light at end of fiber-optic cable
Prospects brighter for telcos in Colorado
By Jeff Smith
Rocky Mountain News
Friday, November 11, 2005
It's nowhere close to the giddy telecom bubble days, but
Colorado's three leading publicly held telecommunications
companies are enjoying a resurgence. Qwest Communications,
Level 3 Communications and Time Warner Telecom all have
experienced stock boosts in recent weeks and perhaps in
their business prospects as well.
All of that is good news for the state's battered
telecommunications sector, which has been the weak link in
an otherwise improving job climate. The three companies
together still employ nearly 13,000 people here, after
shedding almost that many since the bubble burst in late
2000 and 2001.
"These companies have shown the investment community that
they're not going away, that they're going to remain
players," said Jeff Kagan, an independent telecommunications
analyst in Atlanta.
Whether they will become among the biggest or best, however,
remains uncertain because the U.S. telecommunications
industry is in the middle of reshaping itself yet again,
Kagan said, as evidenced by regional Bells emerging as
mega-merger winners and gearing up to take on the cable
For Denver-based Qwest, whose stock is up more than 15
percent in recent weeks, the company has cleansed itself of
most legal and financial issues lingering from former CEO
Joe Nacchio's tenure. Last week, Qwest settled a
class-action shareholder lawsuit for $400 million and
embarked on a plan to refinance $3 billion of very
For Broomfield-based Level 3, whose stock this week broke
the $3 barrier for the first time since January, the
announced purchase of WilTel Communications last week will
eliminate a rival in the wholesale fiber-optic network
business and extend the company's staying power.
For Douglas County-based Time Warner Telecom, whose stock
price has doubled since May, revenues have increased in four
consecutive quarters, including 11 percent in the third
Of course, the stock prices of the companies still are at a
fraction of their historic highs. Earlier this year, Level
3 stock was hovering at all-time lows.
And there's a flip side that arguably makes this a
corner-not-yet-turned story: The three companies still are
losing money, with Level 3 especially struggling to generate
enough new revenue to offset declines in its older, dial-up
Internet access business.
But it is progress.
Time Warner leads way
Time Warner Telecom, which employs 2,000 including nearly
1,000 in Colorado, may be in the best shape right now.
After all, 11 percent revenue growth was nothing to sneeze
at even during the telecom boom.
"Their prospects are solid, with good growth in customers,"
said Donna Jaegers, a telecommunications analyst for Janco
Partners in Greenwood Village.
Jaegers recommends and owns the stock personally. Janco
doesn't do any investment business with the company.
Part of Time Warner Telecom's advantage may be related to
the telecom space it occupies.
Qwest and Level 3 spent billions building nationwide, long
distance fiber-optic backbones. That market still suffers
from overcapacity and price compression.
Prices in some areas of the long-haul network business were
still declining by 25 percent to 45 percent last year,
according to a regulatory filing by Level 3, although
declines are beginning to moderate and traffic is increasing
at robust rates.
While it helps for Level 3 to knock out WilTel, the overall
impact may not be that great, analysts say, given the number
of other competitors: AT&T, MCI, Sprint, Global Crossing
and Broadwing Communications.
"This industry is likely to remain very competitive,"
Michael Hodel, an analyst with Morningstar, wrote in a
research note last week.
Time Warner Telecom, by contrast, has focused its investment
in building fiber loops in cities and connecting fiber
directly to more than 5,700 buildings in 44 markets across
The company specializes in installing private data networks
for businesses and the government, and selling high-speed
services to wireline and wireless carriers.
"There's a scarcity in last-mile (connections), and that's
where Time Warner Telecom plays," Jaegers said.
Time Warner Telecom Chief Executive Larissa Herda told
analysts last week the company is benefiting from low
customer churn and industry consolidation such as the mega-
mergers of SBC-AT&T and Verizon-MCI.
In the past, Herda said, it was difficult for Time Warner
Telecom to gain an audience of larger customers. But now
large customers are inviting Time Warner Telecom to bid
because they are concerned about the industry
consolidation's impact on pricing and competition "and
they're looking for alternatives, diverse networks, disaster
recovery (back-up systems)," Herda said.
