May 28, 2016
Adam E. Kirk
614.354.1710
Kirk_51@cob.osu.edu
Wireline Telecommunications
Company Report
Qwest Communications International, Inc.
Marketweight
Market Capitalization (000)
Close Price (19-Feb-2004)
52 Week High
52 Week Low
Price Change - 4 Week
Price Change - 26 Week
Price Change - 52 Week
Price Change - YTD
$7,559,219
$4.28
$3.01
-0.7%
-5.5%
23.0%
Trailing Returns %
Qwest
% Rank in Industry
Industry Average
S&P 500
1,766,173
8,960,800
$5.28
-0.9%
3 year
-50.7
88
-12
-2.6
Shares Outstanding (000)
Avg. Daily Volume Last 10 Days
5 year
-32.5
79
-11
-0.1
Short Interest Latest Date
Short Interest Ratio
Shares Held by Institutions (000)
# of Institutions Holding Shares
% of Shares Outstanding Held by
Institutions
Valuation
10 year
--Qwest
--Industry
--S&P 500
---
P/E
39.09
20.1
21.7
P/S
0.52
2.4
3.3
8-Jan-2004
1.4
980,681
968
55.5%
P/CF
2.97
9.7
17.1
(Source: Morningstar.com 02-20-04 )

The marketweight recommendation for Qwest is based on the clash of near-term successes
and changing future industry landscape. Although more growth is possible in wireless and
DSL, wireline growth continues to be negative.

I am indicating a price target of $4.50. Details on this estimate are provided throughout this
report.

On a positive note more asset sales are possible, potentially in wireless, which could prove
positive for shareholders. This and potential M&A prospects remain the only notable catalyst
opportunities, as VoIP and DSL are not yet significant enough to provide for radical growth.

Qwest addressed its liquidity issues and reduced debt in 2003, making the year a one
centered on rebuilding. Qwest’s net debt is now $15.75 billion, reflecting a reduction of $5
billion since 2002.

4Q03: Long-Distance continues solid growth, with consumer penetration in the first eight
states launched exceeding 26%. Qwest’s DSL customer-base grew 10% in 4Q to finish the
year at 637,000. Year-over-year consumer access lines declined approximately 8% in
4Q.
1

February 19, 2004 – Qwest announces 4th quarter earnings for 2003. Below are the results:
The street was expecting a loss of $0.08 per share and the actual loss was $0.17 per share.
Given these developments, and the fact that management has given no guidance on 2004
targets, revenue estimates are being lowered by many analysts. This is reflected in my DCF
valuation on page 16.
2
Overview of Qwest Communications







25 million customers
Nearly 1 million wireless customers
240 million calls transmitted across network daily
637,000 DSL customers
Approximately 16.5 million access lines
More than 180,000 miles of fiber optic network capacity
Employees: 47,000
Qwest Communications International, Inc. provides local telecommunications and related
services, intralocal access and transport area (IntraLATA) long-distance services and wireless,
data and video services within its local service area. This area consists of the 14-state region of
Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, New Mexico, North Dakota,
Oregon, South Dakota, Utah, Washington and Wyoming. Qwest was incorporated under the laws
of the State of Delaware in 1997 and merged with U S WEST, Inc. on June 30, 2000. The
Company provides InterLATA long-distance services outside its local service area and switched
InterLATA long-distance services (as a reseller) in all states within its local service area other
than Arizona. Qwest also aims to provide reliable, scalable and secure broadband data, voice
and video communications outside its local service area, as well as globally. Qwest markets and
sells its products and services to consumer and business customers. It also provides its products
and services to other telecommunications providers on a wholesale basis.
As a result of a segment change in December 2002, Qwest organized its products and services
into three segments: Wireline Services, Wireless Services and Other Services. The Company
also maintained, until September 2003, an additional segment – its directory-publishing business.
Qwest's directory-publishing business was sold in September 2003 to a group of private equity
investors.
Wireline Services
Qwest offers a variety of wireline products and services. Its wireline products and services are
offered through its telecommunications network, which includes both a traditional telephone
network and a fiber-optic broadband network. The Company's traditional telephone network is
made up of both copper cables and fiber-optic broadband cables. This network serves an
estimated 16.5 million access-lines (access-lines are telephone lines reaching from a central
office to customers' premises). Qwest’s fiber-optic broadband network extends over 180,000
miles to major cities worldwide and enables long-distance voice services and data and Internet
services outside its local service area.
For the years ended December 31, 2002, 2001 and 2000, revenue from voice services accounted
for approximately 70%, 72% and 77%, respectively, of Qwest’s total revenue from continuing
operations, as restated. For the same periods, revenue from data and Internet services
accounted for approximately 25%, 24% and 19%, respectively, of our total revenue from
continuing operations, as restated.
Collectively, for the years ended December 31, 2002, 2001 and 2000, revenue from wireline
services accounted for approximately 95%, 95% and 97%, respectively, of Qwest’s total revenue
from continuing operations (as restated).
