GX: Lower Guid. & IRU Higher % Revs., but Funded & Winner in Ind. Recov
Global Crossing Ltd(GX)
Rating: 1S
As of 08/02/2001
Last Changed 11/09/2000
August 2, 2001
Global Crossing Ltd. (GX)#
GX: Lower Guid. & IRU Higher % Revs., but Funded & 1S (Buy, Speculative)
Winner in Ind. Recov Mkt Cap: $5,033.0 mil.
August 2, 2001 SUMMARY
* GX rptd Q2 rev & EBITDA slightly below est w/cash rev
TELECOMMUNICATIONS of $1.62B vs $1.68B est and adj EBITDA of $472M vs $476M
SERVICES est. Guid for 01 lowered to $6.4B cash rev vs $7.1B est
Jack B. Grubman and adj EBITDA to $1.6B vs $2.1B est. We are lowering 02
cash rev to $8.1B from $9.4B and 02 adj EBITDA to $2.3B
from $2.7B. 01 Capex reduced to $4.5B from $5B. GX
Christine R. remains fully funded (FCF+ in H2'02)
Gochuico * IRU rev guid increased as GX benefits from less comp.
env. Svc rev guid decr. due to obvious softness
impacting everyone from Bells on down.
Charles Simonds * Value of new comm'l contracts signed in Q2 rose to
$500M from $300M in Q1 (excl Swift in both pds). Also
British Emb contract already upsized 20% w/i 9 mos.
overall GX gaining shr in comml with comml data up 11%
seq and comml voice up slightly. Pricing stable: rate of
decline slowing in voice; stable in IRU, up a bit in
Frame/ATM.
* See GX as fullyfunded, gaining comml traction w/great
assets; clear LT player.
FUNDAMENTALS
P/E (12/01E) NA
P/E (12/02E) NA
TEV/EBITDA (12/01E) 7.5x
TEV/EBITDA (12/02E) 5.3x
Book Value/Share (12/01E) $11.65
Price/Book Value 0.5x
Dividend/Yield (12/01E) $0.00/0.0%
Revenue (12/01E) $6,430.1 mil.
Proj. Long-Term EPS Growth 0%
ROE (12/01E) (27.2%)
Long-Term Debt to Capital(a) 41.7%
GX is in the S&P 500(R) Index.
(a) Data as of most recent quarter
SHARE DATA RECOMMENDATION
Price (8/2/01) $5.68 Current Rating 1S
52-Week Range $25.75-$6.55 Prior Rating 1S
Shares Outstanding(a) 886.1 mil. Current Target Price $30.00
Convertible Yes Previous Target Price $30.00
EARNINGS PER SHARE
FY ends 1Q 2Q 3Q 4Q Full Year
12/00A Actual ($0.44)A ($0.61)A ($0.65)A ($0.70)A ($2.11)A
12/01E Current ($0.69)A ($0.69)A ($0.93)E ($1.01)E ($3.32)E
Previous ($0.69)A ($0.93)E ($0.89)E ($0.86)E ($3.38)E
12/02E Current NA NA NA NA ($3.46)E
Previous NA NA NA NA ($3.99)E
12/03E Current NA NA NA NA NA
Previous NA NA NA NA NA
First Call Consensus EPS: 12/01E ($3.17); 12/02E ($3.19); 12/03E NA
OPINION
Global Crossing reported second quarter results lighter than expected and
lowered guidance for the remainder of 2001. Specifically, Global Crossing
reported $1,620.4 million of cash revenues from continuing operations (pro
forma to exclude Global Center and the ILEC assets), up 0.4% sequentially and
below our $1,684.2 million estimate. In addition, recurring adjusted EBITDA
was $472.3 million (about a 29% margin), about 8% better than Q1'01 adjusted
EBITDA of $441.2 million (a 27% margin), but below our $475.7 million (28%
margin) estimate. We provide several tables in the text with detailed
segmentation of revenue, showing sequential growth and revenue mix by
carrier-commercial, service-capacity and voice-data.
