Infonet 2003 Loss Skyrockets

EL SEGUNDO, Calif. -- Infonet Services Corporation (NYSE: IN), a leading provider of value-added global communications services, today announced results for its fiscal year 2003 and the fourth quarter ended March 31, 2003.

Total revenue for fiscal 2003 was $654 million compared to $646 million for fiscal 2002. Fiscal 2003 revenue includes an incentive fee that Infonet earned in connection with the completion of a European outsourcing agreement, of which $74 million was recognized and $57 million was collected in cash during fiscal 2003. Revenue for the fourth quarter of fiscal 2003 was $166 million, compared to $159 million for the fourth quarter of fiscal 2002, an increase of 5%. Fourth quarter revenue includes $17 million of the incentive fee.

Core revenue (footnote 1), excluding the $74 million incentive fee, increased 10% in fiscal 2003 to $552 million from $500 million in fiscal 2002. Core revenue for the fourth quarter of fiscal 2003, excluding the incentive fee of $17 million, was $149 million, versus $131 million in fiscal 2002, an increase of 14%. Core revenue growth reflects continued demand for Infonet's value-added services. Core revenue will represent 100% of revenue going forward, based on our current plan.

Expenses: To provide greater visibility into the relationship of variable expenses to total expenses as well as revenue, we have reclassified our expenses. Expenses are now classified into five expense categories, two of which fluctuate directly with our revenues and three other operating expense categories which are fixed or can fluctuate irrespective of our revenues. The two variable cost categories are costs related to all services and local access variable costs. We believe this reclassification will better present our cost structure. In the case of local access costs, the reclassification allows the consolidation of variable access costs from multiple expense categories into one category.

Total expenses for fiscal 2003 were $701 million, compared to $670 million a year ago, an increase of 5%. Total expenses for the fourth quarter increased to $177 million from $164 million a year ago, an increase of 8%.

Communication Services Costs: Communication services costs decreased $54 million, or 34%, from $156 million in fiscal 2002 to $102 million in fiscal 2003, primarily as a result of the completion of the European outsourcing contract. Communication services costs, which are not associated with local access costs, include both country representative compensation and support compensation. The country representative compensation was previously reported in the country representative compensation category. The support compensation expense was previously reported in the selling, general and administrative category. Communication services costs excluding outsourcing services increased $11 million, or 15%, from $76 million in fiscal 2002 to $87 million in fiscal 2003. The increase is related to an increase in revenue.

Integration and Provisioning Costs: Integration and provisioning costs increased $9 million, or 5%, from $162 million in fiscal 2002 to $171 million in fiscal 2003, largely due to increased integration and provisioning revenue. Integration and provisioning costs include expenses related to the provisioning of the "last mile" whereby Infonet installs and manages leased lines and customer premise equipment at the client site to enable access to The World Network. Integration and provisioning costs excluding outsourcing services increased $36 million, or 28%, from $129 million in fiscal 2002 to $165 million in fiscal 2003. The increase is primarily related to an increase in revenue. Integration and provisioning costs as a percentage of the local access portion of consulting, integration and provisioning revenue, excluding outsourcing services, was 97% in both fiscal 2002 and fiscal 2003.

Bandwidth and Related Costs: Bandwidth and related costs increased $39 million, or 35%, from $110 million in fiscal 2002 to $149 million in fiscal 2003. The increase was primarily due to a write-off of $41 million in bandwidth assets during the first quarter of fiscal 2003. Bandwidth and related costs are primarily comprised of leasing and amortization expenses associated with network circuits. Excluding the write-off, bandwidth and related costs decreased by $2 million in fiscal 2003, reflecting the fact that Infonet is able to leverage its network as core revenue grows.

Network Operations: Network operations expense increased $22 million, or 21%, from $102 million in fiscal 2002 to $124 million in fiscal 2003, including approximately $14 million in increased expenses associated with the support of transitioned European outsourcing agreement clients. Excluding this amount, the increase was $8 million or 7%. Our network operations expense includes costs associated with our network management, operations and support activities. These costs include personnel, occupancy, maintenance, equipment depreciation, outsourcing costs and other network related costs.

Selling, General and Administrative: Selling, general and administrative expenses increased $16 million, or 11%, from $140 million in fiscal 2002 to $156 million in fiscal 2003, primarily due to bad-debt expenses caused by the bankruptcy of our resellers. We have rarely incurred bad-debt expenses in the past. Excluding the bad-debt expense of $6 million, SG&A increased by 7% for fiscal 2003. Selling expenses consist primarily of personnel costs and incentive compensation related to our consolidated country representative sales force, as well as costs related to providing centralized sales and marketing support for our non-consolidated country representatives.

Depreciation and Amortization: Depreciation, amortization and asset write-offs for fiscal 2003 were $118 million. Excluding asset write-offs, depreciation and amortization charges were $77 million in fiscal 2003, up $1 million from the previous fiscal year. Depreciation and amortization for the fourth quarter of fiscal 2003 totaled $19 million, a $1 million decrease from that of the fourth quarter a year ago.

