Telecom and Data Services: Fiber: A Sector Evolves

Telecom and Data Services
Industry Overview
October 29, 2010
Analysts
Fiber: A Sector Evolves

Conclusion: We believe increasing utilization of private WANs (wide area networks) and the public Internet will increase demand for fiber-based networks over the next several years and that this will create significant investment opportunities. After nearly ten years of 1) market consolidation, 2) increasing utilization, and 3) improving pricing, we believe we have reached an inflection point. Specifically, we believe the network has become an essential component of everyday life in both personal and business environments and that this trend will accelerate in coming years. This in turn should drive doubledigit revenue growth and increasing ROIC for the next few years for pure play bandwidth infrastructure providers focused on providing data-oriented services to wholesale and enterprise customers.
Colby Synesael (646) 562-1355 colby.synesael@cowen.com Jonathan Charbonneau (646) 562-1356 jonathan.charbonneau @cowen.com
A Reintroduction to the Revitalized Bandwidth Infrastructure Industry. Over the next few years we expect bandwidth infrastructure to evolve into a sizable standalone segment of the telecom services industry. While there will continue to be demand for voice-oriented services (even if it is primarily VoIP), we believe fiber companies that focus on providing a simplified/focused set of data services will generate the most growth and highest margin. Although telecom networks were originally designed to help transport voice, it is clear today that voice is only an application and that companies focused on delivering all content over a horizontally aligned network are best positioned. Where we believe companies will be able to differentiate is on 1) network density, 2) on-net locations, and 3) uniqueness of route. Relevant public companies. AboveNet (ABVT); Alaska (ALSK), AT&T (T), Cablevision (CVC), CenturyLink (CTL), Cogent (CCOI), Comcast (CMCSA), FiberTower (FTWR), Global Crossing (GLBC), Knology (KNOL), Level 3 (LVLT), Hickory Tech (HTCO), PAETEC (PAET), Sprint (S), TowerStream (TWSR), tw telecom (TWTC), Verizon (VZ), XO (XOHO).
Please see addendum of this report for important disclosures.

www.cowen.com
Sections
Introduction...5 Market Consolidation5 Increasing Utilization...7 Improving Pricing.....10 Copper Will No Longer Do..11 Another Large Buildout is Unlikely.....11 Service Offerings..............................................13 Customers..16 Ethernet Exchanges..17 Wireless Backhaul18 Conclusion...20 Company Example.22 Definitions.24 M&A Transactions 2006-Present25 Company Directory..26
Charts
Chart 1: U.S. Wireline Capex....5 Chart 2: CLEC Industry circa 2001....6 Chart 3: Notable 2010 Fiber Acquisitions......7 Chart 4: Global IP Traffic.......8 Chart 5: Broadband Subscriber Growth.....8 Chart 6: Average Consumer Broadband Speed....9 Chart 7: Elasticity of Price vs. Demand...10 Chart 8: Max Speed and Distance for Various Copper-Based Solutions ....11 Chart 9: Typical Capex Allocation.....12 Chart 10: OSI Model....13
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Chart 11: U.S. Ethernet Market Forecast..15 Chart 12: U.S. IP MPLS VPN Market Forecast..16 Chart 13: Customer Examples.....17 Chart 14: Ethernet Exchange Providers.....17 Chart 15: Example IRR for Fiber Backhaul.....18 Chart 16: Wireless Backhaul Network......19 Chart 17: North American Mobile Backhaul Connections Forecast...20
October 29, 2010
Forward
While the opportunity to invest in specific companies is obviously important, this report primarily focuses on investment trends. However, we do mention various companies in the report that we believe exemplify some of the opportunities that we discuss. In addition, at the end of the report (see page 26) we provide a list of public and private companies that provide bandwidth infrastructure solutions. For a more in-depth analysis of the public companies we cover (see page 32), please contact your sales representative to receive our individual company reports.
October 29, 2010
Introduction
We believe increasing utilization of private WANs (wide area networks) and the public Internet will increase demand for fiber-based networks over the next several years and that this will create significant investment opportunities. After nearly ten years of 1) market consolidation, 2) increasing utilization, and 3) improving pricing, we believe we have reached an inflection point. Specifically, we believe the network has become an essential component of everyday life in both personal and business environments and that this trend will accelerate in coming years. This in turn should drive double-digit revenue growth and increasing ROIC for the next few years for pure play bandwidth infrastructure providers focused on providing data-oriented services to wholesale and enterprise customers. Although the first fiber optic cables were deployed in the late 1970s to help improve the delivery of voice traffic, the benefits were focused on reducing cost in the core where large volumes could be aggregated and transported over long distances more economically than copper. While this helped open up a new wave of competition that led to reduced long distance pricing, the value proposition of fiber outside the core remained limited. It was only in the mid-1990s with the commercial adoption of the Internet and the passing of the 1996 Telecom Act that it became apparent that building a last mile fiber network that extended to the end user premise and replaced the copper network would represent a new sector and have significant value.
Market Consolidation
Between 1996 and 2000 hundreds of fiber networks were built in the United States by a variety of local utilities, government sponsors, and individual companies. Although these networks were expensive to build and required significant planning, the bullish outlook on the Internet economy during this time, and the passing of the 1996 Telecom Act, helped create significant investment interest.
Chart 1: U.S. Wireline Capex
$80 $70 $60 Billions $50 $40 $30 $20 $10 $0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: US Census Bureau, Annual Capital Expenditures Survey
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Like many technology trends however, demand took longer to reach fruition than expected and many companies that took on significant debt to support the builds were not able to survive. For example, of the 37 public companies the Telecommunications Industry Association identified as CLECs in its 2001 report, 23 had filed for bankruptcy by the end of 2003.
Chart 2: CLEC Industry circa 2001
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Company Adelphia Business Solutions Advanced Radio Telecom Corp. Allegiance Telecom, Inc. Allied Riser Communications Choice One Communications, Inc. Convergent Communications Corecomm Ltd. Covad Communications Group CTC Communications Group, Inc. Cypress Communications, Inc. DSL.NET Inc. E Spire Communications, Inc. Electric Lightwave FiberNet Telecom Group, Inc. Focal Communications Corp. General Communication GST Telecomm Inc. ICG Communications Intermedia Communications, Inc. Status BK March 2002 BK April 2001 BK May 2003 Acquired Feb. 2002 BK October 2004 BK March 2001 Acquired June 2002 BK August 2001 BK October 2002 Acquired April 2002 Acquired April 2006 BK March 2001 Acquired June 2002 Acquired September 2009 BK December 2002 Never went BK BK May 2000 BK November 2000 Acquired July 2001 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 Company ITC Deltacom, Inc. Log on America, Inc. McLeodUSA, Inc. Mpower Communications Corp. Net2000 Communications, Inc. Network Access Solutions Network Plus Corp. Northpoint Communications NTELOS Inc. Pac-West Telecom, Inc. RCN Corp. Rhythms Netconnections, Inc. Teligent, Inc. Time Warner Telecom, Inc. US LEC Corp. USOL Holdings, Inc. Winstar Communications XO Communications, Inc. Status BK June 2002 BK July 2002 BK February 2002 BK April 2002 BK November 2001 BK June 2002 BK February 2002 BK January 2001 BK March 2003 BK May 2007 BK May 2004 BK August 2001 BK May 2001 Never went BK Acquired March 2007 BK November 2005 BK April 2001 BK June 2002
Source: Telecommunications Industry Association 2001 Annual Report, Company data, Cowen and Company
Because many of the telecom companies that did not survive owned fiber that had already been placed in the ground, there was a significant amount of interest in acquiring these scarce assets during the downturn, albeit at a fraction of what it cost to build them. As a former boss of mine was prone to saying, there was significant value knowing where the bodies were buried. Some of the acquisitions made by telecom providers were to expand geographical presence while others were to increase network utilization by shuttering one network and combining traffic. This was particularly helpful in improving margin, considering the high degree of fixed costs to run a network. Other assets went to buyout firms or market speculators. By the end of 2003 much of the weaker companies assets had been liquidated and the industry as a whole was in survival mode. However as the economy began to improve in 2004 and the valuation of many public telecom providers improved, another wave of acquisitions began. Although transactions were no longer being done for pennies on the dollar they were still considered good prices compared to what it cost to build the networks and what many of these companies were valued at before the bubble burst. Speaking with several providers who were involved, many viewed this round of acquisitions as the last group of fiber companies with sizable revenue and an opportunity to further improve market pricing/rationalization. By the end of 2007 the economy and the telecom industry in general were doing very well. At the same time the promises of the Internet that were made in the 1990s were being seen in companies like Amazon (ecommerce), FaceBook (social network), and Salesforce.com (SaaS). The use of broadband (BB) had also significantly increased and businesses were now utilizing the network for a wide variety of tasks. With many of the larger fiber-oriented companies already acquired, M&A shifted to smaller deals. Companies began rolling up several of the remaining pure play assets. Private equity also emerged as a serious player since the industry provides many favorable characteristics including recurring revenue, a scalable model, and fragmentation (still).
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Chart 3: Notable 2010 Fiber Acquisitions

12.2x
10.3x
10.0x 8.4x
9.5x
9.7x
LTM EBITDA
7.8x 6.8x
Target Acquirer Value (MM)
Lexent Lightower $110
Fibertech Court Squared $535
KDL-Norlight Windstream $782
WV FiberNet Ntelos $170
AFS Zayo $100
Veroxity Lightower $21
AGL Zayo $71
RCN Metro ABRY $496
Source: Company data, Cowen and Company
The increase in strategic M&A in the last few years has also been partly driven by the change (or the perceived change) within the regulatory environment. Unlike the heavily regulated copper networks (or whats happening in the U.K.), fiber networks are largely unregulated. Current laws do not require incumbent carriers to sell fiber to other carriers at mandated wholesale rates. The concern then is that as the incumbents build out fiber networks they may elect to shut off parts of the copper network, which would leave competitive providers either without a way to reach customers or force them into a commercial agreement with the incumbent or another competitive carrier that could disrupt the economics of its business.
Increasing Utilization
According to Cisco, as of 2008, YouTube and Hulu generated twice as much monthly traffic as the entire U.S Internet backbone in 2000. Cisco also estimates that global IP traffic will grow at a CAGR of 34% between 2009 and 2014. We believe IP traffic growth is directly correlated to increasing utilization of fiber networks since one of the primary values of fiber is that it supports higher capacity. We believe there are three interrelated events taking place that have led to IP traffic growth including increasing BB 1) users, 2) speeds, and 3) intensive applications.
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Chart 4: Global IP Traffic
70,000 60,000 Petabytes 50,000 40,000 30,000 20,000 10,000 0 2009 2010 Internet 2011 2012 2013 2014
Managed IP
Mobile Data
Source: Cisco VNI: Global Mobile Data Traffic Forecast Update 2009-2014, Cisco VNI: Forecast and Methodology, 2008-2013
Drivers Over the past 10 years BB users at home, at work and on the go (wireless), have increased significantly. This is most obvious in the residential market where in the U.S BB penetration is now over 65% compared to approximately 4% in 2000. While residential BB users should continue to increase slowly, the majority of BB user growth in the U.S. going forward will come from wireless adoption and business expansion. According to IDC, the U.S wireless broadband market will grow from 6.5MM subscribers in 2009 to 30.2MM in 2014, which equates to a CAGR of 36.1%. Surprisingly, there is a lack of information that shows business utilization of BB, although empirical observation suggests most businesses today use broadband and that future user growth will come from business expansion.
Chart 5: Broadband Subscriber Growth
200 Millions 150 100 50 0 2000 2001 2002 2003 2004 2005 2006 2007 2008
Mobile Broadband Subscribers Mobile Data Subscribers

