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ONI CFO Jumps to McLeodUSA

ONI Systems Inc. (Nasdaq: ONIS) today announced the departure of CFO Chris A. Davis, who's leaving to join a newly created turnaround team at McLeodUSA (Nasdaq: MCLD) (see ONI Shuffles Execs and McLeod Reports Results, Restructuring).

Davis, whose tenure at ONI Systems lasted roughly 14 months, is taking on a bigger title at McLeodUSA. She will become COO and CFO and join a newly formed executive committee. At the new job, she'll be rejoining ex-colleague Ted Forstmann, senior partner at Forstmann Little & Co., an investment firm that's also playing a key role at McLeod.

Davis and Forstmann worked together for several years at Gulfstream Aerospace Corp., where Davis worked as executive VP and CFO prior to joining ONI Systems.

On a conference call with analysts this morning, Forstmann praised Davis's work and expressed pleasure at having her help with the McLeod turnaround. "Chris was an enormous help to me at Gulfstream, and together we faced a number of operating challenges," he said. He cited Davis as an executive particularly talented at streamlining operations in order to achieve financial makeovers.

Back at ONI, several steps are being taken to cope with the loss of Davis, who had been with the company since May 2000 when she helped shepherd its IPO. First, Ken Burckhardt, VP of finance, will become interim CFO until the company finds a Davis replacement. At the same time, Rusty Cumpston has been promoted from executive VP of engineering and operations to a newly created job of COO. Cumpston has been with ONI Systems since 1998.

Ordinarily, the departure of a CFO meets disapproval on Wall Street, particularly if the exec's tenure is short. But ONI shares weren't hit too hard on the news. In morning trading today, they were trading at $23.17, down 0.31 (1.32%). McLeodUSA shares were trading at $2.33, down 0.49 (17.38%).

Some analysts downplayed the move. "CFO departure is clearly a negative, but should have no material impact on ONI's opportunities and performance in the optical networking equipment market," wrote analysts Jim Parmelee and Gregory McNiff of Credit Suisse First Boston in a note yesterday.

The analysts say "ONI's fundamentals remain intact," and they're maintaining a Strong Buy rating on its shares.

Indeed, today's news looks to be more signficant for McLeodUSA than ONI Systems. The ailing carrier today announced a sweeping reorganization. Besides the appointment of Davis, the reorg includes the promotion of Steve Gray, former co-CEO, to the position of president and CEO, and the formation of an executive committee comprising management and newly appointed board members, including Ed Breen, president of the Networks Sector of Motorola Inc. (NYSE: MOT); Dale Frey, ex-CEO of ad agency Young and Rubicam; and Peter Ueberroth, who owns the Pebble Beach Co. golf mecca.

McLeodUSA also has embarked on a complex restructuring plan, primarily aimed at regrouping the company's finances. Included is the reworking of the carrier's investment arrangements with Forstmann Little, as well as an equity infusion of $100 million from that same firm.

McLeodUSA announced early in July that it had drawn $175 million of its $1.3 billion Secured Credit Facility.

Execs say these moves and others will help McLeod raise its ailing financials. "This structure has worked well [in other firms}," CEO Gray told analysts this morning. And he expressed "relief" at having the team in place to "move McLeod to the next level."

Analysts on the call praised the moves, while questioning whether the carrier really can achieve its goals in the present environment.

The carrier announced second-quarter 2001 results today, including revenues of $473.6 million for the quarter ended June 30 -- a 43 percent improvement year over year. EBITDA (earnings before interest, taxes, depreciation, and amortization) was $34.2 million for the quarter, up 300 percent year over year.

McLeodUSA says its 2001 EBITDA will be $150 million to $155 million on revenues of about $1.9 billion. For 2002, the company projects EBITDA to be $300 million to $325 million on revenues of $2.1 billion to $2.3 billion.

- Mary Jander, Senior Editor, Light Reading
Titanic Optics 12/4/2012 | 8:00:14 PM
re: ONI CFO Jumps to McLeodUSA Here's hoping McLeod can rise up and take on the [lazy] RBOCs. In the long run, successful competitors pushing the RBOCs is better for the ONIs than any impact a CFO can make, as this push will help meet user demand for broadband access.
johnjohn 12/4/2012 | 8:00:13 PM
re: ONI CFO Jumps to McLeodUSA Titanic,

The real question is how demand for broadband access is there?
cfaller 12/4/2012 | 8:00:12 PM
re: ONI CFO Jumps to McLeodUSA Mary, I guess I'm not really paying close enough attention to McLeod: where are their financial problems?

They have plenty of cash, they're strongly EBITDA positive, they've got good customer growth. Why are they in crisis mode? Is there a massive cash burn rate that I'm unaware of?

cfaller 12/4/2012 | 8:00:12 PM
re: ONI CFO Jumps to McLeodUSA Bandwidth demand, especially in local services is growing solidly, in my opinion (15-20% overall, 25-30% in metro). Remember that McLeod is focusing on residential and small business services, where the market is still extremely underserved.

The original poster put it best: it is in all the equipment vendors' best interests to encourage and support competitive carriers, otherwise the whole telecom market will regress back to the monopoly growth rates of 5-8%. Those growth rates will hardly support the ONIs of the world...
Titanic Optics 12/4/2012 | 8:00:09 PM
re: ONI CFO Jumps to McLeodUSA There is an old adage in economics, that nothing is ever free. If a good is given away, with no monetary charge, the consumer will have to give something up, such as a long wait in line. So, while in the monetary sense, the good is "free", in reality it isn't really free because your time has a value to it as well, think: time is money. (Unless of course you enjoy waiting in line.)

Sure, the RBOCs may offer DSL at $50 per month, but you have to put up with them to get it. I have personally lost over 6 days of my life simply waiting for my local monopoly just to set up a voice line--God only knows how bad setting up a DSL line would be. Your real cost of a DSL line from an RBOC is much higher than the $50, because you have to put up with the RBOC.

If a capitalist firm is forced to give away a good at a price lower than it is willing to offer, the firm will not sell the good or it will sell a shoddy version. Government price controls often have this effect, as does rent control. So, what the RBOCs do, is simply not bother with DSL rollouts and many consumers don't bother.

At what price would the RBOCs both offer good service AND roll out DSL everywhere? Maybe $200 per month. Otherwise, they will 1) offer lousy service AND/OR 2) not roll out very aggressively.

RBOCs are sclerotic outfits that don't want to get into the game that computing did: lower dollars per cost-to-process-a-bit led to greater growth as new applications developed. The greater growth far outpaced the drop in price-per-bit and so the computer industry grew. RBOCs would just assume focus on high-priced T-1 lines to businesses, ignore pesky retail consumers, and be home by 5 pm. RBOCs want to return to the good old days of monopoly. (So would Lucent, Agere, and AT&T managers, but unfortunately for them this is nearly impossible.)

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