Interview with CTC's CEO Robert Fabbricatore.
THE WALL STREET TRANSCRIPT:
Questioning Market Leaders For Long Term Investors
ROBERT FABBRICATORE - CTC COMMUNICATIONS CORPORATION (Nasdaq:CPTL)
CEO Interview - published 11/15/1999
DOCUMENT # HAW619
ROBERT FABBRICATORE founded CTC Communications Corp. in 1980 and became
Chairman and CEO in March 1983. Prior to CTC, Mr. Fabbricatore founded
International Business Telephone Corp., a telephone interconnect
company, in 1970. When Rolm Corporation acquired IBT CORP. in 1978, Mr.
Fabbricatore was elected President, Rolm New England. Prior to 1970, he
was Executive Vice President of Electronic Engineering Corporation of
Ohio and prior to that, Chairman and President of Flexwatt Corporation.
Mr. Fabbricatore has over twenty-five years of telecommunications
experience including interconnect, networking, technology development
and entrepreneurial ventures. Specialty areas include process
engineering, applications development, and retail marketing and
distribution. He has extensive senior management experience in finance,
operations, marketing and sales distribution. Mr. Fabbricatore is a
graduate of Saint Francis College in New York.
SECTOR: INTERNET SERVICE PROVIDERS
TWST: Could we start out with a brief overview and a quick history of
CTC?
Mr. Fabbricatore: CTC has been in the telecommunications business since
the 1980's. We have over 15 years experience in local telecom services,
10 years in long distance and 8 years in advanced data services. In
January 1999, after a long and successful history of being a sales agent
for Regional Bell Operating Companies, CTC transitioned to a Competitive
Local Exchange Carrier (CLEC). CTC offers its customers an extensive
array of voice and data services including local, long distance, frame
relay, Internet and advanced data services. In the seven quarters since
January 1998 we have grown from a virtual startup CLEC to a full-service
Integrated Communications Provider (ICP), providing converged voice and
data communications solutions to medium-and larger-sized business
customers in the Northeast U.S. As of September 30, 1999 we have built a
major customer franchise of over 11,000 customers, 226,000 access lines
in service and an annual revenue run rate of $140 Million. In addition
to growing our customer base and revenue during this period, we also
designed, engineered and deployed a Cisco Powered high speed packet
network we call CTC's Integrated Communications Network, or ICN. The ICN
Network provides broadband capabilities right at our customer's
locations and allows us to converge their voice and data services on a
single broadband access facility we call the PowerPathSM. We are
currently providing converged Long Distance voice, data and Internet
services on the ICN, have over 50 customer locations on the network,
will ramp that number up to 200 by the end of calendar 1999 and provide
full commercial service in 2000. The ICN Network is currently deployed
in eight contiguous Northeast States.
TWST: Now what is this geography that you service?
Mr. Fabbricatore: We serve business customers in all of the New England
states, New York, New Jersey and most recently we've opened up in
Maryland. Our near term plan is to expand down to Washington DC and
fully cover the corridor from Boston to Washington. This is the most
telecom rich corridor in the country. 65% of all data traffic originates
or terminates in this corridor and our target market has a $25 billion
telecom spend. The Company markets its services through its 310 member
sales and service teams located in 26 branch offices throughout these
states. Both sales and service are provided out of these branch offices.
We are a face to face marketing and sales organization and have located
our branch sales offices in the local areas and close to our customers.
Our ICN Network is, and will continue to be, deployed in these states as
well. The Industry refers to this Network deployment strategy as the
'smart build' strategy. We open branch offices, build a customer base
and then transition those customers to our ICN Network. This approach
results in efficient use of capital, success based growth and improved
financial performance.
TWST: How would you describe the customer base that you're serving?
Mr. Fabbricatore: Our customer base is primarily medium to larger size
companies that are telecommunications and data intensive. Most have
multiple locations and spend upwards of $30,000 or $40,000 on voice and
data network services.
TWST: Over what time span? Annually?
Mr. Fabbricatore: Yes that's an annual figure.
TWST: What is it that you do better than AT&T or the big guys that
you're competing with?