Wireless Services
Qwest operates its wireless services segment primarily through its indirect wholly owned
subsidiary, Qwest Wireless LLC. Through Qwest Wireless, Qwest operates a personal
communication service (PCS) wireless network that serves select markets within its local service
area, which includes Denver, Seattle, Phoenix, Minneapolis, Portland, Salt Lake City, and
additional smaller markets. To provide these services, Qwest holds 10 megahertz (MHz) PCS
3
licenses that were issued in 1997 with 10-year terms and are renewable for successive 10-year
terms under FCC regulations. The Company also provides digital wireless services in the 1,900MHz band.
Qwest offers consumer and business customers a road range of wireless plans, as well as a
variety of custom and enhanced features. The Company also offers integrated service, which
allows customers to use the same telephone number and voicemail box for their wireless phone
and for their home or business phone.
In August 2003, Qwest entered into a services agreement with a subsidiary of Sprint Corporation
that allows the Company to resell Sprint wireless services, including access to Sprint's nationwide
PCS wireless network, to consumer and business customers within its local service footprint. The
services agreement provides that Sprint will be the Company's exclusive wireless provider and
has an initial term of five years (with automatic renewal for successive one-year terms until either
party provides notice of non-renewal).
Competitors include AT&T Wireless Services, Inc., Verizon Communications Inc., T-Mobile
International, Sprint and Nextel Communications.
For the years ended December 31, 2002, 2001 and 2000, revenue from wireless services
accounted for approximately 5%, 4% and 3%, respectively, of Qwest’s total revenue from
continuing operations, as restated.
Other Services
Qwest provides other services that primarily involve the sublease of some of its unused real
estate assets. This includes space in its office buildings, warehouses and other properties. The
majority of these properties are located in the Company's local service area.
Qwest also offers Web hosting, which provides data center services and a variety of server and
application management and professional Web design services. In addition, it offers professional
services such as network management, the sale, installation and maintenance of data CPE and
the building of proprietary fiber-optic broadband networks for governmental and other business
customers.
Competitors in this arena include AT&T Corporation, Sprint Corporation, WorldCom, Inc. (now
known as MCI), XO Communications, Inc., McLeod-USA, Inc., Global Crossing Ltd. and Cable &
Wireless plc.
Directory Publishing
For the years ended December 31, 2002, 2001 and 2000, revenue from directory publishing was
included in income from discontinued operations.
Strategic Relationships
Qwest recently entered into a strategic marketing arrangement with DIRECTV, Inc. and Echostar
Communications Corporation in order to bundle the satellite television products and services of
these companies with its traditional telecommunications, data and Internet offerings in several
markets within its local service area, including Colorado, Nebraska, Arizona and Washington.
Qwest management believes these relationships are key to providing the full suite of products
being demanded by the market.
VoIP
Given the recent court rulings that favor VoIP —Voice over Internet Protocol—providers, Qwest
plans to enter the arena on a limited basis in the state of Minnesota. Qwest’s objective in offering
VoIP services would be to find a path toward deregulation, not to circumvent access charges or
dodge paying Universal Service fees, etc. This not only represents an opportunity for Qwest, but
4
VoIP signals a massive paradigm shift in the telecom industry as a whole. Qwest risks a great
deal if it does not respond quickly to this new offering. Smaller competitors, such as upstart
providers and cable companies, who move swiftly and beat Qwest to market may use Qwest’s
size against it, as the regulatory barriers may allow for more efficient cost structures. Moving
quickly to roll out voice services delivered over the Internet promises to reduce costs (including
regulatory fees) while expanding the services available to customers. More details on VoIP are
discussed in the industry analysis section.
Assessment
Qwest combines the steady cash flow and industry power of its large local-phone operations with
the cutting-edge technology of its original long-distance business. The ability to offer satellite
services from Hughes and EchoStar and the nationwide wireless service via Sprint PCS together
with its phone services will ideally help Qwest keep customers and increase revenue.
The firm has dramatically reduced capital spending and cut unprofitable businesses, pushing free
cash flow back into the black. However, there is still much to do. For instance, costs tied to the
accounting restatement and past poor business decisions should be eliminated in the near future,
but remain currently nevertheless. Qwest's accounting disclosure since these incidents has been
exemplary.
Strategy
Qwest is working hard to slash debt via asset sales, and focus on cost and capital-spending
reductions. The company is also evaluating its business lines, looking to eliminate those not
generating a profit. Investigating its past accounting practices and rebuilding its reputation are top
priorities for Qwest. New management has also emphasized improved customer service.
Management
Qwest's board finally released Joe Nacchio in June 2002, paying him $10.5 million in severance
and granting him a consulting job that pays $125,000 per month through mid-2004. Industry
veteran Dick Notebaert replaced Nacchio. Notebaert led fellow RBOC Ameritech until it merged
with SBC in 1999. After that he filled the CEO spot at telecom-equipment vendor Tellabs. He
makes about $1.2 million in base salary, which is consistent with other telecom CEOs. Upon his
hiring, Notebaert was given 5 million options (about 0.3% of the company) with a strike
price of $5.10. Company founder and largest shareholder, Philip Anschutz, still owns 17% of the
firm.
Since taking over in 2002, Dick Notebaert has lead the way for several dramatic changes for the
better. He and his executive team have reduced debt by over $10 billion, more than tripled
Qwest's cash position via asset sales and debt tenders, staved off bankruptcy, completed
financial restatements, completed S271 approval across Qwest’s entire local service territory, and
driven a major personality change in the company which now radiates the "Spirit of Service".
