"These outstanding results demonstrate the rapid pace at which we continue to expand our global communications network and telecom services offerings," said Bob Annunziata, Chief Executive Officer of Global Crossing. "In the past twelve months, we've completed three major acquisitions and formed two joint ventures, solidifying our network presence in North America, Europe and Asia and expanding our service offerings beyond bandwidth to provide our customers with a full range of telecom services. One year ago our revenue was $420 million, and now we are running at ten times that level. In that time, we have grown from 148 employees to over 12,000, and expanded the number of major cities connected by our network from two to over 200. Today, we offer seamless end-to-end connectivity from Paris to New York to Tokyo through our integrated Global Crossing Network. We are well on our way to achieving our vision of becoming the world's premier provider of fully integrated, data-oriented products and services."
Highlights since the third quarter include:
Closed the acquisition of Racal Telecom, which has a 4,500 route mile U.K. network utilizing IP-centric technologies and a reach of more than 2,000 cities and towns across the UK. This network will be within 5km of almost 70% of all U.K. business customers by 2001.
Completed formation of the Asia Global Crossing (AGC) partnership with Microsoft and Softbank to develop broadband systems throughout Asia.
Formed Hutchison Global Crossing, a $1.2 billion joint venture with Hutchison Whampoa. This joint venture, closed January 12, 2000, provides Global Crossing with a network in Hong Kong and, when regulations permit, entry into the Greater China region.
Initiated service on Pacific Crossing-1 in December 1999, three months ahead of schedule, and inaugurated Pan-European Crossing and Mid-Atlantic Crossing.
Completed the North American Crossing Network (formerly the Frontier Optronics Network), consisting of 20,000 route miles in the United States. Lit three additional OC-192's on North American Crossing, bringing total OC-192 capacity on the network to 500,000 gigabit miles. Also completed the first phase of a multi-vendor IP over OC-192 field trial. This service is expected to roll out commercially on North American Crossing in the first half of 2000.
Expanded the GlobalCenter footprint with new Sunnyvale and Anaheim media distribution centers, and formed GlobalCenter Japan, a partnership between Asia Global Crossing and IRI, in January 2000. Announced a plan to construct 10 new media distribution centers worldwide in 2000.
Provided the world's first IP connectivity via an optical wavelength link, interfacing at OC48's/STM16's. The link will carry commercial traffic between London and New York at 2.5 gigabits per second.
Expanded International Private Line (IPL) service to provide retail customers greater flexibility at reduced cost. Access to London, Amsterdam, Frankfurt, Paris and Tokyo is currently available and access will be available to 18 additional cities within the next six months.
Launched a new wholesale Asynchronous Transfer Mode (ATM) product to carrier customers who can now use Global Crossing's network to support multiple applications (data, Internet, voice & video) over a single platform.
Additional deployment of our Voice Over IP (VOIP) platform to a total of seven regional switching centers. Global Crossing is currently in the process of deploying 18 trunking gateways, which will cover the United States, and three soft switches with connectivity to its ATM backbone in this new €˜NexGen' network.
Global Marine Systems' cable-laying ship, Bold Endeavour commenced service on December 31, 1999.
Appointed former AT&T and TCI executive Leo Hindery as Chairman and CEO of GlobalCenter.
Appointed former Dell and AT&T executive John Legere as new CEO of Asia Global Crossing.
Highlights for pro forma results include:
On a pro forma basis for the year 1999, revenue was $4.1 billion and recurring Adjusted EBITDA was $1.2 billion, driven by continuing strong global demand for broadband services. Fourth quarter Adjusted EBITDA declined compared to the Company's strong 1998 fourth quarter, as it increased spending to augment its sales force, to add network and web hosting capacity, to add to its fleet of installation and maintenance vessels, to activate new fiber optic systems, and to consummate and integrate its acquisitions. In addition, the costs of terminating international traffic rose, and delays in third-party subsea cable projects deferred recognition of certain profits under Global Marine's percentage-of-completion contract accounting method.
Pacific Crossing 1 (PC-1), which entered service in December 1999, is an unconsolidated joint venture. When Global Crossing includes PC-1 capacity in a sale to a customer, Global Crossing purchases the capacity from PC-1 and combines it with capacity from other systems for sale to the customer. Accordingly, Global Crossing's revenue includes the sale of PC-1 capacity to the customer, and its Adjusted EBITDA reflects the margin on that sale, based only upon the amount paid to PC-1 for capacity purchased. The remainder of this operating margin is reflected in PC-1's results, the Company's share of which is included in equity in earnings of affiliates.
PRO FORMA CONSOLIDATED SEGMENT RESULTS
The Company's reported business segments are Telecommunications Services, Installation and Maintenance Services and Incumbent Local Exchange Carrier Services ("ILEC"). Recurring corporate and administrative costs are fully allocated to these segments. However, amounts relating to merger and integration expenses and other non-recurring items are segregated into the Corporate segment.