Mr. Fabbricatore: First and foremost is the way we care for our
customers. At CTC, exceptional customer care is the foundation of our
business and the culture of the firm. We service customers locally at
the branch office level with an Account Executive and Network consultant
personally assigned to each customer. They develop long term business
relationships with their customers and provide them comprehensive and on
going support in the management and evolution of their telecom services
and systems. Our customers reward us for this exceptional service by
staying with us, purchasing more and more services and trusting us to
guide them into the future. This is the primary reason for our access
line retention rate of over 99.5%. Secondly, we have deployed a Cisco
Powered, high-speed, packet based ICN network across the eight
contiguous Northeast states in which we operate. Our ICN network is the
new generation communications infrastructure that people are talking
about. CTC is currently providing its customers with the efficiencies
and economies of converged long distance voice, data and Internet on the
ICN Network. As we move into the future our ICN Network will be used as
well for local services and a host of web based capabilities. We are
committed to enabling our customers to excel in the emerging new web-
based world of communication, information and e-commerce. Our ICN
network is the new world communications infrastructure to fulfill that
commitment and our engineering alliance with Cisco is targeted
specifically at developing new capabilities and applications that will
place all telecommunications services, including local, on the ICN
Network. In summary, what we do better is customer service, converged
services on our broadband ICN network and equip our customers with a
broadband gateway to the future right at their business locations.
TWST: Now is all your system based on fiber?
Mr. Fabbricatore: The ICN network nodes are Cisco MGX BPX ATM switches
and they are interconnected with fully redundant fiber sonet rings. The
entire network is carrier grade and fully redundant.
TWST: Whom do you compete with in this space, other than everybody?
Mr. Fabbricatore: In general, we compete with everybody. We will see
usually the larger players because of the size and sophistication of the
business market that we go after. So we'll see Bell Atlantic, AT&T and
MCI WorldCom in particular. On any given day, there are many people out
there competing in the marketplace. Although over time, you see lots of
them, ironically, it is such a big marketplace and vast customer base,
you don't see all the competitors in all situations, but you're always
going to see one or two candidates up against you. Our good fortune is
that once we are in front of the customer, our close ratio is extremely
high.
TWST: As we look out over the next couple of years, how would you
describe your strategy?
Mr. Fabbricatore: Our strategy is, and always has been, to treat the
customer as the centerpiece of all of our initiatives. Our strategy is
to enable our customers to excel in a rapidly emerging web based world
of e-commerce, information and communications. So our goal is to
continue our culture of customer care and execution, deploy technologies
and introduce value added products and services that enable our
customers to excel in this emerging new world.
TWST: As you look at that, do you expect the market just to continue as
it is, or are there going to be other dramatic changes that take place?
Mr. Fabbricatore: I think we're just beginning to see dramatic changes.
Just this summer, with our ICN network, we have seen the birth of packet
based services on a single broadband access facility to our customers.
The products and services that I mentioned earlier, (the long distance
voice and the Internet access and the video and the data communication)
all combined on a single very high-speed bandwidth connection. I think
that you're going to see many more products, dramatic new products,
introduced in the future based on the inherent efficiencies and
capabilities of this new network technology. For example, I believe you
will see traditional basic dial tone and local service capability on
this new infrastructure, perhaps as early as the end of the year 2000.
Over the next two years, this new world packet based infrastructure will
evolve dramatically in services and applications. We are just starting
to experience the dramatic changes that are to come.
TWST: So that kind of change moves from copper to fiber to satellite I
guess?
Mr. Fabbricatore: It's a move from copper to fiber and that is very
interesting, because that's a remarkable transformation. Fiber makes
near limitless the availability of good bandwidth to all the customers.
Packet based switching provides convergence and efficiency. It's the
packet switching combined with the fiber that creates all of the
products and creates a whole new host of opportunities that can be
achieved tomorrow. It's all done with packets, not circuits. The
implications for customers are more value-added services that are
better, cheaper and faster than the traditional products available
today.
TWST: So you're going to get below $.07 a minute pretty quickly?
Mr. Fabbricatore: We already are below $.07. Today, our price for long
distance voice on our ICN network is $.059 and I think you'll continue
to see improvements. By the way, since 1985, the amount of long distance
traffic has grown almost 600 percent while the cost has gone from about
$.30 a minute to below $.10 a minute. So one feeds off the other. It's
still a tremendous market.
TWST: What changes have to take place at CTC, if any, to allow you to
keep pace in this rapidly changing world?
Mr. Fabbricatore: On the marketing and sales side, our Company is run
out of our branch sales offices. Each has it's own P&L, uses centralized
systems and a standard sales and service process. We have 28 branches
today and will be growing 13 additional branches over the next 18
months. Branch growth will result in CTC market coverage from Virginia
to Maine. Our ICN Network expansion will follow the branch expansion so,
we will have ICN network deployment in that corridor as well. In regard
to future services and applications on our ICN network we have an
engineering alliance with Cisco Systems for joint development of new
applications including local services and a host of web based products.
