XO Holdings (news, filings) had finished off 2010 with two quarters of solid revenue growth and higher EBITDA margins, but saw a sequential decline in both in the first quarter of 2011 driven by churn in long distance voice services. Actually though, while they don’t say much on the subject of seasonality (or anything else really), Q1 pretty much always looks like this for XO so it didn’t surprise me to see EBITDA margins beneath 10% again. Over the same quarter last year, XO saw improvements across the board – though nothing spectacular. Here’s a quick summary of their numbers in context:
| $ in millions | Q4/09 | Q1/10 | Q2/10 | Q3/10 | Q4/10 | Q1/11 |
|---|---|---|---|---|---|---|
| – Strategic Core | 208.4 | 234.9 | 237.8 | |||
| – Legacy | 133.3 | 128.5 | 126.9 | |||
| – Non-Core | 27.8 | 26.9 | 18.7 | |||
| Total Revenues | 375.8 | 369.5 | 383.6 | 385.7 | 390.3 | 383.4 |
| Cost of Revenue | 212.7 | 208.5 | 218.9 | 218.3 | 223.7 | 229.6 |
| SG&A | 120.0 | 130.6 | 124.4 | 106.6 | 107.5 | 118.1 |
| Adjusted EBITDA | 43.3 | 30.6 | 40.5 | 60.8 | 59.2 | 35.7 |
| Adj. EBITDA margin | 11.5% | 8.2% | 10.6% | 15.8% | 15.1% | 9.3% |
| Capital Expenditures | 50.1 | 64.2 | 57.6 | 50.1 | 39.9 | 53.2 |
Revenue: XO reconfigured it’s reportable segments into Strategic Core, Legacy, and Non-Core. Because of that we have rather fewer historical numbers to compare with. However, as one might expect from the names, Strategic Core revenues were up, Legacy revenues were down a bit, and Non-Core revenues got hammered. Most of the non-core revenues lost were long distance voice, as a result of “targeted price adjustments implemented to improve margins.” Perhaps they will find their way to another second half ramp.
Costs & Margins: Both cost of revenue and SG&A went up sequentially, and gross margins fell 4% over the same period last year. When revenue declines while costs increase, EBITDA doesn’t generally fare well – hence the sequential drop to $35.7M, still better than last year’s $30.6M due to better SG&A performance. Hopefully as the year goes on we will see a return to something like last quarter’s EBITDA margins of 15%+.
Cash: Cash on hand fell back only slightly to $56.6m, and the company has yet to tap into the promissory note that Icahn extended back in October. So while they still obviously need to raise money for any expansion plans, things seem relatively stable otherwise.
Icahn’s buyout offer update – Nothing. No word since the special committee brought in JP Morgan to advise them 6 weeks ago. Recent rumors have them at least talking to potential buyers now though, which is the only thing that might explain why it has taken four months now to formulate some sort of response to Icahn’s offer of $0.70 per share. Perhaps we will hear something before the Q2 report in three months?
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Categories: CLEC · Financials
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Is this a typo?
“Both cost of revenue and SG&A went up sequentially”?
Thanks.
Are you guys every going to get around to responding to Icahn’s $.70 bid? Does it really take 5 months to respond?
Rob, do you still see LVLT as a player on this one? Also, given the customer base for XO, I’m not sure I like the idea from LVLT’s standpoint. Adding the backbone revenue would be a no-brainer since XO leases the strands from LVLT, but what about all those little edge customers… LVLT already shed a bunch of those from Broadwing if memory serves. Can you update your take on this view?
Level 3 has reasons to buy XO, and reasons not to buy XO. Hence, unless they are the only bidder I don’t think they win an auction should Icahn decide to hold one. The customer fit (misfit) is the primary reason, and a more likely buyer would be someone who values smaller customers more highly. (TWTC, PAET)
That said, at the moment I’m not convinced there is such an auction occurring – Icahn has cards yet to play even if he probably shouldn’t.
Yeah, you make 100% sense here. I’m desperately trying to calculate/time a sale of this company. I keep watching other assets (that I want to buy) climb while I’m waiting to cash out on XO. I am so tight on cash right now that the $60k I made on XO is significant. I just don’t want to pull any other of my holdings out to buy more metro … so that leaves me with the choice of using my reserves (and I am currently using much of them in real estate right now… and am strapped badly), or cashing out XO. I could sure use a little help on this. Unfortunately, nobody knows exactly what is in the cards for XO. I’m watching your board like a hawk these days… I’m betting we’ll see it here first… for a number of reasons .. and you know what I mean 😉
Predicting just how stubborn Icahn is would be risky. But there clearly is something going on with XO. The date for Icahn to respond to the R2 complaint keeps getting extended in 1 month intervals. I cannot see R2 agreeing to that unless there were a good reason like productive negotiations or a sale in progress. Even if the sale is just a way for Icahn to get comps for his own buyout of the company the comps wont come in anywhere near his .70 offer. It seems to me that we will know if there is a sale, a buyout, or a settlement fairly soon. Icahn made his offer months ago, the special committee hired counsel about 6 or 7 weeks ago. It cannot be too much longer and I doubt the outcome will be the status quo. It could be that the BOD sells to Icahn, but it wont be .70. However, you should consider my not so sterling record of predicting events at XO. The only right thing I did was back up the truck to buy more 2 years ago. I am sitting on a nice gain as well but just cant let go of what I think is coming. Good luck to all of us.
Icahn views XO as a “addition by subtraction” asset. Add profits in other investments and subtract them with losses by XO. It’s that simple. Move on as it’s not going to change anytime soon. No chance.
That’s what the NOLs are for, but there’s no need for *more* losses to make that work! The NOLs can be separated from the rest of the business if he can manage to gain 100%, at which point the situation would likely evolve rapidly.
Brian,
Where did you see the extension? Can you post a link?
Here is a link to the stip that extends the fiing date. https://iapps.courts.state.ny.us/fbem/DocumentDisplayServlet?documentId=tirVQewp3WtQ29z2QQ9QXg==&system=prod
In case it doesnt work you can google ny courts then go to the ny unified court system select supreme court search on R2 as a plaintiff and there you will find our case. All the documents are available there and the site is free. The amended complaint which spells out the case against Icon was submitted in Feb this year. The deadline for responding has been extended 3 or 4 times. The only reason I can fathom for R2 agreeing to an extension that many times is there are positive negotiations or a sale in progress.