The reaction of the stock versus the bonds is very interesting. Today, the
stock is off almost 20%, but the bonds are firm, trading in the 70s (double
to triple the level of most new telecom players). As we see it, the bonds
are right! Yes, Global Crossing lowered guidance, and yes, IRUs are now a
greater portion of near term revenues (33% versus 31% of 2001 revenues on
current versus previous guidance), but Global is funded and will be a
surviving winner, we believe, as the telecom landscape recovers due to
industry factors (i.e. less players and better pricing) and macroeconomic
trends improving.
As for IRUs not being recurring like service revenue, we disagree. Product
companies start each year with zero revenue but grow as a function of new
product cycles and overall rising demand. Similarly, IRU sales recur at
higher levels since demand grows and buyers of IRUs want increasingly bigger
swaths of capacity each year despite having existing capacity. Thus, while
we agree that services that drive monthly recurring revenue are more
predictable, nonetheless plenty of stocks in the S&P get big multiples of
revenues selling products which are far less predictable in growth than are
IRUs. In fact, Global Crossing's level of predictability is materially
better in IRUs with 20% of its backlog being global network sales which are
growing 40% on an annual basis. As we have said previously, the 40 - 60 big
buyers of capacity on a global basis have growing capacity requirements and
want IRUs to stabilize network platforms and be able to deploy service layers
on a guaranteed long term basis. To be blunt, one could argue that the IRU
business with 40 - 60 huge buyers of increasing levels of capacity each year
is actually a more recurring, less volatile business than certainly voice
which has high levels of churn.
We believe telecom stocks, especially the newer players, reflect real doom
and gloom. We believe that those companies whose businesses are growing
(even if slower than previously thought) and who are on sound financial
footing are positioned for value accretion. Global Crossing is clearly at
the top of that list.
Global Crossing has lowered its guidance for 2001 to $6.4 - 6.9 billion for
cash revenues versus $7.1 - 7.2 billion previously (we were at $7.1 billion)
and $1.6 - 2.0 billion in adjusted EBITDA versus $2.0 - 2.1 billion
previously (we were at $2.1 billion). Revenue guidance breaks down even
further as service revenues of $4.0 - 4.5 billion versus previous guidance of
$5.0 - 5.1 billion. IRU sales guidance actually is going up to $2.0 - 2.5
billion from $2.0 - 2.1 billion as Global is seeing the potential increase in
capacity sales from customers whose suppliers have gone out of business (e.g.
360networks). For 2002, we believe that IRUs will grow 15% and service
revenues should rise 30% bringing cash revenue to about $8.1 billion (versus
our previous $9.4 billion estimate). If we keep EBITDA margins flat (which
is conservative since operating leverage does occur) then our 2002 adjusted
EBITDA is about $2.3 billion versus our previous $2.7 billion estimate.
CapEx estimates for 2001 go to $4.5 billion from the $5 billion range for
2001, meaning that the difference in EBITDA guidance is equivalent to the
change in CapEx, so Global Crossing remains fully funded. For 2002, CapEx
will be below $2.5 billion since 50% of Global's 2001 CapEx is construction
oriented which is falling off. This means that capital returns and paybacks
dramatically improve. On pricing, Global Crossing is seeing a slower rate of
erosion on pricing across the board, average voice revenue per minute is only
modestly lower, frame and ATM pricing is flat to up and subsea capacity
pricing is declining at stable rates relative to six months ago.
Despite popular belief, demand for IRUs among large buyers of capacity is
growing and is not changing to leases. On the service side, Global Crossing
is not immune to overall softness, hence a lowering of guidance. However, it
is clear that Global Crossing is gaining traction with commercial data
(excluding equipment sales) growing 11% sequentially and commercial voice up
sequentially, both clear indications of share gains. Moreover, Global
Crossing signed $500 million of new contracts in Q2'01, up from $300 million
in Q1' (both figures exclude Swift) and the British foreign service contract
has been upsized from $250 million to $300 million---a 20% upsizing---within
nine months of signing. Therefore, we would argue that Global Crossing is in
good shape. Their position in the IRU segment is clearly stronger than ever
and notwithstanding an overall softer environment, Global Crossing is clearly
gaining traction in the commercial space. Most importantly, we believe they
are fully funded with no need for additional capital.
