XO Hints at M&A, Doesnt Talk Channel, in 3Q Report

XO Communications Inc. (XOHO.OB) could be the next consolidator in the CLEC industry. And with NuVox now snapped up by Windstream, XO’s target – or targets – is anybody’s guess.

The Virginia-based CLEC said in its third-quarter earnings report on Tuesday that it’s keeping an eye out for “strategic investments.”

“We believe that certain opportunities exist today in the highly competitive CLEC industry that may not recur such as, but not limited to, the acquisition of other CLECs,” XO said, adding it plans to “seek to raise appropriate levels of capital in the near future” to fund such initiatives.

Getting the money might not be an easy task, as XO intends to avoid high-interest debt. Even though the recession is said to be ending, favorable credit terms remain hard to find. And, XO noted, burdening itself with pricey debt would defeat the purpose of operating in an industry filled with rivals, not to mention dealing with the restrictive covenants that often accompany such borrowing. Those legal constraints could keep XO from pursuing M&A, just one of the growth strategies it’s mulling to remain competitive against what it called “much larger” telecom and cable operators. And in the spirit of staying competitive, XO said it will require “significant and additional” capex for its fiber network.

The news came as XO announced it netted $19 million in the third quarter of 2009, thanks mostly to the $16.3 million conversion of certain securities into cash. Revenue was higher, too, climbing $8.1 million to reach $382 million.

Still, that revenue fell by $3.6 million as compared to the second quarter of 2009. That’s because XO increased the margins on its wholesale long-distance products by adding new suppliers and changing pricing, the company said. Indeed, broadband services drove the company’s earnings and XO said the trend will pick up speed as demand for legacy and TDM services continues to fall.

It was unclear how much the indirect channel contributed to XO’s earnings, as the CLEC did not break out the amount of sales brought in by internal and external salespeople. Nor did XO discuss its apparently shifting indirect channel strategy, which has caused heartburn among a number of traditional carrier services agents. The CLEC reportedly is moving away from selling through those parties, relying more on data VARs. Those companies and individuals take referral commissions, which cost a provider much less than the residuals paid to agents.**

Meanwhile, XO is looking to new improvements to help it meet year-end goals. The provider now offers MPLS IP-VPN services in all 50 states and in 22 countries and said recent long-haul expansions have more than doubled its inter-city transport network capacity.

“We believe the company is well-positioned to end the financial year on a strong note and carry that momentum into the year ahead,” Carl Grivner, XO’s CEO, said in a prepared statement.

XO’s stock was trading higher on Tuesday on its earnings report. Shares had risen 3.08 percent, hitting 67 cents, at 11:41 a.m. Eastern.

**This paragraph is erroneous. XO has set the record straight with PHONE+ on its channel strategy. To read more, click here.


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