THE DAY AHEAD: Broadwing flies under the radar

Larry Dignan
4 min read

COMMENTARY -- You'd think the company behind the third largest fiber optic network would get a little more attention, but Broadwing (NYSE: BRW) is flying under the radar for now.

Broadwing, which was spawned from the merger of Cincinnati Bell and IXC Communications, brings about 18,000 fiber-network miles to the table, following Williams Communications (NYSE: WCG) and Qwest (NYSE: Q).

Broadwing's network is just about complete, which opens a lot of possibilities. While the big players in the telecommunications arena struggle, companies like Broadwing, Williams and Qwest will become the new leaders.

I first noticed Broadwing after perusing the SEC filings of Corvis (Nasdaq: CORV), a hot fiber optic gear maker that made a huge IPO splash despite not having a dime of revenue. Corvis, which recently reported earnings, reported its first sales, and Broadwing was the big reason.

Williams and Qwest are implementing Corvis gear now and will be roughly six to 12 months behind Broadwing when it comes to using Corvis' gear. Corvis' equipment by all counts lives up to its advance billing, leaving Broadwing with a platform to offer broadband services, metered billing and data centers. Broadwing sells bandwidth to corporate customers and carriers.

Broadwing's pedigree isn't too shabby either. Broadwing's legacy local-telephone business generates cash to build the network, so there aren't a lot of worries about running out of capital. Meanwhile, Broadwing is headed by CEO Rick Ellenberger, an MCI veteran whose profile is growing.

Broadwing's pitch revolves around execution. Indeed, the company reported that earnings before interest, taxes, depreciation and amortization (EBITDA) increased 56 percent to $137 million in its third quarter. Net loss was 12 cents a share, narrower than First Call's expectation of 20 cents a share, a loss of 36 cents a share in the same period a year ago. Revenues increased 25 percent, growing to $531 million.

Some analysts are sold on the story already. "I've liked their story for a long time," said James Ott, an analyst with Hibernia Southcoast Capital. "The market will value them more because they're focused on execution. Their data center business will be a $30 million business by the end of the year from a dead stop."

ZDII recently spoke with Tom Osha, Broadwing's chief of staff and vice president of corporate affairs. Here are the key issues:

  • The bandwidth game: Broadwing plans to complete its network in January or February. Once completed, Broadwing plans to offer metered services, on-demand video and data centers. Some of these revenue streams are just gaining traction. Osha said Broadwing plans to make its name through execution. Network installation problems with fiber optic high-fliers are pretty well documented as installation can take 90 to 100 days. Broadwing promises a 45-day delivery time and is on the mark 90 percent of the time.

  • Corvis: Broadwing has a minority stake in Corvis, so it's not surprising that Osha had good things to say about the young company. Osha's take: Corvis lives up to the hype. Corvis' gear has worked in Broadwing's network "right out of the box," he said. "Corvis is exceeding our expectations," said Osha.

    Corvis' gear is impressive, but Osha said Broadwing is agnostic about the equipment it uses. Broadwing's goal is to have a best of breed network. Osha said Broadwing's labs are a playground where it tests gear from all the leaders, including Cisco, Ciena, Nortel, Lucent, Juniper and Sycamore.

  • Competition: Osha said he thinks Broadwing's profile will increase in 2001. Why? The competition is distracted. He said Qwest is a glorified Baby Bell with the acquisition of US West, AT&T is splitting up, WorldCom has its own woes and Sprint is looking for a dance partner. The competitive local exchange carriers are capital constrained. Global Crossing doesn't have the network heft, and Broadwing's main rival -- Williams -- primarily plays in the "carrier's carrier" market for now. Broadwing plans to rev up an advertising campaign at the beginning of 2001 to build its enterprise sales.

  • Capital spending: Considering Corvis' most recent quarter was carried by sales to Broadwing, the company's capital spending plans are a big deal. Osha said capital spending will slow, but not "radically." Fiber optic networks are usually a work in progress, but Broadwing's buildout will be complete in early 2001. Ott, who rates Broadwing a "strong buy" with a $48 price target, expects Broadwing to have capital spending of $800 million in 2000, $650 million in 2001 and $500 million in 2002.

    Williams Communications bullish

    Howard S. Kalika, treasurer for Williams, echoed much of Broadwing's bullishness, but disputed Osha's "carrier's carrier" description. He said that the company's traditional base of customers -- Qwest, Telmex and SBC -- is changing to any firm that needs bandwidth.

    Like Osha, Kalika, speaking at the recent Prudential Volpe Technology conference, had good things to say about Corvis and noted that Williams "isn't into marginal improvement" when it comes to implementing new equipment. In its field trials, Williams is seeing a huge improvement in its distance by bandwidth ratio.

    Williams, like Broadwing, is expected to be a big winner once the telecommunications sector gets back in favor with investors. TDAIN