Capacity sales in the quarter were $567 million, flat sequentially and below
our $580 million estimate. Capacity sales accounted for 35% of total
revenues in the quarter, versus 35% in Q1'01 and 38% in Q4'00.
The overall carrier business (as we allude to in Table 2 below) represented
60.3% of cash revenue in the quarter, versus 59% in Q1'01 and 62% in Q4'00.
If one looks at carrier products excluding capacity sales, carrier data
products declined about 6% sequentially, while carrier voice grew about 10%
sequentially, as overall Carrier cash revenues grew about 5% sequentially.
The reason carrier data was soft but IRUs were strong is due to different
customer segments. Carrier data services are sold to smaller carriers while
IRUs are sold to large carriers.
TABLE 1
GX Revenue Breakdown
($ Millions)
Q2/Q1
Category Q2'01A Q1'01A % Change
Cash Revenue $ 1,620 $ 1,613 0.4%
- Inst & Maint 163 195 (16.6%)
- Telecom Services 1,458 1,418 2.8%
Commercial cash revenue 460 422 9.0%
Consumer cash revenue 38 40 (5.5%)
Carrier cash revenue 959 956 0.4%
Telecom Services 1,458 1,418 2.8%
Voice revenue 553 525 5.4%
Cash data revenue 905 893 1.3%
Telecom Services 1,458 1,418 2.8%
Capacity Sales 567 567 0.0%
Services Product Rev (1) 890 851 4.6%
Telecom Services 1,458 1,418 2.8%
Commercial 443 422 5.0%
- Data 215 197 9.1%
- Voice 229 225 1.4%
Consumer 38 40 (5.5%)
Carrier Services 409 389 5.2%
- Data services 123 130 (5.4%)
- Voice 287 259 10.5%
Services Product Rev (1) 890 851 4.6%
Installation and maintenance 163 195 (16.6%)
Total Service Revenue 1,053 1,046 0.7%
(1) Includes Commercial, Consumer & Carrier Product
Source: SSB & Company reports.
TABLE 2
GX Revenue Mix - Type of Service/Type of Customer as % of Cash
Revenues
Category Q2'01A Q1'01A Q4'00A
Voice 34.1% 32.5% 34.1%
Data
Capacity Sales 35.0% 35.1% 38.0%
Data Services 20.8% 20.2% 18.3%
Total Data 55.8% 55.4% 56.3%
Installation and maintenance 10.0% 12.1% 9.6%
Total 100.0% 100.0% 100.0%
Carrier
- Capacity Sales 35.0% 35.1% 38.0%
- Carrier Data (excl. capacity sales) 7.6% 8.0% 6.9%
Total Carrier Data 42.6% 43.2% 44.9%
Carrier Voice 17.7% 16.1% 17.3%
Total Carrier 60.3% 59.3% 62.2%
Commercial
Commercial Data 13.2% 12.2% 11.4%
Commercial Voice 14.1% 14.0% 14.2%
Total commercial 27.3% 26.2% 25.6%
Consumer 2.3% 2.5% 2.6%
Installation and maintenance 10.0% 12.1% 9.6%
Total 100.0% 100.0% 100.0%
Source: SSB & Company reports.
Turning to the commercial business, Global Crossing's overall commercial
business grew about 5% sequentially, with voice up about 1% and commercial
data up a healthy 9% sequentially (11% excluding IPC/IXNet), both on a GAAP
basis---in Q2'01 there was an approximately $17 million difference between
GAAP and cash commercial revenues due to some one time items. In fact,
growth in commercial data represented approximately 29% of the incremental
revenue growth on a sequential basis, similar to Q1'01 levels.
Global Crossing has made progress during the year signing on new customers.
