Not long ago, I had the opportunity to talk once again with AboveNet's Chief Executive Officer, Bill LaPerch, who today makes a return visit to Telecom Ramblings' Industry Spotlight series. Few companies have weathered the economic storms of the last several years better than AboveNet, which resurfaced from near oblivion about two years ago and has been one of the best turnaround stories in the sector ever since. This year, they have eschewed (thus far) the spasm of M&A that has engulfed the metro fiber sector in favor of expansion into new markets, very solid organic growth, and a recently announced special dividend. With no further ado:
TR: High-bandwidth Ethernet continues to grow at a rapid pace. What are some of the current trends you are seeing?
BL: We see tremendous growth in the demand for high-bandwidth services. In fact, by 2014 over 80% of that demand will likely be for greater than or equal to 100 Mbps connections.
We have positioned the company to benefit from this growth, and you will continue to see progress from us related to our metro expansions in Europe and the U.S., as well as our high-bandwidth solutions such as the new eXchange Hub Service and Core Wave roll-outs in London and NY.
The adoption of Ethernet services in market segments other than financial services also continues to grow. For example, in Q3 we signed up two of the largest law firms in the U.S. along with major universities and healthcare providers.
TR: AboveNet is in the process of expanding to new markets. What form does that take on the ground? What does a 'starter set' look like in a newly entered market?
BL: We go into the top metro markets, and we do two things simultaneously. One, we connect it to the rest of our markets using our wide area network. Two, based on the experience we have in our existing markets, we know that a significant amount of business is going to be focused around the data center infrastructure. So, we establish a fiber ring that hits the key carrier hotels and data centers. Depending on the city, this usually includes five or six data centers.
TR: You recently cut projections for capex in 2010, pushing off some expected spending into 2011. What is behind that delay? Are the new market expansions going slower than expected?
BL: On the expansions to new markets, we're executing according to plan. For examples, the three European cities—Amsterdam, Frankfurt and Paris— will be done in the first quarter of next year. We completed Denver ahead of schedule, and Miami is already on our wide area network.
TR: Can you give us some examples of the issues you run into that make the timing of capital expenditures hard to predict?
BL: Unlike the long haul where you just visit the railroad or the interstate commerce commission to get a single permission to build the route, the metro requires discussions with dozens of authorities. Planning to get that all done in a timely manner is sometimes a challenge, but that's the nature of the metro business. We're comfortable with it and react accordingly.
An example of a typical situation we encounter is in the New Jersey metro area where we have done some overbuilding. One of its quirks is when a company requests permission from a town to build a route, we often will receive approval for just the one build. If we want to overbuild it, we have to go back and request permission a second time.
Another example is a project in Virginia where we hit an unexpected amount of rock, and it's taking us longer to drill through it.
Delays like this don’t influence the overall strategy of the company or how we think about our performance and market leadership.
TR: I saw that AboveNet joined the Ethernet exchanges of CENX and Equinix. Are you there as a buyer or as a seller?
BL: We’re going to use it both ways. The concept of the Ethernet exchange holds many opportunities. I like the idea that we can get access to many other carriers for our type 2 connectivity, and I like the fact that our presence makes our high-bandwidth services available to customers.
We're still very early in the process with both Equinix and CENX and other exchange partners. I think a little more work needs to be done on the economic model so that it makes not just technological sense but economic sense as well. But, we're working closely with each of our partners to get there.
TR: How does AboveNet view off-net opportunities, and how does it affect your revenue and margin growth?
BL: Actually, I have been overestimating a bit its impact over the past several quarters. It's something that our sales team has the flexibility to do. However, we don't just go out and resell someone's service. It has to be part of a bigger solution that includes the use of the existing network. We're ready to use it whenever it makes sense for the customer deal we have on the table.
The fact is that if used correctly, these will help complement revenue, although they are likely to tug a little bit on margins. Over the long run, they will also give us a good indication of strategic places to build. In some ways, the type 2 strategy negates large capital expenditures on building networks where you're not sure you're going to need it. We'll use type 2 to get to some locations, and if it’s a location that over time reaches a scale that makes sense for us to build our own metro network, we'll do that as well.
TR: After so much metro fiber M&A activity this year, how does the environment look now? Where do we go from here? Is AboveNet looking to buy assets?
BL: A lot happened in the second and third quarter. These purchases don't seem like the endgame, so you have to ask what else is coming.
We will continue to look at opportunities that fit with our market leadership strategy. To the extent that the right acquisition comes along that makes sense for AboveNet shareholders, we are ready, willing, and able. We just haven't seen it yet.
In general, our strong balance sheet and cash position provides us with the latitude to fund operations and invest in network infrastructure and growth initiatives as well as to consider other available options to increase our strength and position in the marketplace.
In November, we declared a special one-time cash dividend of $5.00 per share and announced that we received a commitment from SunTrust Bank for a new five year $250 million senior secured revolving credit facility.
With interest rates at historic lows and our strong credit profile, we had an opportunity to improve the efficiency of our balance sheet at very attractive rates and optimize our cost of capital. The new credit facility also gives us immediate access to capital to take advantage of investment opportunities and consider other initiatives to propel our industry leadership.
TR: Your recent expansions have now taken you off of your original turf and into continental Europe. Are there local differences there that force you to change the way you do business?
BL: I would tell you that the essence of the metro business is that it is “local” in nature. New York is much different than Dallas which is much different from San Francisco. So yes, Frankfurt, Paris, and Amsterdam all have specific nuances. That's why it was important for us to establish a local presence and support structure. We knew it would be different in each of those cities, and we're ready to adapt to support our customers.
TR: Now that you've expanded into continental Europe, is Asia next?
BL: Asia has to be on everybody’s radar, but we have not announced specific plans for expansion. In order to complete our strategy of being a large bandwidth provider in all tier 1 cities, part of that puzzle is going to be Asia. But we have enough work to do right now with the U.S. markets we're in and our European expansion to keep us busy for the foreseeable future.
TR: Where is the low latency craze going right now, and how does AboveNet benefit from it?
BL: If you talked to me a year ago, everyone was talking about milliseconds. Six months ago it was microseconds. Now it's nanoseconds. Our view of the low-latency market is simply to leverage the world-class fiber footprint that we have in the New York, Chicago, and London metros. I'm as fascinated as you are by what’s going on with the New York to Chicago, New York to London, and Frankfurt to London routes. That to me seems like a never-ending race that is going to be very expensive to play in.
The metro market is a little more clear cut. It's easier to build 2,3,4,5 mile straight lines than it is to build 800-mile straight lines. The reality of our world is that if we don't have the quickest route between an exchange and a data center, it's not at all farfetched for us to go build it. Those are the type of investments we’re interested in. When we have that straight line distance in the metro, it positions us well for the long-term.
TR: Where do you see the greatest growth opportunities coming from in years to come?
BL: We're happy to see the addressable market moving our way. Finance and media companies have been our traditional customers, but the legal, healthcare, and education segments are starting to move up to the part of the market we're good at.
In a couple of years, more than 85% of enterprises will have a need for 100Mbps+ connectivity. The idea that some of these larger law firms, premier educational institutions, and large hospitals are now looking at us as a go-to provider for their next generation Ethernet-based networks is very encouraging for us.
TR: Thank you for talking with Telecom Ramblings!
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