UUNet
Q2
| UUNet
Q2
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| (FOOL
CONFERENCE
CALL
SYNOPSIS)* By Debora Tidwell (MF Debit) UUNet Technologies<% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: UUNT)") else Response.Write("(NASDAQ: UUNT)") end if %> UNION CITY, Ca., July 30, 1996/FOOLWIRE/ --- UUNet reported Q2 1996 earnings this morning. Revenue growth continued at a very fast pace. They had about $57 million in revenue which was up 185% from Q2 last year. Net income for the quarter was $1,067,000 or about $0.03 per share, compared to last year's loss of about $1.9 million.
EBITDA was $6.4 million for the quarter compared to a loss of $401,000 in Q2 1995.
The company felt that they had completed a really excellent quarter that was very positive in all respects. They feel the business is in good shape heading into their merger with MFS which is expected to finalize on or about August 12, 1996.
SALES
With regard to the revenue growth, the company noted that if software sales are excluded, their core Internet services revenue for the quarter grew extremely fast, at about 296% year over year. Software sales in their business are simply to facilitate the sales of Internet services. And, with the advent of Windows 95 and free browser software, their software sales have been reduced on a trend they expect to continue.
Their new order rates for the quarter were also very positive in all locations, both domestically and internationally. The sale of new high-speed dedicated connections continued on a very positive trend and were well ahead of plan. They had 1,011 new orders for the quarter in the US for dedicated connections compared to 439 in Q2 last year. Internationally, the received another 224 new orders compared to 128 last year.
REVENUE HIGHLIGHTS
Their revenue per connection also continued to improve as customers continue to order higher bandwidth connections and also as they continue to upgrade, which is very important to their ongoing margin situation. Upgrades to previously purchased connections were at a record pace in Q2.
The core Internet services revenue, excluding Microsoft, grew by 33% on a sequential quarterly basis to $31.4 million in Q2. This growth was fueled by increased sales of high-speed connections and bandwidth upgrades as well as an increase in dial-up revenues. As they stated before, the sale of high-speed dedicated units is really the key growth driver in their core business. In that regard, they believe that the market for Internet access continues to be demand driven and that they are on track in terms of meeting their growth objectives.
On the Microsoft side of the business, related revenues grew by 43% on a sequential quarterly basis to $22.6 million in the current quarter. Their Microsoft network program continued to be very strong with deployment ahead of plan in all respects. Revenues from Microsoft represented about 40% of total revenues during the current quarter, up modestly from 37% in the first quarter. Both of these increases were somewhat higher than they originally anticipated. This is partially due to the rapid deployment of UUNet's international hubs during the quarter, which were essentially funded by Microsoft. As sales to other commercial accounts take place over the next few quarters, this will yield a higher percentage of revenue from commercial accounts and a smaller percentage of overall revenue from the Microsoft account. Their relationship with Microsoft is strong and they continue to benefit from Microsoft's expansion of MSN, in particular on the international front.
The only revenue weakness was in UniPalm's 3rd-party software sales as mentioned, where that revenue had decreased by 25% from Q1 to $3.0 million in the current quarter. While this decrease was not unexpected it has occurred faster than anticipated and reflects increased competition in the UK softer reseller market as well as the company's focus on Internet services. They expect to see continued weakness in software revenues in the future from UniPalm.
MARGINS
They reported an operating profit of $1.4 million, marking their second consecutive quarter of operating profit. They accomplished this despite the fact that they kicked off a significant advertising campaign in Q1 and that continued strongly into Q2, and they acquired UUNet Canada in Q2 which is currently operating at a loss.
Overall, their Internet services gross margin has continued to improve and they continue to obtain leverage on most of their basic operating costs. On the bottom line they are pleased that they earned net income of $0.03 per share even though they are continuing to invest in UniPalm, UUNet Germany, and now UUNet Canada. The strength of the US core business and Microsoft business is really what has allowed them to make these investments and still achieve their profit numbers. They believe this is rather unique in their industry.
NETWORK DEPLOYMENT PROGRESS
As far as network deployment, they have continued to increase their access points regularly over the last year. They now have approximately 742 points of presence deployed with 448 of these POPs outside the US. For comparison purposes, last year at this time they had 98 POPs deployed. The deployment of new POPs has been extremely rapid over the last year. They think that within the US, the focus is going to shift from concentration on deployment of new POPs toward a more balanced view of deployment of new POPs plus deployment of additional capacity within existing POPs. They are going to be working in conjunction with Microsoft on the forward capacity planning and deployment.
Outside the US, they are going to develop relationships as fast as they can with ISPs around the world. Some of those relationships will turn into merger and acquisition discussions. They continue to be on the acquisition track to gain international presence and partnerships. Some of those relationships will not turn into merger agreements, but will just be alliance arrangements. They also continue to expand their international presence in other ways. They just completed the acquisition of Metrix Interlinks which is a Montreal-based Canadian Internet service provider. Combined with UUNet Canada, this gives them a significant presence in Canada.
ALLIANCES AND THE MFS MERGER
As far as other major deals, they announced several alliances during the quarter but the most significant by far was the alliance with GTE. GTE selected UUNet to provide national Internet service in 46 states. GTE will be using both their dial-up and dedicated network facilities under this arrangement. While they did not announce the exact size of the deal, they said it will be worth multiple millions of dollars. They saw this deal as very important to them because it enhances their position as an infrastructure provider to other online service providers as far as any industry which has been, over time, a key piece of their strategy. They do provide infrastructure and other facilities to many of the online service providers and other Internet providers in the industry.
The biggest news of the quarter was the merger with MFS which they expect to close around August 12th. They believe that the combination of MFS's high-bandwidth infrastructure and local access facilities with UUNet's Internet expertise and Internet facilities creates a new kind of communications company with extraordinary potential.
The company was asked about Earthlink's recent decision to use PSI as a vendor. UUNet indicated that this deal had no impact on their continuing business with Earthlink. They said it was simply a decision on Earthlink's part to have a secondary vendor relationship, a backup, in place because of criticism the company had received about their reliance on a single vendor. * A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. | |
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