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Global Crossing Improves Gross Margins as Revenue Falls

Global Crossing Ltd. on Tuesday reported a 21 percent decline in revenue for the first three months of the year, but improved its gross margins as the worldwide network services operator strived to get closer to profitability.


First-quarter revenue of $526 million declined over the previous year by $140 million in step with the companys decision to deemphasize its legacy wholesale voice operations, a business characterized by low margins.


Global Crossing slightly lowered its net loss from $109 million to $107 million while gross margins rose from 28 percent to 39 percent.


The company said revenue in its invest and grow category expanded over the quarter a year ago from $268 million to $273 million. Global Crossing defines this category as the core businesses supporting global enterprises, government clients and collaboration and carrier data customers. Gross margins in this category rose year-over-year from 50 percent to 54 percent.


Global Crossings first quarter results continue to prove our execution against a focused business plan that is accelerating our pace toward profitability, Global Crossing CEO John Legere said Tuesday. Global Crossing has not given guidance on when it expects to become profitable, but has said it anticipates reaching two key milestones next year: EBITDA positive and cash flow positive.


Global Crossing is adding to revenue when it sells businesses Internet Protocol services because it does not have a large base of enterprise customers that want to move away from higher-priced legacy data services such as private lines and frame relay, says Global Crossing Chief Marketing Officer Anthony Christie.


That is accretive revenue to the company because we didnt price down a base, he said in an interview. Were not cannibalizing our existing revenue base.


Christie says enterprises are beginning to put applications beyond data over Global Crossings IP network, including voice and video. That reduces costs.


Our backbone [network] is able to deliver more services at roughly the same cost structure, he says.


In October 2004, Global Crossing announced a large business restructuring plan geared to woo worldwide enterprise customers and de-emphasize lower-margin legacy voice services. Wholesale voice revenue of $219 million declined 38 percent compared to the first quarter of 2004, while gross margins in this category improved from 9 percent to 17 percent following a spate of price increases.


The wholesale voice market has been characterized by plummeting prices for several years, but Christie says the prices in the industry are almost identical to what they were a year ago at this time.


He also says the prices of traditional data services and commoditized IP services, such as IP transport, are beginning to stabilize in the industry. The prices of these services, Christie says, are down 20 percent to 25 percent over a year ago. He says that compares to a 2004 decline of 40 percent over the previous year.


Global Crossing is hustling to court big businesses in a telecommunications market that is rapidly consolidating. SBC Communications Inc. and Verizon Communications Inc., the two largest regional phone companies, are seeking government approval to acquire AT&T Corp. and MCI, the two biggest long-distance carriers.


Christie says Global Crossings business plan to reach cash flow positive in the second half of 2006 is not based on the assumption that the company will acquire another firm or be acquired.


However, he did not rule out the possibility of a merger.


Singapore Technologies Telemedia Pte. Ltd., Global Crossings majority owner, views us as a perfect platform to do something that is accretive to shareholders, Christie says.


Global Crossing has been exiting what it considers non-core businesses. The company expects to generate $22 million in net proceeds through the recently completed sale of its voice trader business to WestCom Corp. Global Crossing also announced plans in March to sell its small business group to Matrix Telecom for $40.5 million. Christie says that agreement should close in the third quarter.


The company projects 2005 revenue of between $1.8 billion and $1.95 billion, down from 2004 revenue of $2.49 billion.


Global Crossing ended the first quarter with $277 million in unrestricted cash and cash equivalents.



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