Global Crossing charts a new course
By Carol Wilson
Aug 14, 2006 12:00 AM
telephonyonline.com
Global Crossing was once synonymous with what was wrong in telecom. In the '90s, the company was characterized by a lofty business plan, which produced an overbuilt network that generated mountains of debt but little revenue and no profits, accompanied by an accounting scandal tinged with alleged political shenanigans and, ultimately, bankruptcy and legal action.
Today, Global Crossing has become a symbol of survival, largely by taking a totally different tact. The company's current leadership is taking a down-to-earth approach to finding customers and profits, and, as a result, is beginning to connect with both. This month, Global Crossing announced its first EBITDA-positive month and by year-end expects to be cash-flow positive as well.
Past problems are not entirely in the rear-view mirror — only last month a federal judge in New York gave preliminary approval to a settlement with major investment banks, under which they would pay $99 million to resolve claims stemming from Global Crossing's financial collapse. Officers and directors of Global Crossing already paid $245 million (out of a total $444 million collected) in that legal case, and two more defendants, Microsoft and Softbank, remain.
But the new Global Crossing is focused on building a record of financial stability intended to appeal to customers and the financial community alike.
“Our company has been through so much,” said CEO John Legere, who was at the helm through Global Crossing's bankruptcy. “There is no arrogance. We're flat; we move. We are not afraid to lose some of a customer's business because we take the piece we can and fight hard for more later.”
That “take what we can” strategy, combined with an aggressive new product road map and a conscious decision to let go of unprofitable wholesale business, has earned Global Crossing higher marks from industry analysts of late.
“One of the great things about a company like Global Crossing is that they don't need to own the market to succeed, they just need to shave off a percentage point here and a percentage point there to succeed,” said Brian Washburn, senior analyst for Current Analysis. “They can grow their bottom line on the business they can win and get to where they want to be.”
Global Crossing announced what it calls an “invest and grow” strategy in 2004, signaling its intention to move away from selling cheap bandwidth and invest instead in enterprise services, where it could add value and generate profits. The company has been steadily rolling out additions to its portfolio, such as IP virtual private networks, managed services, security and video conferencing.
“They just came out and said, ‘Here's where we are planning to be,’” Washburn said. “They have been delivering ever since on their plan. That has helped them build up credibility with the analyst community and the investment community. Now it's at a point where the numbers seem to be moving in the right direction.”
Romeo Reyes, managing director of global investment bank Jefferies & Co., sees two other major elements to Global Crossing's recent success, in addition to the invest-and-grow strategy — serious cost-cutting for efficiency and an improved financial position that makes the company a less risky choice for enterprise customers.
“They've done a good job of changing their revenue mix by going after higher-margin revenue,” he said. “The company is purposely targeting these Fortune 2000 companies that are not getting this kind of service from Verizon and AT&T that they are getting from Global Crossing. That has really been their sweet spot. One other leg of the story is that they are cutting costs to become more efficient. And finally, they have money in the bank — companies that didn't want to do business with them because of their liquidity position, that is now over.”
For the second quarter, the company reported a loss of $77 million, compared to $109 million in the first quarter of 2005, on consolidated revenues of $461 million, up from $456 million in the first quarter of 2006. Adjusted EBITDA was a loss of $17 million, a 62% improvement sequentially. In addition, the company said its adjusted EBITDA was positive for the month of June and is expected to be positive for the third and fourth quarter of 2006.
Reyes believes it is significant that Global Crossing was able to be EBITDA positive — and on track to be cash-flow positive — by the end of the year, so quickly after its bankruptcy.
“Global Crossing had an EBITDA loss of $45 million for first quarter, which is a run rate of $200 million for the year, so what they are saying is they are going to go from negative $200 million to positive by end of the year — that's very aggressive.”
Legere sees the financial results playing out as he and his management team planned them, he said.
“All the milestones that we laid out are coming — sequential revenue growth, invest-and-grow revenue growth, cash-flow positive — we can see a half-billion dollars in free cash,” he said. “We are in a good state; we are getting past the questions of financial viability.”
The company closed a convergent round of public stock offering and investor underwriting in May, raising more than $380 million, and found its existing investors eager to step up again, Legere said.
“Our latest round of funding was multiple times oversubscribed,” he said. “STT [Singapore Technologies Telemedia, Global Crossing's largest investor] is doubling down every time. Fidelity is now one of our biggest investors with 4.5 million shares, which is all we've given them. [Latin American billionaire] Carlos Slim Helu was selling shares, and everyone thought he was getting out, but he was one of our biggest takers this time around.”
Thus far, however, Global Crossing's common stock hasn't risen to match its more positive results. Chief Financial Officer Jean Mandeville believes that's because the company's financial picture is complex and not easily understood.
“People are looking mainly at the numbers — the closer you get to break-even, the more volatile things are,” he said. “As the story becomes more clear — our invest-and-grow strategy, our higher-growth rates — people see the difference.”
