Fiber as an Economic Hedge

October 4th, 2008 by · 1 Comment

With the financial crisis frightening the heck out of nearly everyone, it is quite noteworthy to see a confident smile now and then from a telecom CEO. And in the last week, we've gotten two of them.

Dan Caruso over at Zayo managed to raise $35M of new debt in this economic hurricane and is probably planning to purchase more assets.  In a comment on this blog he indicated that the financial crisis will be a boon to those who don't have to tighten their cash on cash payback targets.  Over on Telecom Straight Shooter, Dave Rusin of AFS sees the current crisis within the parable of the tortoise and the hare, with the tortoise crossing the line at last.  Do these guys live in a bubble?  No, what they have in common is that owning their own fiber assets is a powerful economic hedge. Their customers are sticky, their competitors' customers are not, and they understand how to use the assets they hold.  They fully expect to grow their size of the pie at least as fast as the pie might shrink, and they know that storms eventually move on.

During Q2 earnings season, I watched carefully to find signs of economic weakness seeping into telecom. There was some at the SME level for fiber light providers PAETEC and CBeyond, but other than that not too much.  TW Telecom chimed in later with some weakness in the SME as well, customers they also lease lines to serve.  But the situation has clearly changed, and I fully expect to find the financial crisis to have done much more substantial damage to sales and growth rates in Q3.  Surely the market has been pricing in a disaster for the sector.  What I expect to see is that the middlemen bear the brunt, while the carriers with fiber in the ground weather the storm better (though still getting wet of course).  Will that be the case?  Is the situtation truly as dire as the markets say it is?  We'll see in a couple weeks.

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Categories: Financials · Internet Backbones · Metro fiber

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  • jeremy drane says:

    good post rob. tracking everyones results and assessing whos getting hit vs not will be a key theme for this q. at this point i believe LVLT will grow CNS @ 2.6% or $20M, with approp. 8 from euro, 8 from wholesale, 3 from cdn, and 1 for enterprise. i don’t see this to be that challenging considering that much of the credit crisis hit towards the end of Q3. furthermore, it’s not like customers are going to stop paying their bills for access to the internet or phone. living in a recurring model is a critical difference between us and others. actually im quite bullish the sector in general as we will see the winners rise up now.

    ps: zayo was able to get financing, so im sure their bankers did a deep dive and obviously got very comfy re the impact of the crisis on their business.

    jeremy.

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