Realizing Qwest is in a commodity business, this last dynamic not only provides an environment
fertile for advancement, but it allows for a potentially competitive advantage given the industry
situation.
After personally asking Mr. Notebaert about challenges in 2004, he advised that the “main
issues this year are growth and the industry model changes”.
Risks
Qwest specific risks include a large debt-load and lingering regulatory investigations. Qwest may
need to tap the capital markets to meet debt repayments after 2007. Competition in the localphone industry is growing and sapping the company’s much-needed cash flow.
5
Competition
Similar to the other incumbent wireline service providers, Qwest faces a very competitive
environment. It continues to steadily lose lines to UNE-P providers, and as a result of substitutes
such as wireless and broadband.
Growth
Growth has been meager. Qwest is losing share in the local-phone business, which still accounts
for the majority of revenue. The company has also exited several unprofitable businesses. Longdistance and data services should help to boost growth in the coming year.
(Source: Company 10-K, all-employee meeting minutes and Morningstar.com)
6
U.S. Economic Condition
In General
Economic activity in the United States has remained sluggish in part of 2003, but is inarguably in
a recovery as of late. Thus the value style and cyclical sectors would intuitively be in favor,
which is a positive for Qwest. Given the great degree of uncertainty, many businesses were
reluctant to undertake new projects in the recent past. On a positive note, consumer spending
grew reasonably, defense spending grew, and housing activity was moderate. GDP has been
advancing and is expected to grow at a rate of 3.1% in 2004. Labor productivity appears to be
rising at a fairly robust pace, as firms continued to trim payrolls in 2003. Job losses are also
slowing to some degree. For much of the first half of the year energy prices have soared. Slack in
resource utilization and continued sizable advances in labor productivity held core inflation--which
excludes the direct effects of food and energy prices--to a low level.
Even in the midst of economic growth the prospect that inflation would remain very subdued has
kept the federal funds rate at the accommodative level of 1¼ percent for much of the first half of
2003 and remains around 1 percent, but it is hinting at an up-tick. Intermediate and longer-term
yields declined in the recent past, in some cases to their lowest levels on record in 2003. Equity
prices have been volatile lately in response to weaker-than-expected economic news and rising
geopolitical tensions. The apparent increase in investors’ risk tolerance has also helped push
down risk spreads on corporate bonds and triggered inflows to equity and high-yield bond mutual
funds. Since the beginning of the year, the foreign exchange value of the dollar has depreciated
significantly against the broad assembly of currencies of the US’s major trading partners.
Households and businesses have taken advantage of the decline in intermediate-term and longterm interest rates from their already low levels, mostly by refinancing debt at ever more favorable
rates. Partly as a result, household credit quality was little changed over the first half of the year,
and household debt continued to expand at a rapid pace as mortgage interest rates fell to their
lowest levels in more than three decades. Business balance sheets strengthened noticeably, and
many measures of corporate credit performance showed some improvement. Still, net borrowing
by businesses continued to be damped by the softness in investment spending.
Corporate Profits and Business Finance
Looking backward, before-tax profits of nonfarm, nonfinancial corporations grew at a 6.5% annual
rate in 1Q of 2003, and constituted the highest proportion of GDP since 3Q of 2000. Sales and
production are also increasing. Turning to companies that make up the S&P 500, earnings per
share for the first quarter of 2003 were up nearly 7% at a quarterly rate from 4Q of 2002 and were
11% higher than four quarters earlier. Although oil companies accounted for the majority of this
four-quarter increase, earnings from the financial, utility, and consumer durable sectors were also
strong and exceeded the market’s conservative expectations by more than usual margins in
2003. The recent depreciation of the dollar substantially boosted revenues of U.S. multinational
corporations, but the hedging of currency risk conceivably limited the extent to which gains
showed through to profits.
Should inflation rise the economy could turn to overheat, and with the presidential election
coming up this year the Fed Funds rate should stay low and government spending could
increase. We are clearly in the midst of an economic recovery with business and consumer
spending on the rise, but job growth continues to lag and may for some time.
(Source: www.federalreserve.gov)
7
Telecommunications Industry Condition
As all companies push to be lean operators there also seems to be a perception that public
network operators need to expand into new areas to drive revenue growth in the future. Talk is
centered on service bundling, the success of DSL, adding video to telecom portfolios, and
expanding managed service offerings and new-generation wireless. In addition, there is a good
deal of buzz and excitement in the industry around VoIP. IDC forecasts that the total market for
VoIP equipment will reach $15.1 billion by 2007 with a compound annual growth rate of 44
percent. For service providers, the VoIP services market is expected to reach $11.3 billion by
2007, with a compound annual growth rate of 27.2 percent, according to Gartner Dataquest.
Nevertheless, the future success of VoIP and its impact on Qwest remain a great uncertainty.
Qwest management plans to offer this service free of tax given the unclear stance on this issue
the government and courts has taken. This remains a controversial issue with the sensitivity of
the regulatory environment, but could prove to be a positive yet risky move.
Expanding on the industry situation Dick Notebaert provided me with a paper he drafted
for The Yankee Group. In that paper Mr. Notebaert said the following:
“Let me lay the foundation for my remarks with a brief synopsis of our current climate. As
you know, the telecom sector has been a particularly soft part of our nation’s struggling
economy for well over two years. And there have been a number of contributors to that
situation. Competition has never been fiercer, not only among traditional providers but
also from a host of new entrants—from electric utilities to diversified financial institutions
to systems integrators—who see telecom as a way to shore up their own portfolios.
