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Technology Stocks : Qwest Communications (Q) (formerly QWST) -- Ignore unavailable to you. Want to Upgrade?

To: MangoBoy who wrote (4653)	7/21/1999 3:53:00 PM
From: Epics	Read Replies (2) \| Respond to of 6846

I can't wait for Bell South to take over these clowns (Qwest)

To: MangoBoy who wrote (4653)	7/21/1999 4:31:00 PM
From: SteveG	Read Replies (1) \| Respond to of 6846

CSN was IIXC's desperation play (this would've been the third quarter of disappointing the street, and they knew they would've gotten slaughtered. Let's see if LaMacchia can trim the fat and get the combined entity ontrack for a sale. And if anyone cares, PW's Strumingher on QWST/USW from earlier this week: Qwest Communications International Rating: Neutral (QWST-$35.00) Qwest: Initiating Coverage with a Neutral Rating KEY POINTS · Qwest is an aggressive and opportunistic company that has grown from a concept just a few years ago into a company poised to become a top-tier carrier and one of the likely survivors in the telecommunications services industry after completing its merger with U S WEST. · We believe that the merger with U S WEST will create value for QWST shareholders over the long-term because Qwest gets needed scale and skill sets at a very good price, and the transaction is structured in a way to give Qwest management sufficient control over the combined company. · Qwest has two key assets that are prerequisites for success in the age of the digital economy: lots of backbone capacity and a management team that has a clear vision about new business opportunities created by innovation in computing and telecommunications technology. · Qwest is making the pivot from commodity “transport” to differentiated “applications” sales and has strong partners in emerging growth areas such as remote hosting of corporate software and data bases. · Our 12-month target price on QWST shares is $35 based on a multiple of 10x-estimated 2000 EBITDA pro forma for the merger with USW. The company is on the verge of making a major transformation, and we believe that a “wait and see” attitude is warranted at this time. INVESTMENT OPINION Qwest is an aggressive and opportunistic company that has grown from a concept just a few years ago into a company poised to become a top-tier carrier and one of the likely survivors in the telecommunications services industry after completing its merger with U S WEST. Management has a clear vision about new business opportunities created by innovation in computing and telecommunications technology and has lots of backbone capacity to meet demand. The technology behind the Internet has brought together the telecommunications, media, and computing industries in a way that has begun to effect and should continue bring large and lasting changes to the economy and should be the single biggest growth area of U.S. GDP for the foreseeable future, and we believe that Qwest has a good plan of attack to seize these new business opportunities. In the midst of this gold rush, Qwest is loading up on mining supplies before heading into the hills. We believe that the merger with U S WEST (USW-$60.00)[3] will create value for QWST shareholders over the long term because Qwest gets needed scale and skill sets at a very good price, and the transaction is structured in a way to give Qwest management sufficient control over the combined company. Increased scale will give Qwest a more competitive cost structure with large carriers in the sector, allowing it to be more aggressive in investing in new products and services due to its larger base of revenue and cash flow. In addition, it will bring skill sets in the local exchange service business that will help Qwest in its ability to provide end-to-end telecommunications services. (One good example of these two benefits is the ability for Qwest to accelerate its rollout of DSL services across the country). Lastly, it would also make Qwest a more attractive partner for larger carriers. We believe that the transaction could gain regulatory approvals needed to close within one year. While we believe that the USW transaction would create value for QWST shareholders over the long-term, we remain cautious on the stock at this time. This merger will test Qwest management in ways in which it has not yet been tested. Parallel processing the integration of U S WEST and the pursuit of digital economy gold will be a challenge. Although Qwest has a new Chief Operating Officer with a strong background in the local exchange business and who has been through large merger integrations before, it does not have great management depth in the local exchange business and will have to invest time to learn it. Cultural differences and differences in employee compensation will also be challenges in merger integration. Moreover, synergy estimates for the merger are ambitious, in our opinion, especially given that Qwest will likely want to accelerate its spending and investment on new business initiatives given U S WEST's cash flow and because it will likely need to spend additional money in the U S WEST region to address service quality