Chatting with Jon A. DeLuca, CEO of Fibernet Telecom
Posted on November 16, 2006
We continue to believe that companies with high-replacement cost fiber
in metro areas are best positioned to benefit from the consolidation
wave sweeping the IP Transport and Colocation services market. As such
we were pleased to have recently had the opportunity to chat with Jon
A. DeLuca, President and Chief Executive Officer of FiberNet Telecom
Group (FTGX), a company that owns strategic metro fiber assets in key
US cities. While FiberNet’s cash profits are on the upswing, Fibernet’s
stock (FTGX) still trades at a significant discount to fully-diluted
tangible book value, and therefore appears to offer a low-risk way to
invest in the growth of the metro fiber and IP Services markets.
Envoy Global Research:
Can you give us a brief overview of the services that FiberNet Telecom provides?
Jon A. DeLuca for FiberNet Telecom Group (FTGX):
FiberNet provides interconnection services to many of the world’s largest telecommunications carriers and service providers, enabling them to exchange voice, data and video traffic by connecting their diverse networks. Our business has two main components that we integrate to provide these services.
Firstly, we own and operate nearly 100,000 square feet of carrier-grade co-location and data center space in the two key gateway markets of New York/New Jersey and Los Angeles. This part of our business is similar to Equinix (EQIX), Internap (INAP), and Switch and Data, a company that has recently filed to go public.
The other component of our business is our transport service, which is similar to Broadwing (BWNG), Level 3 (LVLT) and many of the other companies that Level 3 has recently acquired. In the transport business we provide connectivity services, ranging from T-1’s to 10 gigabit wavelengths, utilizing legacy TDM and SONET protocols, international protocols like SDH, and next generation standards including Ethernet and IP. We also provide services for the conversion and exchange of the multiple protocols to facilitate network interconnections for our diverse customer base.
Envoy Global Research:
Who are some of the specific clients that you provide transport and co-location services to?
Jon A. DeLuca:
Though I can’t discuss individual client relationships for competitive and confidential reasons, I will note that we provide service to 242 customers from 30 countries on six continents. So our customer base is very diverse and no single customer contributes more than 10% of our revenue.
In addition, we provide services to seven of the G8 incumbent carriers and also have significant penetration into emerging market carriers. Our business is very focused on the international marketplace. For specific customer relationships that are public knowledge, I would point readers to some of our past press releases, on our website at: www.ftgx.com, where we highlight some of our customer wins, which include recent deals with Internap (INAP), Savvis (SVVS), and British Telecom to name just a view of our publicly-known clientele.
Envoy Global Research:
How is the company doing from a financial perspective?
Jon A. DeLuca:
Well, for the third quarter of 2006, our most recent quarter, we reported year-over-year revenue growth of 20.2% and EBITDA growth of 159.1%. We also generated levered free cash flow, defined as EBITDA less cap-ex and cash interest expense, of approximately $700,000, a significant achievement for the company.
These outstanding financial results are the product of a highly focused business strategy that generates significant operating leverage. Our reputation in the marketplace and the differentiability of our network infrastructure and capabilities has enabled us to drive profitable growth, while not increasing SG&A expenses.
Envoy Global Research:
What are Fibernet’s major competitive advantages?
Jon A. DeLuca:
By operating key colocation facilities and the 60 Hudson Street Meet-Me-Room, we are well positioned to serve as a landing point for international telecommunications companies establishing a presence in the United States.
Leveraging that strong market position, our network infrastructure enables a customer to reach approximately 700 other communications and data networks through one single interconnection to our network.
In addition, our Network Solutions business, as part of our professional services subsidiary Availius, also allows us to expand our addressable market to provide connectivity anywhere in the United States. This service offering is actually the fastest growing area of our business, with third quarter revenues increasing 84.0% over the prior year.
Envoy Global Research:
What initiatives is the company currently taking to accelerate growth via entry into new markets?
Jon A. DeLuca:
Within the past year, we launched two new initiatives. One is Availius, our professional services subsidiary, which provides off-net transport services. The other is Phonomenum, our Voice-over-IP (VoIP) peering platform.
As regards to VoIP, we have developed a robust suite of VoIP services, including gateway services, VoIP switch partitioning, our Minutes Marketplace and an ENUM registry, to maximize the opportunities created by rapid VoIP adoption and network migration to IP-based communications.
To further the development of our VoIP services, we recently established an agreement with Columbia University to support research into various important aspects of VoIP. Professor Henning Schulzrinne, Chair of the Department of Computer Science at Columbia University and one of the world’s leading authorities on Internet Protocol (IP) technologies, will lead the research effort.
Finally, in terms of growth in our colocation business, we are also analyzing the possibilities of expanding our presence in this area, although we have no definitive plans at this time.
Envoy Global Research:
There have been several major acquisitions in your industry this year. How does this consolidation affect FiberNet?
Jon A. DeLuca:
Consolidation in the industry this year has served to rationalize the marketplace. I believe it bodes well for FiberNet, as we are able to further differentiate our products and service capabilities. There certainly will continue to be an important role for a focused, nimble operator, like FiberNet, that provides outstanding customer service across a broad range of vital carrier offerings.
Envoy Global Research:
Any thoughts about selling FiberNet given the high valuations afforded to similar companies in recent acquisitions?
Jon A. DeLuca:
Right now, we’re really focusing on the organic growth of our business.
Most importantly, we are keenly focused on creating value for our shareholders, and we think that is best achieved by continuing to deliver profitable growth. In the last year, the market has begun to reward our strong financial performance, and we hope that this continues.
Envoy Global Research:
What challenges does FiberNet face in the future?
Jon A. DeLuca:
Our major challenge will be to maintain our focus on tightly managing our operations as our business expands. In addition, since we are in an industry that is constantly changing due to new technological developments, we want to make sure that we benefit from the technological advancements that will change the landscape, such as VoIP and metro Ethernet. It is very important for us to stay at the crest of the technology curve, without missing a beat in terms of customer service.
Envoy Global Research:
What major factors should investors focus on when evaluating Fibernet’s performance over the coming few years?
Jon A. DeLuca:
They should focus on our ability to maintain profitable top-line growth. We believe that the addressable market for our services is expanding, and our goal is to continue to drive revenues with outstanding returns for shareholders. Our business has certainly hit an inflection point, in terms of free cash flow generation, and our capital efficiency and operating leverage are keys to this current success and our future growth.
Envoy Global Research:
Jon, thanks for your time and we look forward to watching FiberNet’s progress in the coming year.
Disclaimer:
Envoy Global owns shares in FTGX. This site may include
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