=DJ Convergent Commun Execs Upbeat Despite Downside 3Q
By Tom Locke
(This story was originally published late Wednesday.)
DENVER (Dow Jones)--Convergent Communications Inc. (CONV) executives were upbeat
Wednesday, despite earlier in the day reporting a loss of $1.06 per share, 5 cents a
share wider that the First Call consensus estimate of a loss of $1.01 per share.
The stock also dropped 13% Wednesday, after the release of the third-quarter results.
The third-quarter loss for the Englewood, Colo., provider of integrated voice and data
communications wasn't quite as large as its loss of $1.11 a share a year ago. And its
third-quarter revenue rose 90%, to $42.4 million, compared with $22.3 million reported a
year ago.
In a Dow Jones Newswires interview following a conference call with analysts, Chief
Executive John Evans and Chief Operating Officer Keith Burge said the
greater-than-expected loss stemmed from accelerated investments in front-end software,
hiring and other areas, and from a drop in long-distance revenue due to price declines
caused by competition.
Burge said one important aspect of the third-quarter results was the fast growth in
the company's data area, which grew to $4.5 million in the third quarter compared to $2.1
million in the second quarter, with a gross margin of 67%.
The other area of importance he cited was the growth in the company's Enterprise
Network Services (ENS) business, in which it owns, manages, maintains and monitors client
data and voice networks under long-term agreements. Convergent typically has gross
margins of 80% in its ENS business.
Third-quarter ENS revenue came in at $1.1 million. That almost doubled the $660,000 in
ENS revenue a year ago, but it was flat compared with the $1.1 million in second-quarter
ENS revenue.
However, Burge emphasized that Convergent signed a number of contracts late in the
quarter that weren't yet booked to revenue. Convergent more than doubled its number of
ENS customers and ENS contract volume between the end of the second quarter and the end
of the third quarter, he said. The number of customers rose to 47 from 23, and the
contract volume rose to $34.4 million from $16.0 million. The average ENS contract lasts
4.2 years.
J.P. Morgan Securities Inc. senior analyst Mark Langner said Convergent's
third-quarter results were "generally in line with what we were expecting," but he would
have liked "more progress' in growth of recurring revenue from data, ENS and other
services.
Langner noted that professional services, which are non-recurring, accounted for a
large portion of the data revenue. He said he was glad to see progress made in
cross-selling data services to current voice customers.
The failure of Convergent to meet the First Call third-quarter consensus estimate
wasn't important, Langner said, partly because estimates varied widely. The First Call
estimates from six analysts ranged from a loss of 91 cents to a loss of $1.21 for the
quarter. The broad range was due in part to the fact that the company has no chief
financial officer, Langner said.
CEO Says New Financial Chief To Be Named Within 2 Weeks
But Chief Executive Evans said the company has narrowed to three candidates its search
for a chief financial officer to replace John Phibbs, who left in August. Evans said a
decision by the board of directors on a new chief financial officer is expected "in the
next couple of weeks."
Langner said he doesn't yet know whether his estimates will change in response to
Convergent's third-quarter results. He has been projecting revenue in 2000 of $282
million and negative EBITDA of $9 million next year. EBITDA is earnings before interest,
taxes, depreciation, and other income.
Langner has been projecting that Convergent will turn EBITDA-positive in the fourth
quarter of 2000.
Convergent's third-quarter EBITDA loss of $16.5 million was about $1 million more than
Langner expected. He said he will be watching closely to see whether the ENS contracts
Convergent signed in September start producing strong revenue increases in the fourth
quarter.
Burge said that if no other ENS contracts were added in the fourth quarter, the new
contracts added by the end of September would result in ENS revenue growth to $1.8
million for the fourth quarter, compared with $1.1 million in the third quarter.
Convergent has operations in 35 markets. In seven of those, it has data-centric
switches and software that lower the company's capital costs by 80% and operational costs
by 50%, compared with traditional, circuit-based networks, according to Convergent.
It plans to expand that new data-centric switching by the end of the year to nine more
cities: Seattle, Portland, Salt Lake City, Dallas, New York City, Miami, Kansas City, St.
Louis and Minneapolis. Convergent now has that technology in San Francisco, the Los
Angeles area, Denver, Chicago, the area of Washington, D.C., Des Moines, and Atlanta.
Within the next three to five years, the company's goal is to provide service in 50
markets, with yearly revenue reaching $50 million per market ($2.5 billion total), Evans
said.
He said in three markets where Convergent has been present for about 24 months -
Dallas, Des Moines and San Francisco - the company is already halfway toward hitting that
goal of $50 million in yearly revenue. And those three markets are EBITDA-positive, he
said.
Evans told analysts in the conference call that he was "extremely pleased" with the
results from the third quarter.
But apparently investors didn't see it that way. Convergent shares closed Wednesday
down 1 13/16, or 13.2%, at 11 15/16 on volume of 1.2 million shares, compared with
average daily volume of about 510,000 shares.
-Tom Locke, Dow Jones Newswires, 303-293-9294
(END) DOW JONES NEWS 11-11-99
08:15 AM
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