snip from Salomon Smith Barney ~ November 13, 2000
Global Crossing Ltd.
GX: Q3 Results Better Than Expected;
....
Global Crossing reported better than expected 3Q'00 revenue and adjusted
EBITDA results. We will quote numbers on a cash revenue and adjusted EBITDA
basis, since as investors know, those are the figures that support cash
collected. Reported revenue can be very lumpy depending on the mix of
circuits sold in a given quarter that conform or don't conform to immediate
revenue recognition. However, given that in all circumstances, cash is
collected up front for subsea circuit sales, we believe the correct analysis
for GX and its peer group is cash revenue and adjusted EBITDA. This
methodology is consistent with recognizing revenue in line with cash coming
into the coffers, which, last we looked, is how the SEC likes companies to
report, except in this particular industry.
Having said that, Global Crossing reported total cash revenues (including the
ILEC assets) of $1,554 million, slightly above our estimate of $1,552
million. Global also reported total adjusted EBITDA (including the ILEC
assets) of $450 million, above our estimate of $436 million. If one adjusts
for the Frontier ILEC results, which are being sold for approximately $3.65
billion to Citizens Utilities, Global Crossing has cash revenues from
recurring businesses of $1,367 million and adjusted EBITDA of $355 million,
ahead of our estimates of $1,361 million and $337 million, for revenue and
EBITDA respectively. Q3'00 results reflect the first full quarter of IXNet
and IPC operations. Cash revenue growth for recurring businesses was 12% (4%
further adjusted to exclude Global Center) sequentially and 46% on a YOU
basis excluding Global Center; adjusted EBITDA grew (also excluding the ILEC)
6% sequentially (7% further adjusted to exclude Global Center) and was up 91%
YOY . Given that the ILEC business had no growth in revenues sequentially,
declining slightly to $187 million from $189 million in Q2, and 4% EBITDA
decline sequentially going from $99 million to $95 million, it is clear why
Global Crossing is selling these businesses since they are leaving a business
that detracts from the growth rate, is not strategic, and with the proceeds
of approximately $3.65 billion, Global Crossing will now have no net debt,
and a lot of financial flexibility which is important in a capital intensive
industry.
As demonstrated by yet another quarter of better than expected results,
Global Crossing has a deep bench, in our view, with strong operators despite
what has become frequent turnover in the CEO position. We believe the
reality is that Global is ahead of plan in building out the network, is
productizing the network faster than scheduled so results continue to beat
expectations. Tom Casey, the most recently appointed CEO, and his team
around the world truly are operating this business despite what conventional
wisdom may be. The proof of that is the continued increase in revenues
coming from products as opposed to capacity and we believe it is Tom Casey's
mission to operate the business as opposed to doing deals.
Peeling the onion back further, Global's Telecom Services cash revenues were
$1,249 million this quarter, basically in line with our estimates, with
Installation and Maintenance coming in at $118 million versus our estimate of
$85 million. Global Crossing's Telecom Services revenues grew, on a cash
revenue basis, 13% sequentially (5% further adjusted to exclude Global
Center) and 47% on a year-over-year basis excluding Global Center and pro
forma as if the IPC/IXNet deal had closed on 1/1/99.
Before we get into further details for quarter, we feel Global Crossing is
the epitome of what is driving value in telecom services. In telecom
services, one has to have a network to drive product, which drives revenues
and cash flow. In the subsea world, where demand far outstrips supply by
increasing degrees, such that total demand for subsea capacity could be 30-40
times actual capacity deployed over the next 5-6 years, it is clear to us
that Global Crossing's 101,000 route mile global network is going to be a
factory off which to drive a full range of products from carrier capacity
sales through commercially driven ATM, frame relay and IP services. In that
regard, when looking at Global Crossing's worldwide network, roughly 60% of
its route miles in service today, with 100% of this network likely to be in
service by the end of 1Q'01 or early 2Q'01.