Source: FCC Fourteenth Annual Wireless Report (2010)
Fixed Broadband Subscribers
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Ten years ago network connections at home and at work barely qualified as BB (>256Kbps) and wireless BB did not exist; however today this is significantly different. Median advertised BB speeds in the U.S. increased from 1.5Mbps in 2000 to 7.0Mbps in 2009 (FCC). According to Cisco, in 2000 the average global residential Internet connection download speed was 127Kbps vs. 4.4Mbps in 2010. Although most residential users still rely on coaxial cable modems or copper- based DSL, it accelerates wholesale demand for fiber. Within wireless, advancement of 3G and 4G (LTE and WiMAX) is also accelerating demand for fiber- based backhaul (see page 18). Within the business market, demand for Ethernet and IP VPNs that require >100Mbps service is accelerating, which typically requires fiber-based connections.
Chart 6: Average Consumer Broadband Speed (Mbps)
8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 0.8 1997 1.5 2000 2.4 2003 2006 2009 4.0 7.0
Source: FCC Broadband Performance Report (2010)
Over the past 15 years the use of the Internet has evolved from one of curiosity to one of ubiquity due to the increasing value of the applications and content being made available. While many of these applications require minimal bandwidth such as email or voice-over-IP (VoIP) others, like massive multiplayer online gaming (MMOG) and web conferencing, require significant bandwidth. At the same time the type of content being made available has transitioned from user generated (ex: early version of YouTube) to professional (ex: current version of Hulu). Importantly, these trends are not just evident with consumers, but also inside enterprises where the use of rich content websites and increasingly complex applications has become the norm.
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Improving Pricing
During the 1990s the largest network builds were long-haul routes connecting major cities to one another. Many companies partnered with other companies to help offset the costs, but it also meant that competitors were offering service on the same route. Making things worse, since many providers had a considerable amount of fiber strands they also sold dark fiber indefeasible rights of use (IRUs) to other competitors. When demand failed to reach fruition a significant glut of capacity led to commoditized pricing on many long-haul routes. Although utilization has gone up considerably in the last few years and IRU sales have continued to decline as the market consolidates, this glut remains on many of the more popular long-haul routes today. There has been less pricing pressure on regional routes or metro routes. While much of the investments during the last major build focused on long-haul routes there was less focus on routes that connected to the last mile providers or directly to an end user location. According to Vertical Systems Group (www.verticalsystems.com), only 22.9% of all businesses in the U.S. with greater than 20 employees are now connected with fiber, of which the majority is large enterprise locations. This is because of the additional cost and effort required to dig up city streets and connect to buildings, which can require elongated negotiations with city officials and building landlords. As a result, regional and metro fiber networks have experienced more stable pricing. While we generally assume that pricing is weaker for long-haul routes and stronger for regional or metro routes, it is important to note that the biggest impact is based on uniqueness of the route and end points, regardless of what type of route it is. It just happens that most unique routes are regional or metro. That said, the importance of diversification has increased the value of alternative long-haul routes that go to popular destinations (New York to Chicago) or for long-haul routes that go to destinations that have minimal networks built to them (New York to Fargo). Elasticity of Demand for Bandwidth is High Since the cost to support capacity is largely fixed, a provider who wants to sustain a profit should only lower its price as utilization increases. This is because the cost of bandwidth is associated with the cost a network provider spends to build capacity and is not necessarily tied to utilization. Said differently, if the cost to support capacity is 100 and the network operator has one customer it needs to charge that customer at least 100. However, if it adds a second customer it can rationally reduce the price per customer to at least 50. Using this logic, it is fair to assume that the price of bandwidth when measured on a per unit basis (ex: MB) is on a perpetual decline; however, high elasticity of demand will be able to support profitable revenue growth.
Chart 7: Elasticity of Price vs. Demand (Absolute and Percentage)
0% 10% 20% 30% 40% 50% 0.0% $2,000 $2,200 $2,400 $2,600 $2,800 $3,000 -5.0% $1,900 $2,090 $2,280 $2,470 $2,660 $2,850 Y/Y Price Decline -10.0% -15.0% $1,800 $1,700 $1,980 $1,870 $2,160 $2,040 $2,340 $2,210 $2,520 $2,380 $2,700 $2,550 -20.0% $1,600 $1,760 $1,920 $2,080 $2,240 $2,400 -25.0% $1,500 $1,650 $1,800 $1,950 $2,100 $2,250 0% 10% 20% 30% 40% 50% 0.0% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% -5.0% -5.0% 4.5% 14.0% 23.5% 33.0% 42.5% Y/Y Price Decline -10.0% -15.0% -10.0% -15.0% -1.0% -6.5% 8.0% 2.0% 17.0% 10.5% 26.0% 19.0% 35.0% 27.5% Y/Y Demand Increase Y/Y Demand Increase -20.0% -20.0% -12.0% -4.0% 4.0% 12.0% 20.0% -25.0% -25.0% -17.5% -10.0% -2.5% 5.0% 12.5%
Note: Assume $20 base price per MB and 100 MB base demand or $2,000
Source: Cowen and Company
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In the immediate years following the bubble, the price of bandwidth decreased irrationally (i.e. below cost) as competition first accelerated and then companies fought to survive. As the market consolidated, pricing declines returned to historical patterns. Today, although bandwidth pricing continues to decline, lower equipment costs and growing bandwidth demand are enabling profitable double digit growth for providers of bandwidth infrastructure solutions. Thus, when we describe pricing trends as improving, we are in part referring to the total revenue a provider is generating from a customer location/route. Importantly, this excludes when a customer adds additional locations or services, which would be upside.
Copper Will No Longer Do

While improvement in technology has extended the life of legacy copper-based networks, physical limitations are starting to reduce the financial justification of upgrading such networks. The major disadvantage to copper-based networks is their limited bandwidth capacity. In addition, since copper-based networks use electrical signals to transport information they can suffer from multiple quality issues including a higher likelihood for attenuation or a weakening of the signal. This is more likely to occur as the distance between equipment increases. As a result, copper based networks need many additional amplifiers and repeaters, with thousands generally needed to replace a single high-bandwidth long-haul fiber cable.
Chart 8: Max Speed and Distance for Various Copper Based Solutions
Max Downstream (mbps) 5 12.5 25 100 Max Distance (miles) 1.75 1.10 1.25 0.25
SHDSL ADSL ADSL2plus VDSL2
Another Large Buildout is Unlikely

Considering the high costs and the significant time required to build a fiber network, today many providers are expanding in current markets or extending into adjacent markets rather than building in completely new markets. These providers are typically building out based on indications from current customers for specific capacity on specific routes. In addition, by expanding rather than building new they are able to leverage existing infrastructure, which can have a very positive impact on the associated return. Also, as demand for fiber directly connected to an end user location continues to increase, the value of building a deeper network is also increasing since it positions competitive providers as viable alternatives to the incumbent for last mile access.
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When a provider does expand in a completely new market it typically leases out dark fiber from another provider versus building a new network. By doing so it can significantly reduce the cost associated with a build as well as time to market. If it is successful growing the customer base, the provider eventually could increase its margin by building its own network, although this would occur over an extended time period. As a result of the 1) high cost, 2) time required, and 3) unknown demand, to build a new network, we believe the risk of additional companies entering the fiber industry is small. To our knowledge, Allied Fiber and Spread Networks are the only new companies that are building entirely new (long-haul) fiber networks in the U.S. Build versus Buy Logic We estimate that in 2010 the average EBITDA multiple (LTM) paid for a fiber company was 9.3x. While each deal is unique and it is difficult to quantify exactly how much it would cost to build a similar network (costs vary widely based on type of route and location), it is not just the cost to build the physical network that has to be considered, but also the time it would take to 1) build the network, 2) hire the employees, and 3) generate similar cash flow. All providers that we spoke with said they only consider entering a new market if they can do so through acquisition and instead prefer to focus new builds on current or adjacent markets. We estimate that the majority of new builds being done are success based, meaning it is being done for a customer that will enable the provider to generate a positive return on the project. Typically most providers target at least a 30% IRR to take on a new project, although in recent years providers have reduced the initial IRR for specific projects like wireless backhaul that they believe have a high likelihood of being renewed or generating additional revenue (ex: another tower tenant takes service). In addition, current federal stimulus funding is enabling some providers to partner with the government where in some cases the government will pay for 80% of the build.
Chart 9: Typical Capex Allocation
15.0%
20.0% 65.0%
Success
Speculative
Maintenance
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Potential for High ROIC While it is important for fiber companies to sign customers to multi-year deals to offset the large amount of capex that is required to add a customer (ex: building a fiber lateral to the customers location) and generate the proper IRR, the ability for fiber companies to generate a high ROIC (return on invested capital) is tied to the ability to maintain and grow that customer. Because the cost to operate a network is largely fixed (i.e. high incremental margin) and because the incremental capex required to add bandwidth is small (ex: 1GB Ethernet to 10GB Ethernet), when a customer increases its bandwidth requirements the provider is able to generate a high ROIC. We estimate that many fiber providers generate north of 20% ROIC.
Service Offerings
Customers who purchase bandwidth infrastructure buy a combination of services that support their specific needs. One of the more helpful ways to understand the various services and how they interact with one another is to view them as part of the open systems interconnection (OSI) model. The OSI model helps subdivide the communications system into smaller parts called layers. By thinking of each layer as a function that provides a service to the layer above it and receives service from the layer below it helps conceptualize the different types of solutions providers typically sell. Note that bandwidth infrastructure services are Layer 1 thru Layer 3, although some carriers offer additional Layer 4 thru Layer 7 services.
Chart 10: OSI Model
Application 7 End-to-End Layers Presentation 6 Session 5 Transport 4 Network 3 Chained Layers Data Link 2 Physical 1
Internet (L3) SME customer for direct Internet access, with multiple upstream transit providers IP VPN (L2/3) Regional retailer or bank/ATM network connecting all sites and forming the backbone for data and voice connectivity Ethernet (L2/3) Wireless carrier for backhaul from towers
to MSO
SONET (L2) CLEC using regional SONET private line ring

