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How to Pin Down a Galloping Colt

Analysts will be looking at 'growth in switched minutes' and other such measures to assess just how well Colt Telecom is faring.
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Colt Telecommunications


will release its earnings report on Thursday, and analysts will be looking well beyond revenue growth to determine if the company's rapid growth rate in Europe will continue.

Hemington Scott

, a British brokerage and information provider, polled six analysts and found the consensus estimate is for Colt to report a loss of 10.6 pence per share in 1998 compared with 1997's loss of 7.25p.

In its interim earnings report released in October, the company revealed that revenues for the nine months ending Sep. 30 grew 160% over the prior year's nine months -- to 142.8 million pounds. For all of 1998, analysts are expecting between 150% and 165% growth.

The phenomenal rise in Colt's share price -- from December 1996's IPO price of 275p to 1191p -- has been driven by the company consistently meeting or exceeding its network build-out that began in London and now covers 11 cities in seven European countries. The question is whether Colt's business model can continue to sustain the current levels of growth, especially now that the firm must focus on second-tier cities like Hamburg and Munich as its markets in London, Frankfurt and Paris mature.

Alas, revenue growth alone tells us little because building out networks necessarily means that revenues will rise, and Colt has already stated its aggressive expansion plan to spread its footprint to 26 European cities by 2001. So what should you be looking at instead? The experts, it seems, agree to disagree.

Claire Rothman, telecoms analyst at

SG Securities

, believes the growth in switched minutes -- voice, data or video transmissions via switching centers -- offers a useful insight. Rothman has an underperform rating on the stock. SG Securities has no investment banking relationship with Colt.

"Switched minutes offers a good gauge of whether Germany's business is growing at the same rate as it did in the U.K.," Rothman says. "Colt's London business is about 24 months ahead of Germany, so people are looking at the growth in switched minutes in Germany to see whether there is any divergence between the two."

Switched services in London began with an initial spurt of growth, which then steadily tapered off. Switched services on the continent appear to be following roughly the same pattern. According to Colt, quarterly growth in switched minutes in London in the third quarter of this year was 19%, but 42% for Germany and 51% for France.

However, there are two problems associated with this measure that limits its usefulness: The first is that Colt provides advanced data-centric applications that are valued in terms of bandwidth rather than minutes; the second, that Colt bundles many of its free services together with paying ones.

Instead, Paul Sharma, an analyst at the U.K. brokerage

Henderson Crosthwaite

, prefers to look at average revenue per customer or revenue per kilometer of fiber optic cable. Both of these measures take into account increasing competition in markets and the relative profitability of building out the network between different markets.

Annual growth in revenue per customer in the U.K. was 24% in 1997. Sharma forecasts that revenue growth per customer rose to 38% in 1998, but expects it to fall steadily over subsequent years to around 7% by 2002. Revenue per customer growth in Germany in 1997 was 77%, a figure that Sharma expects to surge 139% in 1998, but then to drop off sharply to 20% in 1999 and fall further to 11% by 2002.

"The expansion of Colt has been spectacular, but the market fundamentals that fueled this growth are beginning to change ... The competitive playing field is evolving, with companies such as

Level 3



due to enter the market this year," Sharma says.

Sharma also looks at the total of sales, general and administrative expenses, or SG&A, as a percentage of total revenues, to see whether Colt is achieving the economies of scale it should be in its maturing markets. In 1997, SG&A as a percentage of sales was a whopping 414% in 1997, but Sharma expects this to fall to 34% this year.

On the financial front, Christine Nairne, telecoms analyst at

BancBoston Robertson Stephens

, which has no investment banking relationship with Colt, says she is interested to know the status of earnings before interest, tax, depreciation and amortization, or EBITDA, in each of Colt's markets.

According to Colt, EBITDA in its London market turned positive in the second quarter of 1996, almost four years after Colt was established in 1992. Colt began its Frankfurt operations in March 1996, and this business had turned EBITDA positive after only 22 months.

Nairne says she is looking to see whether this encouraging trend will continue in the other cities where Colt is operational. Nairne has a market-perform rating on the stock

There may be many different measures that the analysts are looking at, but the experts just want to answer one key question from shareholders like Klaus Martini, the head of European equities at

Deutsche Fund Management

: "Is Colt a growth stock or a grown-up growth stock?"