Joseph Kealy, chairman, president, and chief executive officer of
International FiberCom (IFCI) talks about being a third-party
resource provider to the telecom industry.
multexinvestor.com
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Executives Zero In
Joseph P. Kealy, Chairman, President and Chief Executive Officer 2001-07-23
International FiberCom (IFCI)
by George S. Mack
Outsourcing has now penetrated into nearly every major industry. A cable or telephone network no longer needs to staff up to build a system or even maintain it. Whether it's wired, wireless or converged—or copper, coaxial or fiber-optic—International FiberCom (IFCI) offers a complete infrastructure solution that includes outside installation, central office integration, and upkeep. Indeed, in order to become a successful provider of outsourced services, IFC needed to be able to offer end-to-end service in both the wired and wireless worlds. Overall, in a period of depressed telecom spending, the Phoenix, Ariz.-based company is expected to grow revenue, on average, by at least 15% and EPS by at least 35% annually over the next three years. Don't let the puny $92 million market cap fool you. IFC is trading at about one-fourth of this year's expected revenue of $364 million and less than nine times this year's projected earnings of $0.29 per share. And EPS is expected to double to $0.60 per share in 2002. On July 11, I spoke with Chairman, President and CEO Joseph Kealy about the company to find out if these optimistic projections are reasonable.
[THE TELECOMM ANALYST—GEORGE S. MACK] Joe, what does it mean that the company is qualified end-to-end?
[JOSEPH P. KEALY] There's not a service that you would have for a communications company that we couldn't perform. It ranges all the way from design to any kind of permitting or any negotiating for right of way to construction of either a fiber-optic or copper system.
[GSM] You also do maintenance.
[JPK] Yes, we do.
[GSM] Service providers don't want to carry crews on their payroll, do they?
[JPK] I think that's true. Second, I think it's widely known in this and every other industry that companies that specialize in service do it much more efficiently than companies whose main business is selling equipment and providing infrastructure only. Telecom is arguably the only industry that hasn't looked at outsourcing up until now. Even the car industry is now 70% to 80% outsourced with just-in-time vendors.
[GSM] Why is outsourcing now taking root in communications.
[JPK] Quite frankly, I think it's because the telcos—the regional Bell operating companies (RBOCs)—were historically public utilities, and there was just no reason to try to become more efficient. However, in the new game, where they are public companies that have to report like the rest of us, I think it's now exceedingly important for them to be as efficient as they can be. I really think the huge growth in our industry has not hit yet, but it will hit during the next 10 years. Consolidation continues, and Wall Street demands that companies like AT&T (T), SBC Communications (SBC), Qwest Communications (Q) and all the rest really compete for the bottom-line dollar. Then I think companies like ours will be more in vogue.
[GSM] What kinds of companies do you have as customers?
[JPK] We predominantly have the largest companies. On the cable side, the top five or six cable companies are our customers—Comcast (CMCSK), Cablevision Systems (CVC), Cox Communications (COX), Charter Communications (CHTR) and AT&T Broadband. On the telephone side, it's SBC, WorldCom (WCOM), BellSouth (BLS), Verizon Communications (VZ) and again, AT&T, of course. We're with all of them—all of the larger companies. We also do work for Lucent Technologies (LU) and Level 3 Communications (LVLT).
[GSM] Are there CLECs (competitive local exchange carriers) in the mix?
[JPK] We really did not get caught in the dot-com craze or in the smaller CLECs, because if you look at an outsourcing opportunity, that should be a long-term relationship. We weren't interested in a business plan that went out for just 18 months. We really want to be around for the long haul with companies that are well funded and have history and character—like the RBOCs and cable companies.
[GSM] My readers are investors, and they'd like to know what percentage of your business is in CLECs?
[JPK] The percentage right now would probably be 25%, and that fluctuates. Last year, it was probably closer to 30%. We expect that to go down to maybe 20% in 2002. As you well know, George, CLECs aren't getting funded at this point in time. So I don't see opportunities for new builds continuing at the rate of telephone and cable companies that are raising capital—and doing so successfully. I would guess that out of our, let's say, mid-$300 million in revenue this year, $60 million will come from CLECs. That's a rough number.
[GSM] Joe, you just got a big contract worth an additional $25 million to $30 million to this year's top line from a major cable TV company. The fact that you can provide a turnkey solution of that size should get the attention of other potential customers. This is a big deal.
