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WorldCom's Ebbers Stands Firm

Global communications provider WorldCom Inc. (Nasdaq: WCOM) saw its stock skyrocket this morning after the company refuted rumors that have been circulating that it is on the verge of bankruptcy. Reporting its fourth quarter and annual results, WorldCom announced that it has nearly $10 billion in available liquidity, including $1.4 billion in cash and cash equivalents.

In response to the announcement, WorldCom stock rose more that 15 percent in the first hour of trading today, jumping $1.05 to $7.74.

"To question WorldCom’s viability is utter nonsense,” Bernard J. Ebbers, WorldCom president and CEO, said on this morning’s conference call. “We continue to lead the industry with revenue growth... None of the rumors that have hatched in the last two weeks will change any of that.”

On the call, Ebbers also dismissed speculations that he might be planning to sell his stake in the company to repay personal loans, despite his current debt to the company of $198.7 million. "I have assets in addition to the company stock that are more than sufficient to cover my debt," he said. “I will continue to do what’s best for the shareholders."

A rumor that WorldCom’s two tracking stocks might be recombined was also denied. Ebbers said the company doesn’t feel such a combination would benefit either company. WorldCom stock tracks the data, corporate telephone, and international businesses, while MCI (Nasdaq: MCIT) stock follows residential long-distance telephone operations and dial-up Internet business. He said the MCI Group's dividend could realistically be maintained at 70 cents a share.

“I think there were just a lot of really bad rumors out there,” says Crédit Lyonnais Securities Inc. analyst Rick Grubbs. “This is no Enron. It went from the biggest story in the world to no story.”

WorldCom reported $5.3 billion in revenues for its fourth quarter of 2001, ended on December 31, up 7 percent from fourth-quarter revenues a year ago of $4.9 billion. Of that, data and Internet revenues grew 13 percent to just under $3 billion, and voice revenues declined 8 percent from the year-ago period to $1.6 billion. WorldCom’s cash earnings, before goodwill amortization, were $595 million, or 20 cents per share, while the company’s net income was $384 million, or 13 cents per share for the quarter.

“Their revenue numbers were just a little lower than anticipated,” Grubbs says. “We were looking for 15 cents. They said 13 cents.”

Although WorldCom did manage to break even on free cash flow, excluding a $200 million prepayment to one of the company’s largest network equipment suppliers, and reduce its debt by nearly $1 billion over the quarter, the company still reports a remaining debt of $24.7 billion.

Ebbers, however, said he wasn’t worried about the debt. “Our debt load is very manageable. We’re up to the task.”

For the year, WorldCom reported revenues of $21.3 billion, up 11 percent from the $19.2 billion in revenues for 2000. The company also announced that it had cash earnings of $3 billion, or $1.01 per share, for the year, and that its cash income was $2.1 billion, or 70 cents per share.

For 2002, WorldCom forecasts mid-single-digit percentage revenue and EBITDA (earnings before interest, taxes, depreciation, and amortization) growth, and is expecting earnings to be between 75 and 80 cents per share. Capital expenditure for the year is expected to drop to between $5 billion and $5.5 billion.

“We are expecting the economy not to get any worse,” Scott Hamilton, vice president of investor relations at WorldCom, asserted on the call, "But we’re not expecting it to get any better. We are certainly trying to be realistic in our numbers.”

— Eugénie Larson, Reporter, Light Reading
http://www.lightreading.com
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Belzebutt 12/4/2012 | 10:58:21 PM
re: WorldCom's Ebbers Stands Firm And what is this:

Ebbers also dismissed speculations that he might be planning to sell his stake in the company to repay personal loans, despite his current debt to the company of $198.7 million.

Excuse me? I didn't know you could do that, how do I apply for a loan from my company, I could use a low-interest line of credit...
Belzebutt 12/4/2012 | 10:58:21 PM
re: WorldCom's Ebbers Stands Firm Oh my how times have changed...
lightcreeping 12/4/2012 | 10:58:20 PM
re: WorldCom's Ebbers Stands Firm I don't think Nortel can afford to give anyone a loan anymore. They got in too much trouble for that.
alcaseltzer 12/4/2012 | 10:58:18 PM
re: WorldCom's Ebbers Stands Firm Excuse me? I didn't know you could do that, how do I apply for a loan from my company, I could use a low-interest line of credit...

First...become CEO....

It's pretty common for companies to loan executives cash to exercise stock options or to purchase restricted stock. In Ebbers' case, it looks like the classic "bought on margin" compounded by breaking the first rule of buying on margin - "Never meet a margin call."

From Feb 1/02 WSJ :

"Mr. Ebbers, who built the Clinton, Miss., company through more than 60 increasingly large acquisitions, borrowed the money in 2000 to help cover an earlier demand that he put up additional collateral for WorldCom stock he had bought on credit, or margin, before the company spun off its consumer long distance into a tracking stock."
DoTheMath 12/4/2012 | 10:58:17 PM
re: WorldCom's Ebbers Stands Firm From WCOM, Q balance sheets as of Sep 01 in
Yahoo Finance:
WCOM: Plant, Property and Equipment: $38 billion
Long term debt: : $30 billion
Net Tangible Worth : $8 billion

Q: Plant, Property and Equipment: $30 billion
Long term debt : $20 billion
Net Tangible Worth : $2.4 billion

The liabilities are FACTS, while the carrying value of the assets is a matter of OPINION. Have they paid for their switches, cross connects, routers (highly perishable) with long term bonds? If they are forced to write down their equipment due to technology obsolescence, both WCOM and Q are in deep trouble - their net tangible worth can easily be wiped by relatively smallish equipment write offs.

