Following my article about XO’s layoffs last month and the outpouring of comments that followed from both insiders and outsiders, I have pondered what to say in followup. There are obviously strong feelings involved, and there are more than two sides. But from my point of view, XO spends too much time in the shadows relative to the assets they hold and I am not sorry for having briefly shined a flashlight back in the cave. But where is it that XO can or should go from here?
To answer that question properly, one must understand how they got here. How did a company with 9000+ miles of choice metro fiber get itself into a position where it struggles to maintain 10% EBITDA margins nearly a decade after the last bubble popped? For those who follow the stories of this sector, it is possible to feel the personality of the true leadership as it runs through each company and its story – both the uplifting and the challenging parts. Level 3’s optimistic, grand strategic vision which sometimes outpaces reality on the ground – it pervades the company but seems to come directly from Jim Crowe. TW Telecom’s no-nonesense, meticulous, but highly risk-averse approach similarly seems to filter down directly from Larissa Herda. Paetec finds value everywhere, fiber, fiber-light, energy, VARs, fixed wireless – and seems to enjoy multitasking to try them all, just as Arunas Chesonis himself seems to. None are necessarily wrong, that comes down to details of implementation. But what about XO? What sits at the core of its corporate personality?
I would argue that it is Carl Icahn himself. It‘s Icahn’s multidirectional manic energy, the relationship between CEO and Board of Directors he subscribes to, and and the forceful, combative style that he specializes in. That’s where XO’s corporate personality derives from whether he means it to or not; it bleeds through despite the fact that he says he is barely involved. At XO, there’s always some grand effort going on to preserve or flesh out the value of some subset of the company’s assets, whether it be pouring piles of cash into NextLink to preserve unproven spectrum, lighting those longhaul dark fiber IRUs and entering the wonderful(?) wholesale bandwidth market, the Ethernet-over-copper initiative to make more of their central office presence, and most recently this aborted assault out of the blue on the Fortune 1000 market by an SME-focused company. Some of these plans have worked out better than others, obviously. But it all has the feel of an über hedge fund manager with too much influence over company decisions, one who doesn’t understand the nitty gritty of telecom and fiber and lacks the necessary knowledge or insight to have it taken apart and put it back together again like Bill LaPerch did at AboveNet.
From talking to many from the company, both happy and angry, first I’d like to say that there are and have been many, many good people there who have fought long and hard for the company’s success. For better or worse, they have believed in the future(s) they have been sold, and that includes the group who purportedly came in from Global Crossing as a major part of the national accounts effort. There is lots of misdirected finger pointing, though. Margins don’t stink because the sales team has the wrong people (again and again) or because a group of engineers need to be consolidated from two locations into one, or even because a manager here or there isn’t up to the job. They stink because high level decisions have consistently failed to match up with the assets on the ground. All else derives from that disconnect, and the layers in between bear the brunt of it each time.
As both chairman and majority shareholder, Carl Icahn can and will do as he likes. He’s undeniably a brilliant guy – one doesn’t get to be a self-made billionaire any other way. But at some point he’s surely going to realize that he doesn’t really understand telecom or fiber; they just don’t respond to his methods. Eventually it will surely dawn on him that he’s wasting his time managing these assets the way he has over most of the last decade. But what reasonable choices does he have going forward? He could hire someone who does understand fiber and telecom and back off completely, or he could sell or trade the assets to an existing player with a proven track record and focus his own efforts elsewhere. But until then, I think there is little anyone can do to break the cycle.
So now we sit and watch shareholder lawsuits smolder while the company’s cash dips below $100M as it inexplicably forswears long term debt in favor of equity despite a stock price hovering in the neighborhood of, as a recent commenter suggested, a can of Coca-Cola. In a post a week or so ago, I said there is a limited pool of talent with a proven track record of knowing what to do fiber assets. What do you think these guys and gals would do with XO if they had it? One thing is clear though： whatever happens, Icahn intends to get a decent return on his investment or the status quo will continue to prevail.
