outlined in a conference call with analysts this morning its plans for combining and restructuring the two companies--an advanced Internet-based carrier and an older Baby Bell local phone company--which completed their merger in July.
Specifically, Qwest plans to eliminate 4,500 jobs by the end of the year, higher than previous reports that had indicated Qwest would likely trim between 2,000 and 4,000 jobs. Qwest also plans to cut another 6,500 positions by the end of 2001 in an effort to "right-size" the company, executives said.
In addition, Qwest will trim 1,800 contractor jobs during the next 16 months. The layoffs primarily are targeted at non-union, middle management jobs in an effort to reduce redundant staff functions such as those in the legal department, Qwest chief executive Joseph Nacchio said.
The company also plans to trim its executive team by reducing the number of vice president or higher positions by about 75 jobs from more than 300.
"We've inspected the totality of our business, and I've come to the conclusion that we need to narrow the focus, right-size the company and shed nonstrategic assets," Nacchio said.
Qwest faces the difficult task of bolstering investor confidence in the wake of its agreement to buy US West. The deal prompted criticism when it was announced, as US West was viewed as the most rural, and what some described as the least-desirable, of the Baby Bell local phone companies.
But Nacchio, despite his own outbursts regarding US West actions, has maintained that the local and wireless connections owned by the Baby Bell, coupled with Qwest's strong Internet and long-distance properties, will make for a powerful combination.
Stock in Qwest, which suffered after the merger was announced, has remained relatively flat in recent months.
The new company has honed its executive roster, plans to invest heavily in wireless and high-speed digital subscriber line (DSL) Internet connections, and will sell about $1 billion in strategic investments in 15 companies, including its largest, an inherited stake in Global Crossing, an international carrier and a competitor.
Qwest also announced a new subsidiary, Qwest Digital Media, which will focus on the storage and high-speed, or "broadband," delivery of digital video and other content.
Executives acknowledged the tough decisions associated with forging new ground in combining two very different communications companies.
"We're the first company to combine a major Internet-based company and a large company in the pre-Internet world, which is what US West was. Both companies were from very different heritages," Nacchio said. "We are creating a new company that is focused on customers, technologies and growth."
Riding the economic waves
Company executives also raised forecasts for revenue and earnings before interest, depreciation, taxes and amortization (EBIDTA), fueled by the continued growth in Internet and data services.
Qwest expects fiscal year 2000 revenue to come in between $18.8 billion and $19.1 billion from a previous estimate of $18.5 billion. In 2001, executives forecast revenue of about $21.3 billion to $21.7 billion, up from prior projections of $21 billion.
Internet and data revenue is growing faster than expected, executives said, and will represent about 22 percent to 24 percent of revenue this year, up from the 17 percent previously projected. Next year, Internet and data will represent about 26 percent to 29 percent of revenue.
Qwest chief financial officer Robert Woodruff said he is comfortable with compound annual growth rates (CAGR) for revenue of about 15 percent to 17 percent, which would result in sales of about $38 billion to $40 billion by 2005. Internet and data revenue is expected to comprise almost 45 percent of total revenues by then.
"We're positioning the company to ride the economic waves that are driving this industry," Nacchio said. "Slow-growth assets are not the kind of assets we're interested in."
To that end, Qwest will sell about 570,000 local phone "access" lines in the US West 14-state region, generating about $1.75 billion in the next year. The company also plans to invest heavily in DSL and wireless services and will build more Internet hosting data centers, the secure facilities that house computer servers and other high-end Internet equipment.
Qwest expects to double its wireless customer base to 1.6 million customers by the end of next year. The company also expects to double its hosting capabilities and its number of DSL customers.
Qwest also announced the formation of Qwest Digital Media, a new subsidiary that will compete with the likes of iBeam Broadcasting and RealNetworks, among other streaming content companies, executives said.
"This will be a company that we may take out as a separate public entity," Nacchio said.
The unit, with about 250 employees, will be led by newly appointed CEO David Woodrow, an 18-year veteran of Cox Communications, where he most recently served as senior vice president of business development for the cable operator. Woodrow will join the company next week.
Steering in new direction
Qwest executives outlined several key priorities as part of the restructuring, including a cohesive political agenda, an increased effort to gain long-distance approval by next summer for the former US West and to stabilize local phone service, the reason for US West's widely known "US Worst" nickname.
"We're not going to be worst in class," Nacchio said, noting that Qwest will add a new chief quality officer charged with improving service quality.
The future of Next Level Communications, a maker of DSL equipment designed for delivering video, was expected to be decided today. But Nacchio said Qwest is in the process of working with Next Level, which derives most of its revenue from US West, to reduce the costs associated with deploying Next Level's high-speed video gear.
"We will be in a go-slow mode until we are sure...that we can generate the returns that a dollar in the Internet, wireless or DSL returns," he said. "For now we are maintaining all current commitments to our suppliers."
Overall, executives said the restructuring process has shed optimistic light on the new company.
"We're very pleased with the progress we've made. We feel very good about the five-year revenue opportunities," Nacchio said. "I think we're off to a fast start."