Worthwhile July CSFB report on ELIX and value of OSSs:
Electric Lightwave's Warning of Revenue Growth Shortfall Illustrates Difficulty and Complexity of the CLEC Business
ú Electric Lightwave announced that revenue projections for the next three quarters would be approximately 8% below Street consensus estimates due to implementation problems of a new provisioning system which will have an impact on the company's ability to ramp-up its order processing.
ú Electric Lightwave's warning illustrates the importance of the successful design and integration of robust Operational Support Systems (OSS) and, more importantly, the highly complex nature of the CLEC business.
ú The announcement further underscores our belief success will only be
achieveable if management focuses on the complex nuts and bolts of the
CLEC business has the ability to execute complex business plans in this competitive industry.
ú The announcement also highlights our CLEC investment philosophy which is based on the notion that there are not enough quality managers to go around for all the new startups that have been created. This leads to the conclusion that the first stop in the analytical process should be in assessing management quality.
On July 13, Electric Lightwave Inc. (ELIX) warned that revenues for the second, third, and fourth quarters of this year would be approximately 8% (on average) below Street consensus estimates due to the installation of a new provisioning system. According to Dave Sharkey, president and chief operating officer of Electric Lightwave, the company is not experiencing any demand problems, but is finding that its ability to provision is temporarily constrained. Electric Lightwave had indicated in its first quarter earnings release on May 4 that the installation of the company's new provisioning system "would probably have a temporary impact on the company's ability to ramp-up its order processing.
As part of creating the new platform, thousands of bits of data, including data regarding every card, port, and trunk, had to be put into the firm's new system. During this conversion process, some "dirty data" made its way into the system. (As they say, garbage in garbage out.) Now, the backoffice staff is focused on getting the new system up and running. A painstaking process of removing dirty data from the firm's database. As a result, the company's access line
backlog has increased as sales efforts have not been curtailed. The company expects to have its new business systems platform up and running later this year. The new platform will allow for the integration of an enhanced order flow, provisioning, and billing system.
As we noted in our CLEC industry overview, dated May 7, one of the primary drivers of success, which without the CLEC cannot survive, are excellent operating and support systems (OSS) which can only be implemented through effective management. We continue to believe that a robust OSS platform is extremely difficult for the CLECs to execute effectively. It is not off the shelf.
In large part, it has not been created before in the structure required by the operators. OSS involves the integration of provisioning services for customers and interconnection with the incumbent local exchange carrier (ILEC), order entry systems that can interface with the ILECs as well as the customers and with other
internal operating systems, and billing systems which will allow for the billing of bundled products and services on one statement. And there is a shortage of talent to design, develop, and implement quality systems. Further, an experienced and focused management team is crucial for the successful implementation of an effective OSS platform. Therefore, as we evaluate the CLECs we place a premium on managerial competence.
Presently, we believe that NEXTLINK Communications, Teleport Communications Group, and WorldCom's MFS are at the forefront of dealing with the OSS issues. That is not to say that the other CLECs are far behind. (And, clearly we have not been able to assess the OSS of every public and private CLEC.) In fact, relative newcomer Hyperion Telecommunications recently reported that within two to seven months, it will have completely implemented an automated system, which will gather records from its switches. In addition, the company noted that
it is aggressively working on its order-entry system and is in the process of evaluating various software that it will use for automating its design and layout of circuits in order to speed up line provisioning. Further, GST Telecommunications is also in the process of an extensive upgrade of its operational support systems as evidenced by its recent selections of various software packages and
consulting services to provide billing/customer service and support, provisioning, and interconnection systems. We expect WinStar to spend approximately $25 million this year to develop its OSS platform. That should position the company to be able to aggressively rollout its point-to-multipoint system which becomes ready for deployment in the first quarter of 1999.
The implementation of efficient back-office support systems is critical to the success of any CLEC in this competitive industry. Simply stated, if access lines cannot be provisioned in a timely manner, access line backlogs will grow to unacceptable levels. The net result is lost customers and the loss of potential customers and revenues. It is no use if the CLEC can effectively market its products, but not provision their access lines - customer service in this industry remains paramount.
We are presently in the process of gathering data to determine the relative degree of success that each CLEC that we have under coverage is having in implementing robust OSS platforms. This will also include an examination of the various software packages available on the market which focus on the provisioning, billing, network management, and customer care systems available to the telecommunications
industry.
Our top picks in the industry, along with our yearend price targets include the following: NextLink ($38), WinStar ($61), GST ($22), e.spire ($26), and Hyperion ($25). |