Specifically, AC-1 (Atlantic Crossing) is fully operational and has been
upgraded several times. PC-1 (Pacific Crossing) is 50% in service and is
well over one year ahead of any rival network. MAC (Mid Atlantic Crossing)
is fully operational; PAC (Pan American Crossing) is one-third operational.
Obviously, the Frontier North America network is 100% operational, as is the
Racal UK network. GX's pan-European network, PEC (Pan European Crossing),
already connecting 37 cities for service of the 46 planned for service by
mid-2001. In addition, Global Access Limited (GAL), which is GX's
partnership with Marubeni in Japan, is in service in Japan and connected to
GX global network. Its joint venture with Hutchison in Hong Kong is in
service and should be connected to the global network by year-end. As far as
pricing is concerned, pricing over the Atlantic in Q3 remained stable in the
$1 million range and pricing over the Pacific also remained constant, still
in the $3 million per STM-1 range. Additionally, the company announced that
it had begun selling circuits on SAC (South American Crossing) and EAC (East
Asia Crossing) in the price range of $3 million per STM-1 for the wet
portion. Furthermore, many customers are buying the company's Global Network
offering, which gives a customer flexibility on which routes they want to use
capacity.
Global Crossing truly has a pervasive set of assets that is going to drive
products in this space, and is already providing ATM, frame relay and IP
services in North America, UK, continental Europe, Japan and Hong Kong. The
company is also providing large amounts of IP transit coming out of Japan.
GX's one-hop global network application (i.e. one router delay to get onto
the network at the client end, and one router delay to get off the network at
the application end) is the result of GX's self-constructed contiguous,
global, optical network that has IP addressing schemes, which it anticipated
from the beginning as a single global network, as opposed to a model of
interconnecting regional networks. The company continues to layer additional
services on this network; at the end of Q3'00, private line service was
available in 16 European cities, as well as Tokyo, Hong Kong, and the major
cities of North America and Mexico.
GX, at current prices, using fully diluted shares of 984 million is trading
at 8.2 times our $2.1 billion 2001 adjusted EBITDA, excluding ILEC EBITDA.
We believe this discount is ludicrous for a company like Global Crossing with
legitimate EBITDA growth in the 35-40% range from '01-'06 (implying GX trades
at about one-fifth its expected five year EBITDA CAGR), which has a global
set of network assets that it is quickly productizing to move up the value-
chain, and which, with its subsea network assets, in particular, represents
having the most pervasive set of assets in the biggest bottleneck area in the
entire bandwidth value-chain of telecom, namely subsea network capacity. We
realize that the entire sector is under pressure, but the reality is that
those companies that are building the right network assets with the right
products to get to the right revenue mix and which happen to have assets that
represent the particular bottleneck assets in the entire value-chain should
drive disproportionate amount of value in this industry. We think Global
Crossing is the epitome of that, and is selling at what we believe is an
incredibly low level of valuation, especially since they continue to
outperform expectations. Now we will turn to details of the quarter.
DETAILS ON THE QUARTER
We are going to limit our remarks to the Telecom Services area since the
Frontier ILEC is no longer part of the business and the Installation and
Maintenance revenues are not particularly relevant to the Telecom Services
story. Overall Telecom Services cash revenues were $1,249 million, up 13%
sequentially (5% on a pro forma basis excluding Global Center and as if
IPC/IXNet had closed on 1/1/99) and 47% year-over-year (on the same pro forma
basis), versus growth of 7% sequentially and 38% year-over-year in Q2. More
importantly, the mix continues to change in the right direction.
