FOCAL COMMUNICATIONS - FCOM -available at DLJ
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Focal is a rapidly growing competitive local exchange carrier, or CLEC. We provide data, voice and colocation services to large, communications-intensive users in major cities. Our target customers include large corporations, Internet service providers and value-added resellers. We offer our customers anattractive alternative to incumbent local exchange carriers, or ILECs. Since other CLECs have chosen to compete in smaller cities or target smaller customers, we believe we have a unique strategy.
We began operations in 1996, initiated service first in Chicago in May 1997 and currently offer service in 12 large, metropolitan markets nationwide. As of April 30, 1999, we had sold 99,826 access lines, of which 80,218 were installed and in service. We estimate that at least 70% of these lines are utilized by our customers to carry data traffic.
A majority of our revenue is currently derived from the provision of switched data services for our targeted customers. Due to customer demand, we are deploying additional services such as digital subscriber line, or DSL, access and nationwide networking using asynchronous transfer mode, or ATM, technology. Once these services are deployed, we believe we will have an advantage over other data and voice CLECs offering these services due to our established relationships with some of the largest corporate and Internet service provider customers in the nation, our highly reliable network, and our ability to package switched and high-speed data connections. We also believe that by providing these data services, we will appeal to a broader customer base.
We believe we were the first CLEC to employ the "smart-build" approach to designing networks. As such, we own and operate our switches, and initially lease, rather than own, transport capacity. Currently, we use leased facilities for 100% of our transport requirements. However, based on the increase in volume of customer traffic in some of our markets, we now believe it is economically attractive for us to own a portion of our transport capacity. We have signed an agreement with Level 3 Communications and are negotiating with another company to acquire a combined minimum of 10,800 fiber miles of our own local fiber transport capacity in 16 markets. By combining leased fiber transport facilities with owned fiber capacity, we expect to be better able to control these assets and generate stronger operating results.
To further develop our long distance service offerings, we have signed agreements with a number of carriers under which we plan to lease approximately 10,000 DS-3 miles of fiber transport capacity connecting each of our existing and planned markets. Using these facilities, we are developing a nationwide ATM
network to carry data and voice traffic. For example, we expect to be able to price long distance voice calls that remain on the Focal network as if they were local calls--a service we call FocaLINC(TM). In addition, we expect to offer our corporate customers nationwide toll-free access to their local area networks--a service we call Virtual Office.
We also offer colocation services. Many of our Internet service provider customers house their equipment in colocation space we operate within our switching centers. We provide equipment management services to some of these customers. We currently have over 64,000 square feet of secure and environmentally conditioned colocation space available to our customers or under development. We believe the proximity of existing and future colocation customers to our network as well as the concentration of Internet traffic within our space will provide us with an advantage in marketing additional services in the future.
In order to increase our coverage of major U.S. cities, we plan to provide our services in four additional markets in 1999 and another four markets in 2000. When we complete our planned expansion, we will provide service in 20 markets, which encompass a total of 50 metropolitan statistical areas. We estimate there will be approximately 20 million business access lines in these markets by the end of 1999, which will represent about 36% of the total business access lines in the nation. We estimate that in 1999 these lines will
generate approximately $18 billion in annual local switched service revenue. In addition to our local switched service opportunity, Frost & Sullivan projects that the total U.S. market for high-speed and switched data services will grow from $18 billion in 1997 to approximately $40 billion by 2002. We estimate that the addressable market for high-speed and switched data services in our targeted markets will be approximately $9 billion by the end of 1999.
We believe that our management and operations team has been critical to our initial success and will continue to differentiate Focal from its competitors. We have built a skilled and experienced management team with extensive prior work experience at major telecommunications companies, such as MFS Communications, Sprint, MCI WorldCom, AT&T and Ameritech.
STRATEGY
Our objective is to become the provider of choice for data and voice communications services to large, communications-intensive customers in our target markets. The key elements of our strategy are as follows:
. Leverage Current Customer Relationships--Our customer base includes a substantial number of large companies and Internet service providers such as:
IBM Sony Citigroup United Airlines
E*Trade Merrill Lynch Mindspring PSINet
CompuServe Nortel Networks Sears Motorola
We believe that this customer base of communications-intensive users
gives us an advantage in successfully marketing additional services.
Consequently, we plan to leverage the relationships we have built with
our customers and increase our share of their total communications
expenditures by expanding our service offerings and market coverage.
. Expand Data Service Offerings--The majority of our access lines are
utilized for switched data services. We believe a significant
opportunity exists with our existing and targeted customers to
successfully offer a wider array of data services. As a result, we are
currently developing high-speed local area network and Internet access
using DSL technology as well as private line data services.
. Connect our Local Networks Nationally--We believe that the number and
types of services we can provide to communications-intensive customers
in major markets will be greatly enhanced if our networks in these
markets are interconnected. Therefore, we are developing a seamless,
nationwide network based on ATM technology that will interconnect our
switching and colocation centers
in the U.S. We expect this will give us the necessary network platform
to offer additional services such as virtual private network and private
line data and voice services.
. Design and Install a Highly Capital-Efficient Network--We believe we
have optimized our return on invested capital by initially leasing fiber
capacity and by making most of our capital expenditures in switching
facilities and information systems. Going forward, we believe that our
hybrid network, which will combine leased and owned transport capacity,
is the best way to balance capital efficiency and control of network
assets.
. Maximize Network Utilization through Value Added Resellers--We provide
service to value added resellers, or VARs, such as managers of large
multi-dwelling units and companies that market bundled
telecommunications services to small- and medium-sized businesses. This
VAR distribution channel allows us to increase the number of access
lines served by our networks, which further maximizes network
utilization. |
