The Internet and corporate data traffic are not growing as fast as carriers expected when they provisioned fiber-optic networks last year. But Global Crossing has enough cash to survive the slowing market for dark fiber, one of its key products, said Dan Cohrs, the companys chief financial officer, speaking to attendees at the Emerging Communications Conference in New York City yesterday.
One third of Global Crossings revenue comes from sales of capacity known as indefeasible rights of use (IRUs), mainly secured by other carriers. Because negotiating deals for dark fiber and deploying the equipment needed to light it takes a long time, Global Crossing typically sells such capacity at least a year in advance. Dramatic falloff of such sales in the third quarter led to a $300 million correction of Global Crossings earnings that drove the companys shares to new lows.
Cohrs blamed the shortfall on slowing demand for bandwidth and cited research indicating that the Internet is growing at 250 percent per year instead of the expected 400 percent, and that corporate traffic is growing at 50 percent instead of 75 percent.
“We sold $200 million worth of IRUs [in Q3],” said Cohrs. He said that company executives were in conference calls all day Sept. 30, the day the quarter closed, and had enough deals in the works to make the revenue numbers, but killed most of them because the margins were not there.
Analysts tracking operators of large fiber networks say IRU business is hurting, but wont disappear.
“The IRU market is not going away, at least not in this lifetime,” Vic Grover, a Kaufman Bros. analyst, wrote in a recent research note on Global Crossing. “We predict this segment will resume growth in 2002.”
Williams Communications CFO Scott Schubert earlier told the Emerging Communications Conference that Williams had sold $450 million worth of IRUs this year.
Cohrs tried to reassure investors that the spectacular flop in dark fiber sales and the Exodus Communications bankruptcy, two recent events that added to the negative perception of Global Crossings future prospects, wont drive Global Crossing out of the industry. While Cohrs didnt use the word “bankruptcy,” his line of reasoning was clearly arguing against such a scenario.
Facts are on his side. Global Crossing has $2.4 billion in cash sitting in the bank, and expects to collect $1 billion from the sale of two business units: Global Marine and IPC Trading Systems. Global Crossing can also better control its capital expenditure costs next year because its network is finished, and additional capacity will be added only if there is demand. Even with troublesome investments like Exodus, Global Crossing is not losing out-of-pocket cash: Exodus pre-paid $200 million towards its bandwidth bill when Global Crossing sold its subsidiary, GlobalCenter, to the Web hosting company.
The pressures on Global Crossing came not from failed dot-coms, but from business customers that slowed their online activities because of the current recession, Cohrs said. However, slow growth is still growth, and Global Crossing has other sources of revenue than IRUs, including carrier and business-oriented services such as IP virtual private networks. And because its business is linked to enterprise customers, Global Crossings fortunes will likely rise once the recession is over, which could happen as early as next year.
“There is a very little chance that Global Crossing is going away,” Cohrs said.