XO Narrows Expected Loss, but Wants to Talk About the Future

You could call it an earnings surprise. XO Communications (XOXO) was supposed to talk about its earnings. Surprise! Why talk about revenue numbers when you can address the company's chances for survival given a $1 billion funding gap in the next five years?

XO put off talk of Street-beating earnings to discuss its viability as a business. Public markets are too stingy to allow XO to skip forward happily into new markets with all the money it needs. Instead, XO is cutting $2 billion in expansion plans, taking private funding and scrambling to scrape together another $1 billion to keep the company going.

Put your party hat on, this is going to be fun.

XO Communications Chairman Dan Akerson thanked investors for sticking with the Craig McCaw brainchild and insisted he's "in this game for the long haul," even as XO was abandoning its long-haul network in the U.S. to darkness. XO can't afford to light up the fiber just yet. Oh yeah, it can't afford to do business in Europe either. In all, XO is slicing $2 billion in planned spending out of its plans for the next five years. But it can afford to offer 50 million shares of common stock to Forstmann Little for $250 million, increasing Forstmann's investment in the company to $1.45 billion for 22.4% of the company. XO is reducing the pricing on Forstmann's previous preferred shares from $31.625 to $17.

Cake anyone?

XO made the majority of its expansion cuts by repenning its contract with Level 3 Communications (LVLT). Level 3 gets back the nine European networks it sold to XO in November 2000. Any money XO has already paid will be applied to U.S. networks XO agreed to buy in July 1998. Additionally, XO is cutting its 2001 plans for spending on network build-outs from almost $2 billion to around $1.3 billion. XO will expand its domestic network to only two new cities this year.

Now, time for pin the tail on the broadband carrier, everyone.

XO's results for the first quarter ended March 31 weren't as alarming as its corporate outlook. XO beat Street estimates for earnings with a $1.31 a share loss vs. the $1.36 loss analysts were expecting, according to Multex.com. XO's revenue fell short, however, with its 10% sequential improvement to $277.3 million missing analyst's $281 million consensus expectations. EBITDA losses narrowed to $77.1 million from the fourth quarter's $88.7 million, but were wider than the year-ago quarter's $63.1 million miss.

Bring in the fortuneteller!

Akerson painted an upbeat picture with the dreary colors at his disposal. Capital spending cuts starting now would trim 2001 capex levels by $600 million to a range of $1.3 billion to $1.5 billion. Based on lukewarm efforts in the less-lucrative DSL business, cutbacks in e-commerce efforts and no added room on networks and data centers, revenue for 2001 will come in at $1.27 billion to $1.3 billion, $300 million to $310 million of that coming in the second quarter. Management expects EBITDA losses to decrease while revenue climbs, with its EBITDA loss hitting $205 million to $235 million for the full year, $65 million to $75 million of that in the second quarter. High growth is not out of the picture yet -- as long as we're putting that $1 billion funding gap out of our minds -- and Akerson expects 2002 revenue to leap to $2 billion.

Now, on to that $1 billion XO needs to keep in business in the next five years -- XO is determined not to sell any more stock at bargain prices, pushed up more than 8% into the high $4 range at midday Thursday on excitement that Forstmann has some semblance of faith in the broadband provider. XO has $2.5 billion at its disposal, $388 million of that in a line of credit. As CFO Wayne Rehberger put it, "we remain cautiously optimistic for the remainder of year and outlying years."

Who said this isn't a party?

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