QWEST REPORTS PROFIT, SAYS IT WILL OFFER VoIP IN DEC. IN MINN.

Qwest said its operating loss was $523 million, reversing operating income of $76 million a year earlier. It said the results included pretax charges of $393 million to end arrangements with Calpoint and another vendor, and a $230 million impairment charge to reflect the anticipated decrease in use of Qwest’s wireless network as a result of new wireless arrangements with Sprint. The company said general and administrative expenses in the quarter jumped 9.6% -- $265 million.

Qwest said revenue declines were partly offset by growth in data and long distance services within the local service territory. It said it added long distance to 572,000 access lines in its local service territory, reaching a total of 1.7 million. It also said it expected the FCC to rule on its application for long distance authority in Ariz., the final state in its local service region, in early Dec., after the Justice Dept. last month recommended approval. This month, Qwest began using its own network to carry long distance traffic within its local territory. It also said it introduced or expanded DSL coverage in more than 300 communities and neighborhoods. It said that by quarter’s end, it had 577,000 in-region DSL subscribers -- a growth of 41,000 lines (7.6%).

Following up on an announcement this month (CD Nov 5 p5), Qwest said Wed. it would begin offering VoIP services to a select group of consumers in Minn. next month, marking its first step in a phased deployment of such services that it said would continue into 2004. The action followed a recent decision by the U.S. Dist. Court, Minneapolis, to let Vonage provide its VoIP service without telecom regulation. Qwest also announced a 3-year agreement to buy switches and gateways from Lucent that it said would upgrade its infrastructure and give the company greater flexibility to offer VoIP.

“This is the first contract for the [Lucent’s] Accelerate VoIP Solutions” portfolio, which the company introduced Wed., a Lucent spokesman said, and Qwest also was the first customer for the company’s new intelligent media gateway. He said Lucent was involved in 13 softswitch trials and deployments, including ones with AT&T Wireless and China Unicom. He said Lucent also was in talks with other carriers on the Accelerate portfolio solutions but wouldn’t disclose who they were.

Under the agreement with Lucent, Qwest will integrate its new 5E-XC switch technology -- a key component of the Accelerate portfolio -- into its local network, laying the groundwork for its migration to VoIP. After trials scheduled for the next year, Qwest plans to deploy the new intelligent media gateway. That eventually will connect its existing customers to VoIP networks and allow the unit to continue to switch 911 and intracommunity calls in case of interruption in the line to the host switch.

The Lucent agreement with Qwest is a “big deal” for the technology provider, Current Analysis Vp-Telecom Infrastructure Chris Nicoll said. He said by signing the agreement, Lucent, which introduced its 5E-XC switch in Dec. 2002: (1) Continued “to prove that the company delivers a convergence solution. Lucent and Nortel have most of this market in North America.” (2) Proved it could come up with a product targeting its strategy. (3) Showed that “it’s serious about VoIP. It’s important to announce a strategy and deliver it on time. With this announcement, [Lucent] addresses all these issues.”

Nicoll said he expected more carriers to follow Qwest and “look favorably at the 5E-XC as a VoIP transition capability.” He said he expected Lucent customers such as SBC -- which bought the same switch last year but was using it for traditional voice rather than VoIP -- would “also be likely to use 5E-XC to transition to VoIP.” He said another Lucent customer in China’s Fujian province, which signed a $20 million agreement with the manufacturer this year, was “also looking at using 5E-XC for transition to VoIP.” Verizon and BellSouth haven’t announced whom they would choose for such transition, Nicoll said. A Verizon spokesman said the company, which began deploying VoIP 18 months ago, had announced last summer that it had bought switches from Nortel and expected to buy additional switches next year from an undisclosed vendor. He said Verizon expected to announce the manufacturer soon.

While the market offers “several different solutions [carriers] can pursue to support VoIP,” Nicoll said 5E-XC was “absolutely competitive to similar Nortel products.” However, he said a trend in the industry was that most of the carriers, especially incumbents, “seem to stay with their traditional equipment providers.” Nicol said 5E-XC had an increased switching capacity of 250% over 5ESS, the current Lucent switch, and was 90% smaller.

“The [VoIP] market is growing, there is a traction and we can expect capital expenditures to be made for the next generation architecture,” Nicoll said. Analyst firm IDC predicted that the total market for VoIP equipment would reach $15.1 billion by 2007, with compound annual growth of 44%. Gartner Dataquest said that for service providers, it expected the VoIP services market to reach $11.3 billion by 2007, with compound growth of 27.2%. Another telecom market research firm, Dell'Oro Group, estimated worldwide enterprise VoIP equipment shipped in the 3rd quarter rose 23%, exceeding 1.5 million. It said Cisco led that growth with a 58% sequential increase in its IP line shipments.

Announcing its financial results, Qwest also said Wed. it had begun a tender offer for up to $2.25 billion in aggregate principal amount of certain notes. The company, which reduced its total debt $1.2 billion in the 3rd quarter, said the successful completion of the offer would cut debt more than $7 billion since the end of the 3rd quarter of 2002 and save more than $100 million annually in net interest expenses. The tender offer will be open until Dec. 19 and includes an incentive for holders that tender by Dec. 4, Qwest said.