I believe we are well positioned not only to keep pace, but perhaps lead
in a few areas. I think we have the basics to get to be a nationwide
organization.
TWST: Is that the goal to become nationwide?
Mr. Fabbricatore: Ultimately, that is the goal.
TWST: Why go beyond the region?
Mr. Fabbricatore: Our first expansion is to fill out the northeast
corridor from Boston to Washington DC. The next logical step for us is
expand beyond the corridor on a contiguous basis and gradually cover the
entire triangle from Boston to Chicago to Miami. Then look at
nationwide, or at least the major cities outside this triangle.
TWST: But doesn't that require a whole, I guess, next step up the ladder
to get there?
Mr. Fabbricatore: The answer here is yes and no. Yes, in regard to the
physical expansion of our branch offices and network. We are developing
a dark fiber plan and network design that would facilitate this
expansion and we would, of course, need capital. The answer is really no
in regard to the sales, service and product sets we offer customers
today. There is no reason that our marketing and sales success in the
northeast is not directly replicable in other areas of the country. It
is all about customers and fulfilling their needs.
TWST: You mentioned capital as being a constraint.
Mr. Fabbricatore: I don't know that it's a constraint. You just can't do
it without capital. The high yield marketplace has been a great source
of capital for our industry as well as other sources such as vendors,
more conventional bank lines, and so on. We have access to capital
markets and I am confident we can fund our plans.
TWST: Even give the difficulties of people like Iridium, money will
still be available?
Mr. Fabbricatore: Oh, money will be available. The competitive
revolution is going to take place. Like CTC, there will be many
successful business models and approaches. I see an appetite for people
who know that the future is going to take place and will invest in this
revolution, yes.
TWST: What kind of capital spending plans do you have for the next
couple of years?
Mr. Fabbricatore: In the next couple of years we plan on spending about
$65 million on expanding our ICN Network. This is mostly success based
investment, opportunity investment, to expand the network to drive more
revenue. Longer term, the number is, of course, much higher than that.
TWST: As you look to become national, are you going to do it on your own
or can that are done through acquisition?
Mr. Fabbricatore: Analysts estimate that we will be at a $450 million
annual revenue run rate in 2001 and I am comfortable with this estimate.
This is all internal growth and does not include any acquisitions. We
are looking for the ability to do some acquisitions out in the future.
What we would be looking for is companies that compliment our growth
plan and share our culture.
TWST: We've put all those together, what kind of growth rate should
investors expect from CTC over the next three or four years?
Mr. Fabbricatore: We started in January of 1998 and have grown our
revenue from zero to $140 million in the first 21 months. I am
comfortable with analysts estimates of continued growth to $450 million
in 2001. Additionally, our margins will continue to grow as we migrate
customers onto our network at a 50% margin and drive our SG&A down
toward our objective of 20%. That's assuming that we don't do any
acquisitions.
TWST: When might you begin to generate some profits?
Mr. Fabbricatore: We expect to be EBITDA positive in the year 2000. I
think that's fairly rapid.
TWST: I was going to say that's only three months away.
Mr. Fabbricatore: That's right, but January is three months away,
December is fifteen months away. I am looking for EBITDA break even in
the summer of 2000. I think people see that coming. Because of our
experience in this business we tend to consumer capital more
efficiently. Basically, we get more productivity from less capital, a
pretty good formula. We will make the journey to EBITDA positive with
minimal unavoidable losses in the transitioning of the business.
TWST: Do you have the management team in place today to get you where
you want to go?
Mr. Fabbricatore: Yes, and that's how we got here. Our management team
has an average of over 15 years industry experience and most of the team
has been here together for over 10 years. We've been able to attract
some very skillful people like our chief technology officer and market
development people. I am encouraged to think that we'll be able to
continue to do that. We have a sound management team and we're
constantly adding to those skills.
TWST: And they're the right people to get you to that half billion-
dollar level?
Mr. Fabbricatore: Yes, we have a great team coupled with the good
fortune to be in a very exciting industry. I think that our business
model within this very exciting space is a good one. We also have a
culture that spawns personal and professional development and
achievement. CTC is an exciting place to be.
TWST: As CEO of the company, where are you spending your time today?
Mr. Fabbricatore: There is tremendous opportunity in front of us and I
am focused on the timing and execution of our growth strategy. This
means our business model, raising capital and making sure the company
continues to execute in five basic areas; acquiring high quality
revenue, controlling our expenses, prudent use of capital, managing our
technology and financing our growth plan. It goes without saying that a
related thrust is continuing to foster the vigorous culture that got us
here in the first place.