Regulatory impediments are also as bad as ever, thanks to many of the FCC’s recent
Triennial Review decisions—decisions that will tie up the courts for years and that
continue to discourage investment. The FCC’s own chairman, Michael Powell, described
the fiasco by saying the FCC: (quote) “has brought forth a molten morass of regulatory
activity that may very well wilt any lingering investment interest….”
True to his prediction, telecom investment is minimal, continuing layoffs on the
manufacturing side of the industry. Tens of thousands of people have also lost their jobs
on the service provider side, as customers hopped from provider to provider, opted for
alternate technologies or, in the enterprise space, simply closed their doors. And not
surprisingly, such significant force reductions have prompted many opinion leaders—
including many analysts—to predict inevitable industry-wide declines in customer service.
Technology improvements might give someone an edge for a few weeks; low price might
create an advantage for a couple days. But to be successful you need a strategy that
takes you to the next level.
Others in our industry are opting for various differentiators toward that end—putting their
emphasis in such directions as innovation, greater reliance on customer self service, or
ongoing acquisitions. As for Qwest, we see service excellence as the only valid,
sustainable differentiator—and we’ve made the commitment to achieve that
position.”
Moving forward, it appears that the worst days for telecommunications are in the rearview mirror.
In fact, most analysts feel that industry stabilization has begun. However, this remains a
mature/declining industry overall, as growth continues to languish and catalysts are few and
far between. Telcos such as Qwest continue to seek out sustainable competitive advantages to
grow market share, or at least stem share loss.
(Source: www.xchangemag.com)
8
Though once though of as a growth company Qwest is picking up more cyclical traits (see below).
The main problem is that the telecom industry as a whole is leaving the world of linearity
and entering a chronic pattern of volatility, with the boom and bust pattern becoming
commonplace rather than an anomaly. Ups and downs may very well become the pattern in the
future.
QWEST COMMUNICATIONS INTL (Q) Price 4.8
1999
2000
2001
2002
StockVal®
2003
2004
2005
66
HI
65
LO
1
ME
24
CU
5
GR -29.7%
32
16
8
4
2
02-12-1999
02-13-2004
1
PRICE
2
HI
LO
ME
CU
GR
1
0
1.63
-1.37
-0.41
-0.36
NEG
-1
03-31-1999
09-30-2003
-2
EARNINGS-PER-SHARE
11500
HI 11246.3
LO 9066.6
ME 10092.2
CU 11246.3
GR
4.6%
11000
10500
10000
9500
03-31-1999
12-31-2003
9000
GROSS DOMESTIC PRODUCT ($BIL)
9
Financial Analysis
Expenses and Revenue
Source: 10-K
Major contributors to operating expenses in 2002 were Goodwill and Asset impairment charges,
accounting for 24.7% and 30.7% of total operating expenses respectively. These were one-time
or infrequent events and were likely taken in this period to expose negative impacts during a
down year and clear the air for future bottom line improvements.
Source: 10-K
Revenue growth was seen mainly in Wireless, while Voice, Data and Internet services declined
from 2001 to 2002. Impeding this wireline revenue decline (7.25% from 2001 to 2002) is a major
focus for Qwest going forward.
10
Balance Sheet
StockVal ®
QWEST COMMUNICATIONS INTL (Q)
FYE Dec
2002
% Chg
Cash & Equivalents ($ Mil)
2253.0
Accounts Receivable
2325.0
Inventories
2001
% Chg
2000
% Chg
1111
186.0
-20
2906.0
1999
% Chg
-10
207.0
-8
3165.0
1998
165
78.0
59
49.0
29
2455.0
41
1743.0
197.0
68.0
-56
156.0
44
108.0
-60
272.0
38
1774.0
19
1490.0
19
1252.0
-10
1387.0
176
503.0
Total Current Assets
6420.0
36
4738.0
0
4732.0
13
4192.0
68
2492.0
Plant & Equipment Gross
44580.0
-18
54437.0
12
48400.0
27
38126.0
7
35638.0
Accumulated Depreciation
25585.0
3
24958.0
11
22414.0
3
21722.0
5
20730.0
Plant & Equipment Net
18995.0
-36
29479.0
13
25986.0
58
16404.0
10
14908.0
Other Long-Term Assets
3930.0
-90
37949.0
-10
42098.0
1716
2318.0
128
1016.0
22925.0
-66
67428.0
-1
68084.0
264
18722.0
18
15924.0
29345.0
-59
72166.0
-1
72816.0
218
22914.0
24
18416.0
Other Current Assets
Total Long-Term Assets
Total Assets
Accounts Payable
904.0
-31
1318.0