Highlights for pro forma results for Telecommunications Services include:
Data revenue, which includes bandwidth products, was 46 % of total product revenue in the fourth quarter of 1999, up from 40% in 1998. Data revenue increased 63% year-on-year.
Commercial Services
Commercial Services include GlobalCenter and business-to-business long distance voice and data services. Pro forma combined revenue for the fourth quarter and year was $322 million and $1,274 million, respectively.
In North America, for the seventh consecutive quarter, data products continued to grow at triple digit rates. Fourth quarter frame relay revenue increased 237% year-on-year and sales from dedicated internet were up 122%, while web hosting revenue increased 196%. For the full year, growth rates for the same products were 304%, 159% and 187%, respectively, over the prior year.
GlobalCenter more than doubled its complex web-hosting business and nearly doubled its customers for the year. During the year, two new huge media distribution centers were opened in Anaheim and Sunnyvale, bringing the total to eight media distribution centers. Currently, 1.3 million square feet are under lease.
The Competitive Local Exchange Carrier (CLEC) Business provides facility-based service in 40 markets, with 27 new markets entered during the year. Revenue grew 28% in the quarter over the same period last year with full year growth of 46%. Facility-based access lines grew nearly five-fold from year-end 1998.
Always-on, high-speed SDSL Internet access was offered in 28 major markets. This offer is expected to extend to 38 markets by the end of the second quarter of 2000.
Consumer Services
Consumer Services includes retail long distance voice and data services. Pro forma combined revenue for the fourth quarter and for the year was $47 million and $188 million, respectively, which represent declines from 1998. Although the Company continues to de-emphasize non-ILEC service territories, consumer long distance market share within the ILEC territories grew from 33% at December 31, 1998 to 43% at December 31, 1999.
Carrier Services
Carrier Services includes all subsea and terrestrial network facilities and related services sold to carrier and Internet Service Provider customers. Pro forma combined revenue for the fourth quarter and for the year were $483 million and $1,609 million, respectively, representing growth of 25% and 48%.
The rapid growth of this unit included an 87% increase in wholesale minutes sold on a year-on-year basis as well as strong growth in international city-to-city circuit activations. Responding to customer demand for trans-Pacific capacity, a number of circuits to Tokyo were activated immediately after Pacific Crossing 1 (PC-1) and the Global Access Ltd. Japan systems were declared ready for service in late December.
In North America, data product revenue in this segment- primarily private line -grew 614% and 588% for the quarter and the full year, respectively.
Fourth quarter 1999 results for Carrier Services reflected planned increases in costs that were incurred as the Company built its worldwide sales force, expanded GlobalCenter web hosting facilities, integrated acquisitions, and incurred the initial maintenance costs of the newly lit systems in advance of revenue recognition. As discussed above, the activation of PC-1 contributed only marginally to fourth quarter 1999 Adjusted EBITDA, because PC-1 Adjusted EBITDA is not consolidated.
Global Crossing's total unrecognized backlog remains at over $2 billion and was supported by new and returning customers, including Exodus, Microsoft, KDD, Level 3, MCI Worldcom, Deutsche Telekom and Softbank.
Installation and Maintenance Services
Installation and Maintenance Services provides worldwide subsea cable installation and maintenance.
Highlights for pro forma results for Installation and Maintenance Services include:
Global Marine, the Installation and Maintenance business segment, added three ships since our acquisition, with five ships scheduled to enter service early in 2000. Global Marine also announced an agreement with Maersk to charter ships as needed, with the first five ships to come into service during 2000 and 2001 under the agreement.
Fourth quarter installation revenue declined from a year ago due to the completion of major projects, such as Southern Cross in the third quarter of 1999, and Gemini and SeaMeWe 3 in the fourth quarter of 1998. Delays in the TAT-14 and U.S.-Japan cables, which had been scheduled for installation during the fourth quarter of 1999, deferred the realization of revenue on those projects. Adjusted EBITDA for the fourth quarter was also lower due to these factors, and due to increased costs related to new ships that were being readied for service during the quarter and will enter service in 2000.
Incumbent Local Exchange Carrier Services
Incumbent Local Exchange Carrier ("ILEC") Services includes wholesale and retail local exchange telephone services.
Highlights for pro forma results for ILEC Services include:
The Rochester-based ILEC operation continued to exceed service metrics required by the New York State Public Service Commission.
Adjusted EBITDA for the year was impacted by the addition of technical staff, which resulted in a measurable improvement in the customer service metrics. Market deployment of the consumer ADSL product, LightningLink, was initiated in selected markets in the fourth quarter. Response to this product has been extremely positive.
