XO Turns In a Nice Quarter

August 16th, 2010 by · 20 Comments

Following three straight quarters of declines, XO Holdings (news, filings) turned around and posted some nice numbers in this afternoon’s release, which as always came on the last possible day.  The prior few quarters had featured slower growth in broadband revenues that didn’t successfully balance churn in legacy services.  Both sources showed measurable improvement, however questions over the company’s cash levels and plans to raise money remain in place.  Here is a quick table summarizing XO’s performance for Q2/2010:

$ in millions Q1/09 Q2/09 Q3/09 Q4/09 Q1/10 Q2/10
–Broadband 189.5 195.4 199.9 209.8 209.8 220.0
–Integrated Voice 73.7 75.4 69.2 59.2 55.9 56.8
–Legacy TDM 114.6 115.7 112.9 106.8 103.8 106.8
Total Revenues 377.8 385.6 382.0 375.8 369.5 383.6
Cost of Revenue 220.0


217.7 212.7 208.5 218.9
SG&A 130.0 119.1 120.3 120.0 130.6 124.4
Adjusted EBITDA 28.1 37.1 44.1 43.3 30.6 40.5
Adj. EBITDA margin 7.4% 9.6% 11.5% 11.5% 8.2% 10.6%
Capital Expenditures 40.3 51.4 57.2 50.1 64.2 57.6

Revenue:  Broadband revenues surged 4.8% from the previous quarter, while integrated voice and legacy TDM managed to eke out gains as well. Revenues declined slightly from the same quarter last year, which remains the company’s high water mark.  We’ll have to see if they can maintain the surge into Q3 or not of course.

EBITDA:  Costs rose as well, but slower than revenue and therefore EBITDA rose to $40.5M.  That was good enough to raise the company’s adjusted EBITDA margin above 10% again, still lagging the sector (and especially those with lots of metro fiber) but returning to the double digits.

Cash:  That brings us to the question of cash, in that the company’s cash on hand fell to $66M.  Capex was $57.6M, which is consistent with prior quarters, and the company reiterated its need to spend capex on network projects.  They also reiterated their both their intention to raise money and their objections to it being in the form of high yield debt, though they will look at all options.

There’s only so long you can run a telecom company having $1.5B in revenue with cash levels below $100M, but I’ve given up trying to predict when they will make their next move.  The ebb and flow of working capital in the sector might help them maintain current cash levels throughout the second half while continuing to spend.  But why wait for the economy to dip again?

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Categories: CLEC · Financials · Metro fiber

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20 Comments So Far

  • Notrom says:

    If they do not wish to borrow long term & their stock is at $.60, what are their options ?
    Do they have non-core assets that can be sold ? Short term debt ?

    Responses appreciated !

    • Homer says:

      This company does not have any debt and could easily borrow very inexpensively. By threatening with some sort of absurd dilution, Icahn keeps the stock price low so that he gets a better deal from the minority shareholders. He has tried to buy the minority stake at least 3 times and he wants it cheap. Really, really cheap.

      We should expect another “offer” from Icahn very soon. Last one was 80 cents per share…. next one should be a lot more… uncle Icahn is dealing with quite a bit of litigation in here. This is all posturing in negotiating the final deal.

  • Anon says:

    I don’t follow how or why this was a “nice” quarter? Net losses, even at operating line? Explicit company warning that they need more capital to remain competitive,,,, but don’t favor / can’t operationalize the covenants (defined: “promises”) required by providers of debt. So suggestion is more equity to be offered (yes, a .60 cent stock can be diluted). Also, the Preferred equity shows up as liabilities on balance sheet – so GAAP must define it as such. Voice revenue is down (boring, presumably profitable) while broadband revs up (good but competes with cogent et al so unlikely to show growing margin). Capex number is substantial and likely drives rev stability/ growth. Good luck

    • Rob Powell says:

      Well, nice is a relative term here, given XO’s low margins there was no reasonable chance of profits. They grew nicely, moreso than most of their peers. But one quarter does not a trend make.

  • Anon says:

    On another note, did anyone see that former xo CEO Dan Akerson is slated to run (new, USA-owned) General Motors. Was this orchestrated Alice or the Tweedles ?

    • Anonymous says:

      Good choice GM. He took a good company Nextlink, made it into XO. Told the world they are going to be the next AT&T. Got laughed at by the industry. Tried to add a complete product suite to make them look like a player and overspent and mismanaged the process end-to-end. Burned through about $15 billion in capital. Then he and Nate Davis bankrupted the company and got out with their golden parachutes leaving the company in shambles. Good luck GM. Who the heck with the govt. or GM is responsible for picking this idiot?

