RE: contracts and survivability of telecom sector

["Tomas L. Byrnes" <tomb () byrneit net>]

To some extent, you're both right. I actually have some background in
this, so bear with me.

The telecom business is, fundamentally, about wringing as much marginal
additional cash flow out of your fixed infrastructure and operations
costs as possible. There are variances around the margins, such as
contribution margin of new services as they are marketed, but,
fundamentally, it's about constraining fixed costs and driving revenue.

One of the most important fixed costs is the leasing of the equipment,
fees for rights of way, etc.

Effectively, what has been the primary factor that drives the
profitability of facilities based providers has been the spread between
the leasing rates and the rates of return on capital their regulators
have allowed them. Hence the description of facilities telcos as "rate
factoring" businesses.

When the cost of money goes up, as it does in the current credit crunch,
it makes it next to impossible for facilities based providers to
economically improve their facilities, given the relatively inelastic
ROIC allowed by the PUCs.

VZ has the cash flow, but they'll use it to pay off the notes, as
opposed to roll over the notes and invest in the business, if the rate
factor on the new credit is uneconomic.

IOW, those selling gear to Telcos are in deep doo-doo.


> -----Original Message-----
> From: Valdis.Kletnieks () vt edu [mailto:Valdis.Kletnieks () vt edu]
> Sent: Monday, October 06, 2008 9:17 PM
> To: Patrick Giagnocavo
> Cc: nanog () nanog org
> Subject: Re: contracts and survivability of telecom sector
>
> On Mon, 06 Oct 2008 23:45:15 EDT, Patrick Giagnocavo said:
>
> > If you assume for example, that Verizon has notes of 10-year terms,
> > then (if the notes are spread evenly) they will need to borrow some
> > $4Billion in the next 12 months.
>
> Close but no cee-gar.
>
> They'll need to come up with $4B to pay off the notes.  There's no
> requirement that they borrow to do it.  They can do it out of their
> revenue stream, for instance, just like most people who have to make a
> mortgage payment will do so out of their paychecks, rather than
> borrowing to do it (and in fact, if a person or company is relying on
> borrowing to pay off previous debt, that's a Bad Sign).