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Technology Stocks : Global Crossing - GX (formerly GBLX) -- Ignore unavailable to you. Want to Upgrade?

To: RobertSheldon who wrote (13168)	8/5/2001 1:12:33 AM
From: Ally	Read Replies (2) \| Respond to of 15615

It is a perpetual struggle to determine what is the correct depreciation or amortization period, and whether an expenditure is capital or expense item. GAAP fails miserably in this area. That's why I look at the cash flow statement as closest to the truth of what is happening... at least the statement has to reconcile back to real cash at end of each period. However, I fail to see how goodwill would enter in a capacity purchase. It is not like buying a business with a branded product or service that would "enhance" revenue for a period of time in the future due to the brand recognition. Wouldn't capacity leases be like capital leases, and expensed over the period of useful life?

To: RobertSheldon who wrote (13168)	8/5/2001 1:27:59 AM
From: Ally	Read Replies (1) \| Respond to of 15615

OK, I had a second look at what you wrote, and it is interesting that a company can break a capacity lease into equipment and service. Sure, if it is tangible assets then depreciation period is shorter, causing a larger periodic charge to expense versus amortization of service useful life. Deciding between tangible and intangible is a management perogative with the blessing of the auditors. Purchase cost allocation situation also found when buying real estate... allocation to building versus land. But isn't IRU useful life 20 years and not 40? But like you said, it is not material. I don't think it was an accounting treatment of depreciation period when the word 'swap' was used by the Prudential analyst at the conference call. His concern was that swaps were used to increase revenue and were not real revenue per se.

To: RobertSheldon who wrote (13168)	8/5/2001 10:32:18 AM
From: Ally	Read Replies (2) \| Respond to of 15615

OK Robert, it was getting late and I had to get my beauty sleep before commenting on the "owners earnings" methodology that you mentioned. "Reported Earnings (we adjust the top line for cash revenues and make some minor adjustments on down the income statement to get to an adjusted ‘reported earnings’ figure for GX) + Depreciation + Depletion (not relevant here!) + Amortization + and certain other Non-Cash Charges – the average annual amount of Capital Expenditures that the business requires to maintain its competitive position and its unit volume. The rub is that it is often difficult to identify the level of capital expenditures in future years – but we feel we have this nut cracked and thus our "fiddling" confidence in our growing GX position." Your definition is very similar to "free cash flow (FCF). FCF is commonly used by analysts in their "discount cash flow" model to determine the net present value i.e intrinsic value in today's dollars. DCF is twin to annuity calculations, proven by insurance companies to make oodles of profit by setting premiums on risks that have a low probability of occurring. The "owners earnings" looks similar to "cash retained earnings". The essence of free cash flows (a.k.a. cash retained earnings, a.k.a. owners earnings) calculations is the ability to make sound assumptions on future cash earnings and capital expenditure requirements. You say you've cracked it, so I assume you've done arduous "what if" calculations and checking around on capex requirements for a network the likes of GX has built, and found the NPV value far exceeded the current stock price, thus the stock remains a "strong buy". The problem as you've pointed out with owners earnings calculations is the ability to make good forward looking assumptions. Analysts generally fail miserably in this area and that's why their DCF calculations give such a wide range of values and fail to bring a sense of credibility to investors. We've seen various analysts a year ago stating that their DCF calculations showed GX worth $60. Then after a quarter of slower growth, the same DCF calculations showed GX worth $14. How can we believe in a methodology where the swing is so wide that within a heart beat of one quarter the so called "intrinsic value" calculation has shrunk by 77%? However, when the price of the stock is $6, then it becomes easier to make a high probability profitable investment decision without going through the arduous DCF calculations. I try and look at the broad picture in a rational and business like manner: It took GX 4 years to build the global network and the organizational infra-structure to maintain and service customers of the network. Looking at the balance sheet, the cost of building the network (i.e. buying and installing equipment and tangible facilities) was around $10B. If we were today to build a similar network, it would be reasonable to assume it'll at least cost $10B, if not more. Replacement cost alone is equivalent to $11 per share. However, it takes more than just property and equipment to run a business. So the intrinsic value of GX should be higher than $11 so as to factor in the developed intangibles such as systems, procedures, operating staff, management expertise, and business model. GX has completed its network building phase, and in Q2, it announced rationalization of operating expenses from regional to a global operational structure. Make sense to me! Being a global service provider, it would need to centralize operations as much as possible so as to maintain costs and have better internal controls in making centralized global decisions. So I take the news of restructuring and reducing expenses as very positive. If they had not announced a restructuring, I would have been dismayed. Companies go from one growth phase after another and it is management incompetency if there is no re-structuring after each growth phase. GX has repeatedly indicated that it expected capex to decrease substantially after this year. The estimate for next year was $2B, then relatively very little for years forward for the core network. Again makes sense to me. After building a core network, a company would want to sell, sell, sell services that the network is capable of providing and to its capacity. It's like after building a toll bridge, the developer's task is to promote the bridge so that as many commuters as possible will use the bridge. Any material future capex spending beyond the current budget on the core network will only take place if there is a major opportunity for further business expansion. So the line of my thinking is same as your capex projections in calculating owners earnings. The main assumptions being: after 2002, no more large capex requirements. The core network has the capacity to generate tons of cash before further major capex is required (thus the cash cow concept labelling GX). The main worry now is whether the economy will slow revenue to a pace where it would be problematic to service debt. Since you're optimistic in the owners earnings calculations, I assume that you've assumed that cash flow in will be just fine. This is the bet that longs are willing to take, i.e. revenue stream will be sufficient to service debt. At $6 it is more than a reasonable bet to take. From the past track record of GX's management in building the network and selling services, it is reasonable to assume that there are no fools in the executive team. Surely if the economy slows down to a crucial level wrt debt servicing, management will take all necessary actions to conserve cash flow. It takes a lot to put a company into BK, so it is simplistic and irrationally pessimistic to think at this point in time that the company is heading toward BK. For example, in the covenant with preferred share holders, the company can issue shares instead of paying cash dividends. So if cash flow becomes a problem, this will be the first area where cash can be conserved. Again, it is really irrational fear at this time to assume that GX will have problems servicing debt. Coming back to your owners earnings figuring, and fiddling of forward capex, resulting in continued confidence... it tells me that you are still seeing a cash cow situation after 2002. Or should I say, even more so, based on today's stock price which Anne of Weakest Link would scream "Unbelievable!".