NEW YORK-Aided by a federal regulatory regime that has leveled the playing field for newcomers, broadband telecommunications competitors are coming on strong in their efforts to wrest business customers from incumbents.
“There are significant opportunities, a $100 billion business marketplace that broadband is targeting with local, long distance and data,” said Ken Hoexter, telecommunications analyst for Merrill Lynch & Co. Inc.
“They are becoming full-service providers of bundled services, going beyond local and long distance into data: Web hosting, e-commerce and other Internet services.”
Hoexter announced Feb. 10 during a conference call that Merrill Lynch had initiated coverage of 15 wireline and wireless competitive local exchange carriers. The investment bank expects these companies collectively to experience in 2000 a 71-percent increase in revenues, reaching $8.4 billion by year-end.
Gross profit margins for first-generation CLECs, including Winstar Communications Inc. and McLeod USA Inc., will jump 700 basis points, topping 48 percent in 2000, Hoexter said. One basis point equals 0.01 percent.
Merrill Lynch also expects the first-generation CLECs to become EBITDA-positive this quarter. Their second-generation counterparts, like Nextlink Communications Inc. and Allegiance Telecom, “should pass their EBIDTA loss through” this year.
EBIDTA stands for Earnings Before Interest, Depreciation, Taxes and Amortization. It is used as a measurement of cash flow, which investors regard as a benchmark for a company’s ability to pay stock dividends.
“2000 will be a telling year for fixed wireless. There is a lot of interest in this space,” Hoexter said. “Companies like Winstar and Teligent (Inc.) have taken large steps to roll out service.”
With a goal of broadened offerings, incumbents like SBC Communications Inc. and Bell Atlantic Corp. are more likely to joint-venture with the CLECs than to buy them, he added. New broadband carriers also may pursue acquisitions to expand their services.
In January, Nextlink announced the acquisition of Concentric Network Corp., “which defines its data strategy and gives it a toehold internationally,” Hoexter said.
Merrill Lynch acted as financial adviser to this transaction.
Nextlink, founded by Craig McCaw, “owns a complete set of last-mile broadband solutions, including local fiber, fixed wireless and [digital subscriber line],” he said.
Most of the 15 companies in Merrill’s broadband coverage group are fully funded for at least the next 18 months. However, Hoexter said he does expect some of them to seek private equity financing this year.
Therefore, the risks these newcomers face have less to do with capital raising than with other milestones they must reach to execute their plans successfully.
“They must be able to provision services and [build] back offices that are scalable and electronically provisioned with [Internet service providers],” he said.
“They need an end-user sales force that retains customers, and they badly need interconnection, the electronic bond with the [regional Bell operating companies].”