-30
1887.0
11
1700.0
26
1347.0
Short-Term Debt
2789.0
-42
4807.0
33
3616.0
25
2882.0
126
1277.0
Other Current Liabilities
3202.0
-22
4098.0
-2
4193.0
92
2184.0
5
2072.0
6895.0
-33
10223.0
5
9696.0
43
6766.0
44
4696.0
19754.0
-2
20230.0
30
15541.0
53
10189.0
18
8642.0
796.0
-29
1122.0
-6
1191.0
52
786.0
0
5504.0
13
4890.0
39
3513.0
-1
3537.0
Total Current Liabilities
Long-Term Debt
Deferred Income Taxes
Other Long-Term Liabilities
0.0
5526.0
Total Long-Term Liabilities
25280.0
-5
26530.0
23
21553.0
45
14893.0
15
12965.0
Total Liabilities
32175.0
-12
36753.0
18
31249.0
44
21659.0
23
17661.0
755.0
Minority Interest
Preferred Equity
Common Equity
-2830.0
35413.0
-15
41567.0
3212
1255.0
66
Total Equity
-2830.0
35413.0
-15
41567.0
3212
1255.0
66
755.0
72166.0
-1
72816.0
218
22914.0
24
18416.0
Total Liab & Equity
29345.0
-59
Balance Sheet Ratios
StockVal ®
QWEST COMMUNICATIONS INTL (Q)
FYE Dec
Cash Items/Total Capital (%)
2002
2001
2000
1999
1998
1997
1996
1995
13.31
0.33
0.36
0.68
0.52
0.29
0.83
1.88
Quick Ratio
0.66
0.30
0.35
0.37
0.38
0.42
0.44
0.45
Current Ratio
0.93
0.46
0.49
0.62
0.53
0.60
0.64
0.67
Net Working Capital ($000)
-475
-5485
-4964
-2574
-2204
-1695
-1385
-1315
163.67
Long-Term Debt/Equity (%)
Long-Term Debt / Capital (%)
Total Debt/Common Equity (%)
Total Debt/Capital (%)
Total Debt/Total Assets (%)
Days Inventory
ALN
57.13
37.39
811.87
1144.64
114.95
144.60
116.72
36.36
27.21
89.03
91.97
53.48
59.12
62.07
ALN
70.70
46.09
1041.51
1313.77
130.87
165.89
192.29
133.20
45.00
33.55
114.22
105.55
60.88
67.82
72.93
76.82
34.69
26.31
57.04
53.86
32.35
37.61
39.41
20.18
54.40
53.01
56.17
4.16
8.72
9.01
26.65
Days Receivable
55.16
64.19
81.65
76.29
57.17
Days Payable
55.31
73.67
157.43
166.58
137.95
Asset Turnover
0.30
0.23
0.30
0.57
0.62
0.66
0.65
0.63
Plant & Equipment Turnover
0.63
0.60
0.67
0.75
0.76
0.81
0.81
0.79
Property Plant & Equipment has dropped 36% from 2001 to 2002, as Other Long-term Assets declined by
90%. Write-offs account for the majority of these changes, indicative of a shifting environment.
Common equity has fluctuated substantially over the past 7 years given the changes in LT debt and LT
assets – in 2000 Qwest merged with US West.
On a positive note Qwest added over $2 billion to its cash position in 2002.
11
Income Statement
StockVal ®
QWEST COMMUNICATIONS INTL (Q)
FYE Dec
2002
% Chg
2001
% Chg
2000
% Chg
1999
% Chg
1998
15385.0
-7
16524.0
17
14148.0
20
11746.0
6
11128.0
5966.0
-9
6530.0
49
4375.0
17
3725.0
5
3564.0
Gross Profit
9419.0
-6
9994.0
2
9773.0
22
8021.0
6
7564.0
S G & A Expense
5279.0
-6
5616.0
15
4886.0
30
3753.0
5
3583.0
50
Revenues ($ Mil)
Cost of Goods & Services
R&D Expense
Interest Expense
Pre-Tax Income
1830.0
13
1624.0
41
1148.0
763.0
41
543.0
-20125.0
-172
-7395.0
-264
-2034.0
1902.0
-21
2419.0
-2500.0
-99
-1257.0
-112
-592.0
800.0
-12
911.0
Taxes
Net Income Reported ($ Mil)
-38468.0
-587
-5603.0
-440
-1037.0
1084.0
-28
1500.0
Net Income Adjusted
-972.0
57
-2249.0
-326
-528.0
1391.0
13
1231.0
EPS Reported
-22.87
-579
-3.37
-311
-0.82
1.23
-29
1.74
EPS Adjusted
-0.58
57
-1.35
-229
-0.41
1.58
10
1.43
1682056
1
Shares Outstanding (Thou)
Dividends Common (Per Shr)
Dividends Preferred ($ Mil)
1661133
31
1272088
44
880753
2
862581
0.00
0.05
-84
0.31
-77
1.36
10
1.24
0.0
0.0
0.0
0.0
0.0
Income Statement Ratios
StockVal ®
QWEST COMMUNICATIONS INTL (Q)
FYE Dec
Gross Profit Margin (%)
2002
2001
2000
1999
1998
1997
1996
1995
61.22
60.48
69.08
68.29
67.97
Operating Profit Margin EBITDA (%)
NEG
NEG
17.35
42.84
46.38
43.37
44.62
41.06
Operating Profit Margin EBIT (%)
NEG
NEG
NEG
22.69
26.62
24.60
25.30
21.63
-130.81
-44.75
-14.38
16.19
21.74
21.08
21.28
17.57
0.00
0.00
0.00
42.06
37.66
37.13
36.85
35.86
Net Profit Margin Adjusted (%)
-6.32
-13.61
-3.73
11.84
11.06
13.88
12.98
12.89
Return on Avg Common Equity (%)
-5.97
-5.84
-2.47
138.41
48.07
38.60
39.23
40.69
Return on Average Total Equity (%)
NEG
NEG
NEG
138.41
48.07
38.60
39.23
40.69
Return on Average Capital (%)
-2.68
-3.99
-1.54
13.35
13.11
16.86
15.47
16.06
Return on Average Assets (%)
-1.92
-3.10
-1.10
6.73
6.82
9.15
8.47
8.14
Times Interest Earned
NEG
NEG
NEG
3.49
5.45
7.00
6.31
5.32
Pre-Tax Profit Margin (%)
Tax Rate (%)
Gross revenue is down from 2001 but is still up from 2000.
