Another nice summary article on CLEC's in TheStreet.com
Silicon Valley: A CLECs Earnings Primer
By Jeffrey Hoffman
Staff Reporter, TheStreet.com
10/20/98 8:44 AM ET
SAN FRANCISCO -- Let's say you bought
Intermedia Communications (ICIX:Nasdaq) before
August, before the market fell off the cliff and when
the stock was still above 40.
Maybe you had an abiding faith in the future of
deregulation and competition in local
telecommunications services. Maybe you were
hoping for a buyout, a la WorldCom's (now MCI
WorldCom's (WCOM:Nasdaq)) purchase of MFS or
AT&T's (T:NYSE) acquisition of Teleport.
Now, with Intermedia, the largest independent
competitive local exchange carrier, trading at 24 --
having bounced back from a 16-month low of 14 1/2
earlier this month -- you're one of the brave few still
holding onto the stock. That makes you either a
long-term investor who understands the future of
telecommunications or certifiably insane. In either
case, CLEC earnings season is here, with sector
bellwether Intermedia reporting third-quarter results
Oct. 28. It's time to dust off those CLEC analysis
skills.
It's crucial to keep in mind that these are early-stage
companies. CLECs compete with regional Bell
operating companies in major metro areas. The
sector started to flower in earnest with the 1996
Telecom Act, which began the process of prying
open local markets long monopolized by the Bells.
But that means high capital expenditure costs to
quickly build local networks and put high-margin
business customers on those networks. If you are not
first or second in market share in a given region you
probably won't be around in a few years. For
investors, it means years of patience.
If you don't stomach that notion of patience so well,
hit the "back" button on your browser. If you can
accept it, read on. Some tips on how to read CLEC
earnings:
Not only are CLECs losing money, with the exception
of Intermedia, they aren't even cash-flow positive --
that is, they don't have positive earnings before
interest, taxes, depreciation and amortization. But
most do have goals for when they'll go
EBITDA-positive. "I don't even look at the bottom line
as a metric," says Ian Link, portfolio manager of the
Franklin Global Utilities Fund. "It just doesn't mean
anything."
EBITDA, however, is becoming an increasingly
important metric. Positive cash flow goes right back
into the business and reduces firms' dependence on
financing. That could be key in the next few quarters
if the CLECs' main sources of capital -- high-yield
bonds and equity offerings -- remain scarce.
Because growth is so fast, investors look at
quarter-on-quarter comparisons, rather than
year-on-year figures.
Rather than comparing a company's EBITDA with
expectations, CLEC investors might do well to
examine how fast losses are shrinking. "I'm not
betting on any one number for the quarter," says
Michael Levine, manager of the Oppenheimer
Growth & Income Variable Annuity fund, which
holds Intermedia, ICG Communications
(ICGX:Nasdaq) and RCN (RCNC:Nasdaq). "The
trend's the important thing, not the exact number."
Nearly everyone in CLEC-dom agrees that the most
important figures are the number of new lines (phone
and data, that is) installed and revenues per line. A
rise in the installation rate signals not only greater
demand but better ability to meet that demand. Both
are good for revenue growth. If revenue growth is
slowing, "it's a sign they're not able to cherry-pick
business customers from the RBOCs," says Levine.
James Henry, telecom analyst at Bear Stearns, says
he looks for sequential -- not year-over-year --
revenue growth of 5% to 20%, depending on the
base from which the CLEC is growing.
Recent numbers from CLECs show strong growth
rates. On Oct. 12, NextLink (NXLK:Nasdaq)
reported it installed 31,220 lines in the third quarter,
up 4% from the number of installations in the
previous quarter, for a total installed base of 134,107
lines as of Sept. 30. NextLink's revenue rose about
18% sequentially, to $37.8 million from $32 million in
the second quarter. Since the report, NextLink's
stock has surged 34%; on Monday, it rose 5 1/8 to
23 7/8.
On Oct. 13, WinStar (WCII:Nasdaq) said it installed
60,000 lines in the third quarter, up 20% from the
second quarter, for a cumulative total of 255,000.
Winstar, which formally reports results on Nov. 2,
didn't release third-quarter revenue. In the second
quarter of this year, revenue grew 21% sequentially,
to $57 million from $47 million in the first quarter.
Since it released the numbers, Winstar's stock has
gained 28%, including Monday's 3 13/16 advance to
20 1/16.
Other CLECs expected to post earnings in coming
weeks include: ICG, Oct. 30; McLeod USA
(MCLD:Nasdaq), Oct. 30; GST
Telecommunications (GSTX:Nasdaq), Nov. 9; and
RCN, Nov. 10. |