issues and to comply with market-opening requirements necessary for long distance approval. In addition, Qwest will need to sell its long distance customer base within the U S WEST region in order to close the merger within a year, and we doubt that Qwest will be encouraging sales representatives to target customers in the U S WEST region if these customers will ultimately be sold. It could take U S WEST two years to gain long distance approval within its region in our view and resume its long distance sales effort in the U S WEST region. On a conceptual basis, the Qwest story is now changed, and the company has probably lost the branding it enjoyed in the investment community as the big winner in the telecommunications services space from the business opportunities created by changes in computing and telecommunications technology; Qwest is clearly no longer a “pure play” in this space. We believe that Qwest will become somewhat less compelling to growth investors during the transition period from the old story to the new one. U S WEST is just not a company that one would find at the top of most growth investors' wish list, and we believe that the story will be a harder sell to growth investors, at least initially. Despite our view that this merger will create value over the long term, we believe that there will be an adjustment phase in the market. Then there is the issue of the USW shareholder base and the turnover there that could occur after the merger close. Although we remain open-minded because of management's track record of creating value, we believe that a “wait and see” approach is warranted at this time. If Qwest can sustain the momentum it has established in the digital economy and process in parallel the integration and transformation of U S WEST like it thinks it can, we would reconsider our valuation assumptions. Our 12-month target price on shares of QWST is $35 based on a 10x multiple on 2000 EBITDA pro forma for the U S WEST transaction. TECHNOLOGY CHANGE CREATES OPPORTUNITIES The primary means through which telecommunications carriers have differentiated their services to their corporate customers during the 1990s is to provide them wide area data networking services. Qwest's revenue base today is primarily commodity data and voice transport services, and the company is now targeting sales of differentiated applications. We believe that the carrier-customer relationship is now evolving due to several important changes in technology and a general shortage of skilled information technology professionals in the labor market. Innovation in technology such as the HTML programming language, the introduction of carrier class routers, and improvements in optics and transmission technology such as wave division multiplexing have enabled carriers to offer a more comprehensive package of data management tools to corporate customers. Examples of these businesses are complex web hosting, e-commerce, and remote hosting of software applications (Application Service Provider or ASP) market . Qwest has among the most well defined business plans and the strongest partner relationships in the emerging data services business of any carrier we know. Qwest has three data centers today with plans to have nine by year-end and 250 IP programmers that came through last year's acquisition of ICON CMT. Furthermore, Qwest has formed partnerships with other companies to further its development of e-commerce and managed software business opportunities. Microsoft invested $200 million in Qwest and has offered Qwest access to its extensive channel of value added resellers to sell these services. Complex web hosting services, e-commerce, and security were first offered in Q1 '99, Internet VPNs are targeted for release soon, and managed software offers are planned to start in early 2000. In the ASP business, Qwest has formed a partnership with KPMG in the managed software area to provide software implementation, help desk support, and server management targeted at mid-sized business customers. The partnership will benefit from a relationship that Qwest has formed with SAP, Siebold Systems, and Oracle that will market Qwest's remote hosting capabilities for their applications. Another Qwest partner, Hewlett Packard, has agreed to provide Qwest with $500 million of server equipment in return for an annuity payment that is a function of Qwest's application hosting sales. VALUATION We value Qwest at a multiple of 10x-estimated 2000 EBITDA pro forma for the U S WEST merger or $35 per share. We believe that this is appropriate given our forecast that the combined company can grow revenue at a low double digit top-line growth rate and EBITDA at a low teens growth rate on a pro forma basis over our 1999-2002 forecast period. This valuation is equal to a multiple of approximately 30x estimated 2000 “cash EPS” (excluding goodwill amortization expense) pro forma for the USW transaction. RISKS The main risks to QWST are managing through a rapidly changing technology and business landscape, pricing in the wholesale bandwidth business, competition from companies with large scale, and the integration of US WEST.