connecting main POPs in one or more markets
DWDM (L2) 2.5GB low latency wave between trading operations in Chicago and to an electronic exchange in New York Dark Fiber (L1) Financial institution or a Casino connecting multiple sites to a remote/consolidated storage or processing center
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Dark fiber Dark fiber is optical fiber, dedicated to a single customer, where the customer is responsible for attaching the necessary equipment and lasers to light the fiber. Although dark fiber can be expensive and fewer providers are now selling it than 10 years ago, there is still demand from customers who prefer to have complete control over the network. Dark fiber is typically leased under long-term agreements of 10 years or more and can be either structured as an operating expense or a capex expense known as an indefeasible right of use (IRU). Churn is very low. The throughput of dark fiber is dependent on the equipment the customer attaches. WDM and DWDM Wavelength-division-multiplexing (WDM) was created to help mitigate bandwidth constraint issues by combining multiple optical carrier signals onto one optical fiber by using different wavelengths or colors of light to carry each signal. Dense wavelength-division-multiplexing (DWDM) uses tighter channel spacing and can deliver more throughput over a single fiber. Modern systems can handle up to 160 signals (10 Gbps per signal) for total theoretical capacity of 1.6 Tbps per fiber. This has reduced much of the need for additional fiber on current routes, although the equipment to light a wave or lambda or fractional fiber can still be expensive. SONET (similar to Private Line) Synchronous Optical Network (SONET) was created in the mid-1980s to help regional telephone companies exchange various types of data and video traffic more efficiently and economically than could be done over the public service telephone network (PSTN). SONET is a legacy solution that some fiber-based providers customers use to transport Ethernet. SONET transmits data at speed greater than 155 Mbps and is refereed to as a self healing network because it is typically deployed using a ring architecture (although not always), which has the capability to transfer traffic in the opposite direction if a fiber cut occurs. Ethernet Ethernet is being adopted as the underlying service transport by enterprises, consumer triple-play platforms, and more recently, wireless backhaul. Developed by Xerox in 1973 (IEEE standard 1985), Ethernet is replacing legacy services such as SONET, Frame Relay and ATM because it provides more flexible bandwidth options and is highly scalable, which in turn makes it highly cost efficient. Because transitioning to Ethernet does require new equipment (albeit cheaper than legacy gear), upgrades typically occur when legacy systems reach the end of life or if the company or carrier is deploying new systems.
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Chart 11: U.S. Ethernet Market Forecast

$12.0
CAGR 2009-2014 16.6%
$10.0
$8.0 Billions
$6.0
$4.0
$2.0
$0.0 2006 2007 2008 2009 2010 Ethernet

Source: Infonetics, Cowen and Company
2011
2012
2013
2014
IP VPN Although Frame Relay made corporate WANs an alternative as early as 1965 its spoke-and-wheel topology and its proneness to outages made it expensive. However, the advent of highly cost-effective virtual private networks (VPNs) in the late 1990s has accelerated the use of private wide area networks (WANs) in the business environment while the IPSEC protocol has reduced security concerns. In addition, globalization and the use of remote workers is also increasing demand for IP VPN services that provide a cost-effective solution for employees working remotely and across the globe.
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Chart 12: U.S. IP MPLS VPN Market Forecast

$9.0 $8.0 $7.0 $6.0 Billions $5.0 $4.0 $3.0 $2.0 $1.0 $0.0 2006 2007 2008 2009 2010 2011 2012 2013 2014
CAGR 2009-2014 9.9%
IP MPLS VPN
Internet Internet Protocol (IP) was originally developed in the 1970s and is the primary network protocol used on the Internet and has also become the technology of choice among service providers throughout their next-generation networks. IP-based networks are able to avoid many of the costs associated with legacy circuit switched-networks such as provisioning, monitoring, and maintaining multiple transport protocols. Overall, IP networks are significantly less expensive to operate while also providing higher levels of performance when compared to traditional circuit-switched networks.
Customers
While bandwidth infrastructure services have historically only been needed by carriers, as bandwidth needs have continued to increase so has the number of potential customers. As a result, many providers today offer these solutions to customers that typically include healthcare institutions, financial institutions, the government, Internet centric businesses, content delivery networks, and other carriers.
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Chart 13: Customer Examples
Financials
Multi-Gig - Low latency, secure, trading networks Off-site, secure backup of financial records
Cloud Computing
Outsourced server hosting
Education
Fiber based Gigabit network to schools/colleges Video/Distance Learning High speed private data networks
Health Care
Remote medical imaging, patient records Telemedicine Connectivity to research institutions
Ethernet Exchanges
When a provider wants to exchange Ethernet traffic with another provider it is required to translate service characteristics from one providers classifications into the others a process that can be very complex and timely. Using Carrier Ethernet, Ethernet Exchanges make interconnection efficient and economical by enabling seamless, one-to-many interconnections. Carriers are therefore able to buy and sell Layer 2 Carrier Ethernet services that are consistent across networks in real time with full service transparency and translation. When delivering traffic, carriers generally prefer to keep the traffic on-net as much as possible because using an off-net solution typically increases the cost of delivery, but also because it can reduce QoS. Using an Ethernet Exchange promises to reduce cost and improve QoS for carriers requiring an off-net solution. Ethernet Exchanges will also help carriers reach international markets more easily to help service multinational customers. Advent of Ethernet Exchanges Will Likely Accelerate Growth of Ethernet Service Over the past year, three companies including Equinix, CENX (with multiple partners), and Neutral Tandem (with partner Telx) have launched separate Ethernet Exchanges. Although the Ethernet market has continued to demonstrate strong growth over the last few years despite a weak economic environment, the advent of Ethernet Exchanges is expected to accelerate growth in coming years by making Ethernet more ubiquitous across providers and markets. According to Vertical Systems Group (www.verticalsystems.com), by 2014 the Ethernet Exchange market will be a $674MM worldwide opportunity versus almost nothing in 2010.
Chart 14: Ethernet Exchange Providers
Provider CENX Equinix Neutral Tandem/Telx Date Announced November 2009 October 2009 June 2010 Based On MEF E-NNI MEF E-NNI MEF E-NNI Markets U.S., Europe, Recently Asia North America, Europe, Asia-Pacific U.S.
Source: Company data
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Largest Beneficiaries of Ethernet Exchanges are Likely to Be Customers Not Providers Providing an Ethernet Exchange service is simply an extension of the services that data center providers particularly those focused on interconnection like Equinix and Telx already provide. Historically, they provide the physical location for carriers to exchange traffic. By providing a more standardized exchange platform they are removing the need for each carrier to forge their own separate arrangements to exchange Ethernet specific traffic with one another. From our vantage point then an Ethernet Exchange is simply one more type of service that interconnection providers will offer and will not prove to be a standalone business. As a result, we believe it is likely that CENX at some point is acquired by one of its data center partners or by one of the other Ethernet Exchange providers. At some point, we also expect providers to interconnect with one another to accelerate adoption and because customers will demand it.
Wireless Backhaul
As demand for wireless broadband data has increased, wireless service providers have begun upgrading various components of their backhaul networks from copper to fiber. While some fiber operators have responded aggressively others have moved more cautiously; however with initial adoption of 4G services expected to begin in 2011 and mass adoption to begin in 2012 the overall industry response is becoming more positive despite significant variations in capital expenditures due to the geography of cell sites and abnormally long payback periods. We expect this demand to continue to provide significant growth opportunities for several fiber operators, although we expect investment returns to vary widely.
Chart 15; Example IRR for Fiber Backhaul
Rev/Tower/mo Life (years) Operating Margin Capex/Tower Mbps Price Monthly Rev
y/y growth
$625 10 80% $50,000 25 $25 $625
Average: 7-10 years Average: 70-90% Can vary significantly 31 $24 $742
18.8%
39 $23 $881
18.8%
49 $21 $1,047
18.8%
61 $20 $1,243
18.8%
76 $19 $1,476
18.8%
95 $18 $1,753
18.8%
119 $17 $2,081

