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Financial

Carrier Crisis: Who's Most at Risk?

Carriers are in crisis. The bottom's fallen out of the bandwidth market, and heavily leveraged service providers have found the piper's price too high to pay. Major fiascoes like Global Crossing Ltd. (NYSE: GX) appear in the headlines regularly, with their financial foibles aflame for all to see. Is it possible to predict who may be next on the chopping block?

If one knows where to look, some educated guesses can be made. In its latest report, Optical Oracle, Light Reading's paid subscription research service, probes the financials of eleven top carriers in an effort to sift probable survivors from those most likely to wind up in trouble.

Alarmingly, the report puts better than half the carriers scrutinized in the category of those at risk for potential acquisition or bankruptcy. This group includes Allegiance Telecom Inc. (Nasdaq: ALGX), Broadwing Inc. (NYSE: BRW), Level 3 Communications Inc. (Nasdaq: LVLT), Qwest Communications International Inc. (NYSE: Q), Time Warner Telecom Inc. (Nasdaq: TWTC), and Williams Communications Group (NYSE: WCG).

Some of these are no surprise: Qwest and Williams seem to be featured in weekly news regarding their books. The spotlight's slowly turning to reveal Level 3 Communications Inc. (Nasdaq: LVLT) (see Is Level 3 Next?). While others may have slipped under the radar, the report says that warning signs show they'll soon be directly in its path.

What's this prediction based on? Several factors, led by the overall decline in profitability. "Until profitability reaches an inflection point, pessimism will reign supreme," writes Christopher Bulkey, Optical Oracle research analyst.

By several measures -- including total debt, ratio of debt to equity, and cash flow -- the carriers mentioned above betray serious financial difficulties.

Warning signs are stronger in some areas than others. Level 3, Williams, and Broadwing, for instance, show severe quarter-to-quarter declines in cash flow. TWTC and Level 3 showed fairly recent declines in cash flow. And significant debt increases mark Allegiance, TWTC, and Qwest as trouble spots.

The outlook for capital spending, the potential for consolidation, and pricing trends will play important roles in the future of these carriers. But the going will be slow. According to guidance reports, capex will decline even further in 2002 and the earliest chance for improving the picture won't come until carrier budgets are revised again in the fall of 2003.

Meanwhile, falling prices for certain telecom services, such as private lines, frame relay, ATM, and T3 connections, will continue to hurt carriers to varying degrees.

Can being acquired save the day for some? Perhaps. "M&A activity has the potential to save a few distressed carriers," Bulkey writes. "Keep in mind, however, that many experts we have spoken with haven't shown much interest in the distressed network assets, and much network technology will be thrown in the dumpster. But some combination of M&A activity is likely to occur, with the strongest carriers -- the RBOCs and IXCs -- looking to make deals."

In the end, in fact, it's a thinning of the herd that's needed to save the industry, concludes the Optical Oracle. The bandwidth pricing and supply situation will likely not improve until there are fewer competitors on the market. — Mary Jander, Senior Editor, Light Reading
http://www.lightreading.com For more information or to subscribe to Optical Oracle, visit: http://www.opticaloracle.com



Editor's Note: Light Reading is not affiliated with Oracle Corporation.
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hemmingway1 12/4/2012 | 10:46:24 PM
re: Carrier Crisis: Who's Most at Risk? and this followup:
http://www.cookreport.com/11.0...
hemmingway1 12/4/2012 | 10:46:24 PM
re: Carrier Crisis: Who's Most at Risk? According to this:
http://www.cookreport.com/11.0...
RBOCs and IXCs not so rosy either.
johnjohn 12/4/2012 | 10:46:22 PM
re: Carrier Crisis: Who's Most at Risk? LR-

Can you at least tell me who the top elven carriers are without forcing me to sign up for the paid subscription :)

Here is my guess:
1. Verizon
2. AT&T
3. SBC
4. BellSouth
5. Worldcom
6. Qwest
7. Sprint
8. Level 3
9. Broadwing
10. Williams
11. Time Warner Telecom

That leaves Allegiance as the odd one out. I can't see putting Allegiance ahead of any of the other carriers. Am I missing something?
The_Holy_Grail 12/4/2012 | 10:46:22 PM
re: Carrier Crisis: Who's Most at Risk? Why wasn't MCI Worldcom mentioned? I thought they carried nearly 50% of backbone LH traffic.
raypeso 12/4/2012 | 10:46:21 PM
re: Carrier Crisis: Who's Most at Risk? Looking at this list of carriers in possible trouble, that's pretty much every carrier that I know of, that hasn't already delcared bankruptcy. I'ts pretty easy to write up a list like this, just name every company you can find, they are all in serious trouble. I would truly like to see an article on which ones are doing well, that would take some investigation.
DoTheMath 12/4/2012 | 10:46:21 PM
re: Carrier Crisis: Who's Most at Risk?
Thanks for the Cook Report, hemmingway1. To quote:

---- Quote
Googin Asserts that Caught in a Vice Between Shift to Unprofitable Data, Declining Use of Network and Long Depreciation Schedules for Heavy Debt ILECs Will Find Themselves Unable to Pay their Debt
----- End Quote

Basically, they have long lived liabilities backed by rapidly eroding assets and revenue bases. I have observed that a lot of my friends have switched to using their cell phones for most of their voice needs, so their voice revenues are shot. Recently our company has been using WebEx conferencing, and I was blown away by how easy it was. We pay more than $500 a month to them and I feel it is worth it in the amount of travel it saves. Now, why aren't our dinosaurs offering such services?

