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Networx Numbers Big for VZ, AT&T, Qwest

Raymond McConville
News Analysis
Raymond McConville
3/30/2007

The U.S. General Services Administration yesterday awarded its highly anticipated Networx Universal Contract to AT&T Inc. (NYSE: T), Verizon Enterprise Solutions , and Qwest Communications International Inc. (NYSE: Q). (See GSA Awards Contracts.) The contract covers ten years and is worth an estimated $20 billion.

The total value of the contract, however, may eventually prove to be worth more than twice that much. So just how can that happen, and how much money does each of these telco giants stand to earn?

First off, the three telcos haven't won a $20 billion pile of money. They've merely won the right to be exclusive bidders to each of the 135 federal agencies involved with Networx. It's still a big deal, but each telco still must bid against its competitors for the right to provide the services.

Another key point: None of the 135 agencies is required to participate, although many of the largest ones -- including Department of Homeland Security -- have indicated that they intend to. "Why wouldn’t they participate when we've got some great prices and strong companies offering a wide range of services all over the world?" asks GSA spokesman Jon Anderson.

The current contract, as it stands, is not worth a potential $48.1 billion, as has been reported. The $48 billion is a sky-high limit the government has set, should the terms need to be changed for whatever reason. "The higher figure is only something we would use if we discovered that we needed to rework the details of the contract," says Anderson.

Under the current terms, the Networx contract cap really is $20 billion. Combined with the upcoming Networx Enterprise contract award in May worth $20.1 billion, you're looking at a realistic cap of $40.1 billion dollars for the two contracts combined, as opposed to a whopping $68 billion number that was widely reported yesterday.

On the current, expiring FTS2001 contracts, Verizon earned revenues of $417.14 million in fiscal year 2006 while AT&T earned $176.5 million and Qwest $10.3 million, so the new contract represents a potentially significant revenue increase for the three telcos -- especially Qwest, currently the least profitable of the three companies.

However, Verizon, as the main incumbent government contractor, is most likely to retain the lion's share of the $20 billion, followed by AT&T and then Qwest. But Qwest has by far the smallest market cap out of the three, so any revenues gained from the contract would have a much more significant effect on its top-line growth.

"Verizon with MCI was already a government contractor as was AT&T, making the impact relatively neutral to these carriers, with the most positive potential impact expected to flow to Qwest," writes Raymond James Financial Inc. (NYSE: RJF) analyst Frank Louthan in a research note yesterday.

While Qwest has the biggest upside, it also has the biggest challenge as it will need to pick up market share against two giant incumbents.

Sprint Corp. (NYSE: S), also an incumbent government contractor, was left out of the new deal. "In our view, this is another in a series of performance failures that have afflicted the company in recent months," writes A.G. Edwards analyst Kent Custer, in a note released yesterday. "However the impact to the bottom line should be modest."

Shares of Sprint were off $0.11 (0.58%) to $18.89 in late afternoon trading on Friday.

— Raymond McConville, Reporter, Light Reading

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