abvt was one of the better stories in the internet infrastructure sector during the recession of 2009. Re-emerging just over a year ago into the limelight after almost a decade of oblivion, the company has quickly taken up the mantle of leadership in the metro fiber space with high EBITDA margins, double digit growth rates, and even a 2-1 stock split. With us today to tell us where the company is headed now is the architect of that comeback: AboveNet’s President and CEO, Bill LaPerch:
TR: In 2009, AboveNet managed solid organic growth in a tough economy. How is the macro environment affecting demand so far in 2010?
BL: In the 4th quarter of 2009 I was cautiously optimistic as I started to see bandwidth intensive enterprise customers plan capital for network expansions and growth. Being a cynical New Yorker I will need a couple of quarters to see if enterprise customers actually spend that planned capital. Having said that, I think it important to understand that in tough economic times opportunity is created for customers to take a hard look at their legacy networks. They are evaluating if it makes sense for them to migrate to next generation fiber based networks that provide much greater scalability than their existing infrastructure. Even in this bad economy bandwidth needs continue to grow. Migrating your network from a legacy TDM based network to fiber based WDM or Ethernet network is ideal for customers who need to increase their capacity at a more efficient cost. Leading edge customers who have figured this out are creating demand for our services.
TR: Where will AboveNet’s expansion plans be focused in 2010? Will you be moving deeper into current markets or opening new ones?
BL: We will have activity in both areas. Today we operate in some of the biggest bandwidth markets in the world and in certain of these we will look to expand our footprint based on a fairly well developed understanding of the market and the needs of our customers. But we also recognize that there are some significant markets in North America and Europe with high densities of customers that fit our profile for high bandwidth connectivity where we will make measured investments starting in 2010.
TR: How do you view the balance between organic and inorganic growth in the metro fiber business? When is it better to buy than build, and vice versa?
BL: We come to work every day prepared to execute on our organic growth strategy. I feel good about the team we have, the customers we serve and the financial strength we have built. We have a well thought out 5 year vision on how we would like to grow. Having said that, there is no doubt that there are asset based fiber companies out there that would allow us to accelerate that effort. I am always on the lookout for things that fit our model.
While I can definitely think of some companies that would be a great fit for us, the reality is that those companies are likely using the same model as us and are performing very well. Consequently they are either comfortable moving forward with their respective plans or looking for a premium higher than I am willing to pay. I will keep on the lookout though. Right now I am trying to exercise some patience and not caught up in the 2010 year of consolidation hoopla.
TR: While AboveNet’s metro assets are always front and center, you also operate a substantial IP backbone. How does that asset affect your competitive position in the sector?
BL: AboveNet’s focus is on providing high-bandwidth connectivity to customers within and between the markets that we serve. While our fiber assets are a key enabling factor and provide real differentiating features for our portfolio of MAN and WAN services, metro fiber on its own is not our product focus. Our IP backbone enables us to offer credible IP-based services such as internet connectivity and, increasingly, VPN services – both key requirements of many high-bandwidth customers. When combined with our ability to deliver these services to key data centers and customer premises by leveraging our fiber assets, we believe we can deliver real value and performance to our customers.
TR: One other way to expand would be to move up the food chain, adding more services over that backbone. Is that an attractive path for AboveNet?
BL: Nope. We are going to stay focused on being the “go to” provider of high bandwidth solutions. Not interested in being a cloud service provider, a CDN provider, a professional services company. In fact, we have some great customers that are very good at all of those things. But if you need to get to and from the cloud, if you need a network between your CDN server farms, if you need a redundant provider of big fat pipes into your data centers, those are things we’ll focus on.
TR: Back in 2006, AboveNet divested its data center business. Given the strength of that sector, do you any regrets?
BL: Not really. The decision was a practical one. We had come to a fork in the road in terms of where we were going to focus our capital. Building data centers and building metro networks are both capital intensive activities. We decided we were more differentiated in the metro network business. We sold the data centers and invested the proceeds to get connected to over 400 data centers. With our focus on high bandwidth fat pipes, being connected to these data centers is crucial. I view us today as a “data center neutral” provider. We have great relationships with all of our data center partners.
