Q&A: AboveNet Communications
AboveNet sells Ethernet, wavelength, IP VPN, and fiber network infrastructure services to enterprises, Web-centric service providers, and domestic and international carriers. The company has a strong strategic focus on providing higher-end bandwidth Ethernet connectivity over its own network currently within and among 17 US metro markets and London. AboveNet has been rewarded for its strategy with an expanding customer base, impressive revenue growth, and rising operating income in recent quarters. AboveNet reported corporate revenue climbed 14 percent year-over-year to $100.7 million and adjusted EBITDA increased 19 percent year-over-year to $45.7 million in the second quarter of 2010. Combined metro and WAN service revenues -- which are predominantly Ethernet-related -- increased 20 percent year-over-year to $47.5 million in the quarter.
Heavy Reading: Over the past year, you recorded double-digit year-over-year revenue and adjusted EBITDA growth, increased cash and cash equivalents by 5 percent, reduced your debt by 6 percent, and expanded your network reach. How much of your progress do you attribute to AboveNet’s strategic focus and how much do you attribute simply to the compelling value of Ethernet?
Rajiv Datta: There is no question that there is a broad move toward Ethernet adoption because of the many features and values of this technology and that AboveNet’s success is partly a function of this market trend. However, we believe that we are addressing the most dynamic part of the Ethernet space in high-bandwidth services and that our specific focus on the features, technologies, and delivery model that address the needs of these customers is a very important factor in what we have achieved. We place a lot of value on the focus and discipline we have maintained on our strategy.
HR: About this time last year, AboveNet introduced the ultra-low-latency Agility Guarantee program. How have customers reacted to this program? Have you seen much demand for ultra-low-latency solutions beyond the financial market?
Rajiv Datta: The Agility Guarantee program has underlined our commitment to offering low-latency services, and customers have appreciated many of its key features, including an SLA with real teeth and the ability to tailor the SLA to the customer’s specific network. I think one of the most differentiated aspects of the program is that it is available across our metro services portfolio so that verticals that may not be as sensitive as the high-frequency traders can get superior latency performance for their applications as well. With the transition to more cloud-based services, we believe that the network will have a greater impact on the customer service experience, which will drive the need for better performance including latency performance. At this point, I am seeing greater awareness to latency more generally, but not yet at the level of sensitivity generally attributed to the financial vertical.
HR: We have seen other service providers rolling out competing low-latency offerings within and among New York City, Chicago, and elsewhere. What are some of the things that potential customers should look at when weighing the pros and cons of low-latency offerings from different companies?
Rajiv Datta: There is much to consider here. Clearly, the actual latency value is the driving force for most customers looking at ultra-low-latency solutions. This is affected most significantly by the actual length of the physical route, but there are real effects of equipment, network design, and specifically in the metro, delivery methodology. As customers look at the solutions available, they should consider the end-to-end latency they will achieve, which includes inter- and intra-city components. There are cases where the metro access component could be the determining factor in the overall result. I also suggest looking at SLAs carefully -- there are some that use one-way measurements while most customers are really interested in round-trip delay. Also, the latency you will experience can be impacted by the frame size of your data. Finally, customers need to be comfortable with the operational capability of their service provider especially when the ultra-low-latency service is a critical part of their business infrastructure. Certainly there are well-established players in this space, but we also see a number of newer providers that may warrant further scrutiny.
HR: At last year’s Expo, you mentioned that you are monitoring the improvements that are going to push 100-Gigabit technology into the network and that you believe your customer base will be among the first movers to take advantage of 100-Gig services. Now that we have the 100-GigE standard ratified and there have been early tests and field trials of 100-Gig DWDM and 100-GigE solutions, when do you think we will begin to see some operators strategically deploying 100-Gig technologies? When do you envision being able to offer enterprise customers a 100-Gig UNI service?
Rajiv Datta: I believe 100 Gbit/s will follow a similar curve to what we have recently experienced for 40 Gbit/s. Initial deployments will be driven by network operators that can justify its initial cost by other factors such as fiber exhaust. Note that 100 Gbit/s will only be relevant in this application when it results in greater system capacity for the operator and is not a spectrally inefficient solution. You are probably looking at mid 2011 for such initial deployments. At AboveNet, we are more excited about offering 100-GbE as a UNI service given our delivery model that is fiber-based and the types of customers we serve. It is probably technically possible to offer such a service even sooner because spectral efficiency is not the driving issue in typical private networks. However, I think that the cost of the solution will make it impractical in the near term. This isn’t just an issue of the cost of the transport solution, but also the ecosystem that needs to exist to support 100GbE including the cost of optics, router ports, etc... While I believe we will offer something in 2011, it may be 2012 before the ecosystem is ready to support a UNI service.
HR: Earlier this year, you shared a strategic vision that involved expanding your service reach through a combination of your own network investment and participation in Ethernet services exchanges. Can you provide an update on your network expansion and comment on the role you expect to play within exchanges?
Rajiv Datta: We are focused on offering high-bandwidth Ethernet services and are adding greater reach to better serve our customers in geographies that are important to them. We have made a number of announcements related to this including serving Miami, Denver, Paris, Frankfurt, and Amsterdam by the end of the year. We are also expanding our reach within our existing markets by investing in network enhancements and extensions that improve our capabilities and coverage area. Finally, we do recognize the need to use partner networks to solve reach issues in some geographies, and to make this easier, AboveNet has been a leading participant in Ethernet exchanges. We believe these exchanges can add real value once they reach a critical mass of service provider participation, which is something the leading exchange players are working hard to achieve.
HR: Thanks, Rajiv. I look forward to visiting with you in New York.
— Stan "EtherMan" Hubbard, Senior Analyst, Heavy Reading, and Chairman, Ethernet Expo Americas 2010
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