[JPK] It really is, and right now we are working on numerous contracts of that size and more. We assume we'll land a strong percentage of those and continue to build our business off our successes. That's the only way you can build a good company.
[GSM] Through both acquisition and internal initiatives during the last few quarters, you've invested in and developed a proprietary wireless technology platform and services. You've now won some contracts. Are you going to break even in this segment of your business this quarter?
[JPK] We are. But I can't give you any more information on that issue. We definitely feel confident that in the next couple of quarters our wireless technology group will turn the corner and actually break even and make a profit. That could happen fairly soon. I can tell you that sales were less than $100,000 per month in the beginning of the year, and they'll probably be in the range of $750,000 or so this month. That's just sales of product, so this is a very exciting ramp-up, which we expect to continue. We have more exciting products with hopefully more patent announcements that will add to that service group.
[GSM] Why is your wireless segment growing so fast?
[GSM] This is a very explosive market right now, and our products are some of the best in that group. With our RF [radio frequency] design team, we can actually do it cheaper, better and faster than nearly anybody in the United States. We're very excited about that portion of our business, and I think it probably still is as valuable a piece of our company as we have today.
[GSM] One analyst is forecasting 2001 revenue of $40 million in your wireless segment after just $11.1 million last year. Are you comfortable with that?
[JPK] Yeah. I think our wireless group will be in the neighborhood of between $30 million and $40 million in 2001. I would expect significant growth in 2002—and maybe more significant growth than has occurred this year. This piece of our business seems to be growing quicker than any other.
[GSM] I understand that R&D costs in your wireless segment are running higher than average. Could this give investors a negative surprise on the bottom line?
[JPK] We've been very up-front about what we've spent on R&D in our wireless technology group. Even including our R&D costs, we expect to break even in that group fairly soon, and we expect to turn it into a profit center shortly thereafter. We're not intending to have a major surprise because of that. The surprises that we've had in general have been in "charted country," where we had expected profitability to continue in a segment or a contract, but then it actually turned negative. But in the case of our wireless technology group, we have been fairly close to the numbers we've used in our R&D, and we've also been fairly close to our sales numbers. It has not been a surprise in the past, and we don't expect it to be a surprise in the future.
[GSM] Telecom spending has hurt everybody, including you. But you've fared better than most infrastructure companies. Unless something out of the blue happens, you're going to be profitable this year. Why has your business model been so successful?
[JPK] First, we haven't varied from the path of believing in outsourcing as a model. Second, we haven't varied from thinking we need to be end-to-end capable; therefore, our customers have stayed with us. Our customers are the telecoms that are funded and that will continue to be funded. George, my opinion is that the consolidation going on in the industry right now is healthy—especially for the industry itself. Long distance rates have actually risen in the past few months. And I think the cable companies, if you look at them, are wonderful cash cows right now. So what you're going to see in the communications industry is a renaissance of the incumbent companies that will become more profitable and more powerful than ever before. In my opinion, you'll see that during the next 12 months. I think our third and fourth quarters will be our best this year, and because of our diversification, we'll have strength into 2002.
[GSM] You're a young company, but you're divesting yourself of your equipment distribution business. Why?
[JPK] It's a market that, as we see it, is in disarray—not only in the U.S. but also worldwide. Companies like Lucent Technologies, Nortel Networks (NT), Cisco Systems (CSCO), and Juniper Networks (JNPR)—you name it—were all in terrible disarray. According to their CEOs and CFOs, they had very little visibility into the future. But we were in a secondary niche below them, and that worked very well in terms of being able to supplant them when they weren't servicing a customer very well and perhaps helping them find equipment they couldn't find elsewhere. With optical gear, you really have to have visibility as to when to buy it and when to sell it and which companies make up the market. We watch markets very carefully, and that told us that the industry had huge question marks. By the way, our equipment segment was, and still is, profitable for us, but cash flow turns much more slowly, relative to the rest of the company.
[GSM] How are things looking in California? Is there any visibility? Do you see things turning around there?
[JPK] What we've told the Street is that we are minimizing and mitigating some losses in California. We have been fairly successful in doing that, and we believe long term in that state, which is obviously the most populated in the U.S. We think at some point in time that a large amount of money will be spent there in communications. We've downsized our operations substantially, but we're now building them up with our better trained personnel so that when growth opportunities return there, we will grow with it. It would not surprise me, George, to have California be the most profitable piece of our business two or three years from now. |
