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Technology Stocks : ARCC -- Ignore unavailable to you. Want to Upgrade?

To: DWB who wrote (49)	4/26/2000 8:45:00 PM
From: RobertSheldon	Read Replies (4) \| Respond to of 83

ARCC Q1 2000 Notes Before I jump into the analysis here is some data from the last quarter (Dec 31, 1999): $0.08 per foot of penetrated space expected by May 2000. Average Life of building (how long folks have used service): 4 months 81.9 million square feet built out 4 million square feet penetrated ......................................................... Management gave us a new way to look at "Average Life of Building": 1) Weighted average life of building in service >12 months is as follows: 38% penetration of tenants, these tenants account for 35% of available space, which in turn works out to 3.3 million square feet. This space averaged $0.18 per square foot - in other words this space is already just pennies away from an estimated EBITDA breakeven of $0.20. Wow. 2) Weighted average life of building in service 12>X>6 months is as follows: 13% penetration of tenants, these tenants account for 12% of available space, which in turn works out to 2.5 million square feet. This space averaged $0.07 per square foot. This is well ahead of management's guidance of $0.05 per square foot. Between the 5.8 million square feet penetrated AND in use (total of 3.3 and 2.5 above) there were 12,000 desktops according to management. This works out to 483 square feet per desktop. Management feels that this number is rapidly coming down as the take rate for tenants other than core (remember the core tenants have more space on average than the small tenants, thus skewing the initial numbers) is ramping up as each property's average life increases. So the 250 square feet per desktop utilized once all buildings are "seasoned" is still realistic. You may recall that this is one method I am using to evaluate the value of this company (recall that I come up with somewhere in the $5-$6B range). The real important idea here is that the average $0.08 per square foot of penetration predicted for sometime in May (as mentioned at the beginning of this rant) was exceeded sometime ago. In fact, the weighted average is now at $0.13+. This is almost 2/3 better than what was originally expected to occur in May. In other words, like so many other areas in the fibersphere, estimates are being blown away. Management also guided analysts UPWARDS in many areas including what they think saturated penetration will be down the road. Last quarter they felt it would be 25%, now they feel it will be 30% which implies the following (guidance directly from management): Year / revenue increase 2001 / $5M 2002 / $30M 2003 / $76M 2004 / $117M 2009 / $1B The implication here is that for every 5% increase in penetration we can assume at least X amount of revenue for a given year. For example $30M in 2002. Seeing that I believe that penetration is likely to be on the order of 50% by 2002, a fella's mind starts to run wild. But gosh, why would my guess at penetration be so much higher than management's guess? 1) They need to give conservative guidance so to not get sued if they fall short. 2) All indications from studies that I've seen look a lot like "Field of Dreams" - build it and they will come & use a lot of it. Also personal observations of my own in some local office suites (similar to the type ARCC is building out) have penetration at 35%+ already . . . but as I have said before I live in a high penetration city & state. 3) As cited in studies from Lehman Brothers and SSBarney, businesses are going to have a tough time surviving without broadband connectivity. Anyway, ARCC is well on its way to whizzing past its original business plan projections . . . oh yea, what about this TeraBeam thing & potential synergies with Allied Riser? I have to tie together some loose ends before I post on that. Stay tuned.