18.8%
149 $17 $2,471

18.8%
186 $16 $2,935

18.8%
YEAR Revenue Operating Cost EBIT One-time Capex NFV Sum NFV Discount IRR NPV Sum NPV
1 $7,500 1,500 6,000 50,000 (44,000) 96,438 1.2 23.9% (35,524) 0
2 $8,906 1,781 7,125 7,125
3 $10,576 2,115 8,461 8,461
4 $12,559 2,512 10,047 10,047
5 $14,914 2,983 11,931 11,931
6 $17,710 3,542 14,168 14,168
7 $21,031 4,206 16,825 16,825
8 $24,974 4,995 19,980 19,980
9 $29,657 5,931 23,726 23,726
10 $35,218 7,044 28,174 28,174
1.5
1.9
2.4
2.9
3.6
4.5
5.5
6.9
8.5
4,644
4,453
4,269
4,093
3,924
3,762
3,607
3,458
3,315
18
October 29, 2010
Backhaul Network Wireless backhaul is the transport network for wireless voice and data traffic from a cell site to a mobile switching center (MSC) and then to an exchange point or central office where it can be transferred to a carriers landline network or the Internet (i.e. the core). Historically traffic between most cell sites and MSCs has been delivered using wireless microwave signals or copper-based T1 lines. Although fiber providers have been building out to select carrier MSCs since the advent of commercial wireless in the 1980s, in recent years it has become more widespread as increasing wireless traffic continues to help improve the economics. Based on the same trends, fiber providers have also begun extending fiber to the actual towers.
Chart 16: Wireless Backhaul Network
Tower
Central Office
Mobile Switching Center
Base Station Controller
Tower
Tower
Mobile Backhaul Network
4G Will Accelerate Demand Oncoming demand for 4G data services will require wireless carriers to upgrade many aspects of their backhaul networks to fiber-based Carrier Ethernet from copper-based T1s since LTE and WiMax are both expected to generate real world speeds of 4 to 6 Mbps down and 1 to 2 Mbps up. Said another way, if a tower is supporting 165 LTE users that are concurrently watching an HD video using 6 Mbps the tower would need to support 1 GB; far more than what is capable with copper. Although bonded copper or hybrid fiber-coaxial (HFC) cable networks will initially be utilized as well, it will most likely only be when fiber is not available. We also expect increasing utilization of microwave networks, which we discuss below. Microwave Although fiber is more reliable and does not require spectrum, in many cases microwave is more appropriate because of economics and time to market. In some cases carriers will use microwave to transfer traffic from multiple towers that are difficult to reach geographically with a physical line, but are within line of site of one tower that serves as an aggregation point. The carrier can then pull fiber to that one tower (or still use microwave) from the MSC. Some microwave companies have also acquired fiber or have agreements with other fiber providers to offer an end-toend hybrid solution. Providing a hybrid network can offer a better ROI than fiber only, although it will not scale to the same capacity and may eventually need to be replaced.
October 29, 2010
19
While there are many incumbent providers such as AT&T, Sprint, Qwest and Verizon Wholesale, as well as cable providers like Cablevision and Cox, going after the wireless backhaul market, a variety of fiber providers are also targeting the market including FiberTech, Intellifiber, Level 3, Lightower and Zayo, as are a handful of microwave companies including FiberTower, TTI, TowerCloud, and TowerStream.
Chart 17: North American Mobile Backhaul Connections Forecast
900 800 700 600 Thousands 500 400 300 200 100 0 2006 2007 2008 2009 2010 Fiber 2011 Air 2012 2013 2014
Copper
Conclusion
Over the next few years we expect bandwidth infrastructure to evolve into a sizable standalone segment of the telecom services industry. While there will continue to be demand for voice oriented services (even if it is primarily VoIP), we believe fiber companies that focus on providing a simplified/focused set of data services will generate the most growth and highest margin. Although telecom networks were originally designed to help transport voice, it is clear today that voice is only an application and that companies focused on delivering all content over a horizontally aligned network are best positioned. Where we believe companies will be able to differentiate is on 1) network density, 2) on-net locations, and 3) uniqueness of route. As private WANs and the public Internet continue to gain size and complexity an industry of infrastructure-oriented companies has developed to support its growing needs. As we described in this report, we believe bandwidth infrastructure is a key sector within this industry; however, we also believe that wireless towers and data centers are too. Somewhat common to real estate, the characteristics include 1) significant recurring revenue, 2) scalable fixed costs, and 3) high capital costs. Although each group is at a different stage in its respective life cycle in the U.S. market, each model should generate significant FCF and ROIC long term. We also believe that international expansion could sustain company-specific growth cycles.
20
October 29, 2010
One of the biggest issues with this sector is a lack of public companies that enable investors to participate in some of these trends. While several existing public companies are benefiting from the trends outlined in this report it is not clearly reflected in financial results because they derive revenue from other legacy telecom segments that dilute growth and/or margin. Based on conversations with various industry participants we expect some private pure play companies to file for an IPO in the next 12 months depending on market conditions and that this will increase investment opportunities. That said, for now we believe the best public company that represents many of the underlying trends outlined in this report is AboveNet (ABVT, Outperform).
October 29, 2010
21
Company Example
There are several stories in the telecommunications industry that provide colorful examples of the market exuberance that initially began to take hold as a result of deregulation in the 1980s and quickly gathered steam in the 1990s with the Telecom Act of 1996 and mass market adoption of the Internet, only to end in disarray in the early 2000s with the crash of the Internet bubble. To help put this in context we have provided a brief summary of MFS and Level 3. While the story is somewhat unique considering it involves two separate companies the relationship between the two is worth noting. In addition, Level 3 is one of the few standalone operators who remain in business today and has taken part in some of the consolidation post the Internet bubble. In 1986 a company called Chicago Fiber Optics (CFO) commissioned Kiewit Corporation to build a metro fiber network in the business district of Chicago. However when it was completed CFO could not pay its bill and Kiewit eventually took ownership of the company. In 1987 Kiewit formed Kiewit Communications Company and in 1991 renamed it MFS Communications (MFS). After building a nationwide network, in 1993 MFS did an IPO to help raise additional capital with Kewitt and its insiders maintaining an approximate 50% stake in the company that was valued at approximately $2B. Then in 1996 the company acquired backbone provider UUNET for $2.0B and later that year was sold to WorldCom for $14.4B or 24x 1995 revenue. Based largely on the success of MFS and the impact management thought the Internet would have on the industry, under the direction of Kiewit Chairman Walter Scott and former MFS CEO Jim Crowe, in mid-1997 Kiewit started up a similar venture it called Level 3 (a reference to the bottom three layers of the OSI stack that the company was focused on) with approximately $3B and the help of several former MFS executives it poached from WorldCom. The following year the company completed an IPO and by March 2000 the companys stock was trading at $130 per share. Its market cap was $44B and its enterprise value was $50B ($7.3B of debt and $1.3B of cash) and thus was trading at 42x 2000 revenue. By 2001 Level 3 was trading below $10.00 and it had significantly pulled back its spending. Capex cost went from $5.6B in 2000 to $2.3B in 2001. Post the crash Level 3 made several financial moves to stave off bankruptcy, although one can argue that for the company it may have been better for it to go into bankruptcy and start fresh considering the sizable debt that remains on its balance sheet, which has hindered growth. The company also acquired some assets at highly discounted prices including Genuity for $242MM in 2003, which at one point had a market cap of approximately $5B. The company also sold some of its businesses including its Software Spectrum segment (acquired in 2002) in 2006. As the economy started to improve in 2004 it became clear that many of the expectations Level 3 and other fiber operators had about the Internet would eventually reach fruition. However, unlike its thinking when the company was first created it appeared that the higher growth and margin opportunity would be had by shifting a large part of its focus on enterprise companies over carriers/ISPs and metro fiber over long-haul. At the same time, to further improve its margins the company believed it needed to increase its network utilization. As a result, between December 2005 and October 2006 Level 3 acquired six fiber operators of which the majority helped expand its presence in the metro and with enterprise customers.
