While we are on the topic of XO, here is a press release of theirs that covers their 1Q08 financial results.

 Their Core Data and IP revenue is growing at a very respectable pace–30%.  However, their overall growth rate is only 3.2% as legacy TDM services are shrinking rapidly (-17.6%) while Core Integrated Voice is growing only modestly (2%). 

EBITDA shrunk materially.  1Q08 was only $7M, compared to $20.3 in the prior quarter and $37.2 a year ago.   Capital jumped up to $65M, from $40M in earlier periods.  To explain the EBITDA drop and capital spike, XO cites that it is investing, both in the form of sales-related OPEX and capital, in the growth of the Core Data and IP business. 

In his Telecosm blog, Ike Elliott had a nicely-written assessment of Vonage’s 1st quarter results.  For those who follow the VoIP sector, it is worth a read.  Thanks Ike.

Ike Elliott had a good post on churn today, using Vonage’s 1Q08 results as a backdrop.

I started to post a comment, but began rambling.  I’ve been hanging around John Scarano too long I guess.  Anyway, I decided if I was going to poke away at the keyboard, I might as well drive some traffic to my blog instead of Ike’s.  So I will complete comment here.

Ike’s analysis is interesting and useful. I will add one more concept to it.  What is a reasonable expectation for steady-state churn?

A 1% churn rate implies a dollar of revenue will stay on the books 5 years.  Think of all the reasons a customer might churn–go out of business; move; out-grow the service; benefit from repricing; or switch to another service provider.  If, on average, only one of these events every five years would seem to be a a fantastic result for most recurring revenue businesses. Yet many telecom business tout 1% or lower rates and attribute it to their great service.  Eventually, it becomes clear that the churn rate is really higher–this is explained usually by citing external uncontrollable macro events such as a slowdown in the economy. 

What is really happening?  Newer companies should have low churn.  Why?  –the maturity of their customer base is low.  If you have been in business only three years, your average customer has been with you less than 1.5 years.  Your churn better be very low!   Else, you have bigger problems such as bad service or an unsticky product.

Rapidly growing companies have a similar dynamic.  When Cbeyond was in its rapid geographic expansion phase, it’s average customer life was unnaturally low.  Churn, it follows, should be much lower than steady state.  Is this how they explained their low churn numbers in their early years?  I don’t think so.

Tracking and understanding churn is very important in recurring revenue businesses.  I wrote a series of posts on the topic.  For those in the telecom services business, they are worthwhile to read.  Look over at the categories on the left and click on Disconnect Inferno to read more.

This came from a bearonbusiness reader who added color to yesterday’s XO Texas hold’me post.  I thought it would be interesting to share.  (I did not look into the accuracy.)

Looking to get into the Internet business, XO bought Concentric for about $1 billion.  In return, XO got a leased OC-3 Internet backbone, a number of POPs located in the back of Payless Shoe stores and an eroding base of medium to small sized hosting customers.  The network was replaced via Level 3.  Ultimately they retained some of the smart folks who have been leveraging patented hosting technologies.  Largest customer is Microsoft’s B-central.  At the end of the day they paid too much and it didn’t add to the brand nor did it deliver meaningful revenue.  It did make a lot of the Concentric execs very rich though.

Now this was a classic telecom bubble story. 

To the reader who sent this–thanks for the email. 

This morning’s post revealed XO as having a final table seat at the Fiber Telecom Texas Hold’em Tournament.  I also suggested that despite their respectable chip stack, their position is a bit shaky.  You might say they are playing recklessly.  This post will add some color to my point.

R2 Investments owns a 6.6% equity stake in XO Communications.  Read this exert from a letter that R2 sent to certain directors of XO:

“Should any of these ‘new financing alternatives’ being considered include refinancing the debt facility and the preferred equity owned by affiliates of XO’s majority stockholder and chairman, Carl Icahn, we write to place you on notice that R2 will challenge any proposed transaction that it perceives to be unfair to XO’s minority shareholders or otherwise disadvantageous to XO, and will seek to hold you liable for any such breach of your fiduciary duty.” 

Wow.  Now those are fighting words.  It will be intriguing to see how this situations plays out. 

For more insight into the letter, please refer to this post that appeared in Ronald D. Orol’s blog on active hedge fund managers.

MFS, TCG, and Brooks were not the only CLECs who were building metro networks at a frantic pace in the 1990s.  Craig McCaw, who made billions in the wireless arena, founded Nextlink in 1994.  Like Brooks, their strategy initially focused on 2nd tier markets such as Columbus, Allentown, Las Vegas, Memphis, Salt Lake City, and Spokane.  By 1997 they moved into tier one markets such as Los Angeles and Philadelphia.

