WorldCom And Its Wannabes
May 01, 1998 7:49 PM
By Tiernan Ray
NEW YORK (Dow Jones)--They've got Minitel, we've
got the Internet. They have monarchical bureaucracies,
we have financial empires built of stock-fueled merger
mania. About the only thing the U.S. and Europe have in
common in the world of telecommunications is probably
Rupert Murdoch. But that may be changing, if
WorldCom Inc. (WCOM) and the other companies in
this week's telecommunications screen have their way.
The $44 billion long distance phone service provider,
which is swallowing MCI Communications Corp.
(MCIC) for a proposed $37 billion, is looking to
Europe as the next telecom frontier. And Europe itself is
gradually paving the way. The Continent is dismantling
its public telecom monopolies and opening up
competition in what should be a sizable chunk of the
$700 billion worldwide communications market. In the
first of a series of telecommunications services screens
we'll be running, we took a look at strong long distance
providers, both domestic and overseas, that are
developing a strong long distance franchise while
simultaneously developing a package of multiple service
bundles to sell to business customers.
Analysts are hoping that WorldCom CEO Bernie
Ebbers and friends can not only sell those services at a
premium above ordinary long distance rates in the U.S.,
but also market those same bundles of long distance
calling, local access, Internet access, wireless services,
etc. to customers overseas. The idea was to find the
companies that would benefit most from this trend -
either through increased business in the region on their
own or by being acquired outright by another firm. (See
recipe) Mergers, however, have essentially cut our
screen to the bone, including the recently-announced
purchase of LCI International Inc. (LCI) by Qwest
Communications International Inc. (QWST) for a $4.4
billion stock swap. The upshot of the mergers is a
uniquely American-style integration of services, fueled
by the race to play all markets at once and by the
technological promise of the Internet. Aside from Qwest
and WorldCom, we're left with Burlingame, Calif.-based
Pacific Gateway Exchange Inc. (PGEX). But the truth is,
WorldCom, because of its unique strategic and
operational command of the marketplace, may be the
best positioned to take advantage of the new order the
company itself will be instrumental in creating. On
Thursday, WorldCom reported first-quarter revenues of
$2.8 billion and earnings per share of 18 cents, up from
last quarter's 15 cents a share.
Operating margins improved as well, with the company
turning in operating income of $426 million, or 18%,
over last years 9.2%. Part of that did come from
increased efficiencies, most notably a decline in the cost
of leasing lines from 54% of sales in the first quarter of
1997 to 48% in the first quarter of this year. The
question now for investors is how do you really value a
company as hyped and written about as WorldCom? Is
it fully valued or even overvalued based on all the
expectations surrounding its MCI deal? Or is
WorldCom in a position similar to Dell Computer Corp.
(DELL) last year when the company (and its stock)
stood on the brink of phenomenal growth? Unlike its
counterparts in wireless service, where the measure of
success is the ultimate size of the market, or the regional
Bells, where new subscriber lines are the yardstick,
WorldCom is a study in efficiencies. The point is, in a
commodity market like long distance, how well can you
do on an operating basis by reducing your costs? And
efficiency is the crux of WorldCom's strategy.
To service global multinationals, Bernie Ebbers and the
other dominant players are acquiring small to medium
regional providers with an installed customer base and
spending huge amounts of money on fiber-optic
networks cross country and under the sea. Qwest and
Worldcom have spent several billion dollars each on
such plant buildout, acquiring thousands of route miles in
the U.S. combined in the last couple of years.
The thinking is that by owning their own physical plant,
long distance companies can maximize their operating
profits and, hopefully, their EPS, by squeezing more and
more in sales out of the same fiber.
(LCI alone will add 8,500 miles to Qwest's holdings.)
What's more, with ultimate control over their networks,
WorldCom can do more than companies such as
Incomnet Inc. (ICNT) that are simply reselling long
distance calling.
WorldCom can sell any kind of traffic that will run over
those networks, including Internet access, which more
than doubled last year to $566 million from $253 million
the year before. If the Internet is ultimately able to carry
voice and fax traffic efficiently, then the entire game turns
upside down and WorldCom owns a data network over
which it can pump voice, fax or any other traffic, all at
the same capital expenditure, while possibly billing
customers for premium services. The hope is that the
mix of domestic and international long distance, Internet,
and local calling that WorldCom derives from this
flexible network will go over just great in Europe. The
next frontiers: Asia and Latin America, where there is
even less of an infrastructure for providing cheap long
distance, fax and other resources to small and medium
businesses. Sure enough, Ebbers recently cut the ribbon
on WorldCom Japan with a reseller arrangement that
allows the company to provide long distance calling for
Japanese customers through facilities leased from
incumbents. At the same time, however, WorldCom has
become the first operation to be approved by the
Japanese government to provide ser vices over its own
facilities in the future.
What could possibly louse up Bernie Ebbers' European
vacation? MCI. With ambitious plans for growth in
Europe, WorldCom is in the tricky business of rolling
out facilities and services around the globe at the same
time that it must complete its corporate integration with
MCI. MCI yesterday reported a 48% decline in net
income as revenues climbed by 8% to $5.3 billion.
That's basically what happens in a commodity market
with increasing competition and fixe d costs. Blessedly,
MCI's product mix is shifting to one with a higher
percentage of Internet services revenue, which should
improve margins. But the up and down performance in
the core long distance market over the past year
suggests there's still room for the company to
underperform substantially, especially if the Bells are
allowed into the game in the near future. If you believe
that WorldCom can make an EPS target of $4 by 2001,
then the present $42 per share asking price is dirt cheap.
Nonetheles s, sensible investors will want to wait and
see whether MCI's changing business will affect things
for good or ill. |
