Global Crossing continues invest/grow strategy, sees value in industry consolidation

Global Crossing (Nasdaq: GLBC), like its other competitive global provider contemporaries, is looking for a way to improve its profitability after facing one of the worst economic downturns since the Great Depression.

Speaking at this week's Deutsche Bank 18th Annual Leveraged Finance Conference, John Kritzmacher, Chief Financial Officer, Global Crossing said the drive for the rest of 2010 and into 2011 is to focus on an invest and grow strategy. Not surprisingly, Global Crossing's invest/grow strategy, including the declining wholesale voice business, is focused on emerging IP-based services for both its enterprise and wholesale carrier and content customers.

"As we made our way through 2008, 2009 and into 2010, we continued to focus on growing our invest and grow revenue base and that has the benefit of improving our overall profitability trend over time," he said. "In fact, as we made our way through the second half of 2010, our invest/grow rose to 88 percent of our overall revenue base."

Similar to much of its global competition, Global Crossing continues to see its TDM voice declines, while IP services continue to grow.

But even as the TDM-based network service revenues decline, Gary Breauninger, Chief Financial Officer, North America and Worldwide Carrier Services, was quick to point out that many of its customers will continue to run dual TDM/IP networks for some time.

"There will always be a base of business in our wholesale voice segment," he said. "A lot of our customers, whether they be enterprises or carriers, dual operate TDM as well as IP networks. One of the things we do across multiple protocols, whether it be Frame/ATM, VPN, SONET and Ethernet capabilities, we allow customers to operate together as well as give the customer the runway to allow them to migrate from legacy networks to IP."

On a regional basis, Global Crossing's invest/grow revenue base in 2009 grew by six percent, while the UK declined by five percent, Latin America up 9 percent, and the rest of world (primarily North America) rose 10 percent due to IP network migrations.

The UK market has been a bit of a challenge for Global Crossing over the past year. What contributed to declines in the UK were certain government agencies which did not renew their contract with Global Crossing. In particular, Global Crossing's contract with the UK Lottery, which made up 10 percent of the revenue base, came to an end when the agency decided to migrate to a satellite-based technology that it does not support.

Despite losing key contracts with the UK government, Global Crossing is still very bullish about the UK market. Going forward, the plan will be to shift towards targeting new large enterprise deals.

"In the UK, the business has been under a bit of pressure in what is an extremely competitive environment," Kritzmacher said. "We're in the process of evolving our revenue base, which is 50 percent UK government today, 25 percent enterprise and 25 percent carrier, to grow the non-government base."

Of course, the other question for Global Crossing is what its own M&A strategy as the U.S. service provider market continues down a new path of consolidation. This consolidation has been driven mainly by 2 ILEC and competitive telecom providers.

While Kritzmacher would not comment on any specific M&A plans, he did recognize the need for consolidation and that making an acquisition in North America to enhance its network and service capabilities is not out of the question either.

"If you look at our business in particular and where we think there would be benefits from consolidation, the two most obvious points are our business in North America where we continue to grow and improve capabilities relative to scale, but our network reach is still somewhat limited," he said. "Our assets in combination with another substantial player in North America would give rise to substantial cost synergies in terms of managing and delivering services in the network."

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