Ok, that was more than a few words, but anyway…
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Categories: CLEC · Financials · Metro fiber
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You are being unusually kind to a hypocritical dictator, a do as I say not as I do leader, one who has manipulated markets as well as judges in conjunction with the criminal thugs who remain part of his cabal.
http://www.deepcapture.com/michael-milken-60000-deaths-and-the-story-of-dendreon-chapter-1-of-15/
Perhaps one does not move a dragon by swatting its snout with a rolled up copy of Rolling Stone, one moves a dragon by convincing him there’s a better spot over yonder?
Swatting the dragon on the snout is your job! 🙂
From the day “That Man” and his goon police censored me from his blog while attempting to understand his blatant hypocrisy, I swore to expose him wherever and whenever I could to whoever would listen regardless of place or time.
Besides, I hold nearly TWO CANS of COKE to this DRAGON’s ONE at least in the telecom space! 🙂
The best place for trouble makers like him, is The Big House with Madoff! Society and investors at large will be best served on the day that that happens!
Rob, when you talk about the dismal EBITDA margins of 10% you neglect to mention the real reason as to why they are so poor, accounting manipulation. As taken from the latest shareholder lawsuit.
41. EBITDA was intentionally depressed in the following manner. The Audit Committee changed the accounting policy in place at the time the 2003 Credit Agreement was negotiated. This change related in particular to XO’s policy for accounting for certain labor and installation expenditures and revenues associated with linking new customers to XO’s network. Under XO’s new policy, XO no longer capitalized labor and network-installation expenses over time. Instead, those installation costs were expensed in the period in which cost were incurred.
42. At the same time, XO implemented a policy of deferring recognition of the revenue associated with new customer installations and electing to amortize that revenue over the term of the customer’s contract. Thus, unlike the expenses associated with new customer installations, which XO deliberately elected to expense n the period incurred, the customer fees associated with those same installations were deferred and recognized over the estimated three year contract duration. Defendants knew or should have known that expensing costs but amortizing related revenues would result in materially understating XO’s reported EBITDA.
43. Not surprisingly, these accounting changes resulted in an increase in XO’s selling, operating, and general expenses in 2003 as compared to 2002 under the old accounting policy. Partly as a result of that change, XO’s SG&A as a percent of revenue for year ended December 31, 2003 was 61% – one of the highest percentages in the industry and twice as high as XO’s most comparable competitor – Time Warner Telecom, Inc.
44. XO’s changed accounting policy was not only illogical, it was and remains inconsistent with the accounting policy followed by most of XO’s industry peers and competitors. The changes in XO’s accounting policies negatively impacted EBITDA and resulted in XO reporting EBITDA materially lower than its actual results.
What would EBITDA look like if they used the same accounting for rev and exp as their peers?
Is XO unique and captivating, or just yet another CLEC dying? This one may be sloweset/last but i don’t see any difference from the two dozen other corpses?
Let’s consider Occam’s Razor: The CLEC model of re-selling OPNE (other people’s network elements) simply doesnt work.. never did.
the couple of successful survivors (e.g., TW) don’t rely on RBOC re-sell and in fact go out of their way to invest money into laterals and on-net locations. The rest of the PSTN CLEC crowd (allegiance, xo, focal, ICG, BRW, ELI, Integra, Expedius, McLeod et al) have either died once or several times. Not sure if they have burned hundreds of billions or a trillion but either way they are likely a bigger disaster combined then Enron and smaller than sub prime mortgages
…Paetec is an OPNE (in the truest sense) and has posted positive cash flow for upteen quarters in a row…
TW leases 80% of its last mile from OPNE, says it right there in their financial disclosures.
Anon…XO does not rely on RBOC/ILEC as much as you state. Some markets do, and you may live in such a market. But generally we (yes, I work for XO) deliver via XO fiber, unless we are doing remote site/T1 level, which are almost always ILEC delivered. 90% of my clients have my fiber to their building. Check your facts.
“…90% of my clients have my fiber to their building…”
Then… how can XO margins be so low??
Because they account for revenue and expenses in a way that severly depresses margins as the lawsuit’s show. While there margins would by no means be best in class they would be much better than how they currently appear. There is a lot more to do with XO’s performance than poor management, one just needs to look behind the curtain at Ichan’s shenanigans.
The margins are so low because they absolutely have to whore out their pricing to get a sale. They have 0 competitive advantages over the LECs. They do not offer any products/services that are the least bit unique. I am interested to see what Icahn does in the coming months.