Net profit margins are the most concerning item, and have been eroding over the past three years.
These do show signs of improvement however.
ROIC = -41.8% as of 2/19/04.
12
QWEST COMMUNICATIONS INTERNATIONAL INC
Cash Flows, 10/16/2003 As restated (Source: 10-k)
(Dollars in millions, shares in thousands except per share amounts)
OPERATING ACTIVITIES
Net loss
Adjustments to net loss:
Income from and gain on sale of discontinued operations, net of tax
Depreciation and amortization
Loss on sale of investments and other investment write-downs, net
Provision for bad debts
Cumulative effect of changes in accounting principles
Goodwill impairment charge
Asset impairment charges
Tax benefit from stock options
Deferred income taxes
(Gain) loss on sales of fixed assets
(Gain) loss on early retirement of debt net
Other non-cash charges
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Prepaid and other current assets
Accounts payable and accrued expenses
Current deferred revenue and customer deposits
Current restructuring reserve
Merger-related reserve
Other long-term assets and liabilities
Cash provided by operating activities
$
(1,957)
3,847
1,278
511
22,800
8,483
10,525
(511)
5,364
3,448
615
(24)
(446)
3,340
694
388
41
340
191
(569)
11
(1,836)
290
251
165
(733)
(51)
106
254
75
117
85
(905)
5
(259)
(89)
84
2,334
(438)
(62)
(136)
(514)
98
363
(343)
641
2,890
(694)
(87)
(270)
(130)
286
(2,764)
(8,042)
12
(5)
103
98
(82)
(97)
210
(84)
(2,738)
(146)
(8,059)
1,476
(2,890)
809
14
(12)
6,911
(2,659)
1,247
286
(1,000)
(83)
(42)
4,660
4,331
(2,693)
(234)
435
(509)
488
(226)
355
(2,252)
INVESTING ACTIVITIES
Expenditures for property, plant and equipment
Cash acquired in connection with the Merger
Proceeds from sale of equity securities
Purchase of securities
Payments on derivative contracts
Proceeds from sale of equipment
Proceeds from sale of investment in Global Crossing, net
Other
Cash used for investing activities
FINANCING ACTIVITIES
Proceeds from long-term borrowings
Repayments of long-term borrowings
Net proceeds from (payments of) short-term debt
Proceeds from issuance of common stock
Repurchase of common stock
Dividends paid on common stock
Debt issuance costs
Cash (used for) provided by financing activities
CASH AND CASH EQUIVALENTS
Decrease in cash
Net cash generated by discontinued operations
Proceeds from sale of directory publishing business
Beginning balance
Ending balance
Year Ended December 31,
2002
2001
2000
(38,468.00) $
(5,603.00) $
(1,037.00)
(186)
(789)
$
(1,193)
506
2,754
186
2,253.00 $
207
186.00 $
225
454
1,025
3,762
(7,135)
407
488
(77)
(436)
23
1,561
(87)
(5,256)
(542)
(29)
1,268
78
207.00
Cumulative effects of changes in accounting principals and Asset impairment charges – restructuring
items – represent the most significant impacts to cash flow in 2002.
