New Edge Networks: On the Road to Profitability?

For two years now, New Edge Networks Inc. has avoided handing its employees pink slips and is on pace to reach free cash flow by the end of the first quarter of 2003, said spokesman Sal Cinquegrani.

New Edge, a privately held broadband services provider, came to a stark realization in the fall of 2000 as it combed the financial world to raise senior debt.

Wall Street had started its exodus.

So New Edge, which is backed by Goldman Sachs, three venture capital firms and its own management, ceased its construction frenzy and eliminated about 150 jobs, representing nearly a third of its workforce. New Edge now has about 280 employees, who primarily are based in Vancouver.

Dan Moffat, the president and chief executive officer of New Edge, plays a key role in representing the interests of the competitive industry. Moffat, who co-founded New Edge, is the vice chairman of the Association for Local Telecommunications Services and a member on the board of the Competitive Telecommunications Association.

In an interview Tuesday, Cinquegrani said New Edge has no plans to sell the company and is not actively pursuing financing.

“We have never approached this business with the idea we were going to build this company and then sell it,” he said. “Our management team is very entrenched into this organization and we are building this company to operate.”

New Edge has approximately $383 million in total invested capital. In June the company closed an agreement to convert $131 million of vendor and bank debt to equity, leaving New Edge with around $36.5 million in total debt as of Sep. 30. Interest payments are not due until September 2004 and the principal balance is due in September 2006.

The company’s primary investor is Goldman Sachs. Other contributors include Crosspoint Venture Partners, Greylock and Accel Partners. Representatives for Accel and Goldman did not return phone calls Tuesday seeking comment. All four companies have representatives on the board of directors.

Rich Shapero, managing partner with Crosspoint, said investors are pleased with the progress of New Edge.

“Despite a rough environment the revenues have continued to build. They are very close to profitability now and I think that the investors are quite happy with the progress,” he said.

Venture capitalists are likely to seek a return on their investment in New Edge through an initial public offering, though that could be years down the road, Shapero said.

“There is not a rush to return capital. Our objective is to have a very long term view on these things,” Shapero said. “”If it takes years in order to generate sufficient public interest in the company to justify a public offering at a reasonable valuation then that is fine.”

David Sze, a general partner with Greylock and a member of New Edge’s board of directors, also said New Edge will reach a profit shortly. The opportunity to generate a return on investment will come “if you keep the management team focused on building a business.” Achieving that goal is more important than the time period in which investors will generate a return on investment, Sze said.
“We take a pretty long-view on these things,” he said.

Meantime, New Edge is seeking opportunities to pick up assets. The company recently entered an agreement with Cable & Wireless to migrate part of 1,200 business customers to its own network.

C&W, headquartered in the U.K., is shutting down its circuits Dec. 31. Under terms of the agreement, New Edge will pay C&W a fee for successful migrations of customers for dedicated Internet access, frame relay, and private line services.

New Edge had estimated it could generate up to $45 million in new revenue as a result of the migrations. However, business customers already had started to migrate to other providers when they found out C&W was contemplating exiting areas of its business. Cinquegrani estimates New Edge could migrate about half of those customers by the end of the month, though he was reticent to give a dollar value due to variables associated with those customers.

“Cable & Wireless sounds like a good deal for them,” said IDC research manager Ron Kaplan. “They could gain a lot of revenue from that.”

Analysts don’t have access to New Edge’s financial statements because it is a privately held company, but Cinquegrani said it is generating an annual run rate of around $70 million and its third quarter revenue growth is more than double that of a year ago.

New Edge has managed to grow its revenue and survive an unprecedented shakeout, in large part, by tapping a wide spectrum of distribution channels, Cinquegrani said. Those sales channels include independent sales representatives, hundreds of ISPs and the Baby Bells, who in many cases are not authorized to carry long-distance data traffic.

New Edge offers three distinct business services: dedicated Internet access and DSL as well as ATM and frame relay services. Each business line contributes about the same amount of money to the overall run rate, Cinquegrani said.Kaplan, of IDC, said one area New Edge has proved successful is in providing frame relay services to the Bells’ business customers in areas where the incumbent is not authorized to provide long-distance services. With the Bell companies swiftly gaining federal authorization to provide long-distance services within their local territories, New Edge’s revenue could be threatened, he said.

“Certainly that is something the Bell companies could take over I would think,” Kaplan said. “They could lose some of that revenue.”

But Cinquegrani said New Edge has “not seen a loss of revenue” from the Bells who have gained long-distance approval. New Edge continues to receive orders from them, he said, explaining the incumbents still have to build and expand infrastructure and operating systems to handle the data traffic.

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