Anon-Also,
As a former XO employee, who knows the network and customer base quite well, I can definitevely say that you are full of “it” in saying that most of XO’s customers are on-net to their fiber. You seem to be extrapolating from your market/niche to the entire company.
So while you may personally only sell fiber fed connectivity in Nashville or Salt Lake to “Enterprise” customers, the vast majority of XO’s roughly 90,000 customers are on T1 or NxT1 circuits, and the last mile portion of those are the LEC’s copper assets.
Also, my experience is that XO has not typically been price competetive and loses a LOT of deals that are competetive solutions, because the pricing (margins) are way out of line, which , in many cases is driven by loop costs. The finance pricing model breaks down very quickly once you move outside of the 40 or so Metro market area’s with actual Plant assets and on-net CO’s. You know, as in “Green, Yellow, Red” zone ?
To be fair that situation has been changing in the past year since the GX gang took over, as they are much more aggresssive with regards to pricing.
keep up the rah rah spin though, it’s kind of funny!
OX
OX…my comment was a reply regarding the sweeping generalization made by Anon. His comment was incorrect by stating that we rely on OPNE more heavily than we do, and lumps us in with carriers that were pure/predominantly resell. No carrier will light fiber for T1 or even NXT1 level service. We ALL use Type2 ILEC for T1 level. All of us. Learn the industry.
My sales generally consists of 50% or more of 10m/100m/Gig/10Gig level service, all delivered via XO fiber.
Not rah, rah..just stating facts. Seems several folks are a tad too filled with bile. XO has it’s ups and downs, just like every carrier. Calm down.
If you really want to get technical….its technically Level 3’s fiber not XO’s
Thanks for your reply. I think you aren’t quite right about XO’s alleged independence from ILEC resell. First of all, XO bought Allegiance which was almost entirely a user of ILEC assets. Also, while you may be correct that XO tries to use it’s own fiber for larger data pipes, historically they sold a lot of PSTN circuits. Often either the “last mile” and/or the rinse that go from CO to CO are owned by ILEC. If I am mistaken and all of XO’s revenue is “on-net” then their ebitda margins suggests that they are awful, awful managers of assets (recall that building out owned fiber assets his the balance sheet, not the P&L).
I will turn this around – if I am not up to speed and you are, why is XO such a perennial laggard???
You must be in Nashville or Memphis.
It is funny you mentioned Nashville. They lease alot of Dark fiber in Nashville from Level 3 on the Telcove assets.
XO has a very extensive network in Nashville. Are you sure about them leasing metro fiber in Nashville?
They are best case… Smart buyers. But McLeod assets went bk twice already. Paetec is the (proverbial & actual) 3rd owner who makes money
Does anyone know:
1) How does XO’s pricing compare to its peers? Is it really that much lower?
2) Any ideas on churn? (I know the company doesn’t say anything about this… but some of you might have some ideas)
3) Bottom line… how good is XO’s revenue? Obviously not as good as TWTC but definitively not too far from Paetec’s (Paetec is just much more competent at turning a profit from similar revenue). Am I missing something? (other than Icahn)
Pricing is on par with its peers. They will get aggressive when they need to just like every other CLEC. Not sure on churn, but I would think they again are right there with the rest of the CLEC’s. Aside from Ichan keeping the company down for his own benefit, I just don’t believe they have capable management like Paetec, TW, Nuvox, Integra, etc.
Thanks. Just what I thought: 1) XO’s management is probably the most inept in the industry and 2) XO’s revenue (and assets) would have quite a bit more value in the rights hands
I would love to see Paetec buy them out. It would be a perfect fit.
1. As an IXC with very little metro, XO gives a piece of every sale to a metro company.
2. Due to poor process and management, this piece usually falls to the LEC rather than a competitive CAP.
3. This high metro price forces XO to lower their own Gross margin to keep the deal in play.
4. XO has poor talent in sales and management. (And when they DO find talent, they don’t keep them.)
5. Icahn is a negative when it comes to valuing XO because he doesn’t play well with others.
With the anti-Level 3 sentiment for the past 5 years, you would think they could have turned into the 800 LB gorilla. Instead they end up as gorilla dung.