Earnings reports

Williams Winding Down?

Could Williams Communications Group (NYSE: WCG) be the next telecom services company to file for bankruptcy? That was the talk on Wall Street after the company issued its fourth-quarter earnings call this morning and announced that its banks have warned of a possible default on its credit agreement (see Williams Reports ).

Williams refuted the claim that it's headed toward bankruptcy, but agreed to submit a restructuring plan of its balance sheet to its lenders by February 25. The company wouldn’t reveal what the restructuring would involve, saying that it would disclose more, along with its guidance for 2002, on a separate call on February 13. Observers, however, say the company will probably try to sell more non-core assets first but that, in the end, bankruptcy seems inevitable.

“I would imagine that the restructuring will involve debt for equity with the bonds,” says RBC Capital Markets analyst David J. Bank. “There’s a pretty good chance that bond-holders will end up owning the company."

Such a scenario would amount to a takeover of the company and would likely render its common stock virtually worthless, which is what happened at Global Crossing Ltd. (NYSE: GX) (see Global Crossing Falls Overboard).

Williams, however, denied that it intended to seek bankruptcy court protection, blaming the recent negative developments in the overall industry for the banks' sudden mistrust of its abilities to follow the terms of the credit agreement.

Executive vice president and CFO Scott Schubert said on the call that he expects Williams to be successful in lowering its debt levels, which stood at $5 billion at the end of the third quarter.

"In the past, we’ve always executed on what we’ve said we’re going to do,” he said. "I expect that at the end of 02 we’ll have less debt than at the end of 01, and that at the end of 03, we’ll have less debt than at the end of 02.”

In the meantime, the market pounded Williams stock, which lost nearly one-third of its value, dropping $0.42 (29.58%) to $1.00.

The company's claims apparently did not reassure a market already shaken by the recent bankruptcy filings by Global Crossing and McLeodUSA (Nasdaq: MCLD) (see Global Crossing: Telecom's Enron? and Carrier Pile-Up Claims McLeodUSA ) -- not to mention the plummeting stock of Williams competitors like Level 3 Communications Inc. (Nasdaq: LVLT), Qwest Communications International Inc. (NYSE: Q), and WorldCom Inc. (Nasdaq: WCOM).

In response to the call, Kaufman Bros. LP downgraded Williams’s shares this morning to Accumulate from Strong Buy. Vik Grover, the analyst who wrote the note, said he still believes Williams is a good company, but that with the concerns over default conditions, along with the lack of 2002 guidance and the plans for restructuring the company’s balance sheet, a downgrading was necessary. Kaufman Bros also placed its Williams price target under review.

"This debt issue is suffocating not just the company, but the whole space," Grover says. “It’s really disappointing what’s happened to the industry. It’s almost unstoppable. Another soldier appears to be in the hospital."

The good news for Williams today was that the company managed to meet its fourth-quarter guidance by increasing revenue and its customer base and reducing its net loss. Still, few observers believe the numbers will help the company avoid a bankruptcy filing.

The company reported total revenues of $330.3 million for its fourth quarter, ended on December 31, 2001, up 11 percent from the third quarter, and 28 percent from its fourth quarter a year ago. At $302.8 million, network revenues were also up 11 percent over last quarter, and up 36 percent over the year-ago quarter. Williams had predicted that the network revenue would grow by 10 to 20 percent quarter-over-quarter.

With 353 customers, the company reported a 20 percent growth in its customer base from its third quarter. Company officials also hinted that Williams would be announcing a major new customer in a couple of days. The customer, observers say, is probably WorldCom.

In addition, the company’s net loss has continued to decline. For the fourth quarter, Williams reported a net loss of $372 million, or 76 cents per share, down from $546 million, or $1.18 a share in the same quarter a year ago.

While the company’s EBITDA (earnings before interest, taxes, depreciation, and amortization) improved 43 percent over last quarter, with a loss of $12.8 million, down from a loss of $22.5 million, observers point out that these improvements didn't arise through improvements in gross margin -- which declined during the quarter -- but through substantial SG&A expense cuts.

“We think this trend line, though not necessarily significant, could raise doubt as to the company’s EBITDA trajectory,” Kaufman's Grover writes in his note.

“They appear to be hitting guidance,” Grover says. “But their stock is still melting. People are most interested in what’s happening with the debt.”

— Eugénie Larson, Reporter, Light Reading
Cyras Forever 12/4/2012 | 10:59:13 PM
re: Williams Winding Down? "In response to the call, Kaufman Bros. LP downgraded WilliamsGÇÖs shares this morning to Accumulate from Strong Buy..."

This is the next area the SEC and Justice Department might find interesting in exploring - analysts recommeding Strong Buys on dying companies...I laughed hard after these guys "Downgraded" the stock to "Accumulate"
flanker 12/4/2012 | 10:59:13 PM
re: Williams Winding Down? Williams is falling through the magical $1 barrier.
vapa 12/4/2012 | 10:59:11 PM
re: Williams Winding Down? Look at all these companies' financial numbers like E/S and P/E ratio! AT&T, Worldcom, C&W, Williams, Qwest, Level-3, MFN, etc.... It makes your head spin! Either negative earnings or high P/E ratio....

And then.... Take a look at ILEC's. They are the healthies of all kinds of carriers. Who said to learn how to love your ILECs? I hear ya!
HarveyMudd 12/4/2012 | 10:59:10 PM
re: Williams Winding Down? Like QWEST, Williams communication is busy in testing telecom from start-ups. Its wastes a significant portion of its resources in testing the equipment from other companies.

Williams chances of succeding is very slim.
gea 12/4/2012 | 10:59:09 PM
re: Williams Winding Down? The thing that continues o baffle me is why a company like Williams would be in this situation. Have they los customers? Has th amount of traffic on their networks gone down? Somehow, I suspect the answer to both of these questions is "no". The real answer to the industries woes may be in the following statement:

"This debt issue is suffocating not just the company, but the whole space," Grover says. GÇ£ItGÇÖs really disappointing whatGÇÖs happened to the industry. ItGÇÖs almost unstoppable. Another soldier appears to be in the hospital."

In other words, Williams and the other carriers over-leveraged thenmeselves, betting on growth that didn't occur. Was this a reasonable mistake? Perhaps...if tremendous growth had occurred, the carriers unprepared for it would have simply died. Is the problem, then, that they believed in the hype? Possibly, but then again companies like William that had sweet-heart stock deals with the likes of Sycamore had a lot of reason to want to believe in growth.

It's a funny situation then. It would appear that there's no fundamental reason why the industry should be doing this badly. It seems to be paying more for its speculative sins of the past rather than suffering from a bad economy per se.

But thn again, does anyone out ther have any real numbers to show that actual shrinkage has ocurred?
rafaelg 12/4/2012 | 10:59:09 PM
re: Williams Winding Down? Harvey,
I can't resist, and I'll probably regret responding to your posts whilst giving you some air of credibility...

How in the H__ll, would anyone do beta testing on any equipment and how do you know how much resources they allocate to such?

I just lowered myself...
Daveman 12/4/2012 | 10:59:08 PM
re: Williams Winding Down? Gea,

I agree. I think Williams is one of those companies that were only designed to run on growth and hype. A stodgy old company like Verizon looks pretty good by comparison now...

If Williams goes down, who are they going to affect the most? Anyone have a clue as to their largest creditors? I was surprised to see GX owing Lucent $130MM... Is this going to be another nail in Lucent's coffin? It looked like Lucent might rebound but Lucy seems to have a few hands around her ankles trying to bring her down...
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