Accounting Matters
During the third and fourth quarters of 1999, changes in the business activities of the Company, together with a newly effective accounting standard, caused the Company to modify certain of its practices regarding recognition of revenue and costs related to sales of capacity. None of the accounting practices described below affect the cash flows of the Company.
As a result of an accounting standard that became effective July 1, 1999, revenue from terrestrial circuits sold after that date have been amortized over the terms of the related contracts. Previously, these sales had been recognized as current revenue upon activation of the circuits. This deferral in revenue recognition has no impact on cash flow.
With the consummation of the Frontier acquisition on September 28, 1999, service offerings became a significant source of revenue. Consequently, the Company initiated service contract accounting for its subsea systems during the fourth quarter, because the Company, since that date, no longer holds subsea capacity exclusively for sale. As a result, since the beginning of the fourth quarter, investments in both subsea and terrestrial systems have been depreciated over their remaining economic lives, and revenue related to service contracts have been recognized over the terms of the contracts. Revenue and costs related to the sale of subsea circuits have been recognized upon activation if the criteria of sales-type lease accounting have been satisfied with respect to those circuits.
During the fourth quarter, the Company's global network service capabilities were significantly expanded by the activation of several previously announced systems, and by the integration of other networks obtained through acquisition and joint venture agreements. With this network expansion, the Company began offering its customers flexible bandwidth products to multiple destinations, which makes the historical practice of fixed, point-to-point routing of traffic and restoration capacity both impractical and inefficient. To ensure the required network flexibility, the Company will modify its future capacity purchase agreements and its network management in a manner that precludes the use of sales-type lease accounting.
Because of these contract changes, and the network management required to meet customer demands for flexible bandwidth, multiple destinations, and system performance, the Company anticipates that most of the subsea circuits activated after January 1, 2000 will be part of a service offering, and therefore will not meet the criteria of sales-type lease accounting. Consequently, revenue related to those circuits will be deferred and amortized over the appropriate term of the contract. In certain circumstances, should a customer's specific terms meet the requirements, the Company will be required to follow sales-type lease accounting with revenue recognized upon payment and activation.
The Company does not anticipate significant changes in the terms of payment for capacity sold, and notes that the accounting recognition of revenue and cost for such capacity sales does not affect the cash flow from such contracts.
The Company notes that accounting practice and authoritative guidance regarding the applicability of sales-type lease accounting to the sale of capacity is still evolving. Based on the accounting practices described above, the Company believes that changes, if any, in accounting practice or authoritative guidance affecting sales of capacity would have little or no impact on its results of operations.
If none of the contracts recognized in the fourth quarter of 1999 had met the requirements of sales-type lease accounting, the Company would have deferred approximately $200 million of additional revenue, and incurred an additional loss of approximately $20 million. In addition, Adjusted EBITDA would not have changed materially, and cash flow would have been unaffected.
Definition of Terms Used
In this press release, "incremental cash deferred revenue" refers to the cash portion of the change in deferred revenue. Adjusted earnings before interest, taxes, depreciation and amortization, "Adjusted EBITDA," refers to operating income (loss), plus goodwill amortization, depreciation and amortization, non-cash cost of capacity sold, stock related expense, incremental cash deferred revenue, and amounts relating to the termination of the advisory services agreement. This definition is consistent with financial covenants contained in the Company's major financial agreements. "Recurring Adjusted EBITDA" refers to Adjusted EBITDA plus amounts relating to merger and integration expenses and other non-recurring items.
About Global Crossing
Global Crossing Ltd. (Nasdaq: GBLX) is building, and offering services over, the world's first global fiber optic network with 97,200 announced route miles, serving five continents, 24 countries and more than 200 major cities. The Global Crossing Network and its telecommunications and Internet product offerings will be available to over 80% of the world's international communications traffic. Global Crossing hosts more than 300 of the top Internet brands at its web hosting division, GlobalCenter. Among the brands are some of the largest and most densely trafficked sites on the Web, including Yahoo!, The Motley Fool, Ziff Davis, MP3.com and eToys. Global Crossing's operations are headquartered in Hamilton, Bermuda, with principal offices in Los Angeles, California; London, England; Morristown, New Jersey; and Rochester, New York. For more information, visit www.globalcrossing.com.
Statements made in this press release that state the Company's or management's intentions, beliefs, expectations, or predictions for the future are forward-looking statements. Such forward-looking statements are subject to a number of risks, assumptions and uncertainties that could cause the Company's actual results to differ materially from those projected in such forward-looking statements. These risks, assumptions and uncertainties include: the ability to complete systems within currently estimated time frames and budgets; the ability to compete effectively in a rapidly evolving and price competitive marketplace; changes in the nature of telecommunications regulation in the United States and other countries; changes in business strategy; the successful integration of newly-acquired businesses; the impact of technological change; and other risks referenced from time to time in the Company's filings with the Securities and Exchange Commission.