Data came in at $763.8 million, accounting for 61% of Telecom Service revenue
in the quarter, up from 56% in Q2 and 51% in Q1. Pro forma to exclude ILEC
assets and Global Center, and as if the IPC/IXNet deal had closed 1/1/99,
data revenues were $712.5 million, accounting for 59% of pro forma revenues
of $1,197.6 million, and up from a pro forma 57% in Q2. More importantly, of
the $763.8 million of data revenue, $357.3 million (including Global Center;
$306 million excluding Global Center) represented non-capacity sales---in
other words, frame, ATM, IP, hosting, IP transit and the like, so almost
half (about 47%, up almost 300 basis points from 34% in Q2; excluding Global
Center it was 43%) of GX's data revenues are up the value stack from pure
capacity sales which is almost double the revenues from a year ago. This is
a direct result of the reach of Global Crossing's network expansion,
salesforce production and the company's productization of its network
capacity. Overall, data grew 23% sequentially. Pro forma for the sale of
the ILEC assets and as if the IPC/ IXNet acquisition had been completed on
1/1/99, data revenues were up almost 9% sequentially and almost 88% YOY.
Looking at it from another direction, carrier revenue had cash revenues of
$755.9 million, up almost 7% sequentially. Carrier revenue represents about
61% of total telecom revenues, down from about 64% in Q2 and Q1; however, on
a pro forma basis, carrier cash revenues reflected about 63% of Q3'00 total
telecom revenues, up slightly from about a pro forma 62% in Q2. Commercial
cash revenue was $453.5 million, up almost 27% sequentially, pro forma
commercial revenues were $402.2 million, up 2% from pro forma Q2. Business
voice revenues are estimated in the $150 $160 million for Q3, or less than
50% of commercial service revenue, and thus GX is less exposed to pricing
pressure in business voice. Consumer revenue was very small (only 0.03% of
telecom services revenues) at $39.5 million, down 3% sequentially.
The bottom line is that Global Crossing had a spectacular quarter, in our
view; it clearly is leveraging its global network, the network is being built
out very rapidly, and Global is clearly moving up the value chain in terms of
offering finished products on top of their network. We believe Global
Crossing represents one of the best overall global network assets in the
world of telecom which is the key ingredient to drive products and revenues
in this industry. We believe this is especially true in areas of acute
scarcity of supply relative to demand, most notably subsea.
RECENT EVENTS
In the third quarter, Global Crossing executed two transactions highlighting
the value of the company's assets and streamlining operations to focus on
Global's core strengths. First, on September 28th, Global Crossing announced
that it was selling its Global Center web hosting assets to Exodus (EXDS, 1S)
in an all stock transaction. Global Crossing will receive approximately $6.5
billion of Exodus stock if Exodus trades between $56.41 and $65.55. Below
the collar, Global would receive 115.7 million shares of Exodus stock and,
thus at current levels (EXDS closed at $27.69 on 11/13) the deal is valued at
approximately $3.2 billion; this deal is expected to close in Q1'01.
Additionally, Exodus agreed to use Global Crossing as its primary network
carrier for 10 years, which Global believes is worth about $x million in
revenues over that period. Then on, October 6th, the company completed the
IPO of Asia Global Crossing (AGCX, 1M) raising approximately $950 million in
proceeds, including approximately $400 million in a concurrent high-yield
offering. Global Crossing (parent) retains 57% economic ownership and
approximately 64% voting control of Asia Global Crossing.
On October 11th, Global Crossing announced a change in management, appointing
Tom Casey as president and CEO in the wake of Leo Hindery's departure.
Although Hindery's departure was not expected, we did not regard this as a
big deal---as we noted in our October 11th call note "GX: Leo Hindery
Resignation Not a Big Surprise"---as it was widely known that Hindery was
primarily incentivized to recognize value for Global Center (i.e. either
through a sale or public offering), which was accomplished with the sale to
Exodus.
Finally, on November 6th, Global Crossing moved from the NASDAQ to the NYSE,
changing its symbol from GBLX to GX in the process.
NET/NET:
Global Crossing once again beat numbers on all accounts, in our view. They
are building their network out ahead of schedule, productizing the network in
a very rapid fashion. We believe they truly represent a terrific set of
global assets and at current valuations are being very severely mispriced in
the market as we have said time and again, most recently in our November 9th
call note "GX: Stock Decline Completely Unfounded - Strongly Reiterate Buy".
We would obviously be aggressive buyers of the stock. |