Nextlink acquired a few fiber networks along the way.  Unicom Thermal Technologies, Inc. (”UTT”) in Chicago, Linkatel in Los Angeles, and U.S. Network Inc. in Ohio.  Allegiance Telecom, which had some fiber through its smart build approach, was acquired by the company in 2004.

On September 25, 2000, the company changed its name to XO Communications.  On June 17, 2002 XO went into bankruptcy.   The company emerged from bankruptcy on June 16, 2003.  XO, which is a public company but under the effective control of Carl Icahn,  is one of the survivors in the consolidation of fiber based telecoms. 

Including the spendings of Alliegiance, UTT, Linkatel, and U.S. Network, let’s chalk up $5B for XO/Nextlink’s contribution toward the $85B invested in fiber optic networks.   Let’s also make room at the Texas Hold’em Final Table for them.  Though they have a lot of chips in front of them, they have been playing a bit wrecklessly as of late–it will be investing to see if they are still around a year from now or if they merge with another player.

I was reviewing my blog stats and noticed seven hits from http://www.itaoran.com/.   I clicked on it and was surprised to find a new blog called Telecom Ramblings: Musings on fiber, IP, content, and new things in Telecom.  Very cool.  It even had bearonbusiness.com as one of the three items on its blog roll.  I will add this site to my blog roll and keep an eye on the content. 

I tried to figure out who the author of the site is–I couldn’t find info about the author other than a first name (Rob) and a nickname (Toes).  I tried to leave a comment but it required a log-in.  The site is new so I am sure kinks are being worked out.  If the author reads this, please shoot me an email or post a comment so we know who you are.  Judging from your early postings, I suspect you are a Level 3 alumni.  Also, if you think its appropriate for your audience (a.k.a., new things in Telecom part), it would be great if you added http://www.managedvideoblog.com/ to your blog roll.

In any case, best of luck with the blog.  I will promote it often and steal ideas only occasionally. 

Todd Vernon, a successful entreprenuer in the Boulder community and a good guy, wrote a fantastic post on Angel Investing.  When people ask me about this topic in the future, I will refer them to the post.  Thanks Todd for sharing this with us.

In late April, Zayo had a board meeting in Boston. This was the first time I put into practice “Part 1: CEO Report Card” of the Closed Session of the Board.

As you’ll recall from my blog post “Closed Sessions of Board Meetings” in early May, the final item on the board meeting agenda includes only board members and the CEO. Other participants nervously leave the room.

My format for the Closed Session has three parts but part 1 is my favorite.  I get to do the talking. I get to play Roger Ebert.  Part 1 is the CEOs opportunity to share thoughts with the board without the broader management team listening in.

I begin by commenting on the board meeting itself. Did I think the meeting went well? Are there areas that require a bit more color—such as agenda items that went adrift or problem areas that surfaced unexpectedly? Perhaps someone from the management made a comment that came off as inappropriate or misleading, but correcting this in front of the board did not seem wise.

Next I cover the company in general. How do I think the company is doing?  What do I feel good about?  What keeps me up at night?  

Then I shift to the management team.  Who is doing a great job? Who might be struggling a bit? Where might we have holes in the organization we need to fill? What do we see as our pillars of strength? What changes am I contemplating and why?

The final part is my favorite part of my favorite part. You following me? The final part is to provide feedback to the board. Do I think our board is operating effectively? Are there any issues I see regarding the board (or the investors they represent)? As I look forward in time, what changes might we contemplate? Oh how I love to see board members fidget.

Perhaps the most important aspect of a director’s role is to assess the CEO.  All companies face challenges.  Do the directors believe the CEO has his or her arms around the company’s challenges? If so, they are much-relieved and can focus on monitoring how the CEO excutes. If, to the contrary, the board sees it differently, they at least have a clearer picture of what is going on inside the CEO’s head.

If I had my druthers, I would end the Closed Session without moving onto items two and three. I know I need to be clever about how to accomplish this.  It helps to know the time of the last flight back to the east coast. There is nothing like dragging part 1 on just long enough to catch two or three board members glancing at their watches. “I think the taxi is waiting downstairs,” I tell them, knowing the I think caveat drives them crazy. “I don’t think the new roadwork project has slowed down traffic all that much.” If this doesn’t kill parts 2 and 3, it will at least keep their comments to a minimum. Only once has a board member called me afterwards and said he didn’t notice the highway construction. “Must be starting next week” was all it took to move onto the next subject.

Why do I like to avoid parts 2 and 3? That will be clear when I cover them next week.