The biggest challenge of my job is establishing an identity for the company. Qwest is a young company and although people understand where we are, one of my main objectives is to make them realize where we are heading.
Network spin-off
We started out as a spin off from the Southern Pacific Railroad Company, which is owned by Philip Anschutz, one of the wealthiest businessmen in the US. We were – and still are – building a state-of-the-art fiber optical network, which will cover more than 18,500 miles in the US when it is finished in mid-1999. There is also an additional 315 mile network that should be completed at the end of the year. The company went public at the end of June 1997.
Although we have moved into different business directions over the past two years, a substantial number of investors and analysts still wrongly think of us as just a wholesale networker. Today we are much more than just a long distance operator. We are now also a leading provider of higher margin products and services – including internet-based data, voice and image communications – to both the retail and corporate markets. We’re also getting involved in the cutting edge technologies of complex web hosting, electronic commerce, video streaming, managed network services and managed software services.
We started laying the foundation for our new image by holding two large investor/analyst meetings in July last year and February this year to spell out our strategy. I plan to hold more meetings with the investment community during the year. I also regularly attend brokerage sponsored conferences and am pretty active in visiting our institutions and analysts in different parts of the country.
However, it was the link-up with Microsoft in December 1998 as well as the two recently announced deals in April – one domestically with BellSouth and the other with KPN in the Netherlands – that clearly demonstrated to the financial community our commitment to becoming a much broader and more varied organization, both in terms of products and services as well as our client base.
Turning point
The Microsoft deal, which was a major technology alliance, was a real turning point for us. It involves the two companies working closely together on a new generation of internet-based broadband systems such as electronic commerce, web hosting and other key business software applications and services.
This will give businesses access to high speed network services that can help them reduce costs, generate new sources of revenue and optimize the management of their computing operations.
As part of the deal, we set up a new business unit in January which is focused purely on the new markets.
As we told the investment community and the press, we expect the new service to generate revenues of about $150 mn in the first two years, most of it in the year 2000. As for pre-tax earnings, we said we expect these to be slightly negative for this year but slightly positive for the year 2000.
One of the main messages we also felt it was important to convey was that by working with Microsoft and its distribution channels, we were able to speed up by as much as twelve months our own plans for the delivery of web enabled applications.
Forging alliances
More recently, we have entered into two new critical alliances, as already mentioned. One is with BellSouth, a communications service company based in Atlanta, Georgia; the other is with KPN, the Amsterdam-based telecommunications company created when the phone business of the former Dutch post office was privatized. In both cases, I worked closely with the other companies’ public relations and investor relations departments to get the major messages across.
We made sure we got wide coverage, which meant contacting journalists from the leading newspapers such as the Wall Street Journal, New York Times and major business publications such as Business Week, Forbes and Fortune. We also worked on getting our story told to online trade newsletters and magazines. Our mission was to highlight our internet data capabilities and our new focus on large business customers.
With the BellSouth deal, it was important to Qwest that the investment community perceived us to be the winners, and understood that it was our technology and services that made the deal attractive.
The deal has three major components, as follows. BellSouth is to invest about $3.5 bn for a 10 percent stake in us, which means that the holding of our main shareholder, the Anschutz Company, will be reduced to roughly 40 percent. We will coordinate our marketing efforts with Qwest providing our full range of data networking, internet and voice services while BellSouth will offer its complete range of local networking services. Finally, once BellSouth receives approval to enter the long distance business, we will both develop and deliver a complete set of end-to-end, high speed data, image and voice communications services to business customers. BellSouth will mainly focus on its retail customers in the south and although we will assist them in the region we will be focusing on the rest of the country.
It was also significant for us to have the BellSouth deal be seen as an affirmation of our new thrust and the work that we had already done. We wanted to make sure that investors and analysts understood that we were like-minded companies going in the same direction. We needed a stronger capability to make the overall high-end communications business a much larger piece of the business but we did not want to portray the deal as being great for us and so-so for BellSouth. We emphasized in our meetings with the press and analysts that our state-of-the-art technology – such as web hosting and e-commerce – were key to the whole alliance and one of the main reasons BellSouth was investing in us.
In order to do this, we worked very closely with BellSouth’s investor relations and PR departments to formulate the press releases and other documentation. Together, we also held a conference call and handled questions from both the investment community and the media. I think we were successful in that both of our stock prices moved up after the announcement. BellSouth increased about 31/4 while our stock price is still trading at about six to eight dollars higher than before the deal.
Global commitment
The same strategy applied to the KPN deal, which was announced about five days before BellSouth in April. Here we wanted to emphasize to analysts and the press our commitment to both technology and building a global business base. Currently, we have 1,000 sales representatives focusing on developing new business relationships. Our business clients account for about 50 percent of our total revenue but we told analysts that our goal is to increase that number to two-thirds over the next two to three years.
With KPN, we entered into a joint venture which will help us tap into Europe’s growing communications services industry. The joint venture is planning to raise about $800 mn in the debt markets to be used to complete the building of the KPNQwest EuroRings fiber-optic network, which is expected to cover 9,100 miles and connect more than 40 major cities, offering broadband and internet-based communications services to customers.
We emphasized that analysts expect the European market to increase to about $224 bn by the year 2001, with five countries – Germany, France, the UK, Belgium and the Netherlands – accounting for about 65 percent of the total. Customers for the new venture will include multinationals and other firms that want integrated voice, data and image communications as well as communications companies who want to buy wholesale network capacity.
I spent seven years with ATT before joining Qwest two years ago and, as you can imagine, there is a vast difference between working for a large organization like that and a much smaller company like Qwest. I enjoy working in a small cap, though, because you become much more involved in the formative stages of the company’s strategies and transactions. You also work more closely with the chief executive officer and chairman, and have a greater insight into their perspectives and thoughts.
