Since its re-emergence a few years ago, abvt has impressed many by leveraging their deep Tier 1 metro fiber footprint with a tightly focused business model to generate steady, powerful growth combined with high EBITDA margins and positive free cash flow. This summer the company and its fiber assets were at the heart of several M&A rumors, but as we now move into autumn it seems more and more likely they will remain an independent force in the industry. With us today to shed some light on AboveNet's plans is Rajiv Datta, who became Chief Operating Officer in January of this year.
TR: M&A activity in the sector has continued to drive headlines this summer. Can you comment about the recent rumors surrounding AboveNet? Has the activity in the sector overall begun to dissipate, and is AboveNet looking at other assets these days?
RD: It’s our policy not to comment on market rumors related to AboveNet. Like any public company the Board of Directors takes its fiduciary responsibility to maximize shareholder value seriously whether it takes the form of an acquisition or an offer to be acquired. If the board approves a transaction, it will notify shareholders through a press release and SEC filing.
In terms of other general activity in the marketplace, I would not describe the environment as being any less active than it was. We have been consistently looking at assets and business models of companies in our space, and there are nice possibilities out there that could make strategic sense for us or for others. The challenge that we continue to work on is making sure that it also makes financial sense, and we continue to look at and try to find that merger of strategic and financial value. Clearly based on our recent history we have not gotten to that goal yet, but we haven't stopped trying.
TR: What sort of assets would AboveNet be interested. More Tier 1 metro fiber or something more transformational?
RD: We're not in the transformational mindset. We have a good solid, focused business model and we think we understand high bandwidth customers and users. There are fairly fundamental things we look for. Number one, we look for an asset based company. There are a bunch of companies out there that have significant reselling components to what they do which is not our model. Our focus is absolutely on companies who have real assets in the ground. Those can be regional as well as metro, but assets and particularly fiber assets are key. Then in the end we look for an ability to take those assets and deliver our Ethernet services portfolio within the metro and across the WAN. We've spent the last seven to eight years transforming from a traditional dark fiber, carrier focused company to an enterprise, services and Ethernet focused company. The greatest area of demand for these services at high bandwidth levels is in Tier 1 markets, but real assets are needed to meet customer needs.
TR: How does AboveNet view the accelerating shift toward cloud computing, are there untapped opportunities there for you?
RD: We think the cloud opportunity is very significant for us, and that our positioning is naturally aligned with cloud connectivity requirements. To begin with there are a number of cloud service providers focused on building their cloud infrastructure. Those clouds typically live in big data centers and need significant connectivity between those data centers, something we are perfectly set up to offer. But the much larger opportunity comes from “cloud access” connectivity where a great deal of transition is underway. We have been providing access for private clouds for a number of years, well before the term “cloud computing” became mainstream. What most people associate with network access to “the cloud” is over internet access from end points – while this has been very successful for certain applications, we believe there is an evolution underway.
What we believe is occurring is that enterprises buy into the value of a cloud but aren't comfortable putting their mission critical data over internet connectivity. So what kind of connection do they need to get to that data center where the cloud lives? That's where Metro Ethernet, VPN, packet-based solutions come in. We haven't scratched the surface yet on this middle ground of clouds that are not quite private but need better connectivity than current public clouds offer. This is a model perfectly suited to who we are and what we do.
TR: Will addressing the cloud computing revolution require large investments on the network side, or is it something you are already ready for?
RD: Our investments are led by our customers - we listen carefully, we move, and we adjust. So I can't say no investment is required. But for the most part, we have every part of this ecosystem in our tool bag, led by our extensive data center footprint and comprehensive Ethernet services portfolio.
TR: This summer you have announced a Tier 2 presence in markets like Providence and Sacramento, is this part of an expansion of focus beyond AboveNet’s traditional Tier 1 stomping grounds?
RD: I would not describe this as a change in strategy; we remain tightly focused on our Tier 1 markets. I would view Providence and Sacramento as adjacencies. For instance, customers in San Francisco view Sacramento as a “beyond the fault line” location for disaster recovery site. It's a very specific driving need. These are examples of where we've seen customer demand in adjacent markets, and if we can cost effectively service those needs then we are willing to do that. But it's not a change in our core strategy.
TR: Do you see AboveNet introducing much in the way of new products as a means to further expansion? How do you view the expansion of your product portfolio?
RD: The way we look at this is in terms of product categories. We think we have the key data transport categories that customers want, so I don't see that we will be adding substantially to them. But I do think that within categories you will see new capabilities & features as we continue to evolve our product set. For instance we intend to have the first 100GigE service offering in the metro, and are working with vendors to find a cost effective solution. We feel we have layers 0, 1,2, and 3 covered but are not looking to go beyond that and into some of the other services that other service providers have gotten into to address a different customer segment.
TR: The overall macroeconomic environment has been deteriorating lately. In what ways might that affect AboveNet’s growth in the near term?
RD: There’s no question that a growing economic environment provides us with more opportunities. Companies whose IT and network departments have had budgets slashed would look to tighten their belt and not build new datacenters etc. Having said that though, one of the values of our focus on connectivity is that this is not a luxury item. This is not something that people can choose not to support. They might change their view of buying a private DWDM ring vs buying a set of metro Ethernet circuits instead. But if you’re in business, you need to have connectivity between your sites and that doesn’t change. Indeed, bandwidth growth between these sites continues and as a result we are able to position how cost effective we can be relative to older technology telecom services that some customers still use the ILECs for. So we’d love it to be a more positive macroeconomic environment so that we could grow even faster, but we’re pretty comfortable that customers still need the services we offer and demand will continue to grow for what we do.
TR: Thank you for talking with Telecom Ramblings!
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