Optical/IP Networks

... And Helps Marconi Cut Its Debt

2004 has started brightly for Marconi Corp. plc (Nasdaq: MRCIY; London: MONI). The vendor has raised further funds to help pay down its debt with the sale of its North American access equipment business (see Access Acquisition Boosts AFC), and this morning confirmed its third quarter guidance of improved quarterly sales.

The combined news pushed up the firm's share price on the London Stock Exchange by 19 pence, more than 3 percent, to £6.16 from yesterday's close of £5.97.

The deal also has downside, though: Marconi is letting go a business that is currently growing.

The $240 million cash sale of the North American unit to Advanced Fibre Communications Inc. (AFC) (Nasdaq: AFCI), due to be completed before the end of Marconi's fourth quarter ending March 31, 2004, will help the vendor pay off some of its debt and so save itself about $20 million a year in interest payments. It plans to clear all its outstanding junior notes, worth $185 million, which pay 10 percent interest per year, and $33 million of its senior debt, which has an 8 percent interest rate.

That will leave Marconi with $684 million in senior secured loan notes, about half the level of debt it had when it rejoined the London stock market in May 2003 (see What's Next for Marconi?).

It also leaves Marconi without one of the units currently contributing to increasing sequential revenues. However, with revenues for the six months to September 30, 2003 of just £55 million ($100 million at the current exchange rate of £1 = $1.83), and operating profit of just £3 million before goodwill amortization and exceptional items, the NAA division accounted for less than 8 percent of the vendor's sales in the first half of the current financial year (beginning April 1, 2003).

CEO Mike Parton and CFO Pavi Binning reiterated during a conference call this morning that revenues in the fiscal third quarter (ended December 31, 2003) are expected to show a slight increase on the £389 million posted in the second quarter (see Marconi Reports Q2 Sales ). That sequential increase was to be the result of "strong market dynamics" in North America and Germany. These results will include numbers from the NAA division.

The "market dynamics," confirms a Marconi spokesman, are: increasing sales of DSL access equipment in the U.S. as the growth in broadband penetration continues -- growth that will benefit AFC once the announced sale is completed; increasing business from the U.S. government (see Marconi Scores $9M Gov't Win for previous success); and increased sales of wireless backhaul equipment to German 3G mobile license-holders in Germany.

"The biggest part of our German business is fixed wireless gear, and the German 3G operators had to have a certain amount of their networks completed by the end of 2003 to meet their license requirements," leading to a sudden upturn in sales towards the end of the year, says the spokesman.

So far, there is no indication that the company will continue to show growth into the fiscal fourth quarter. Keep in mind that it will also be without the NAA division. Guidance for the current period will be given when the third quarter figures are released on January 27.

So what will Marconi need to do in 2004 to continue its creep away from the financial doldrums? Geoff Bennett, chief technologist at Heavy Reading, says there's little prospect of new SDH business, as any deals the vendor may have hoped for in developing regions, such as Africa and the Middle East, are being snapped up by Chinese challenger Huawei Technologies Co. Ltd.

The main prospects for new business, believes Bennett, are further work from the U.S. government and additional sales of its access hub, which has already been snapped up by three Italian operators -- FastWeb SpA, Telecom Italia SpA (NYSE: TI), and Wind Telecomunicazioni SpA -- and by BT Group plc (NYSE: BTY; London: BTA) (see Marconi Gets Bigger in Broadband and BT Gets Tough With Suppliers).

And the edge of the network is where the action is, adds Bennett. "Marconi's access hub is a very interesting product, and Alcatel SA (NYSE: ALA; Paris: CGEP:PA) has shown how vital it is to have a good access product. There's an increasing need for products at the edge of the network that are intelligent and flexible."

But having a good product is not enough, warns Heavy Reading's man. "You need to have the right product at the right time to win long-term deals with the major carriers. Marconi was lucky that it had its access hub put through the testing mill by BT just when [BT] needed that sort of product for its 21st-century network."

The company has landed some U.S. federal business for its massive BXR-48000 multiservice switches, but Bennett says the dark horse for more business is Marconi's ViPr Virtual Presence System, a video- and audioconferencing unit. "It's a very slick product, and while it is most suited to the likes of the federal government at present, because it requires 20 Mbit/s of bandwidth between locations, in time it could become a hit in the corporate sector."

Marconi confirms that the U.S. government has been the largest single customer to date for the ViPr unit, but will not say how many units have been sold. The vendor does, however, say that it has made a commercial sale of its BXR-48000 switch to "a leading European financial institution" that it cannot name, and that the product is also being tested by a number of carriers at present.

— Ray Le Maistre, International Editor, Boardwatch

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