Tuesday, November 13, 2007

XO Burning Cash

SeekingAlpha.com has XO's 3Q07 numbers: "XO Holdings reported the 2007 Q3 with the highest revenue of $359.4 million in two years, $29 million of adjusted EBIDTA, and a net loss of $4.5 million – helped by some special items."

Special items are one time charges, like payment from the L3 litigation. SunRocket was a customer of XO. NextLink (XO Wireless) is still a drag on revenue. Here's the WOW:

Then, in 2007 Q3, the company’s cash burn rate was about $23 million worsened by a doubling CapEx and helped by a special item. "As of September 30, 2007, our balance of cash and cash equivalents was $90.9 million, a decrease of $77.7 million from December 31, 2006." [10-Q] Therefore, the struggling company may still keep running for another 2-3 quarters with the cash in hand, but definitely needs more funding for future growth soon. [alpha]

Another item is that XO is looking for more financing (since the cash is almost gone and to turn up waves costs some bucks. The 10G in 10 Days promo is from lit to lit. XO is not lighting new buildings -- too expensive, not enough cash. But as XO noted in its FCC filing versus VZ's forbearance in 6 Eastern cities (WC Docket No. 06-172), only about 4% of buildings are lit by CLEC's, so XO has a limited number of customers for that promo.

Based on the 10-Q, “for the twelve-month period ended September 30, 2007, the Company was required to achieve a minimum consolidated EBITDA of not less than $470.0 million.” This number may reach $500 million by the end of 2008 to comply with the covenant, which sounds impractical based on the current progress and capital investment level. However, with a closer look, the company’s Data Services + Xoptions FlexIP revenue increased to $142.8 Million (122.375+20.418) from $112.1 million (102.161+9.962) a year ago. That indicates that with about $30 million additional CapEx, the company realized about $30 million increase of revenue in Data and IP revenue in the same quarter a year ago. That was an impressive execution and ROI number of dollar for dollar. [alpha]

The 10-Q points out litigation against XO Holdings board over the wireline sale. The 10-Q does not address the ongoing FCC petitions for forbearance that have been granted so far to VZ, Embarq, Frontier / Citizens, Qwest, and to some extent AT&T. TDM DS1 and DS3 are untouched - for now. But getting bigger pipes to Type II customers is getting more expensive. And building out fiber to a new building is $7000 to $28,000 depending on distance, location, permits, conduit, and concrete.

Agents are getting 15 to 25 points on XO services, but I don't know how XO is able to afford that. Or, with its burn rate, how much longer it can pay it. SeekingAlpha.com thinks that Icahn will be able to pull off more financing. We'll see. XO missed another Covenant according to PR Newswire.

Here are the simple numbers from the SEC Filing are as follows:

  1. Revenue increased $359M for the quarter
  2. Cost of service is $141M - about 39%
  3. Selling, operating, and general (SOG) is $190M (53%)
  4. At 20 points and only 40% of revenue from agents, $29M in commissions.
  5. Loss from operations is $17M.
  6. Only $90M in cash AND equivalents.

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