Posted 05/2000
A Time to Refocus
GST Looks for New Management, New Strategy and New Money
By Ken Branson
According to its chairman, this month GST Telecommunications Inc. (www.gstcorp.com) will unveil its new strategy, which has been crafted over the past several months by its new management team. The company is also looking for money--though company officials won't say how much, nor what kind--to carry GST through to profitability.
Salomon Smith Barney Inc. (www.smithbarney.com) has been retained to "explore all funding options" for GST, while Deloitte Consulting LLC (www.dc.com) has been retained to review the strategy, but not to make it, says Thomas Malone, GST's interim CEO. In February, Malone brought Deloitte in to provide him with "an outside set of eyes."
"They're not here to create our strategy for us, but to provide input to it," Malone says. "It's difficult to pull seven or eight people off the work they're doing and work solely on the formulation of strategy papers. I felt it needed full-time work."
Malone adds that Deloitte has brought market research skills to the strategy-building process, and has examined the internal management reporting process at GST. Only days before its fourth quarter 1999 earnings conference call was to take place, Malone says, Deloitte caught an embarrassing error. In January, GST officials had made an arithmetic error that caused them to credit the company's network with about 400 more route miles of fiber than the 6,170 miles it actually controlled. Somewhere along the line, company officials say, somebody misplaced a decimal point. Deloitte discovered that error, then dove deeper into the numbers and discovered less significant, but still maddening mistakes.
"The new management administration is focused on the operational details of running the business, and that's what helped us catch these errors," Malone says.
Whatever the details of the new strategy, it would appear that the company has discovered data and the Internet, or rediscovered them. For two years, GST has owned an ISP, Whole Earth Networks, and the company possesses a web-hosting business.
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Two relatively flat quarters and embarrassing gaffs like the fiber-mile error have damaged |
That's why Malone came aboard as COO late last year. "We hired Tom because he's data centric," Chairman Robert Ferchat says. "The growth of the business is data centric. So our growth is in that direction."
If it unveils its new strategy on schedule, GST will face a skeptical audience among market analysts. There may be new management, but it wasn't permanent at press time. GST is searching for a permanent CEO. Two relatively flat quarters and embarrassing gaffs like the fiber-mile error have damaged the company's credibility on Wall Street.
Credibility is more important to GST than ever before because the company needs cash now more than ever before. The company has enough cash to get into the third quarter if, as Malone puts it, "nothing good ever happens to us."
Malone and Ferchat are quick to add that they expect lots of good things, such as a new CEO. They also expect to sell their Hawaiian property at long last, and they expect cash. Though they say the company's not angling to get bought, that's another possibility.
But a $1.1 billion debt makes GST hard to buy, and hangs over the company's future. "Liquidity is a huge gray cloud for them," says one analyst. "They're losing money, and their business doesn't appear to be getting any better."
Ferchat disputes the last point. He points out that GST's revenues in the fourth quarter were $69 million, a 38 percent gain over the same period in 1998. The revenues for 1999 were $321.9 million, a 97 percent gain over 1998. "Only in this business would we be somewhat defensive about a growth of 40 percent on a year-over-year basis," Ferchat says.
"They need cash by the end of the year, so something needs to happen," says Vance Edelson, associate analyst at Donaldson Lufkin & Jenrette Inc. (www.dlj.com). "But a $1 billion debt is not unusual for the CLECs, and [GST's] funding needs are modest compared to, say, NEXTLINK [Communications Inc., www.nextlink.com], which still needs over $1 billion more."
Another analyst says the $1.1 billion debt load will likely keep GST out of the capital markets, and may discourage potential equity investors. This may not be fair, he says, but it is a possibility. "Their debt levels aren't that outrageous for what we've seen with CLECs, but the capital structure is changing," the analyst says. "In the past, CLECs went to capital markets and did high-yield [debt]. But in today's environment, it just isn't the same sort of situation." Potential lenders and equity investors, like stock market investors, notice that they can make good returns on other CLECs, and will put their money there, the analyst says.
The first quarter of 2000 has been an action-packed one for GST.
First, Joseph Basile, GST's president and CEO, resigned "to pursue other interests" on January 25. Malone, who had just arrived at GST as COO, took over as interim CEO. Market reaction was swift and negative. GST's stock, which had been in the $10 range, lost 16 percent of its value within hours of the announcement of Basile's departure (see "GST Stock Price Linked to Milestones" chart below). The stock closed at $9, off 10 percent, with volume of 3.5 million. GST's average trading volume is less than half that.
GST continued to sell noncore assets. It sold the last of its interest in Global Light Telecommunications Inc. (www.ggbtelecom.com) in two chunks totaling $56.8 million. It sold an equipment division. Knowledgeable sources told X-CHANGE in March that MBN Communications had concluded a tentative agreement to buy GST's Hawaiian operations for $75 million. Neither GST nor MBN would confirm this report, but GST said it expected the sale of their Hawaiian property to close "sooner, rather than later."
On February 29, GST's stock was trading at $7.3125. On March 1, volume and the price began to pick up. Internet message boards following the stock suddenly began to buzz with rumors that Teligent Inc. (www.teligent.com) was negotiating to buy GST and that ICG Communications Inc. (www.icgcomm.com) was reportedly talking to GST's board.
GST Stock Prices Linked
to Milestones
Source: Author compiled
On March 6 came an advisory that GST's quarterly earnings conference call, scheduled for the next day, would be delayed until March 23. The advisory contained the cryptic phrase about new strategies and leadership. On March 7, the volume reached 4.4 million shares; on March 8, the price reached $10.3125, the highest it had been since Basile's departure.
Between March 8 and press time, the price and volume have declined. The stock was trading just below $6 at press time.
When the conference call was held March 23, it became clear that nothing much was going on. No buyer, no equity investor--not yet, anyway. But GST did announce the departure of CFO Daniel Trampush.
GST has, by consensus, a first- rate fiber optic network and a solid web-hosting business, but still seems weighed down by its immediate operational history and the strategy the company says it is trying to change.
During the past year, GST has presented itself to investors and the public as a forward looking, technically advanced company. GST has stopped referring to itself as a CLEC or even as a telecom carrier, and has taken to identifying itself as an integrated communications provider. Yet sources close to the company say it has not always behaved this way in its day-to-day operations. On the ground, these sources say GST has behaved like a telephone company. While executives at headquarters talk about data and the Internet, salespeople in the field continue to push voice services. The sweet spot was a small-business customer who would order a T1 and divide its 24 lines into voice and data, according to people knowledgeable about GST's sales organization. Data may be the future, but salespeople have to live and make their numbers in the present.
Malone may be changing that. Shortly after taking over as COO, and before Basile's resignation, Malone told X-CHANGE he intended to leverage GST's assets for high-speed Internet access, DSL and complex web hosting.
"We will be a very prominent Internet access company, with more robust data capabilities than we have today, and more pronounced web-hosting skills," Malone said then. "We will enjoy higher growth rates, and a different blend of sales components."
Observers say Malone is focused on improving operations and on bringing in his own team to do the work. "He's an operations guy," says one colleague. "That's what he knows; that's what he's focused on."
