Excellent Report from Salomon Smith Barney.
(i cut out some parts and a table because it is illegal to
post the whole thing, but i think it's ok to post parts of it)
GBLX: 4Q99 Earnings Results Exceed Expectations; Reiterate Buy
02/18/00 Global Crossing Ltd. (GBLX $53.06,1-S,Tgt $70.00) Jack B. Grub
Global Crossing reported better-than-expected Q4'99 results with strong
demand for its global network capacity. GBLX revenues were $1,065
million vs our estimate of $926.5 million, and adjusted EBITDA was $325.4
million in the quarter vs our estimate of $246.4 million. On a proforma
basis, assuming results from acquisitions at the beginning of each
period, GBLX revenues were $1,113 million and proforma adjusted EBITDA
was $344 million. GBLX revenues of $1,065.4 million is comprised of
$803.6 million from telecommunication services, $75.9 million from
installation and maintenance, and $185.9 million from incumbent local
exchange carrier services. Net losses per share for the quarter was
$0.20 vs our estimate of a loss of $0.25, while net loss before goodwill
amortization was $0.04 per share vs our estimate of a loss of $0.08.
Backlog continues to exceed $2 billion.
During the quarter, GBLX increased the capacity and expanded its global
network. GBLX initiated service on PC-1 in December 1999 (three months
ahead of its initial ready for service date) with capacity sales
activated during December; completed the North American Crossing network
(formerly Frontier Optronics Network) consisting of 20,000 route miles in
the US; completed Mid-Atlantic Crossing and Phase I of Pan European
Crossing connecting 13 European cities; and closed the acquisition of
Racal. Racal provides a very dense presence in London and throughout the
UK, bringing GBLX within 5 km of two-thirds of the business customers in
the UK. In addition, 3 additional OC-192s on North American Crossing
were lit during the quarter bringing the total OC-192 capacity on the
network to 500,000 gigabit miles.
Global Crossing is just starting to penetrate the higher end
multinational customer and has signed a number of international private
line contracts with multinationals. Given their expansive network, GBLX
is now at the point where they can provision these types of services and
over the next six months we expect additional international private line
deals, ATM services and other data products to be provided by GBLX. We
believe GBLX will continue to leverage its global network and look for
ways to expand its business plan as it has aggressively done so since we
brought it public in August 1998.
PRESSURE ON THE STOCK IS A BUYING OPPORTUNITY
We believe the pressure on the stock is due to 3 issues: 1) adjusted
EBITDA being down 5.4% which we describe below in the EBITDA section, 2)
implications of GBLX's joint build with LVLT, and 3) a change in
accounting for their subsea systems. On the first point, we would remind
investors that our published estimates as well as our competitors
estimates were below a year ago proforma EBITDA and GBLX beat adjusted
EBITDA estimates. In addition, proforma adjusted EBITDA is actually up
23% sequentially.
Regarding LVLT, we fully expect that AC-2 will be up and running by the
end of 2001 vs. the early part of 2001. GBLX is opportunistically taking
2 fiber pairs on the LVLT network that is being built which will give
them an extra 640 Gbps of capacity or an extra 4,000 STM-1s which then
gives GBLX the luxary of perhaps of making a more prudent technological
choice (i.e. 5 terabit vs 2.4 terabit) for AC-2. The 640 Gbps of extra
capacity that GBLX will get from LVLT will easily bridge them from the
time that AC-2 would have been up from the time AC-2 will eventually go
up with the effect of the probably at the end of the day more prudently
spending capital. LVLT is going to buy capacity off of AC-1 for
redundacy of their fiber system. The bottom line is that far from being
squeemish about demand we actually think this indicates that GBLX is
bullish on demand because otherwise, GBLX would have built their own AC-2
at 2.5 terabits. Instead, they feel compelled to take 640 Gbps now and
probably will end up builidng a 5 terabit system for AC-2.
On the accounting change, we've been through this on Williams, MFNX,
etc. This is clearly the way of the world, and there good business
reasons to do this and get away from the restrictions that allow you to
book everything up front. More importantly everyone looks at GBLX on an
adjusted EBITDA basis. We would remind investors that adjusted EBITDA is
reported EBITDA plus the change in cash deferred revenue. With this
change in accounting there is NO impact to adjusted EBITDA because while
the reported EBITDA may go down, the change in cash deferred revenue will
go up. Thus, valuations which are based on adjusted EBITDA will not
change whatsoever. Last published 2000 estimated revenues will be
somewhat lower, maybe by roughly $500 million, but reported revenues plus
change in deferred revenue will obviously not be impacted given that it
is an accounting, not cash issue.
Therefore, if the stock is down because misinformed (we believe) analysts
didn't realize that adjusted EBITDA was going to be down year over year,
or that people misread the LVLT transaction (we actually view this as an
indication of bullishness), or that people don't understand that the
accounting change has no impact on adjusted EBITDA, we would be
aggressive buyers of GBLX.
DETAILS ON ACCOUNTING CHANGE
GBLX anticipates a change in the way it recognizes revenues for the
subsea business given the changes in the business activities of the
company. Reported revenues for GBLX will be impacted, although cash flow
will NOT change. Historically, GBLX's subsea contracts met the criteria
for sales-type lease accounting and therefore, GBLX recognized the
revenues from their subsea contract sales up-front, which is when the
cash is received. GBLX anticipates that new contracts will not conform
to sales-type lease accounting and will be modified so that GBLX may
maintain network flexibility. GBLX will eliminate the transfer of
ownership option from new contracts and will eliminate the historical
practice of fixed, point-to-point routing of traffic and restoration
capacity as they now have a global network operational today with
different options for routing traffic and providing restoration.