I bet WebEx is offering these services with a fraction of the cost basis a bloated RBOC would. Imagine the ponderous 2 year "process" the RBOC would subject their suppliers, and then they would offer primitive "services" in the end. I really hope for thie Wall Street induced meltdown would result in fundamental industry restructuring. We need this industry to become efficient, if any of us have hope of making money in it again.
fhussain 12/4/2012 | 10:45:48 PM
re: Carrier Crisis: Who's Most at Risk? johnjohn wrote:
>Can you at least tell me who the top elven >carriers are without forcing me to sign up for >the paid subscription :)

Forget the paid report subscription! What is it that the report is offering you? Glasses?

>Here is my guess:
Well not too bad. Why not try to separate the IXCs from the ILECSs so for long distance voice it still goes like this

ATT, WCOM, Sprint, etc

For data it may be more surprising
WCOM, ATT, Sprint, then everyone else

OK, OK I know you've heard all these stories about these new guys etc. but the statistics don't show them up significantly.

What worries me most about the LightReading Carrier Crisis "study" is that they promote it themselves as "news" and it is drawn entirely from information published by the carriers themselves. The results are unsurprisingly garbled.

1. Verizon
2. AT&T
3. SBC
4. BellSouth
5. Worldcom
6. Qwest
7. Sprint
8. Level 3
9. Broadwing
10. Williams
11. Time Warner Telecom

That leaves Allegiance as the odd one out. I can't see putting Allegiance ahead of any of the other carriers. Am I missing something?
optical_man 12/4/2012 | 10:45:47 PM
re: Carrier Crisis: Who's Most at Risk? Author: DoTheMath Number: 5
Subject: Industry Restructuring Date: 3/19/2002 3:00:07 PM
"I have observed that a lot of my friends have switched to using their cell phones for most of their voice needs, so their voice revenues are shot"

I live for statements like that. "Voice is dead because we're using wireless!!"
The price paid for wireless is higher (so is equipment, opex, etc, but not as high as the price, hence higher revenues).
Question: who controls the wireless voice that you are using that is destroying ATT and Worldcom and Sprint? Let's see, it's ATT, Worldcom and Sprint hauling (and charging) for that same voice.
When will we learn that 'wireless' voice is not different from 'wired' voice.


fhussain 12/4/2012 | 10:45:42 PM
re: Carrier Crisis: Who's Most at Risk? The article really seems to be a press release for the study. Apart from the article announcing the study its worth checking out a couple of excerpts from the Optical Oracle study at http://www.opticaloracle.com/d...

The Optical Oracle analysis of Verizon (at least the for free excerpt) is nothing more than "this number changed by that number which is good/bad compared and which compares favorably/unfavorably with others in the industry". The 'carrier analysis' of Verizon at least doesn't provide a basis for soundings of the article because it appears to be based on a superficial regurgitation of obvious trends against past numbers and comparisons against common benchmarks for debt ratios, etc. At least in this free excerpt there is nothing of substance or subtlety at all. Nothing for example, about whether profitable voice minutes are being replaced with unprofitable data - nothing about the long term cost of SONET networks.

LR's track at forecasting the industry hasn't been great in the optical sector. For a couple of years running the LR Top 10 has performed twice as badly as the LR Index which in turn was twice as bad as the NASDAQ! The analysis of the carriers looks on the face of the stuff presented to be very superficial. Its certainly not sufficient basis for suggesting that the RBOCs should receive a ringing endorsement for future investment!

As was pointed out earlier in this thread its not very insightful to gather the names of all the IXCs and CLECs and pick a few that you can claim are going broke then leap to the conclusion that the RBOCs are doing fine!
hemmingway1 12/4/2012 | 10:45:41 PM
re: Carrier Crisis: Who's Most at Risk? optical_man, on your point about copper voice minutes moving to wireless, but the same carriers, I grant the higher revenues and higher opex, but are they yielding higher net margins? It doesn't necessarily follow that they are. The answer might be yes for some carriers and no for others. Any insights?

Also agree that the same universe of carriers are the beneficiaries of the wireless minutes, but I wonder about the re-partitioning to "different" carriers when customers make the switch. Wonder how the market shares per carrier are changing.

Also wonder about long distance. Some people I know have completely disabled long distance service on their land line, and just use their wireless minutes for that (and seldomthe same carrier). You pay several bucks a month in taxes and fees for LD even if you make no LD calls so they use the "tax relief" as argument to cancel LD on landline since it is a redundant service. Can still receive LD on landline, just can't initiate calls.
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