Operating Income, Net Income, EPS: Operating loss increased from $25 million in fiscal 2002 to $47 million in fiscal 2003. Infonet's operating loss for the fourth quarter of fiscal 2003 totaled $12 million. This compares to an operating loss in the comparable quarter last year of $5 million.

For fiscal 2003, Infonet recorded an income tax charge of $178 million compared to a tax provision a year ago of $2 million. The 2003 non-cash charge included approximately $182 million booked in the fourth quarter of fiscal 2003 to establish a valuation allowance against the Company's net domestic deferred tax assets.

Net loss for fiscal 2003 totaled $220 million, or $0.47 per share. In fiscal 2002, the Company recorded a net loss of $13 million, or $0.03 per share. Net loss for the fourth quarter totaled $196 million, or $0.42 per share. In the year-ago fourth quarter, the Company recorded a net loss of $4 million, or $0.01 per share.

Extraordinary Item - Debt Repayment: During the latter half of fiscal 2003, Infonet repaid all of its outstanding debt - $102 million, including $21 million of mortgage debt and $81 million under its $250 million credit agreement. The Company recorded an extraordinary expense of $5 million, which represents unamortized debt issuance costs and other costs associated with the debt payoff and termination of the credit agreement.

Other Operating Highlights

Capital Expenditures: The cash outlay for capital expenditures for fiscal 2003 totaled approximately $45 million, compared to $172 million in fiscal 2002. The cash outlay for the fourth quarter of fiscal 2003 was approximately $9 million compared to $14 million for the fourth quarter of fiscal 2002.

Client Data: In fiscal 2003, Infonet added 672 new client service contracts, compared to 685 new client service contracts during fiscal 2002. Of the new contracts added in fiscal 2003, 343 were new clients and 329 represented additional sales to existing clients. During the fourth quarter of fiscal 2003, Infonet added 169 new client service contracts, compared to 125 new client service contracts during the fourth quarter of fiscal 2002. Of the new contracts added in the fourth quarter of fiscal 2003, 82 were new clients and 87 represented additional sales to existing clients.

Balance Sheet and Cash Position: At March 31, 2003, after repaying approximately $109 million in debt, Infonet's balance sheet reflected cash, cash equivalents and short-term investments totaling $429 million, compared to $518 million at fiscal year-end March 31, 2002.

Net cash generated from operating activities during the year was approximately $94 million, which included the incentive fee payment of $57 million. The cash outlay for capital expenditures of approximately $45 million, a new business investment of approximately $18 million, stock repurchases of approximately $12 million, and the debt repayment of approximately $109 million are reflected in the changes in our cash and short-term investments.

Operating cash flow for fiscal 2003 of approximately $94 million, less the outlay for capital expenditures of approximately $45 million, resulted in a free cash flow of approximately $49 million. Operating cash flow, excluding the benefit of the incentive fee, less outlay for the capital expenditures, resulted in near positive cash flow.

Stock Repurchase Program: Infonet's Board of Directors previously approved the expenditure of up to $100 million over 24 months to repurchase shares of the Company's common stock. Infonet repurchased approximately 6.2 million shares in fiscal 2003 for $12.3 million at an average price of $1.97 per share. As of March 31, 2003, Infonet had repurchased approximately 7.4 million shares since the inception of the program for $14.8 million at an average price of $2.01 per share.

Commentary

Jose A. Collazo, Chairman, President and CEO, said, "Infonet ended fiscal 2003 with core revenue growth of 10%, no debt and cash and short term investments of $429 million and core revenue of $552 million. This occurred during a year that saw bankruptcies of companies such as Worldcom, KPNQwest, Genuity and others.

"Demand for our services, as evidenced by new account growth in the Americas and the Europe, Middle East and Africa (EMEA) regions, continued strong in spite of various geopolitical factors. New clients increased by 23% to 139 new clients in the Americas and by 6% to 417 new clients in EMEA in fiscal 2003. New clients in Asia Pacific were 116 compared to 178 new clients in the previous fiscal year.

"Fiscal 2003 saw an introduction of new service offerings, particularly in the IP area, which is experiencing strong demand by multinational entities. Infonet's financial strength means that our new services introduction as well as improvements to many of our existing services continues even during periods of slow economic activity.

"Our core revenue per Infonet employee, excluding the impact of the $74 million incentive fee, was approximately $545,000 compared to approximately $521,000 in fiscal 2002, an improvement of five percent. Overall revenue per Infonet employee was approximately $645,000 in fiscal 2003 and approximately $672,000 in fiscal 2002, reflecting the decreases from the outsourcing contract. The core revenue per employee increase shows that we are able to improve the productivity of our personnel in a business that continues to experience price erosion of about 20%.

"Our operating results also reflected our continued investment in developing services and increases in our integration and provisioning costs, particularly increases in local access costs. We are taking steps to increase the coverage of our network and to deploy new technologies to reduce local access costs.

"With a strong balance sheet, demand for our services and a focused program aimed at improved margins we expect to continue progress towards our goal of generating after tax profits from our core business."