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Technology Stocks : METROMEDIA FIBER NETWORK (MFNX) -- Ignore unavailable to you. Want to Upgrade?

To: MeDroogies who wrote (531)	9/7/1999 3:58:00 PM
From: MangoBoy	Read Replies (1) \| Respond to of 1983

fiber plays being dragged down by GBLX/FRO meltdown?

To: MeDroogies who wrote (531)	9/8/1999 1:48:00 AM
From: SteveG	Respond to of 1983

Grubman on dark fiber regulatory issue: Dark Fiber Accounting Change a Non-Issue Jack Grubman Salomon Smith Barney Tuesday, September 07, 1999 --SUMMARY:----Telecommunications Services * The Financial Accounting Standards Board (FASB) recently released an opinion that will impact the way fiber companies can recognize dark fiber sales. * Most dark fiber sales revenue will now have to be amortized over a 20-year life rather than booked up-front on a percentage of completion metod. * The impact on the companies in our universe is minimal: There is absolutely no impact on cash flow or valuation. * We reiterate our strongly positive view on the sector. * See below for a company-by-company review of specific impacts. --OPINION:------------------------------------------------------------------ The Financial Accounting Standards Board (FASB) recently released an opinion that will impact the way fiber companies can recognize dark fiber sales. The key point, though, is that this is ultimately a non-event that does not impact valuations. Most dark fiber sales revenue will now have to be amortized over a 20-year, life rather than booked up-front on a percentage of completion basis. This will affect future booked revenue and booked earnings, but will not impact historical results and will not impact cash flow. Since there is no impact on cash flow, there is absolutely no impact on valuation. This is because these companies are valued on a dcf basis and this standard does not affect cash flow. MECHANICS The mechanics of this change are straight forward. When title to the fiber is not transferred, revenues from dark fiber sales and conduit sales will have to be recognized over term of the IRU or the life of the asset. This asset life is generally considered to be 20 years, which is also generally the term of the IRU. So, when a sale occurs, the cash is received, as stipulated in the contract and appropriate taxes are paid (all just as before). A liability is then set up on the balance sheet entitled something along the lines of "Deferred dark-fiber sales." The revenue is then recognized over the assumed life of the asset (generally 20 years) and the liability is marked down accordingly. Note, there is no cash impact. When title is transferred, as is the case with Global Crossing undersea cable, for example, revenue is booked as with any other sale (i.e., there is no change). SPECIFIC IMPACTS ON COMPANIES IN OUR UNIVERSE (Current method used to account for dark fiber sales and expected impact on accounting.) Level 3 ------- Current Method: Cost Sharing for INTERNEXT. Impact: Positive impact to revenues in changing from cost sharing to deferred revenue recognition. Qwest ----- Current Method: Basically out of the IRU business. Impact: Minimal, could lower construction revenues slightly as they move from up-front recognition to amortized over life of IRU. Metromedia Fiber Network ------------------------ Current: Recognizes revenues up-front for IRU sales (on percentage of completion method). Impact: Possible impact to reported revenues and earnings going forward, although no impact to cash flow or DCF valuation. Global Crossing --------------- Current Method for Undersea Fiber Cable: Recognize revenue up-front as transfer of title occurs when the customer is ready to take control of the undersea circuit and the cable is ready for service. Current Method for Terrestrial Cable: Recognize revenues over the life of the contract consistent with recent FASB interpretation. Impact: No change expected. Regarding the article from Barron's dated September 6th entitled, "Pacific Overtures: Can Undersea Cable Live Up To Wall Street's Expectations?" which discussed significant declines in pricing on undersea cables, we believe the article was incorrect. In the first half of this year, including all the volume discounts on the Atlantic Crossing average price per STM-1 was $3 million and thus, Barron's was clearly wrong. We have baked declining prices into our model because when you are in a declining cost business, prices go down to stimulate demand. When you are in a high cost business if prices are high, you don't have much demand stimulation. Either way you can get a large degree of total revenues. We would much rather, as we said in the past, have an industry that can drive strong revenue growth with declining prices because it is declining costs which enables demand stimulation of existing services and new applications for new services. Pacific Gateway Exchange Current Method: Undersea Fiber Cable: Recognize revenue up-front as transfer of title occurs when the customer is ready to take control of the undersea circuit and the cable is ready for service. Impact: No change. NET/NET: This is purely a revenue recognition issue. There is no impact on actual cash flow or actual sales, and absolutely no impact on valuation. We reiterate our strongly positive view on the sector and would take advantage of any market uncertainty surrounding this issue to increase positions.