22
October 29, 2010
Today Level 3s stock trades at $0.97 and it has a $1.6B market cap; however it still has $5.9B of net debt and it trades at 8.3X EV 2011 revenue. Although the company today has what we believe are significant fiber infrastructure assets the company generates a large amount of revenue from voice services and has had a difficult time integrating the assets it acquired, which in turn has led to execution problems. Going forward we believe the company is positioned well from an asset perspective to capture many of the growth opportunities we discussed in this report although negating our excitement is its balance sheet. One of the best opportunities we see for the company would be to make accretive acquisitions or sell off some of its assets to pay down debt and simplify the company.
October 29, 2010
23
DEFINITIONS
Types of Fiber What is optical fiber? Optical fiber is an extremely thin strand of transparent glasslike material that carries information in the form of light very long distances at extremely high speeds. Light travels through fiber by bouncing off the glass walls and since no light is absorbed, the wave of light can travel long distances, albeit such issues like a weakening of the signal might occur due to impurities in the glass. Fiber-based networks that are being deployed today typically will have several hundred strands of fiber located within each fiber optic cable. There are primarily three different types of optical fiber that are being used for fiber networks today; multi mode, single mode, and non-zero dispersion shifted fiber. Types of Routes Long haul routes. Long-haul routes (sometimes refereed to as inter city routes) connect cities together. Typically terminate at a large POP (point of presence) like 60 Hudson Street in NYC. Metro routes. Metro routes (sometimes refereed to as intra city routes) are routes within a specific city that are connected to various office buildings, data centers, and cell towers. Regional routes. Regional routes connect cities within a particular region or smaller distance. They share many of the same characteristics as a metro route. Undersea routes. Undersea routes are routes under water and are used to connect various continents and countries. They typically terminate at a large POP.
24
October 29, 2010
M&A 2006-Present
Date Acquirer Target Announced EarthLink ITC^DeltaCom 10/1/10 Lightower Lexent * 9/14/10 PAETEC Cavalier 9/13/10 Ridgemont Equity Partners Unite Private Networks * 8/31/10 Court Square Capital Partners Fibertech * 8/26/10 Windstream KDL-Norlight * 8/17/10 NTELOS WV FiberNet * 7/20/10 Zayo Group American Fiber Systems * 6/30/10 Alinda Capital Partners DukeNet * 6/25/10 Lightower Veroxity * 5/25/10 CenturyTel Qwest 4/22/10 Zayo Group AGL Networks * 3/24/10 ABRY RCN Metro * 3/5/10 PacketExchange Mzima Networks * 1/18/10 Ntelos Allegheny Communications * 10/6/09 Zayo Group FiberNet * 5/28/09 Zayo Group Columbia Fiber Solutions * 8/25/08 Zayo Group Citynet assets * 9/30/08 Zayo Group Adesta assets * 9/15/08 Zayo Group CenturyTel markets * 4/2/08 Zayo Group Northwest Telephone * 5/1/08 First Communications Globalcom, Inc. 7/22/08 Lightower DataNet Communications * 3/6/07 Lightower KeySpan Communications * 3/6/07 Zayo Group Citynet Fiber Networks * 2/18/08 Zayo Group Onvoy 8/22/07 Zayo Group Voicepipe 11/1/07 PAETEC McLeoud USA 9/17/07 Zayo Group Indiana Fiber Works * 9/1/07 Zayo Group PPL Telecom * 8/1/07 Zayo Group Memphis Networx * 7/1/07 RCN Neon Communications * 6/25/07 Integra Eschelon Telecom 3/20/07 Level 3 Broadwing 10/17/06 PAETEC US LEC 8/14/06 tw telecom Xspedius 7/27/06 Eschelon Mountain Telecommunications 6/29/06 Broadview ATX Communications 6/27/06 Level 3 Looking Glass 6/5/06 Qwest OnFiber 5/15/06 Level 3 Telcove 5/1/06 Level 3 ICG Comm 4/17/06 Integra Electric Lightwave 2/7/06 Level 3 Progress Telecom 1/26/07 Eschelon Oregon Telecom 1/26/06 * Pure play Bandwidth Infrastructure company Value $516 $110 $460 NA $535 $782 $170 $100 $274 $21 $22.6bn $71 $496 NA $27 $104 $12 $3 $6 $3 $7 $59 NA NA $102 $77 $3 $558 $23 $57 $10 $259 $710 $1,273 $741 $532 $40 $91 $156 $107 $1,232 $174 $247 $142 $20 Consideration 100% cash 100% cash 100% cash 100% cash 100% cash 70% cash/30% stock 100% cash 100% cash bought 50% stake 100% cash 53% cash/ 47% stock 100% cash 100% cash NA 100% cash 100% cash 100% cash 100% cash 100% cash 100% cash 100% cash 100% cash 100% cash 100% cash 100% cash 100% cash 100% cash 100% stock 100% cash 100% cash 100% cash 100% cash 100% cash 49% cash/ 51% stock 100% stock 40% cash/ 60% stock 100% cash 100% cash 49% cash/ 51% stock 100% cash 47% cash/ 53% stock 26% cash/ 74% stock 100% cash 48% cash/ 52% stock 100% cash EV/EBITDA** 5.8x 12.2x 5.1x NA 10.3x 8.4x 6.8x 10.0x NA 9.5x 5.2x 9.7x 7.8x NA 6.0x 8.5x LQA, LTM, FTM LTM LTM LTM NA LTM LTM 2009 LTM NA LTM 2010 LTM LTM NA 2009 LTM -
Source: Company data, Cowen and Company estimates
October 29, 2010
25
Company Directory
# Name 1 24/7 Fiber Network Type Private Service Offered NA Location Offered NA
Phoenix (AZ), Tucson (AZ), Yuma (AZ), Los Angeles (CA), Palo Alto (CA), Sacramento (CA), San Jose (CA), Colorado Springs (CO), Denver (CO), Henderson (CO), Pueblo (CO), Cedar Rapids (IA), Davenport (IA), Des Moines (IA), Iowa City (IA), American Falls (ID), Boise (ID), Chicago (IL), Minneapolis (MN), St. Cloud (MN), Billings (MT), Bozeman (MT), Butte (MT), Cut Bank (MT), Great Falls (MT), Helena (MT), Kalispell (MT), Bismark (ND), Fargo (ND), Omaha (NE), Albuquerque (NM), Santa Fe (NM), Las Vegas (NV), Bend (OR), Burns (OR), Hillsboro (OR), Klamath Falls (OR), La Grande (OR), Portland (OR), Amarillo (TX), Dallas (TX), Lubbock (TX), Cedar City (UT), Salt Lake City (UT), St. George (UT), Clarkston (WA), E. Wenatchee (WA), Pullman (WA), Seattle (WA), Spokane (WA), Walla Walla (WA), Basin (WY), Casper (WY), Cheyenne (WY)
Headquarters Baltimore, MD
Comment
2 360 Networks
Private
Lit and dark fiber
Seattle, WA
3 AboveNet
Public
Metro Area Network (MAN) solutions; metro WDM; dcXchange; metro Ethernet Atlanta (GA), Austin (TX), Baltimore (MD), Boston (MA), Chicago (IL), Dallas (TX), Houston (TX), Los Angeles (CA), New York metro Wide Area Network (WAN) solutions; VPN; IP transit; metro IP; eXpressWave long (NY), northern New Jersey area (NJ), Philadelphia (PA), Phoenix (AZ), Portland (OR), San Francisco Bay area (CA), Seattle (WA), haul; Collaborative solutions JabNET Washington (DC), northern Virginia corridor (VA)
White Plains, NY
Stock is covered by Cowen
4 Advanced Communications Technology
Private
NA
NA
Sheridan, WY
5 Airband Communications
Private
NA
NA
Dallas, TX
6 Alaska Communications Systems
Public
Lit fiber
Lit only in Alaska: Anchorage (AK), Fairbanks (AK), Juneau (AK), as well as other locations upon request. Lit only in Oregon: Hillsboro (OR), lit only Portland to Seattle
Anchorage, AK
7 Allegheny Communications Connect
Private
NA
NA
Greensburg, PA
Recently acquired by NTELOS
8 Allied Fiber
Private
Dark fiber
Allied fiber is constructing new fiber between the following metro areas: Ashburn (VA), Atlanta (GA), Chicago (IL), Miami (FL), New York (NY), Seattle (WA), and more west coast and soutwest cities to be announced Canada: Calgary (AB), Edmonton (AB), Montreal (QC), Ottawa (ON), Regina (SK), Toronto (ON) USA: Buffalo (NY), Chicago (IL), Seattle (WA)
New York, NY
9 Allstream
Private
Lit fiber
Toronto, ON JV between El Paso Corp. and Genesis Park
10 Alpheus Communications
Private
Lit and dark fiber
Houston (TX), Dallas (TX), San Antonio (TX), Austin (TX), Fort Worth Texas (TX), Corpus Christi (TX)
Houston, TX
11 American Broadband
Private
NA
NA
Lemont Furnace, PA Stock is covered by Cowen
12 AT&T Wholesale
Public
Where facilities permit; DSx; Sonet P2P and ring; Ethernet; wave; Internet services (lit fiber)
Most major metros nationwide thruoghout the USA
Dallas, TX
13 Atlantic Metro Communications
Private
Lit and dark fiber
Chicago (IL), Los Angeles (CA), New York (NY)
Montclair, NJ
14 Atria Networks
Private
NA
NA
Kitchener ON, Canada
15 Aurora Fiber Optic Networks
Private
NA
NA
Moorhead, MN
16 Balsamwest Fibernet
Private
Lit and dark fiber
Andrews (NC), Blairsville (GA), Blue Ridge (GA), Bryson City (NC), Copper Hill (TN), Cullowhee (NC), Franklin (NC), Hiawassee (GA), Murphy (NC), Robbinsville (NC), Sylva (NC), Webster (NC), Young Harris (GA)
Canada: Calgary (AB), Edmonton (AB), Fredericton (NB), Halifax (NS), Moncton (NB), Montreal (QC), Onslow (NS), Ottawa (ON), Quebec City (QC), Regina (SK), Saint John (NL), saskatoon (SK), St. John's (NL), Toronto (ON), Vancouver (BC), Winnipeg (MB) USA: Atlanta (GA), Buffalo (NY), Chicago (IL), Dallas (TX), Laurel (MA), Los Angeles (CA), New York City (NY), Palo Alto (CA), San Francisco (CA), Seattle (WA), Washington (DC) Anacortes (WA), Arlington (WA), Bellingham (WA), Blaine (WA), Bothell (WA), Briar (WA), Burlington (WA), Edmonds (WA), Everson (WA), Everett (WA), Ferndale (WA), La Conner (WA), Lynden (WA), Lynnwood (WA), Marysville (WA), Mill Creek (WA), Mountlake (WA), Terrace (WA), Mt. Vernon (WA), Mukilteo (WA), Nooksack (WA), Sedro Woolley (WA), Skagit County (WA), Snohomish County (WA), Whatcom County (WA)
Sylva, NC
17 BCE Nexxia
Public
Lit and dark fiber
Schaumburg, IL
Subsidiary of Bell Canada
18 Black Rock Cable
Private
Dark fiber