Still, Kimberly Noland, an analyst for GimmeCredit, a
corporate bond research firm, noted this week that Time
Warner Telecom's business requires significant investment to
run fiber to buildings and will face more competition as the
regional Bells increasingly target the large business
market. Time Warner Telecom isn't expected to be profitable
Profits foreseen for
Qwest Chief Executive Dick Notebaert recently indicated
money-losing Qwest, which has 10,100 employees in Colorado,
might become profitable as early as next year.
Notebaert is basing his optimism on the debt refinancing,
which could shave as much as $300 million of annual interest
expenses, and modest revenue growth sparked by sales of DSL
high-speed Internet access, long distance and new products.
This week, Notebaert told the
Rocky Mountain News
that Qwest calculated it could generate an additional $500
million of revenue just by catching up with the market
penetration figures of its peers.
For example, he noted Qwest was the last of the regional
Bells to get permission to offer long-distance telephone
service, about a year later than the others.
But Jaegers is skeptical.
"You snooze, you lose," she said. "There's not any God-given
right that you should get the same (market) penetration" as
Notebaert indicated the potential to grow organically means
Qwest isn't under pressure to join the industry
consolidation game. The company tried to do that earlier
this year but failed in its bid to acquire MCI.
"We don't need to knee-jerk into some acquisition,"
Notebaert said this week, saying any deal would have to make
strategic sense and be at the right price.
Jaegers agrees there isn't an urgency now that Qwest is
building its own momentum. Still, she wonders if Qwest may
be taking one last look at Virginia-based XO Communications,
which last week announced a deal to sell to its controlling
stockholder Carl Icahn for $700 million.
XO, which provides high-speed communications services to
businesses, has said it will consider a superior proposal
subject to the acquirer paying Icahn a 1 percent break-up
fee. Qwest has been rumored before as a possible suitor of
XO, which two years ago outbid Qwest to buy Texas-based
A Qwest spokesman declined comment specifically on XO but
referred to Notebaert's remarks.
WilTel brings cash to
In Level 3's case, acquiring WilTel largely buys the company
time and revenue. Level 3 said WilTel will contribute an
estimated $125 million to $150 million of additional cash
flow after the two networks are integrated in 2007.
"We've been saying for two or three years that the industry
needs consolidation," Level 3 President Kevin O'Hara said in
an interview Thursday.
Combined with improved pricing trends and a growing Internet
telephony business, "we feel pretty bullish about our
prospects," O'Hara said.
WilTel, formerly Williams Communications, has a
billion-dollar-plus contract to supply communications
services to SBC Communications. But that contract accounts
for around two-thirds of WilTel's business and is expected
to disappear by 2008 as SBC moves the traffic over to the
network of its new merger partner, AT&T.
Level 3's challenge between now and then is to get enough
traction on its new products, such as Internet telephony, to
prove viable to refinance its debt. More than half of Level
3's $6 billion of debt comes due in 2008.
But there's another possible silver lining.
Level 3 executives have been talking for years about the
power of broadband-intensive applications to drive its
business, such as downloading movies or software over the
This week, Microsoft Chairman Bill Gates urged Microsoft to
"act quickly and decisively" to move into such services as
online software to thwart emerging competitive threats.
That endorsement, O'Hara said, could be "a very powerful
step" in spurring more traffic over fiber-optic backbones.
Microsoft, he noted, "has the kind of market power to likely
jump-start a very exciting trend."
But O'Hara also cautioned that the online software business
will develop gradually.
• The telecom sector is
showing signs of life after five years in the doldrums.
- Headquarters: Denver
Profit margins improving, debt declining, class-action
Still a lot of debt, and revenues from new services such as
DSL high-speed Internet barely offsetting losses in local
Lost $144 million in third quarter on revenues of $3.5
Communications - Headquarters: Broomfield
Buying WilTel Communications eliminates a rival.
Highly leveraged, and new services such as Internet
telephony not growing fast enough to offset losses in
traditional business lines such as dial-up Internet access.
Lost $204 million in third quarter on revenues of $799
Time Warner Telecom
- Headquarters: Near Park Meadows mall in Lone Tree
Strong 11 percent revenue growth in third quarter, thanks in
part to increase in larger business customers.
Not yet profitable.
Lost $23.4 million in third quarter on revenues of