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GST Is On the Block

Light Reading
News Analysis
Light Reading
5/12/2000

VANCOUVER, BC-GST Telecommunications Inc. (http://www.gstcorp.com, Nasdaq: GSTX) has fallen on hard times.

GST's problems came fully to light Tuesday, when it unveiled its quarterly financials. Among other things, the report showed a net loss of $26.4 million for the first quarter. With cash on hand of less than $20 million ($16.8 million in cash and cash equivalents, plus a restricted cash balance of $3.4 million), things don't look good. In fact, the ailing CLEC may have less than three months to live in its present form.

Overall revenue for the quarter was $64.7 million, just a 4 percent improvement over last quarter, and 12 percent over the same quarter last year. And sale of new fiber facilities were down to $9 million from $16.2 million the previous quarter. In a corporate release, company officials said they were exploring possible protection under bankruptcy laws if the company runs out of money before finding a potential buyer or new financing.

In the wake of the news, GST's share price fell to a record low of $0.53 on May 11. (The price of shares have fallen steadily since March 15, when the issue was trading at $9.25.) On Friday, May 12, shares recovered $0.19 to close at $0.72. GST is among a handful of so-called next-generation carriers considered part of the advance guard of the emerging optical Internet. However, GST's troubles may be sending a signal about the risks of the aggressive expansion of carrier networks. GST has led the charge in putting much optical networking equipment into trials. Led by acting CTO Ben Peek, GST was the first carrier to put an all-optical subsystem from Optical Micro-Machines Inc. http://www.omminc.com into its live network (see Startup To Upstage Xros on All-Optical Switches). It has a multimillion-dollar agreement with Mayan Networks Inc. http://www.mayannetworks.com, whose gear will be rolled out networkwide by fall (if there's still a network!). GST also was early to trial optical gear from Avici Systems http://www.avici.com and Ciena Corp. http://www.ciena.com.

GST isn't the only alternative carrier facing depressing numbers. In its quarterly statement May 2, Williams Communications http://www.williamscommunications.com reported a mere 14 percent increase in revenue, and stated that it was in the red more than $1 billion. The loss included a loss to Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) of $14.5 million, plus a "loss before a change in accounting principle" of $96.2 million.

GST can't seem to pinpoint the cause of its problems, at least publicly. Topping the list, however, are a series of delays in filling customer orders for network buildouts. Some of these involve other carriers: GST has strong alliances with Williams, to which it sold $62.5 million worth of conduits in June of 1999, and Covad Communications http://www.covad.com, which sells its DSL services in GST's network. Then there's Level 3 Communications http://www.level3.com, with which GST is building networking facilities in the Western U.S.

A GST spokesperson, Scott Clemans, says he has no information on why these and other projects aren't panning out. "I don't know whether there is a problem meeting commitments on our end or whether there's a lack of payment or delays on the customers' part," he says.

Things certainly aren't going as planned: Late last year, GST decided to restructure its business to focus on data and Internet services, reducing its reliance on voice.

And business has gone downhill since then. In January, CEO Joseph A. Basile, Jr., left, followed in March by CFO Dan Trumpush. Both executives declined to give public statements about their reasons for leaving. Basile has since been replaced by Tom Malone (ex-Pick Communications and Cable & Wireless), and Trumpush by Don Bloodworth, formerly of 3Com Corp.) Also in March, GST laid off about 135 workers, for which it had to pay $1.6 million in severance packages.

GST also has been plagued by ongoing lawsuits, many resulting from an unsuccessful attempt by GST directors to invest in a Mexican telecom firm in 1998. While it is not clear how much the litigation has affected GST's balance sheet, it couldn't have helped.

Does GST have a rescuer? Topping the list of possibilities are Covad and Williams. But Covad had no comment on a possible acquisition at press time. And Williams did not return phone calls.

-- by Mary Jander, senior editor, Light Reading http://www.lightreading.com

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