Therefore, revenues from new contracts (which will most likely not
conform to the sales-type lease accounting) will be recognized over the
life of the contract--25 years. With this change, cash flow and adjusted
EBITDA is NOT impacted, although reported revenues will be lower by
roughly $500 million. The company continues to anticipate EBITDA growth
in excess of 30% for 2000.
AGREEMENT WITH LEVEL 3
Given very robust demand seen across the Atlantic (GBLX is selling
multiple STM-16 contracts and is gaining multinational customers with its
product suite including international private line) GBLX yesterday
announced an agreement to jointly build LVLT's previously announced
Atlantic undersea fiber build. The cable build is a four fiber pair 1.28
terabit system that will be ready for service in September 2000. GBLX
and LVLT will each own 2 fiber pairs. This provides GBLX with additional
Atlantic capacity in September 2000 and will allow GBLX to push out its
AC-2 build which was originally expected in Q1'2001 and take advantage of
any technological advances in the subsea area.
TELECOMMUNICATIONS SERVICES
Telecommunication services revenues of $803.6 million for the quarter
includes revenues from the former standalone Global Crossing, Racal
Telecom and Frontier Integrated Services. Thus, it includes revenues
from commercial, consumer and carrier business for all bandwidth, data,
CLEC, long distance, audio/video conferencing and other value-added
services. Data revenues for the telecommunications segment grew 63% year
over year. Adjusted EBITDA for the segment was $210.3 million on a
reported basis while proforma adjusted EBITDA was $228.5 million.
CARRIER. Carrier revenues which includes all subsea and terrestrial
network facilities and related services sold to carrier and ISP
customers were $477.4 million for the quarter. On a proforma basis,
assuming a full quarter of Racal (which closed November 24), carrier
revenues were $483.3 million, representing growth of 25.3%. Carrier
revenues included Global Crossing subsea revenues, Frontier Integrated
Services carrier revenues and a portion of Racal revenues. During the
quarter subsea capacity sales included sales on AC-1 and PC-1 which
became ready for service in December 1999. Global Crossing continues to
see strong increases in demand and has been selling large contracts with
average capacity at the STM-16 level. The wholesale business (from
Frontier) grew revenues 47%, with minute growth of 87% off-setting
pricing declines. Total backlog remains at over $2 billion and includes
sales to new and recurring customers such as Exodus, Microsoft, KDD,
Level 3, MCI WorldCom, Deutsche Telekom and Softbank.
COMMERCIAL. Commercial revenues were $279.6 million in the quarter and
include GlobalCenter and business-to-business long distance voice and
data services (including Frontier's CLEC business). On a proforma basis,
assuming a full quarter of Racal, commercial revenues were $321.6
million. GlobalCenter more than doubled its complex web-hosting business
and nearly doubled its customer for the year. Currently, Global Center
has 1.3 million square feet under lease in their 8 media distribution
centers and will add an additional 10 centers worldwide in 2000. On the
CLEC front, revenues were $60.2 million, growing 27.6% year over year and
facilities-based CLEC lines grew nearly 5-fold from year end 1998. In
addition, FRO expanded into seven new local markets and is now serving 40
markets. SDSL services are now offered in 28 major markets to its small
to medium business customers and is expected to be extended to 38 markets
by the end of Q2'2000.
CONSUMER. Consumer revenues were $46.7 million in the quarter, declining
12.2% year over year. This segment includes Frontier's retail long
distance voice and data services which continues to de-emphasize non-ILEC
service territories.
INCUMBENT LOCAL EXCHANGE CARRIER SERVICES
Incumbent local exchange carrier services revenues were $185.9 million
for the quarter, representing growth of 4.9% on a proforma adjusted basis
and a slight sequential increase vs Q3'99 levels of $182 million. These
revenues include Frontier's local operations. EBITDA was $94.6 million,
a 0.9% YOY gain and flat with Q3'99 levels. EBITDA was impacted by the
addition of technical staff which were hired to improve service metrics.
As a result, EBITDA margin was 50.9% a 200 basis point decline from year
ago levels. A consumer ADSL product was launched in selected markets in
Q4'99. Access lines grew 2.6% to 1.072 million lines in service.
INSTALLATION AND MAINTENANCE SERVICES
Installation and maintenance services revenues were $75.9 million for the
quarter vs. our estimate of $70 million, representing revenues from
Global Marine Systems. Global Marine added 3 ships since the acquisition
with 5 scheduled to enter service early in 2000. Global Marine also
entered into an agreement with Maersk to charter ships as needed.
Installation revenues were impacted by delays in TAT-14 and Japan-US
subsea cables which were scheduled for Q4'99 but is now expected during
2000.
EBITDA
Adjusted EBITDA was $325.4 million in the quarter vs our estimate of
$246.4 million. Adjusted EBITDA is calculated as operating income plus
goodwill amortization, depreciation and amortization, non-cash cost of
undersea capacity sold, stock related expense, and incremental cash
deferred revenue. Proforma adjusted EBITDA was $343.7 million, a 5.4%
decline from the $363.4 million in Q4'98 due to increased spending to
augment its salesforce, to add network and web hosting capacity, to add
to its fleet of installation and maintenance vessels, to activate new
fiber optic systems, and to consummate and integrate its acquisitions.
This is due in part to the fact that Frontier was a standalone company
which was constrained from spending on its growth initiatives since it
was judged on an eps basis. Total operating expenses including SG&A,
cost of sales and OA&M was $922.5 million, depreciation and amortization
was $108 million, goodwill was $123.8 million, and stock related expense
totaled $12.7 million for the quarter.
NET/NET: GBLX Q4'99 results were better than expected with strong demand
for its global network capacity. Reiterate Buy and $70 price target.
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