TR: Following the telecom nuclear winter, AboveNet’s return journey has been longer and lonelier than most. What surprised you most about that process?
BL: How long and how hard it was. The perfect storm of the internet bubble bursting, Sarbanes Oxley requirements, a brand new board and many corporate restructurings was very challenging to say the least. I was very fortunate as the CEO to be associated with a world class team that believed in what we were doing and constantly surprised me with the level of their passion and accomplishment in a tough marketplace.
TR: Thank you for talking with Telecom Ramblings!
BL: It was my pleasure.
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Categories: Industry Spotlight · Metro fiber
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Good interview. How long has he been with Abovenet for?
I believe he joined the company in 1999 just in time for the implosion and worked in several positions before becoming CEO in 2004.
He has been through the bloody wringer then! 🙂
When Bill refers to the “fork in the road” of data centers vs. fiber capital expenditures … fiber was the way to go. Why?
Eventually with fiber your heavy capex is spent on the backbone. Once the backbone is deployed, your capex is now levered by adding customers and big bandwidth at a capex rate relatively low compared to building the backbone.
Data Centers are and will always be capital intensive, besides having no barriers of entry which a well placed unique backbone gives a fiber owner, a data center is constantly spending capital as equipment becomes obsolete, storage devices get filled and expansion of real estate which must be built to certain levels of standards for the type of data center, The capex spend for data centers is endless … you never reach a point of levered capex.
Install a backbone, you have 50 years to lever … you don’t get 50 years with a data center. Plus, eventually data centers can and will be off shored for lower operating costs. You can’t off shore a metro backbone.
AboveNet and a few of us similarly situated know this. It’s the analysts that don’t get it. They see top line data center growth; those of us with fiber like and prefer quality of top line growth, margin growth and profitability. Why data centers get high multiples is short term thinking which is normal for analysts … fiber backbone owners have a predictable, high margin growth business for years.
One exception with a metro fiber owner — the higher reliance on type 2 circuits or special access (aka government regulation) should be discounted compared to AboveNet and those similarly situated. Type 2 is for those in love with the top line growth but the margins and control remains with the ILEC … not sustainable as bandwidth continues to grow at a 50% y-o-y rate. Plus any competitor can get the same type 2 circuit or special access … price declines destroys margins since the ILEC controls, costs, terms, deployment and customer service.
I can remember watching MFNX now AboveNet back in 2000 jumping into software services and data centers because the Real Smart Guys (RSG’s) on Wall Street said that if you don’t your valuation will be affected. You know — the herd mentality. I said then it was a mistake for MFNX and it had proven out to their demise.
Bill LaPerch and his team by the way cleaned up the software/data center mess and got back to their optical roots. Going a mile wild and an inch deep by listening to the RSG’s was a mistake for MFNX.
That said, I would not give Wall Street any type of guidance if I were Bill. Yesterday, since Bill didn’y meet or agree their 2010 consensus, the stock takes hit. There isn’t an analyst on consensus that has never operated anything ;let alone the complexity of a metro network. The “consensus” is spreadsheet driven with no sense of reality. When Bill gives the analysts a sense of reality that disagrees with the RSG analysts, they poop on the stock.
If I were public and the RSG analysts are so smart, I would offer zero guidance and see who is consistently correct and grows q-o-q and y-o-y. AboveNet and those of us similarly situated do not sell widgets out of inventory … analysts don’t understand a pure data/ip company over legacy, type 2 models. But that would require an appreciation for two words the RSG analysts don’t get or understand … the “long term.”
RSG analysts are quarter to quarter hookers, nothing more nothing less … give those of us a break who care about creating long tern value against an unfounded, best guess consensus.
This stock is a buy and hold. When you have a CEO talking about 5-years of growth because of the fiber assets they have — pay attention. Ignore next quarter’s RSG consensus who cares what a spreadsheet model is saying from people who have never operated a lemon-aid stand..
If you are fishing for a good stock with predictable growth go catch the LaPerch.