  • Dave Rusin says:

    Sixty-cents a share says it all … Carl has it locked, there is no float — so its a stand-off.

    Why would anyone trade in this stock outside the minority holder who are holding shares to force Icahn to play his cards …

    • XO says:

      D&B has XOHO valued at $-144M! They have very poor credit. Icahn is going to make his move quick. The real question is whether selling the company off is what Icahn wants. By XO not being profitable, he gets a huge tax shelter–does he really want to lose that?

  • Fred says:

    How long does that tax shelter last? How long until it is exhausted and no longer of any benefit to Mr Icahn?

    • Homer says:

      Icahn will be able to use XO’s NOLs for a very long time (XO has well over 1 billion in tax assets).

      At this point (i.e. two years past the 08 refinance), Icahn can separate XO from its tax assets and keep them even if he sells the company. Exactly the same way Leucadia stripped the NOLs from Wiltel before it was sold to Level3.

      The issue here is how much Icahn should pay XO’s minority shareholders for their share of the tax assets… and how to split the proceeds from the inevitable sale of the company to a third party. Remember, Icahn does not want to hold on to this company forever. His plan from the begining was to take the tax assets for himself and sell the company to someone else. He is not in the telecom business, he is in the business of buying and selling companies.

      • fluids says:

        Homer – any sense of how long you think this willl take to play out? A difficult question to answer, given the history, but you are tracking this closely am I’m wondering what your gut feeling is ?


        • Rob Powell says:

          FWIW, it has already gone on far longer than I thought it possibly could.

        • Homer says:

          Agree with Rob, this has been going on longer than anyone expected. Even Icahn was probably surprised his “independent” board turned down his offers last year. After all, these people were handpicked to play along and had always done their part. Until last year.

          At this point I feel a new offer is imminent. All the cards are on the table and I doubt anyone would really want to put this in the hands of a judge. Just too much money to risk in a trial (regardless of the facts, this kind of trials are true crapshoots). The problem is, of course, negotiating a price with both Raynor (i.e. R2) and the class action attorneys. The Raynor situation is particularly complicated because of the Federal Mogul pissing match with Icahn. Those two have a lot more money at stake than just XO. That said, the end is very near. I really think we will have a new offer within a couple of months (if not sooner).

          • fluids says:

            Thanks Homer (and Rob). That sounds mildly encouraging.

            One other question that is actually rather an important one for a shareholder like me: would any deal cut with the litigants automatically flow on to the general shareholders (ie, those not part of this or any other class action suit?). Of course, this would only be a concern if Icahn goes down that route, as compared to making a general buyout offer as he had done previously.

            Thanks again, fluids

          • Homer says:

            Fluids: Any deal would include everyone. The class action litigation is on behalf of all minority shareholders, everyone has to be treated the same.

            Also, I don’t see the point of another offer without the blessing of the plaintiffs in the litigation. It would eventually come back right where this is now.

  • At what price?? says:

    That is the question. I can not see R2 or the class action settling for anything less than $2.25, the price XO was offered in 08 by multiple bidders.

    • Homer says:

      Once you assume the current stock price doesn’t reflect the true value of the company coming up with the value of XO is rather straight forward: you hire a banker to do a valuation and they tell you how much it is worth. Such valuation would have to take into account the recent efforts to sell the company. This is exactly what the independent committee of the board did last year and they concluded Icahn’s offer “substantially undervalued” the company. No idea by how much (but probably by a lot).

      Of course, there are many big and small kinks in here they have to work through (what to do with the 08 refinance, Raynor’s Fed Mogul ongoing litigation, who pays for all the llegal fees, etc…).

      They will work them out.. we should have an offer soon.

      • fluids says:

        Homer – thanks for all that. Great information.

      • Homer, so why says:

        Homer so why is this stock trading at $.60 when Icahn’s last offer was $.80 and then multiple bidders came in above $2.00 just before Icahn jammed the preferred deal down shareholders throats?

        • Homer says:

          In so many words XO is telling the market it plans to sell its chairman a gazillion shares of XO at some absurdly low price in order to raise cash

          There is a long way from threatening the minority shareholders to actually getting away with such self dealing transaction and dillution.. but this is still one hell of a threat… enough to keep the the stock price where it is

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