TWST: What kind of corporate culture have you developed?
Mr. Fabbricatore: Everything we do is customer centric. We invest in our
customers and provide them the help they need to grow and optimize their
communications networks. The customers reward us for these investments
by staying with us, buying more and more of the products we offer and by
trusting in us to guide them into the future. Within this customer
centric environment we enable employees to perform and motivate them to
excel by paying for performance and the quality of customer care they
provide. Our people are the company and we respect the individual and
equip them to succeed personally and professionally. Training is key
component of this and I know that our training curriculum is one of the
reasons we attract good people.
TWST: As part of that, what kind of incentive programs have you set up
for your people?
Mr. Fabbricatore: Employee compensation is based on the amount of
business they bring into the firm and the quality of service they are
providing their customers. Everyone in the branch offices is incented
not only to acquire customers but retain them as well. I think our
retention rate of over 99.5% is a pretty good indicator of how well we
do this.
TWST: Is there a stock option program as well?
Mr. Fabbricatore: Oh yes. We have a 401-K plan, an employee stock
purchase plan and we have stock option plans as well.
TWST: How far down the organization does the stock option program reach?
Mr. Fabbricatore: All the way down. The employees including management
own about 35 percent of the firm. That's a very big part of the identity
that they have with the company.
TWST: If an outside investor wanted to follow what was going on at CTC
and was reading the annual report, what two or three items should they
pick out to gauge the success of what you're doing?
Mr. Fabbricatore: I think that what they should be looking at is our
approach to the marketplace with the customers, the fact that we are
deploying tomorrow's technology today, our ability to execute and our
ability to grow rapidly and profitably.
TWST: Ultimately, what kind of an operating margin should you be able to
generate?
Mr. Fabbricatore: My own personal goal is to attain pre tax operating
income of over 15%.
TWST: How long will it take you to get there?
Mr. Fabbricatore: Not to wiggle on you, but that really depends upon how
fast we grow. For instance, we can achieve that fairly quickly in our
more mature branches, the ones that have been around the longest. Newer
branches are in the process of maturing and brand new branches don't
make money right away. If you go through rapid branch expansion, the new
branches water down financial results. Therefore how long it takes is
related to how fast you grow and expand. We want to expand at a pace
that optimizes both growth and margins. Like I said, I don't want to
wiggle, but that's the balancing act.
TWST: Absolutely. How do you feel about the value the market is
currently placing on your stock?
Mr. Fabbricatore: I believe we are substantially undervalued.
TWST: Why? What's the market missing?
Mr. Fabbricatore: After a very successful 13-year history as an RBOC
sales agent, CTC became a fully independent CLEC in January of 1998.
Over the next 21 months we built a major customer franchise of over
11,000 customers, built and deployed our new-world ICN packet network
across eight states, became an Integrated Communications Provider and an
Internet Service Provider. I think the market is just starting to catch
up to us, understand what we have accomplished and where we are going. I
think there may be some folks out there who still view us through an
RBOC agency lens. Hopefully, as our story gets out, the market will
catch up and our valuation will move more into line with our CLEC peer
group. I think we have a lot of improvement coming our way.
TWST: When investors look at CTC, what should they be concerned about?
Where's the risk?
Mr. Fabbricatore: I think the risk is that we forget our focus and how
we got here. We are not going to forget this. I don't think risk in the
regulatory arena will increase and I believe competition is good for the
Industry and good for consumers. We have to continue our customer
centric market approach and, manage the technology we have chosen to
serve that market. I feel comfortable that we have chosen the right path
and have the skill sets in place to be very successful. Our growth plan
is well thought out and consistent with our proven capabilities to
execute. Actually, I'm very relaxed. I don't have anything keeping me up
at night
TWST: If you were sitting down with some potential long-term investors,
what two or three reasons would you give them to run out and buy your
stock today?
Mr. Fabbricatore: First of all, the stock price is cheap. It is
significantly undervalued. The second thing is that I think we have a
clear vision of what the network of tomorrow will look like, have the
infrastructure in place today and an alliance agreement with Cisco to
deliver future IP centric applications and capabilities. Third, we are
plain and simple, a marketing and sales juggernaut that knows how to
acquire and retain customers. Coupling these three items with our proven
ability to execute and run a tight ship all adds up to a compelling
story and a compelling basis to invest in CTC.
TWST: Thank you.
ROBERT FABBRICATORE
Chairman & CEO
CTC Communications Corp.
220 Bear Hill Road
Waltham, MA 02451
(781)466-8080
(781)890-1613 - FAX
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