Reyes has raised Global Crossing's rating from hold to buy in part because the slide in the company's equity share pass has created an investment value. While its competitive service peers have seen their equity value slide between 25% and 50%, Global Crossing is leading the pack at a 50% slide, and trading at 7.3 times its estimated EBITDA for fiscal year 2007 while the peer group is trading at 12 times the same value.
Anthony Christie, Global Crossing's chief marketing officer, is the first to admit that some of Global Crossing's current success reflects general industry trends.
“There are fewer players, because of consolidation, and there are basic rules of supply and demand at play,” he said. On the supply side, there has been little addition to facilities, in terms of end-to-end networks that can deliver services, even as demand grows, Christie said. “Two years ago, enterprises were willing to wait to upgrade their facilities, but now they aren't. It's really a confluence of factors — Economics 101, really — that is stabilizing prices, and we haven't seen these abate.”
Global Crossing and its competitive brethren are seeking to capitalize on consolidation in multiple ways, such as winning accounts when contracts come up during merger periods, using streamlined organizations and IP networks unburdened by legacy services to deliver cost-effective services and positioning themselves as an alternative to a single-carrier strategy.
There is a technology migration customers should be going through,” Legere said. “This is a good trend for everyone except the incumbents. We have broad distribution capability, the latest technology at a better price. So we can become the ombudsman. We are not pricing ourselves down. We are price competitive with better-performing technologies.”
Against AT&T and Verizon in North America, Global Crossing can provide redundancy or tackle part of the business and impress the customer to ultimately win more, Legere said.
“It keeps us in the picture,” Christie added. “The terms of the contracts and the commitments become shorter with each merger, which is what analysts have been advising enterprises to do during this consolidation period. We can capitalize on that.”
“We find ourselves being brought in by companies who don't want to be held up [by the larger incumbents,]” Legere said. “We do not need to beat Verizon and AT&T to succeed. [Most] enterprise customers will pick one of these two as their primary, but the rest of the business is still a lot — it's still enough for us.”
Of course, Global Crossing must compete with other survivors for that remaining business. In the U.S., that includes Broadwing, Level 3 Communications, XO Communications and others, while abroad the field beyond AT&T and Verizon includes BT and Orange Business Services. Legere and Christie maintain the company has a solid strategy and a product rollout plan that will enable Global Crossing to compete well.
For example, Christie said, the company has a fixed/mobile convergence strategy that starts with a soon-to-be-announced relationship with an undisclosed carrier to resell EV-DO high-speed data capabilities.
“We think it is 12 to 18 months before wireless shows up as a box you have to tick in North America, and that's something that we could do with a partner or as an MVNO,” he said. “Voice over IP is shining a light on what the capabilities are but is still pretty nascent because we are 12 to 24 months away from having real dual-mode handsets.”
Global Crossing is also looking at a number of players for fixed wireless networks, as a substitute for local access, he added.
“We are looking at unlicensed spectrum because it is available, and there isn't interference today,” Christie said. “But we also are looking at licensed spectrum where it is available. Today there aren't compelling economics for wireless access when you can pay $200 for an E-1 in New York City, and it costs more than that to install the wireless equipment at each end. But for redundancy or local backup, wireless can be useful, and that is a niche that is growing.”
Global Crossing is testing fixed/mobile access on GSM base stations and working with its softswitch vendor, Sonus, on the way to a third- or fourth-quarter fixed/mobile convergence trial, Christie said.
In fact, Legere said, Global Crossing “has the next five sets of stories to tell, including the differentiation to our global IP enterprise networks, but you don't tell the global product road map when the guy is concerned that you are going to run out of cash. That will come.”
Current Analysis' Washburn believes Global Crossing has done a good job of rolling out new products on its network.
“They are the only ones that step up to bat on an annual or biannual basis that talk about all the IP VPN features and enhancements in distinct detail,” he said. That strategy could help make up for where Global Crossing suffers competitively, which is having feet on the street to directly address customers, he added.
In addition to the enterprise strategy, as the company rolls out new services, it is also adding those same offerings to its wholesale business, through a carrier services organization headed by Ted Higase, executive vice president. On that side of the business, as elsewhere, consolidation has reduced the number of choices and improved Global Crossing's chances, he said.
“Once we were going to survive financially, then Ted started to sell [indefeasible rights of use] with 20-year prepaid contracts,” Mandeville said. “To do that, people need to be sure that the company is going to be around.”
That's particularly true when the “global” part of the company's name comes into play, according to Legere and Higase.
“With all the excitement over North American consolidation, investors are actually salivating over Latin American consolidation,” Legere said. “Our U.K. business is one of the more valuable pieces.”
Higase said the company continues to extend its reach into the global market, including reaching back into Asia — Global Crossing Asia was sold off as a separate company during the financial meltdown — and being driven in its investment by customer needs.
There is a question looming over all this evident success however — with half-a-billion dollars in the bank, what is Global Crossing expecting to buy — or will it be bought?
Legere said he will answer that question by year's end.
“Global Crossing has a lot of cash, and I really don't know what they are going to do with it,” Washburn said. “There has been all that speculation between Global Crossing and Broadwing — each has raised a large war chest. Until Global Crossing makes a call about what it might be doing, it's all just wild speculation.” |