Bellingham, WA
19 Bluemile
Private
Lit and dark fiber
Columbus (OH)
Columbus (OH)
20 Broadview Networks
Private
NA
NA
Rye Brook, NY
Source: Capacity Magazine; Metro Connect Directory 2009/10, Company data, Cowen and Company
26
October 29, 2010
Company Directory
# Name 21 Carriercom Type Private Service Offered Lit and dark fiber Location Offered McAllen (TX) Headquarters McAllen (TX) Comment
22 CenturyLink
Public
A suite of of wholesale products offered to IXCs, CLECs, LECs and wireless Provider of communications and entertainment services in cities across 33 states in the US
Monroe, LA
23 Cogeco Data Services
Private
Lit and dark fiber
Mississauga (ON), Toronto (ON)
Toronto ON, Canada Stock is covered by Cowen
24 Cogent
Public
Lit fiber
USA: AZ, CA, CO, CT, DC, FL, GA, IA, IL, IN, MA, MD, MI, MN, MO, NC, NV, NY, OH, OK, OR, PA, RI, TX, UT, WA CANADA: Montreal (QC), Toronto (ON)
Washington, DC
25 Columbus Networks
Private
Lit fiber
Boca Raton (FL), Miami (FL), and NAP of the Americas
North Miami Beach, FL
26 Comcast Cable
Public
Lit fiber
NA
Philadelphia, PA
27 Conterra Telecom Services
Private
Lit and dark fiber
Abilene (TX), Charlotte (NC), Dallas-Ft. Worth (TX), Tuscon (AZ)
Charlotte, NC
28 Costreet Communications
Private
Lit fiber, Ethernet
AL, CA, FL, GA, ID, KY, LA, MS, NC, NM, OH, TN, TX, VA, WV
Lafayette, LA
29 Dakota Carrier Network
Private
NA
NA
Fargo, ND
30 DDR Broadband Networks
Private
Lit and dark fiber
Atlanta (GA), Augusta (GA), Macon (GA), Montgomery (AL), Tallahassee (FL), Charlotte (NC), Greensboro (NC), Raleigh (NC), Wilmington (NC), Columbia (SC), Charleston (SC), Greenville (SC), Spartanburg (SC), Myrtle Beach (SC)
Columbia, SC
31 DQE Communications
Private
Lit and dark fiber
Pittsburgh (PA)
Pittsburgh (PA)
32 DukeNet Communications
Public
NA
NA
Charlotte, NC
Subsidiary of Duke Energy Subsidary of Edison International Subsidiary of HickoryTech Corp.
33 Edison Carrier Solutions
Public
Lit and dark fiber, cel site backhaul, and wireless site development
Los Angeles (CA), Santa Monica (CA), Irvine (CA), San Bernardino (CA), Riverside (CA), Palm Springs (CA), Oxnard (CA)
Des Moines (IA), Bloomington (MN), Brainerd (MN), Burnsville (MN), Duluth (MN), Eagan (MN), Eden Pairie (MN), Eveleth (MN), Faribault (MN), Farmington (MN), Golden Valley (MN), Grand Rapids (MN), Hopkins (MN), Hibbing (MN), Mankato (MN), Minneapolis (MN), Northfield (MN), Owatonna (MN), Plymouth (MN), Red Wing (MN), Rochester (MN), St Cloud (MN), St Paul (MN), St Peter (MN), Virginia (MN), Waseca (MN), Wayzata (MN), Winona (MN), Eau Claire (WI), Superior (WI)
Irwindale, CA
34 Enventis
Public
Lit fiber
Duluth, MN
35 Expedient
Private
Lit fiber
Boston (MA), Chicago (IL), Cleveland (OH), Columbus (OH), Dallas (TX), Denver (CO), Houston (TX), Miami (FL), New York (NY), Philadelphia (PA), Pittsburgh (PA), San Diego (CA), San Francisco (CA), Seattle (WA), Tampa (FL), Washington (DC) NA Atlanta (GA), Austin (TX), Baltimore (MD), Boca Raton (FL), Clearwater (FL), Culpeper (VA), Dallas (TX), Fort Lauderdale (FL), Forth Worth (TX), Houston (TX), McAllen (TX), Miami (FL), San Antonio (TX), Tampa (FL), Waco (TX), Washington (DC)
Albany (NY), Binghamton (NY), Bridgeport (CT), Buffalo (NY), Columbus (OH) Concord (NH), Camden (NJ), Hartford (CT), Indianapolis (IN), Montgomery County (MD), New Haven (CT), New London (CT), Newark (NJ), Norwalk (CT), suburban Philadelphia (PA), Pittsburgh (PA), Providence (RI), Rochester (NY), Springfield (MA), Stamford (CT), Syracuse (NY), White Plains (NY), Wilmington (DE), Worcester (MA)
Pittsburgh (PA)
36 Fairpoint Carrier Services
Public
NA
Charlotte, NC
37 FiberLight
Private
Lit and dark fiber
Alpharetta, GA
38 Fibertech Networks
Private
Lit and dark fiber
Rochester, NY
Recently sold to another PE firm
39 Fibertower
Public
Lit and dark fiber
CCI owns 5% of Atlanta (GA), Boston (MA), Chicago (IL), Cleveland (OH), Dallas-Ft. Worth (TX), Denver (CO), Detroit (MI), Houston (TX), San Francisco, CA company New York/New Jersey (NY/NJ), Pittsburgh (PA), San Antonio (TX), Tampa (FL), Washington (DC)
Washington (DC), Wilmington (DE), Chicago (IL), Baltimore (MD), Southfield (MI), Manasquen (NJ), Morristown (NJ), Newark (NJ), New Brunswick (NJ), Tuckerton (NJ), Albany (NY), Binghamton (NY), Buffalo (NY), New York (NY), Akron (OH), Cleveland (OH), Toledo (OH), Youngstown (OH), Altoona (PA), Clearfield (PA), Corry (PA), Corry (PA), Erie (PA), Forest (PA), Harrisburg (PA), Johnston (PA), Lancaster (PA), Meadville (PA), Oil City (PA), Reading (PA), Philadelphia (PA), Pittsburgh (PA), Scranton (PA), State College (PA), Warren (PA), York (PA)
40 First Telecom Services
Private
Lit and dark fiber
Akron (OH)
October 29, 2010
27
Company Directory
# Name 41 FPL FiberNet Type Public Service Offered Lit and dark fiber Location Offered Miami (FL), Ft. Lauderdale (FL), West Palm Beach (FL), Orlando (FL), Tampa (FL), St. Petersburg (FL), Ft. Myers (FL), Naples (FL), Jacksonville (FL), Daytona (FL) Headquarters Miami, FL Comment Subsidiary of Florida Power and Lights
42 Global Crossing
Public
Lit and dark fiber
North America: Atlanta (GA), Baltimore (MD), Chicago (IL), Dallas (TX), Denver (CO), Detroit (MI), Eagan (MN), Houston Florham Park, NJ (TX), Los Angeles (CA), Miami (FL), New York (NY), Newark (NJ), Orlando (FL), Philadelphia (PA), Phoenix (AZ), San Francisco (CA), San Jose (CA), Seattle (WA), Tampa (FL), Washington (DC) Austin (TX), Corpus Christi (TX), Dallas (TX), Midland (TX), Odessa (TX), San Marcos (TX), San Antonio (TX), Waco (TX) San Marcos, TX
43 Grande Communications Networks
Private
Lit and dark fiber
44 Great Lakes Comnet
Private
NA
NA
East Lansing, MI
45 Hibernia Atlantic
Private
NA
NA
Summit, NJ
46 Indian Nations Fiber Optics
Private
NA
NA
Sulphur, OK
47 Indiana Fiber Network
Private
NA
NA
Indianapolis, IN
48 Inetworks Group
Private
NA
NA
Chicago, IL
49 Integra Telecom
Private
NA
NA
Albany (NY), Atlantic City (NJ), Baltimore (MD), Buffalo (NY), Cleveland (OH), Detroit (MI), Dover (DE), Fredericksburg (VA), Grand Rapids (MI), Kalamazoo (MI), Lansing (MI), Newark (NJ), Norfolk/VA Beach (VA), Philadelphia (PA), Pitttsburgh (PA), Richmond (VA), Salisbury (MD), Syracuse (NY), Trenton (NJ), Washington (DC), Wilmington (DE)
Portland, OR
Subsidiary of Cavalier Telephone (Pending Acquisition by PAETEC)
50 Intellifiber Networks
Private
Lit fiber
Richmond, VA
51 Intermetro Communications
Private
NA
NA
Dothan (AL), Huntsville (AL), Mobile (AL), Montgomery (AL), Clearwater (FL), Daytona Beach (FL), Ft. Lauderdale (FL), Gainesville (FL), Jacksonville (FL), Miami (FL), Orlando (FL), St. Petersburg (FL), Tampa (FL), West Palm Beach (FL), Winter Haven (FL), Atlanta (GA), Columbus (GA), Savannah (GA), Jackson (MS), Asheville (NC), Charlotte (NC), Durham (NC), Greensboro (NC), Raleigh (NC), Winston-Salem (NC), Charleston (SC), Columbia (SC), Florence (SC), Spartanburg (SC), Greensville (SC), Memphis (TN)
Simi Valley, CA
Subsidiary of Deltacom (Pending Acquisition by Earthlink)
52 Interstate Fibernet
Public
Lit fiber
Huntsville, AL
53 ION
Private
Lit fiber
Albany (NY), Buffalo (NY), Plattsburgh (NY), Rochester (NY), Syracuse (NY), Watertown (NY), Ithaca (NY)
Albany, NY
54 Iowa Networks
Private
NA
NA
West Des Moines, IA
55 IP Networks
Private
Lit fiber
San Francisco/Silicon Alley (CA), Sacramento (CA)
San Francisco, CA
56 IRIS Networks
Private
NA
NA
Augusta (GA), Charleston (SC), Charleston AFB (SC), Columbus (GA), Dothan (AL), Fort Gordon (GA), Gunter AFB (AL), Huntsville (AL), Knoxville (TN), Marshall (MN), Maxwell AFB (AL), Montgomery (AL), Panama City (FL), Pinellas County-Clearwater-St. Petersburg (FL), Rapid City (SD), Redstone Arsenal (AL), Sioux City (IA), Sioux Falls (SD), West Point (GA) Atlanta (GA), Baltimore (MD), Bay Area (CA), Boston (MA), Chicago (IL), Cleveland (OH), Denver (CO), Detroit (MI), DFW (TX), Houston (TX), Las Vegas (NV), Los Angeles (CA), New Jersey (NJ), New York (NY), Orange County (CA), Orlando (FL), Philadelphia (PA), Phoenix (AZ), Pittsburgh (PA), San Diego (CA), San Luis Obispo (CA), South Florida (FL), St. Louis (MO), Seattle (WA), Tampa (FL), Washington (DC) plus 66 additional markets
Nashville, TN
57 Knology
Public
CLEC; lit and dark fiber
West Point, GA
58 Level 3
Public
Lit and dark fiber
Broomfield, CO
Stock is covered by Cowen Pending acquisition by Lightower
59 Lexent Metro Connect
Private
Leased or custom built dark fiber
Bronx (NY), Brookyn (NY), Manhattan (NY), Newark (NJ), North Bergan (NJ), Queens (NJ), Secaucus (NJ), Staten Island (NY), Weehawken (NJ) Albany (NY), Boston (MA), Hudson Valley (NY), Jersey City (NJ), Long Island (NY), Manchester (NH), New Haven (CT), New York City (NY), Newark (NJ), Providence (RI), Secaucus (NJ), Weehawken (NJ), White Plains (NY), Worcester (MA)
New York, NY
60 Lightower Fiber Networks
Private
Lit and dark fiber
Boxborough, MA
28
October 29, 2010
Company Directory
# Name 61 Long Island Fiber Exchange Type Private Service Offered Lit and dark fiber Location Offered Nassau and Suffolk (all NY) Headquarters Nesconset, NY Comment
62 MET-NET Communications
Private
Lit fiber
Pittsburgh, PA
Pittsburgh, PA
63 Metrored
Private
NA
NA
Bosques de la Lomas, Mexico
64 Mid-Atlantic Broadband Cooperative
Private
Lit and dark fiber
Southern and soutwest VA
South Boston, VA
65 Missouri Network Alliance
Private
NA
NA
Kansas City, MO
66 MTO Telecom
Private
NA
NA
Montreal QC, Canada