Can anyone shed light on how they finance their equipment purchases? What exactly is the mix of "Plant, Property and Equipment"? Is it mostly equipment, or a lot of it is fiber under the ground, trucks etc?
flanker 12/4/2012 | 10:58:15 PM
re: WorldCom's Ebbers Stands Firm WCOM Property and equipment:
Transmission equipment 20,288 22,053
Communications equip 8,100 7,313
Furniture, fixtures 9,342 11,007
CWIP 6,897 6,839
Acc Dep (7,204) (9,061)
Net 37,423 38,151

cash flow ~ $7bln
Debt: <font color="#FF0000">
CP $ 11
Floating notes 2001 - 2002 977
7.88%-8.25% Notes 2003 - 2010 3,500
Notes Due 2006-2011 2,000
6.25% - 6.95% Notes 2003-2028 4,600
7.13% - 7.75% Notes 2004-2027 2,000
7.13%-8.25% Debentures 2023-2027 1,435
6.13%-7.50% Notes 2004-2012 1,927
6.50% - 8.25% Notes 2004-2031 11,976
Intermedia 11.25% - 12.25%
Senior Discount Notes 2007-2009 665
Intermedia 8.5% - 9.5%
Senior Notes Due 2007 - 2009 614
Capital lease obligations
(maturing through 2017) 987
Other debt (maturing through 2008) 578
Total Debt 31,270



</font>
DoTheMath 12/4/2012 | 10:58:13 PM
re: WorldCom's Ebbers Stands Firm Thanks for the numbers, flanker. So equipment is a big part of the "Plant, Property and Equipment". Now, I have heard it argued that one reason the incumbent telcos move so slowly is their need to carry the old equipment on their books as long as they need to repay the debt on that equipment. That raises a fundamental question about the way this industry is set up.

Imagine if Corporate America were to pay for the IT infrastructure the same way that telcos pay for network equipment. We may still have to make do with 10 Mbps shared-hub ethernet and use 386 MS-DOS PCs, because the equipment/software is still being depreciated.

I can understand fiber/cable/twisted pair in the ground being depreciated slowly (and hence paid for with long term debt). I cannot understand why equipment would be paid for with long term debt when lasers, silicon and software are advancing at the present rates, essentially obsoleting anything older than 3-5 years.

The effect of obsolete infrastructure in telecom is even more pernicious. The telcos may be carrying armies of staff to care and feed old equipment (so as to justify their carrying value!) while the new stuff would take a lot fewer people. Paying for these armies of people is keeping service costs high.

The virtuous cycle of automation and productivity gains, leading to lower prices and exploding volumes, cannot happen with the current way telcos seem to be financing their spending.

This downturn may well be exposing this mismatch between the technological capabilities of the fast moving equipment industry and the obsolete financing structures of the telcos. Something has to give, and sadly, it is the equipment guys who are "giving" (or giving up) right now.

rjmcmahon 12/4/2012 | 10:58:12 PM
re: WorldCom's Ebbers Stands Firm This downturn may well be exposing this mismatch between the technological capabilities of the fast moving equipment industry and the obsolete financing structures of the telcos. Something has to give, and sadly, it is the equipment guys who are "giving" (or giving up) right now.
___________________________

Equipment vendors may do best if they heed the advice of Drucker.

"The innovative strategy consists in accepting that these realities are not extraneous to the product, but are, in fact, the product as far as the customer is concerned. Whatever customers buy has to fit their realities, or it is of no use to them."

Carriers have always depreciated their equipment over longer periods of time. This is their reality.

Equipment vendors and network owners who figure out how to support new technologies without impairing existing network assets will be solving a big part of the puzzle in my opinion.
DoTheMath 12/4/2012 | 10:58:07 PM
re: WorldCom's Ebbers Stands Firm Carriers have always depreciated their equipment over longer periods of time. This is their reality.

Equipment vendors and network owners who figure out how to support new technologies without impairing existing network assets will be solving a big part of the puzzle in my opinion.

----------------------------------------------

Point well taken. This is the reality, granted, but is this reality consistent with a fast pace of innovation? If not, perhaps the innovators should give up on this industry and focus their energies elsewhere.

A poor comparison may be to imagine what would have happened if we still have to use 386 and MS-DOS. The biggest "innovation" which accepted that reality would be the DOS memory-extenders! Smart minds would work on tricking the memory system. I have the uncomfortable feeling that DSL is exactly this type of innovation.

Not that the telcos "owe" anything to the innovator. The innovator has to accept this reality and either conform or seek his fortunes elsewhere.
rjmcmahon 12/4/2012 | 10:58:03 PM
re: WorldCom's Ebbers Stands Firm Perhaps the innovators should give up on this industry and focus their energies elsewhere.
_____________________

Call me crazy but when I feel like giving up I'll take a trip to a local hospital, where some are starting and others are leaving. I tend to prefer the newborn viewing area when I ask myself, "What opportunities will they receive from those who tread before them?" The innovator continuing seems like the only option to me.
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