13
Cash Flow Analysis
StockVal ®
QWEST COMMUNICATIONS INTL (Q)
FYE Dec
2002
% Chg
2001
% Chg
2000
% Chg
1999
% Chg
1998
1084.0
-28
1500.0
13
1231.0
Net Income Reported ($ Mil)
-38468.0
-587
-5603.0
-440
-1037.0
Accounting Adjustment
37496.0
1018
3354.0
559
509.0
-972.0
57
-2249.0
-326
-528.0
3847.0
-28
5364.0
61
3340.0
41
2367.0
8
2199.0
2875.0
-8
3115.0
11
2812.0
-25
3758.0
10
3430.0
Capital Expenditures
2764.0
-66
8042.0
13
7135.0
81
3944.0
36
2905.0
Free Cash Flow Adjusted
111.0
-4927.0
-14
-4323.0
-2224
-186.0
0.0
83.1
-79
394.3
-67
1197.8
12
1069.6
111.0
-5010.1
-6
-4717.3
-241
-1383.8
-154
-544.6
Net Income Adjusted
Depreciation & Amort
Cash Flow Adjusted
Dividends Common ($ Mil)
Free Cash Flow After Dividends
Net Cash From Operations
66
307.0
1391.0
-269.0
525.0
2334.0
-19
2890.0
-23
3762.0
-17
4546.0
16
3927.0
Net Cash From Investing
-2738.0
66
-8059.0
-53
-5256.0
19
-6462.0
-133
-2769.0
Net Cash From Financing
-789.0
4660.0
268
1268.0
-35
1945.0
0.0
0.0
Other Cash Flows
Change In Cash & Equiv
-1193.0
-134
-509.0
-125
0.0
0.0
-226.0
29.0
-1136.0
0.0
32
22.0
First Call Consensus Summary
StockVal ®
QWEST COMMUNICATIONS INTL (Q)
Price 4.040 01/30/04 FYE Dec
Quarterly Mean Estimates
Five-Year Growth Rate Forecast
Q1
Q2
Q3
Q4
EPS
Dec
Mar
Jun
Sep
Mean
-0.08
-0.06
-0.06
-0.05
High
-0.05
-0.04
-0.03
-0.01
Low
-0.11
-0.10
-0.10
-0.10
22
9
10
10
Number of Est
Growth Rate Est Median
0.00
Number of Estimates
4
Standard Deviation
10.30
Mean Estimate History
Revenues
FY1
FY2
FY3
DEC 03
DEC 04
DEC 05
Mean
3563.20
3563.88
3569.78
3570.82
Current
-0.36
-0.22
-0.08
High
3607.00
3612.00
3650.00
3680.00
Last Week
-0.36
-0.22
-0.08
Low
3534.00
3513.00
3472.00
3448.00
4 Weeks Ago
-0.36
-0.20
-0.04
0.72
1.11
1.84
2.37
8 Weeks Ago
-0.35
-0.19
-0.06
11
6
6
6
12 Weeks Ago
-0.30
-0.17
-0.03
FY1
FY2
FY3
FY1
FY2
FY3
DEC 03
DEC 04
DEC 05
DEC 03
DEC 04
DEC 05
Mean
-0.36
-0.22
-0.08
Last Week
0.00
0.00
0.00
High
-0.32
-0.08
0.18
4 Weeks Ago
0.00
-10.00
-100.00
Low
-0.40
-0.40
-0.38
8 Weeks Ago
-2.86
-15.79
-33.33
24
25
11
12 Weeks Ago
-20.00
-29.41
-166.67
Stand Dev %
Number of Est
Annual Mean Estimates
EPS
Number of Est
Number Up
Mean Estimate % Change From
3
6
2
13
16
4
Mean
14381.90
14343.80
High
14613.00
15281.00
Low
14230.00
13723.00
0.53
2.70
21
20
Number Down
Next Expected Report Date
02/19/04
Revenues
Stand Dev %
Number of Est
Given the accounting adjustments Qwest has achieved its first Free Cash Flow positive year in
five years.
Analysts have been steadily ratcheting down their estimates.
14
Valuation
A. Technical
QWEST COMMUNICATIONS INTL (Q) Price 4.0
1994
1995
1996
1997
1998
1999
2000
2001
StockVal®
2002
2003
2004
3
2005
2006
1
HI
LO
ME
CU
FY1
FY2
0
06-27-1997
01-30-2004
2
99.90
0.17
0.84
99.90
99.90
99.90

+
+
+
PE RATIO RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd
0.9
HI
LO
ME
CU
0.6
1.61 
0.06
0.33
0.17
0.3
06-27-1997
01-30-2004
0.0
PRICE / CASH FLOW ADJUSTED RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd
12
HI
LO
ME
CU
9
6
3
99.99 
0.02
0.57
99.99 +
06-27-1997
01-30-2004
0
PRICE / BOOK VALUE RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd
3
HI
LO
ME
CU
2
2.07 
0.09
0.77
0.31
1
06-27-1997
01-30-2004
0
PRICE / SALES RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd
When compared to the S&P 500 Qwest is relatively expensive based on P/E and P/B, however
from a P/CF and P/S perspective, it is not quite so overvalued.
*Qwest’s 5-year P/E was unavailable due to negative past earnings.
15
QWEST COMMUNICATIONS INTL (Q) Price 4.0
1994
1995
1996
1997
1998
1999
2000
2001
StockVal®
2002
2003
2004
3
2005
2006
1
HI
LO
ME
CU
FY1
FY2
0
06-27-1997
01-30-2004
2
99.90
0.22
0.90
99.90
99.90
99.90

+
+
+
PE RATIO RELATIVE TO S&P TELECOM SERV. SECTOR COMPOSITE A (SP-50) M-Wtd
1.6
HI
LO
ME
CU
1.2
0.8
0.4
06-27-1997
01-30-2004
0.0
PRICE / CASH FLOW ADJUSTED RELATIVE TO S&P TELECOM SERV. SECTOR COMPOSITE A (SP-50) M-Wtd
12
HI
LO
ME
CU
9
6
2.54 
0.14
0.58
0.40
3
99.99 
0.04
0.65
99.99 +
06-27-1997
01-30-2004
0
PRICE / BOOK VALUE RELATIVE TO S&P TELECOM SERV. SECTOR COMPOSITE A (SP-50) M-Wtd
2.0
HI
LO
ME
CU
1.5
1.0
0.5
1.60 
0.11
0.57
0.33
06-27-1997
01-30-2004
0.0
PRICE / SALES RELATIVE TO S&P TELECOM SERV. SECTOR COMPOSITE A (SP-50) M-Wtd
Again, when compared to the S&P Telecommunications Services Sector Qwest is relatively
expensive based on P/E and P/B multiples, but not from a P/CF and P/S perspective. The latter
gauges are potentially a more appropriate in this context, given the significance of revenue and
operating performance in this sector.
