The Anglo File: Colt Likely Riding High, if Stung a Bit by Euro Slide

LONDON -- The trouble with doing business in Europe at the moment is the euro.

That's likely to be the message from the Colt Telecom (COLT), which is expected to report a slight decline in revenue growth because of the currency's weakness when it announces its third-quarter results Tuesday.

Colt remains susceptible to any declines in the euro's value because around 65% of its sales come from the Continent, but it reports its figures in sterling. So with the euro mining new lows despite futile efforts by the European Central Bank to prop it up, analysts have been cutting their revenue forecasts for the quarter to around 166 million ($237 million) from around 168 million. This would represent sequential growth of 9% compared with sequential growth of 11% to 14% for the previous four quarters.

A problem? Not according to most analysts. They see any dip in revenue growth from the pathetic euro as a slight negative in another strong quarter from the alternative carrier.

A Galloping Colt

Following strong quarterly demand for Internet protocol connectivity and other bandwidth services reported last week by rival KPNQwest (KQIP), Colt also is expected to show sustained growth in the quarter, driven by the rollout of additional city networks as well as the contribution of new services such as Web hosting.

During the quarter, Colt added Rome and Antwerp, Belgium, to its fiber-optic network. This will be followed by Stockholm in October. With the completion of Birmingham, England, and Dublin before the end of the year, Colt will have fiber-optic networks in 27 cities in 11 European countries, giving it one of the most extensive local-access networks in Europe.

Switching Business

Colt is also showing progress in moving away from its reliance on the switched minutes business -- voice or data traffic that is billed per minute -- which is coming under increasing pricing pressure as competitors undercut each other. Concurrent with building the network, Colt is rapidly building local data centers, with seven operational and 20 planned by the end of 2001.

"It is here that many investors are looking, the deployment of value-added services," Julie Lamirel, of Lehman Brothers, wrote in a report Monday. "These not only enhance margins and reduce churn but also drive demand for additional bandwidth capacity from existing customers." (Lehman has no investment banking relationship with Colt, and Lamirel rates the shares a buy.)

Bill Dixon, an analyst at Robertson Stephens, picks out Web hosting as a key business for Colt.

"The economics are really magical," Dixon said. "For every 1 Colt spends on offering Web hosting, it gets about 5 or more in traffic revenue to the hosted site." (Robertson Stephens has no investment banking relationship with Colt, and Dixon rates the stock a buy.)

Although Colt is undoubtedly making progress in this area, one can't escape the brutal fact that Europe's alternative carriers have seen their share prices roughly cut in half over the past six months on concern over the huge amounts of capital expenditure needed to build the infrastructure. Colt closed Monday down 1.3% at 21.3, which is 48% down from its high of earlier this year.

Although Colt says it is fully funded for the expansion of its network until the end of 2002, the telco has never been shy about asking the market for money. Colt raised 371.7 million in equity in March, only to raise another 352.8 million in debt and equity in April.

If Colt's capital expenditure forecasts of 800 million per year sounds high, at least investors can take comfort from the fact that if the euro keeps falling, Colt's cash balances in sterling will be worth more and more.

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