In fact, Global Crossing increased its signings of new commercial contracts
(excluding the $300 million Swift contract) by $500 million in Q2'01 versus
$300 million in Q1'01. Including Swift, the value of Global Crossings 2001
contract signings rose to about $1.1 billion at the end of Q2'01 from
approximately $600 million at the end of Q1'01. These contracts have an
average life of 3 years and have been for services such as international
private line, ATM, and frame relay.
By cutting the revenues in different ways, one can see that overall, voice is
about 34% of Global Crossing's revenue. Data is about 56% and installation
and maintenance makes up the remaining 10%. Looking at it another way,
carrier is about 60% of revenue, commercial is about 27% of the revenues and
consumer is about 2%, and installation and maintenance to the global marine
business makes up the 10% balance. If one cuts the numbers yet another way,
capacity sales were about 35% of revenue. Commercial voice is about 14%;
carrier voice is about 18%, and consumer voice about 2%. Commercial data is
about 13% and carrier data, excluding capacity sales, is about 8%. Within
overall data, capacity sales accounted for about 63% of that number, down
slightly from 64% in Q1'01 and 68% in Q4'00.
RESULTS VS. EXPECTATIONS
We are going to limit our remarks to the Telecom Services area since the
Frontier ILEC is no longer part of the business and the Installation and
Maintenance revenues are not particularly relevant to the Telecom Services
story. Additionally, all figures discussed are pro forma to exclude the
results of Global Center, which was sold on January 10th, and the sale of the
Frontier ILEC assets to Citizens Communications for $3.5 billion in cash,
which closed on June 29th.
Overall Telecom Services cash revenues were $1,457.6 million, up 2.8%
sequentially and 24.9% year-over-year (on a pro forma basis). This was $86.6
million less than our estimate of $1,544.2 million (8.9% sequential growth
and 32.3% YOY). More importantly, the mix continues to change in the right
direction.
Data came in at $904.6 million, accounting for 62.1% of Telecom Service
revenue in the quarter, versus 63.0% in Q1'01, and compared with our estimate
of $980.0 million (63.5% of Telecom Service cash revenues). More
importantly, of the $904.6 million of data revenue, $337.4 million
represented non-capacity sales---in other words, frame, ATM, IP, hosting, IP
transit and the like, so about 37.3% (an increase of 80 basis points from
36.5% in Q1'01 and compared to our estimate of $400.2 million) of Global
Crossing's data revenues are up the value stack from pure capacity sales
which is a 44.5% increase over the revenues from a year ago. Data cash
revenues were up 1.3% sequentially and 40.1% YOY versus our estimates of 9.7%
sequentially and 58.2% YOY.
Looking at it from another direction, carrier cash revenues were $959.5
million, up 0.4% sequentially, versus our estimate of $1,037.1 million
(representing 8.5% sequential growth). Carrier revenue represents about
65.8% of total telecom revenues, a decline from about 67.4% in Q1'01 (we were
looking for 67.2%) as Global Crossing grows its commercial business.
Commercial revenue was $443.1 million ($460.2 million on a cash basis
including some one time items), up about 5.0% sequentially, below our
estimate of $468.4 million (about 10.9% sequential growth). Commercial voice
revenues were $229 million for Q2, or just over half of commercial service
revenue. Consumer revenue was very small (only 2.3% of telecom services
revenues) at $37.9 million, down 5.5% sequentially.
Global Crossing reported Q2'01 EBITDA loss of $89.0 million on a GAAP basis
and positive $472.3 million on an adjusted EBITDA basis, representing a
margin of 29.1%. This was wider than our estimate of a $59.3 million loss on
a GAAP basis and slightly lower than our positive adjusted EBITDA estimate of
$475.7 million (a 28.2% margin). EPS loss of $0.69 was narrower than our
$0.93 loss estimate.
NET/NET
Global Crossing lowered guidance---no way around it. But, we believe this
company is funded, has great assets and will be a survivor who benefits from
industry recovery. |