16
B. Discounted Cash Flow (Intrinsic Value)
FCF
Discounted FCF
Intrinsic value of firm
PV of debt
Equity value
Shares outstanding
Equity value per share
2004E
729
672
21,615
15,752
5,863
1,770
$
3.31
2005E
989
840
2006E
1,088
852
2007E
1,197
864
2008E
1,316
875
TV
1,448
17,513
Assumptions:
Inflation of 3%
10% terminal growth
(Data sources: Banc of America Securities estimates and
Morningstar research.)
Supporting data:
Risk Free 10 year t-bond
Beta
Historical stock market return 18022001
Qwest Cost of Equity
Equity
Qwest Cost of Debt
Debt
Tax rate
WACC
4.14%
2.54
8.3%
14.71%
7,547.04
8.50%
15,752
40%
8.50%
=7.5+1.0 (default premium)
Equity Free Cash Flow is defined as EBITDA minus Capital Expenditures, minus Interest
Expense (ignoring taxes, as EBIT is less than interest expense currently). Capital expenditures
were subtracted in full due to the fact that they have decreased significantly over the past couple
years and account for an amount that is not significantly above costs for general maintenance. I
believe this provides an acceptable estimate of cash flow generated by Qwest after appropriate
items necessary to run the business are accounted for. I estimated growth at 10% due to average
analyst estimates of 9% revenue growth for Qwest and 11% revenue growth for the industry.
Weighted Average Cost of Capital was calculated using a CAPM cost of equity and cost of debt
estimates from recent debt offerings averaging 7.5%, to which I added a 1% default premium due
to risk.
(Additional sources: Prudential Equity Group, LLC and Credit Suisse/First Boston estimates.)
17
C. Comparables (as of 2/19/04)
Sprint
Verizon
BellSouth
SBC
Qwest
Competitor Average
Communications Services Industry
S&P 500
P/E
89.4
14.4
14.7
10.9
38.9
19.7
20.1
21.7
5
2
3
1
4
P/B
1.3
2.9
2.6
2.1
--1.9
3.2
4.9
1
4
3
2
5
P/S
1.2
1.5
2.3
1.9
0.5
1.6
2.4
3.3
2
4
5
3
1
P/CF
4.2
4.6
5.9
5.5
3
4.8
2
3
5
4
1
Score
2.4
3.2
4.2
2.8
2.4
3.2
9.7
17.1
(Source: www.Morningstar.com)
The previous DCF analysis indicates the Qwest shares may be currently overvalued, and Qwest’s
P/E for trailing twelve months is relatively high compared to its competitors and its industry
average. However, Qwest’s Price to Cash Flow and Price to Sales ratios for trailing twelve
months are comparatively low, potentially indicating opportunity. In order to compare these
companies and current valuations I ranked the five competitors 1 through 5 based on P/E, P/CF,
P/B, and P/S. I then gave each indicator a value based on its appropriateness in the
telecommunications industry. A significance of .2 was given to each indicator except P/CF, which
was given a significance of .4 given the importance of cash flows as a measure of business
health. After multiplying the corresponding rank by the respective significance for each stock, I
came to the conclusion that both Sprint and Qwest may be relatively undervalued compared
to the competition. Given that Qwest’s score is 75% of its competitor’s average, I have assumed
that investors have discounted Qwest’s stock price due to future uncertainty and a lack of
revenue-driving catalysts.
Valuation method
50% x DCF value + 50% x comparable valuation = (50% x $3.31) + (50% x ($4.28/.75)) = $4.51
I am estimating a price target of $4.50 for Qwest using the above proprietary valuation method,
rounding down slightly due to multiple risk factors. This represents an average based on
expected future cash flows minus necessary expenses to run the business and valuation relative
to Qwest’s core competition. Data and estimates used in this model are from various analysts’
reports.
18
Conclusion
Key reasons to marketweight Qwest include the following pros and cons:
Pros
 Progress on restructuring and paying down debt and cost reduction
 Focus on service as competitive advantage
 Recent strategic alliances with Sprint and DIRECTV
 Extensive national fiber asset which is advantageous for VoIP, and as long-haul
expansion continues with 271 (long-distance) approvals
 Potential M&A prospects given current situation
Cons
 Changing industry landscape
 Continued wireline loss
 Debt load is still heavy at nearly $16 billion and Debt/Total Capital is 103.1%
 Backing off of Allegiance acquisition
 Loss of cash flow generated by directory business
Looking at the big picture Qwest has made some significant improvements, but still has a long
way to go. At this time there are no blatantly obvious revenue-driving catalysts to drive up the
stock price. I am reiterating a near-term price target of $4.50 based on discounted cash flow
analysis and comparable valuation multiples. This also takes into consideration decent revenuestabilization and recent cost cuts, which may indicate Qwest is currently slightly undervalued.
Although this price target represents modest positive price momentum Qwest faces too
many idiosyncratic and industry-specific risks to warrant an overweight rating. The
telecommunications industry is mature if not declining and Qwest appears to be lingering around
4-5 o’clock on the business-cycle clock, indicating that it is currently “cheap for a reason”.
19