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Qwest defends deal with start-up

The company's CEO continues to butt heads with analysts, insisting that a new deal it struck has passed the scrutiny of company auditors.

Qwest Communications International CEO Joseph Nacchio continued to butt heads with analysts Monday, saying a controversial deal with a start-up has passed the muster of the company's auditors.

Qwest on Monday announced a five-year deal with Calpoint for managed wavelength services. Specific financial terms of the deal were not released, but Qwest said it expects that the deal will speed up the launch of wavelength services by two quarters.

News of the Calpoint deal came to light last week after Calpoint took on some debt to acquire a nationwide optical fiber network. The deal renewed questions about Qwest's "revenue quality," namely, accusations that much of its revenue comes from non-recurring sources and cannot be used to predict future growth.

Privately held Calpoint is purchasing optical equipment through Qwest, and selling managed wavelength services to Qwest. Qwest, in turn, will resell space on Calpoint's network, and said it hopes to bring in new revenue by reaching new customers through Calpoint's connections.

Merrill Lynch analyst Adam Quinton speculated that while reselling the fiber network capacity could bring in up to $200 million in revenue during the first year, Denver-based Qwest would have to pay about $125 million per year for five years back to Calpoint as part of the agreement.

"We believe the way Qwest is recognizing two revenue streams from the same transaction (i.e. from the sale of equipment to Calpoint, and from the resale of the managed services to customers) is worth noting," J.P. Morgan analyst Marc Crossman wrote. "At the very least, we believe that the equipment sale portion of this arrangement should not be included when calculating Qwest's core revenue growth rate."

The criticism surrounding the deal sent Qwest's stock down 16 percent to $16.70 by the end of last week. But analysts say that may have been an overreaction, "especially in light of the fact that the sales gains are merely $400 million annually," Legg Mason analyst Michael Balhoff said.

Nacchio said on a conference call Monday that he conducted a review of the deal by the company's auditors over the weekend. The company decided to defer recognition of profit from the deal, and recognize the net effect during the term of the agreement.

Separately, Qwest announced a reorganization of its sales structure, adding 1,000 new sales people and launching a marketing and sales campaign.

Joel Arnold has been named executive vice president of global accounts, focusing on the largest 1,000 accounts in North America and Western Europe.

Cliff Holtz, who oversees Qwest's small business market, will serve as executive vice president of national business accounts.

Both Arnold and Holtz will report directly to Nacchio.

"We will now have two senior executives instead of one to better cover the local, regional, national and international markets," Nacchio said in a statement. "Our priorities are to increase sales effectiveness, focus more on strategic services and win market share."

The new sales positions were announced last month. Qwest had said then that it was planning to reduce its total work force of 66,000 employees to 62,000 employees by the end of the first quarter of 2002. It also had cut its financial outlook through 2002, citing "deteriorating economic conditions."