Owned by PacketExchange
67 Mzima Networks
Private
Lit and dark fiber
Atlanta (GA), Chicago (IL), Dallas-Fort Worth (TX), Houston (TX), Las Vegas (NV), Los Angeles (CA), Kansas City (MO), Miami (FL), New York (NY), Phoenix (AZ), San Jose/San Francisco (CA), Seattle (WA), Washington (DC)/Virginia metro Canada: Abbotsford (BC), Calgary (AB), Edmonton (AB), Halifax (NS), Kamploops (BC), Kelowna (BC), Montreal (QC), Ottawa (ON), Prince George (BC), Quebec City (QC), Terrace (BC), Toronto (ON), Vancouver (BC), Whistler (BC), Winnipeg (MB) USA: Los Angeles (CA), New York City (NY), Seattle (WA)
Alexandria (LA), Baton Rouge (LA), Carencro (LA), Deridder (LA), Hammond (LA), Lafayette (LA), Lake Charles (LA), Leesville (LA), Morgan City (LA), Natchitoches (LA), New Orlean (LA), Shreveport (LA), Slidell (LA), Gulfort (MS), Jackson (MS), Austin (TX), Bryan (TX), Dallas (TX), Houston (TX), Longview (TX), San Antonio (TX), Tyler (TX), Wacco (TX)
Los Angeles, CA
68 Navigata Communications
Private
Lit fiber
North Vancouver BC, Canada
69 Network USA
Private
Lit fiber
Lafayette, LA
70 Nitel USA
Private
Lit fiber
Chicago (IL)
Chicago, IL
71 Norlight Communications
Private
NA
NA
Evansville, IN
Recently acquired by Windstream
72 One Communications
Private
NA
NA
Burlington, MA
73 Open Access
Private
Lit and dark fiber
Long Island, metro New York area, with a domestic US and international reach
Farmingdale, NY
74 Optical Communications Group
Private
Lit and dark fiber
Five boroughs of New York City (NY), Long Island (NY), New Jersey (NJ)
Glendale, NY
75 Optimum Lightpath
Public
NA
NA
Jericho, NY
Subsidiary of Cablevision Acquired assets of Mzima in January 2010
76 PacketExchange
Private
Lit fiber
Atlanta (CA), Chicago (IL), Dallas (TX), Los Angeles (CA), Miami (FL), New York (NY), San Francisco (CA), Seattle (WA), Secaucus (NJ), Washington (DC)
London, UK
77 Pacnet
Private
NA
NA
Hong Kong/Singapore Stock is covered by Cowen
78 PAETEC
Public
Lit and dark fiber
AZ, CO, IA, ID, IL, IN, KS, MI, MN, MO, ND, NE, NM, OH, OR, SD, TX, UT, WA, WI Aiken (SC), Anderson (SC), Augusta (SC), Beaufort (SC), Charleston (SC), Charlotte (NC), Columbia (SC), Fayetteville (NC), Florence (SC), Greensboro (NC), Greenville (SC), Myrtle Beach (SC), Raleigh (NC), Savannah (GA), Spartanburg (SC), Wilmington (NC) NYC metropolitan area (NY), New York (NY), northern and central NJ, eastern PA, Philadelphia metro (PA), southern Connecticut
Fairport, NY
79 Palmettonet
Private
Lit and dark fiber
Columbia, SC
80 Pangaea Networks
Private
Lit fiber
Glen Rock, NJ
October 29, 2010
29
Company Directory
# Name 81 Peninsula Fiber Network Type Private Service Offered NA Location Offered NA
Seven County area coverage in and around Houston TX: Alvin, Angleton, Baytown, Bellaire, Channelview, Clear Lake, Clute, Conroe, Cypress, Deer Park, Freeport, Friendswood, Galveston, Hempstead, Houston, Humble, Katy, Kingwood, La Porte, Lake Jackson, League City, Magnolia, Missouri City, Pasadena, Pearland, Richmond, Rosenberg, Rosharon, Santa Fe, Seabrook, Spring, Stafford, Sugar Land, Texas City, The Woodlands, Tomball, Webster, Willis
Headquarters Munising, MI
Comment
82 Phonoscope
Private
Lit and dark fiber
Houston, TX
83 Pinpoint Network Solutions
Private
Lit and dark fiber
Chicago (IL), Denver (CO), Omaha (NE)
Omaha, NE Pending acquisition by CenturyLink Subsidiary of Reliance Communication
84 Qwest
Public
10 gig waves; IP; private line; data; TDM long distance and local voice solutions
Over 240 cities through PoPs in north and south America, Asia and Europe. Qwest's domestic network connects through more than 40 tandem switches, feeding into five global gateways on both US coasts and in Texas
Denver, CO
85 Reliance Globalcom
Public
Lit and dark fiber
Atlanta (GA), Chicago (IL), Dallas (TX), Houston (TX), New York (NY), Philadelphia (PA), San Francisco (CA), San Jose (CA), Seattle (WA), Washington (DC)
Brentford, UK
86 SDN Communications
Private
NA
NA
Sioux Falls, SD
87 Shaw Business Solutions
Private
Lit fiber, IP connectivity, data and private line
Canada: Calgary (AB), Edmonton (AB), Fort St. John (BC), Kamloops (BC), Kelowna (BC), Prince Albert (SK), Red Deer (AB), Saskatoon (SK), Sault Ste. Marie (ON), Thunder Bay (ON), Toronto (ON), Vancouver (BC), Victoria (BC), Winnipeg (MB) USA: Buffalo (NY), Chicago (IL), New York (NY), Seattle (WA)
Boston (MA), Chicago (IL), New York (NY), Philadelphia (PA), Washington (DC)
Calgary AB, Canada
88 Sidera Networks
Private
Lit fiber
New York, NY
Was RCN Metro
89 Southern Light
Private
Lit and dark fiber
Baton Rouge (LA), Bay Minette (AL), Biloxi (MS), Crestview (FL), Daphne (AL), Fairhope (AL), Foley (AL), Fort Walton (FL), Gulf Shores (AL), Gulport (MS), Mobile (AL), Panama City (FL), Pascagoula (MS), Pensacola (FL), New Orleans (LA), Orange Beach (AL), Slidell (LA), Spanish Fort (AL)
Atlanta (GA), Birmingham (AL), Jacksonville (FL), Macon (GA)
Mobile, AL
90 Southern Telecom
Private
Dark fiber
Atlanta, GA
91 Sovernet Communications
Private
Lit fiber
Barre (VT), Bellows Falls (VT), Bennington (VT), Brattlesboro (VT), Burlington (VT), Essex (VT), Junction (VT), Manchester (VT), Middlebury (VT), Montpelier (VT), Rutland (VT), White River Junction (VT), Winooski (VT)
Bellows Falls, VT
92 Spirit Telecom
Private
NA
NA
Columbia, SC
93 Splice Communications
Private
Lit and dark fiber
All cities in the United States
San Mateo, CA
94 Sprint
Public
Lit fiber
Atlanta (GA), Austin (TX), Baltimore (MD), Boston (MA), Chicago (IL), Cleveland (OH), Columbus (OH), Dallas (TX), Denver (CO), Detroit (MI), Houston (TX), Jacksonville (FL), Kansas City (MO), Los Angeles (CA), Miami (FL), Minneapolis (MN), New York (NY), Overland Park, KS Newark (NJ), Philadelphia (PA), Phoenix (AZ), Pittsburgh (PA), San Antonio (TX), San Diego (CA), San Francisco (CA), Seattle (WA), St. Louis (MO), Tampa (FL), Washington (DC)
95 SRP Telecom
Private
Dark fiber
Phoenix metro area (AZ)
Phoenix, AZ
96 Syringa Networks
Private
NA
NA
Boise, ID
97 TDS Telecommunications
Public
NA
NA
Madison, WI
98 Telecom Transport Management
Private
Lit fiber
Allentown-Bethlehem (PA), Camden (NJ), Harrisburg (PA), Lancaster (PA), Minneapolis-St. Paul (MN), Norfolk (VA), Philadelphia (PA), Reading (PA), Richmond (VA), Trenton (NJ), Wilmington (DE), York (PA)
Seattle, WA
99 Telus
Public
Lit fiber
Canada: Calgary (AB), Edmonton (AB), Halifax (NS), Montreal (PQ), Ottawa (ON), Quebec City (PQ), Regina (SK), Saskatoon (SK), Toronto (ON), Vancouver (BC), Victoria (BC), Winnipeg (MB) USA: Albany (NY), Ashburn (VA), Buffalo (NY), Chicago (IL), Detroit (MI), New York City (NY), Palo Alto (CA), Seattle (WA)
Atlanta (GA), Orlando (FL), South Florida (FL)
Mississauga ON, Canada
100 Tower Cloud
Private
Lit fiber
St. Petersburg, FL
30
October 29, 2010
Company Directory
# Name 101 TowerStream Type Public Service Offered Lit fiber Location Offered Boston (MA), Chicago (IL), Dallas/Fort Worth (TX), Los Angeles (CA), Miami (FL), New York (NY), Providence/Newport (RI), San Francisco (CA), Seattle (WA) AL, AR, AZ, CA, CO, DC, FL, GA, HI, ID, IL, IN, KS, KY, LA, MD, MN, MO, MS, NC, NJ, NM, NV, NY, OH, OK, OR, SC, TN, TX, VA, WA, WI Headquarters Middletown (RI) Comment
102 tw telecom
Public
Lit fiber
Littleton, CO
Stock is covered by Cowen
103 USCarrier Telecom
Private
Lit and dark fiber
Atlanta (GA), Augusta (GA), Macon (GA), Savannah (GA), Montgomery (AL), Tallahassee (FL)
Atlanta, GA
104 US Metropolitan Telecom
Private
NA
NA Bloomington (IN), Chicago/Oakbrook (IL), Cincinnati (OH), Columbus (OH), Detroit/Southfield (MI), Fort Wayne (IN), Grand Rapids (MI), Green Bay (WI), Indianapolis (IN), Kalamazoo (MI), Lansing (MI), Madison (WI), Milwaukee (WI), Rockford (IL), South Bend (IN), Toledo (OH) Offers metro services throughout the US and around the globe. IP network alone is in 2,700 cities in 159 countries
Fairfield County (CT), Hartford (CT), Stamford (CT), Andover (MA), Boston (MA), Burlington (MA), Cambridge (MA), Framingham (MA), Marlboro (MA), Waltham (MA), Worcester (MA), New York City (NY), and additional towns served in the following counties: Bristol, Essex, Middlesex, Norfolk, Plymouth, Suffolk, and Worcester
Bonita Springs, FL
105 US Signal
Private
Lit and dark fiber
Grand Rapids, MI
106 Verizon Partner Solutions
Public
Lit and dark fiber
New York, NY
Stock is covered by Cowen Recently acquired by Lightower
107 Veroxity Technology Partners
Private
Lit fiber
Bedford, MA
108 Waypoint Telecommunications
Private
Lit and dark fiber
Chicago (IL), Indianapolis (IN), St. Louis (MO), Grand Rapids (MI), Lansing (MI), Southfield (MI)
USA: Albany (NY), Ashburn (VA), Atlanta (GA), Boston (MA), Brooklyn (NY), Buffalo (NY), Charlotte (NC), Chicago (IL), Dallas (TX), Denver (CO), Jersey City (NJ), Los Angeles (CA), Miami (FL), Newark (NJ), New York (NY), Palo Alto (CA), Philadelphia (PA), Phoenix (AZ), Pittsburgh (PA), San Francisco (CA), San Jose (CA), Seattle (WA), Secaucus (NJ), Stamford (CT), Washington (DC) Canada: Toronto (ON)
East Lansing, MI
109 WBS Connect
Private
Lit and dark fiber
Denver, CO
110 Wilshire Connection
Private
Lit and dark fiber
El Segundo (CA), Los Angeles (CA), Vernon (CA), Las Vegas (NV) Appleton (WI), Chicago (IL), Eau Claire (WI). Fond du Lac (WI), Green Bay (WI), Janesville (WI), La Crosse (WI), Madison (WI), Milwaukee (WI), Minneapolis (MN), Rochester (MN), Rockford (IL), Superior (WI), Wausau (WI), Winona (MN) Atlanta (GA), Boca Raton (FL), Chicago (IL), Dallas (TX), Fort Lauderdale (FL), Indianapolis (IN), Jacksonville (FL), Los Angeles (CA), Madison (WI), Miami (FL), Nashville (TN), Palo Alto (CA), San Jose (CA), Seattle (WA)
Los Angeles, CA
111 Wisconsin Independent Network
Private
Lit fiber
Eau Claire, WI
112 WV Fiber
Private
Lit fiber
Boca Raton, FL
Recently acquired by NTELOS
113 XC Networks
Private
NA
NA
Dallas, TX
114 XO Communications
Public
Lit fiber
AZ, CA, CO, DC, DE, FL, GA, ID, IL, MA, MD, MI, MN, MO, NC, NJ, NV, NY, OH, OR, PA, TN, TX, UT, VA, WA
Herndon, VA
115 Zayo
Private
Lit and dark fiber
49 metro markets throughout the Pacific north west, mid-Atlantic and mid-west US
Louisville, CO
October 29, 2010
31
Cowen and Company Coverage Universe

