[GSTX: A Hot Regional Telecom.]
Wednesday February 23, 9:29 am Eastern Time
worldlyinvestor.com Sector of the Day
Local Call: A Hot Regional Telcom
By Casey Freymuth, Telecom Columnist
Smaller but focused telecoms are more efficient and have more
upside than larger competitors.
Telecom companies can't be all things to all people and do it
well, especially with the broad range of online applications
and services entering the markets every day. Likewise, when
investing in telecom, you should consider narrowing your
choices to smaller companies with tight regional focuses,
which are more likely to succeed than major players, no
matter how big.
Immediate examples of regional plays are integrated
communications providers (ICPs) GST (Nasdaq:GSTX - news) and
Network Plus (Nasdaq:NPLS - news). Pac-West Telecom
(Nasdaq:PACW - news), which isn't as well known, may hold the
most potential. Pac-West is a next-generation telecom and
Internet company based in Stockton, Calif. It went public
last October, and just released impressive results.
With Internet applications and services rapidly emerging in
the product mixes of today's communications companies, the
differentiation between and incorporation of the two is
becoming increasingly important. Generally speaking,
applications are deployed horizontally, meaning they can be
applied to many business types. Services outside of access
are deployed vertically to meet the needs of certain niche
markets.
When playing the Internet sector, understanding and investing
in these models is fairly straightforward. If you invest in
Ariba (Nasdaq:ARBA - news), you're going horizontal. If
you're investing in Proxicom (Nasdaq:PXCM - news), you're
going vertical.
However, it becomes a little more complex when you jump into
telecoms. If a company is a major, generic player and deploys
Internet or e-commerce enabling services, determining the
company's strategic focus may prove to be a difficult task.
The advantage of regionally focused ICPs is that they are a
proven model for delivering a wide arsenal of services that
represent the telecom industry as it continues to adopt
Internet services and applications in its overall product
mix. Regionally focused firms are better able to deliver a
variety of services to their customer bases than counterparts
that try to serve broader markets. This is especially true
with services delivered through strategic partnerships.
In the world of end-to-end solutions, regionally controlled
expansion is more manageable and cost effective than
blanketed national expansion or geographically scattered
expansion. For obvious management and infrastructure reasons,
a firm located in the state of Washington can more easily
extend a complete package of services to customers in Oregon
than Florida.
Another reason to go regional is that clustering is a well-
documented, highly effective method of achieving above-
average value in the communications industry. From cable
companies to cellular operations, providers that have
positioned themselves as strategic targets for bigger fish
have achieved significant value.
Pac-West fits the model well. Fourth-quarter revenues grew
120% to $28.2 million from $12.8 million a year ago. Pac-West
was profitable for the year ended Dec. 31, but 1999 revenues
of $95.5 million included reciprocal compensation settlements
of $6.3 million from GTE (NYSE:GTE - news) and $20 million
from SBC Communications' (NYSE:SBC - news) Pacific Bell unit.
Pac-West is pursuing an expansion strategy that focuses its
power in 10 regional states. The company plans a healthy
combination of strategic acquisitions and organic growth via
a ``smart build' network deployment strategy, leasing excess
capacity to other telecom players and Internet service
providers (ISPs). Currently, the company serves 85 ISPs and
delivers the whole kit and kaboodle of equipment and services
to small and mid-sized retail customers.
As this column was drafted, the company was trading in the
low 30s, and analysts have indicated that the company's
strong financial position could easily propel it into the 50s.
Casey Freymuth is president of Group IV Inc.
(www.groupiv.com), a Phoenix-based consulting, research and
publishing firm specializing in strategic and operational for
global telecommunications, utility and Internet companies.
His weekly column uncovers investing opportunities in telecom
stocks.
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