8/3...Winstar, Intermedia, Mpower Report
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Competitive local exchange carriers Winstar, Intermedia, and MPower reported second-quarter earnings in the last two days. These three budding powerhouses are all bleeding money, with a combined operating loss of $140 million for the quarter, and huge capital expenses above that. Even though their stocks are each down significantly this year, shareholders should recognize that these losses were, in fact, largely part of the plan.
By Bill Mann (TMF Otter)
August 3, 2000
Of all the old-line financial terminology, perhaps "earnings report" is the least relevant to today's companies. How do you report "negative earnings"? Wouldn't that be a loss?
Three companies in the competitive local exchange carrier (CLEC) business reported second-quarter non-earnings in the last two days: Winstar (Nasdaq: WCII), MPower (Nasdaq: MPWR), and Intermedia (Nasdaq: ICIX). Their performance reports weren't bad, mind you, they are just each losing boatloads of money, something that is to be expected at this stage in their development.
The CLEC realm is not for the faint of heart. Companies are essentially taking on the incumbent carriers (mostly the Baby Bells) to provide aggregate local telecom services to local customers. This industry was essentially formed by decree in 1992 when federal regulators required the incumbent carriers to provide interconnect to their competitors. But these upstarts still have had to build their networks from scratch, and are still incurring enormous capital expenses. As local services move rapidly toward broadband from traditional voice and data services, this buildout is expected to continue.
So what's the damage here?
In this past quarter, Winstar increased sales by 84%, MPower by 169%, and Intermedia by 14%, though the latter's comparative results are impacted negatively by its spin off of Digex (Nasdaq: DIGX), its Web-hosting unit. But operating earnings for each company is again a broad term. Winstar reported a $45 million EBITDA (earnings before interest, taxes, depreciation, and amortization) loss on $176 million in earnings; Intermedia's EBITDA loss was $75 million on $247 million in revenues; and MPower's came in the scariest with an EBITDA loss of $32 million on $30 million in revenues.
The largest operating expense for each is marketing. Again, for companies trying to take on some of the largest telecoms in the world, this is as it should be. Each of these companies has been very clear about its continual need for significant additional financing for the near term, so any investor surprised by this has not been paying attention. Of continuing concern is the amount of capital required and the cost of that capital as losses mount. Intermedia's capital expenditures from the first quarter (most recent quarter cash flows not yet available) were 65% of total revenues, while Winstar and MPower are at 120% and 132%, respectively. Again, these levels are not unexpected by the companies.
And the prognosis?
Winstar's unique fixed wireless "last mile" solution has attracted the company more attention than the others, and the potential for this low-cost solution is reflected by the company having the largest market cap of the three at $2.3 billion. Intermedia, which has the most sales, the largest network, and the biggest customer base, has the smallest market cap at a shade under $1 billion. MPower comes somewhere in between, but with significantly smaller revenue.
However, MPower's earnings growth towers over the other two companies. MPower also may have the least number of problems ahead of it. Intermedia is looking at "strategic alternatives" for its 62% share of Digex, which has not been valued at market, while Winstar's technology has had problems in adverse weather conditions, and as such has had to take on higher capital expenses for back-up fiber support.
These three companies are, in their own ways, dancing with the devil, but if they continue to differentiate their customized service offerings and not buckle under the costs of building their networks, there should be sunny days ahead for patient investors.
Your Turn:
These have not been the best of times for shareholders of these companies. Give us your thoughts for CLEC prognosis on the Telecommunications Discussion Board, or on a specific company on the Discussion Boards for Winstar, Intermedia, or MPower. |