Company ($mn) Basic Information Ticker Rating Price - 10/28/2010 Shares Outstanding Market Cap Cash Debt Enterprise Value Annual Growth Rates (2010) Revenue EBITDA EPS Basic Financials 2010E Revenue 2010E EBITDA 2010E EPS 2010E Operating FCF per Share 2011E Revenue 2011E EBITDA 2011E EPS 2011E Operating FCF per Share Valuation EV / Sales 2010E EV / EBITDA 2010E P/E 2010E FCF Yield 2010E EV / Sales 2011E EV / EBITDA 2011E P/E 2011E FCF Yield 2011E Income Data (most recent Q) Revenue Cost of revenue Gross profit Selling, general & administrative EBITDA Depreciation & amortization Other operating expenses Total operating expenses EBIT Interest expense Interest Income & other Interest & other, net EBT Net income Preferred dividends Net income to common EPS Margins Gross margin EBITDA margin Operating margin EBT margin Net margin Leverage Total Debt / EBITDA Net Debt / EBITDA Current Ratio Performance Return on Invested Capital (ROIC) Return on Assets (ROA) Return on Equity (ROE) AT&T T * 1 $28.50 5,938 $169,233 3,246 68,966 $234,953 2% 4% 9% 124,423 42,848 $2.31 $1.69 127,645 44,547 $2.45 $1.73 1.9x 5.5x 12.3x 5.9% 1.8x 5.3x 11.6x 6.1% C3Q10 $31,581 13,519 18,062 7,475 10,355 4,891 0 26,117 5,464 (729) 342 (387) 5,077 11,637 (78) 12,339 $0.55 57.2% 32.8% 17.3% 16.1% 39.1% 1.7x 1.6x 0.7x 8.4% 4.6% 10.9% Verizon VZ * 2 $32.41 2,827 $91,623 5,975 53,170 $132,818 -3% -1% -6% 77,485 19,325 $2.25 $1.93 77,429 23,203 $2.20 $1.99 1.7x 6.9x 14.4x 5.9% 1.7x 5.7x 14.7x 6.1% C3Q10 $26,484 11,250 15,234 7,465 7,769 4,022 0 22,737 3,747 (597) 91 (506) 3,241 2,920 0 881 $0.56 57.5% 29.3% 14.1% 12.2% 3.3% 1.7x 1.5x 0.7x 5.2% 0.4% 1.0% AboveNet ABVT * 1 $56.00 26.2 $1,467 173.0 54.9 $1,349 14% 16% -79% 410.8 181.3 $2.31 $0.63 470.4 207.4 $2.56 $1.32 3.3x 7.4x 24.2x 1.1% 2.9x 6.5x 21.9x 2.4% C2Q10 $101 34 67 21 46 15 2 38 28 (1) 0 (1) 27 16 0 16 $0.62 66.1% 45.4% 28.2% 27.2% 16.2% 0.3x -0.6x 2.1x 22.7% 1.9% 2.6% Cbeyond CBEY * 2 $13.67 29.3 $400.9 51.8 0.0 $349.0 9% 15% NM 451.4 72.6 ($0.02) $0.31 489.2 82.0 $0.03 $0.25 0.8x 4.8x NM 2.3% 0.7x 4.3x 465.5x 1.8% C2Q10 $112 35 76 58 18 14 4 112 0 (0) 0 0 0 (0) 0 (0) ($0.00) 68.4% 16.5% 0.1% 0.2% -0.1% 0.0x -0.7x 1.5x NM NM NM Cogent CCOI * 1 $10.82 44.5 $481.8 52.4 178.1 $607.4 12% 18% NM 263.8 76.7 ($0.07) $0.32 300.4 93.0 $0.27 $0.96 2.3x 7.9x NM 3.0% 2.0x 6.5x 40.4x 8.9% C2Q10 $64 29 35 16 19 14 2 61 3 (4) 0 (4) (1) (1) 0 (1) ($0.02) 54.8% 29.3% 4.6% -1.2% -1.4% 2.4x 1.7x 2.0x 2.8% NM NM Level 3 LVLT * 2 $0.97 1,664 $1,619 518.0 6,411 $7,512 -3% -7% NM 3,646 848.4 ($0.44) ($0.06) 3,744 902.7 ($0.39) ($0.03) 2.1x 8.9x NM NM 2.0x 8.3x NM NM C3Q10 $912 368 544 326 218 215 20 929 (17) (144) (1) (145) (162) (163) 0 (163) ($0.10) 59.6% 23.9% -1.9% -17.8% -17.9% 7.4x 6.8x 1.3x NM NM NM PAETEC PAET * 1 $4.09 147.1 $601.8 125.6 975.0 $1,451 1% 4% NM 1,592 266.0 ($0.20) $0.35 1,618 271.6 ($0.18) $0.34 0.9x 5.5x NM 8.6% 0.9x 5.3x NM 8.2% C2Q10 $396 197 199 134 65 47 3 381 15 (23) 0 (22) (7) (8) 0 (8) ($0.05) 50.3% 16.4% 3.8% -1.9% -1.9% 3.7x 3.3x 1.4x 6.6% NM NM tw telecom TWTC * 2 $18.46 151.6 $2,798 486.9 1,340 $3,651 5% 5% 34% 1,274 459.5 $0.25 $0.56 1,351 492.0 $0.44 $0.71 2.9x 7.9x 74.9x 3.0% 2.7x 7.4x 42.0x 3.8% C2Q10 $317 132 185 71 114 (72) 0 150 36 (14) (5) (20) 16 15 0 15 $0.10 58.5% 36.1% 11.3% 5.1% 4.7% 2.9x 1.9x 2.3x 8.0% 0.6% 1.5% Equinix EQIX * 1 $82.86 45.7 $3,790 715.4 2,132 $5,207 38% 33% -57% 1,220 541.7 $0.76 ($3.66) 1,517 679.8 $1.84 $2.68 4.3x 9.6x 109.5x NM 3.4x 7.7x 45.1x 3.2% C3Q10 $330 117 214 67 146 74 20 278 52 (38) 2 (36) 16 11 0 11 $0.24 64.7% 44.3% 15.7% 4.8% 3.4% 3.6x 2.4x 2.9x 8.0% 0.2% 0.6% InterNAP INAP * 2 $4.93 50.0 $246.6 78.8 40.4 $208.2 -5% 28% NM 244.4 37.8 ($0.12) ($0.58) 255.4 40.5 ($0.08) $0.12 0.9x 5.5x NM NM 0.8x 5.1x NM 2.4% C2Q10 $61 31 30 15 10 8 0 30 (1) (1) 0 (0) (1) (1) 0 (1) ($0.03) 48.9% 16.4% -1.2% -2.0% -2.1% 1.0x -1.0x 2.6x NM NM NM Rackspace RAX * 1 $24.92 132.7 $3,306 148.5 169.8 $3,327 23% 27% 45% 772.4 255.6 $0.34 $0.85 959.0 322.5 $0.53 $1.24 4.3x 13.0x 72.4x 3.4% 3.5x 10.3x 46.6x 5.0% C2Q10 $187 60 127 65 62 38 6 109 18 (2) 1 (1) 17 11 0 11 $0.08 67.8% 33.2% 9.5% 9.0% 6.0% 0.7x 0.1x 1.3x 15.7% 1.6% 2.8% SAVVIS SVVS * 1 $23.51 55.3 $1,300 78.0 772.1 $1,994 6% 4% NM 928.3 228.9 ($1.25) ($0.72) 1,047 268.1 ($0.88) ($1.01) 2.1x 8.7x NM NM 1.9x 7.4x NM NM C3Q10 $242 130 112 52 60 50 6 238 3 0 31 31 (27) (26) 0 (26) ($0.47) 46.2% 24.7% 1.4% -11.2% -10.8% 3.2x 2.9x 1.2x 2.8% NM NM Terremark TMRK * 2 $10.09 65.2 $657.9 52.3 507.1 $1,113 18% 20% NM 346.4 97.0 ($0.44) ($1.14) 428.2 136.8 $0.09 ($0.00) 3.2x 11.5x NM NM 2.6x 8.1x 114.7x NM F1Q11 $79 44 35 16 19 12 0 72 5 (14) (0) (14) (10) (11) (0) (11) ($0.16) 44.8% 24.3% 5.9% -12.4% -13.3% 6.6x 5.9x 1.6x 6.5% NM NM Median 6% 15% 2% 928.3 255.6 ($0.02) $0.32 1,047.5 271.6 $0.27 $0.71 2.1x 7.9x 48.3x 3.2% 2.0x 6.5x 42.0x 4.4% $242 117 127 65 62 38 2 150 15 (14) 0 (14) 0 (0) 0 (0) ($0.00) 57.5% 29.3% 5.9% 0.2% -0.1% 2.4x 1.7x 1.5x 7.3% 1.1% 2.1% Mean 9% 13% -9% 16,389 5,018 $0.44 $0.04 16,712 5,481 $0.68 $0.79 2.4x 7.9x 51.3x 4.2% 2.1x 6.8x 89.2x 4.8% $4,682 1,996 2,686 1,214 1,454 718 5 3,943 720 (121) 35 (85) 630 1,108 (6) 1,005 $0.10 57.3% 28.7% 8.4% 2.2% 1.9% 2.7x 2.0x 1.7x 8.7% 1.5% 3.2%
1 = Outperform, 2 = Neutral, 3 = Underperform, NR = Not Rated AT&T and Verizon FCF and FCF Yield is Dividend and Dividend Yield Verizon's Revenue and EBITDA estimates exclude the 45% that Verizon Wireless does not own
Source: Company data, Thomson One, Cowen and Company estimates
32
October 29, 2010
Addendum
STOCKS MENTIONED IN IMPORTANT DISCLOSURES
Ticker ABVT CBEY CCOI EQIX INAP LVLT PAET RAX SVVS T TMRK TWTC VZ Company Name Abovenet Cbeyond Cogent Communications Group Equinix Internap Network Services Corp Level 3 Communications PAETEC Holding Corp Rackspace Hosting Savvis AT&T Terremark Worldwide tw telecom Verizon Communications
ANALYST CERTIFICATION Each author of this research report hereby certifies that (i) the views expressed in the research report accurately reflect his or her personal views about any and all of the subject securities or issuers, and (ii) no part of his or her compensation was, is, or will be related, directly or indirectly, to the specific recommendations or views expressed in this report. IMPORTANT DISCLOSURES Cowen and Company, LLC and or its affiliates make a market in the stock of ABVT, CBEY, CCOI, EQIX, INAP, LVLT, PAET, RAX, SVVS, T, TMRK, TWTC, VZ securities. Cowen and Company, LLC compensates research analysts for activities and services intended to benefit the firm's investor clients. Individual compensation determinations for research analysts, including the author(s) of this report, are based on a variety of factors, including the overall profitability of the firm and the total revenue derived from all sources, including revenues from investment banking. Cowen and Company, LLC does not compensate research analysts based on specific investment banking transactions. DISCLAIMER This research is for our clients only. Our research is disseminated primarily electronically and, in some cases, in printed form. Research distributed electronically is available simultaneously to all Cowen and Company, LLC clients. All published research, including required disclosures, can be obtained on the Firms client website, www.cowenresearch.com. Further information on any of the above securities may be obtained from our offices. This report is published solely for information purposes, and is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any state where such an offer or solicitation would be illegal. Other than disclosures relating to Cowen and Company, LLC, the information herein is based on sources we believe to be reliable but is not guaranteed by us and does not purport to be a complete statement or summary of the available data. Any opinions expressed herein are statements of our judgment on this date and are subject to change without notice. Notice to UK Investors: This publication is produced by Cowen and Company, LLC, which is regulated in the United States by FINRA and is disseminated in the United Kingdom by Cowen International Limited ("CIL"). In the United Kingdom, Cowen and Company is a Trading Name of CIL. It is communicated only to persons of a kind described in Articles 19 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005. It must not be further transmitted to any other person without the consent of CIL. Copyright, User Agreement and other general information related to this report 2010 Cowen and Company, LLC. Member NYSE, FINRA and SIPC. All rights reserved. This research report is prepared for the exclusive use of Cowen clients and may not be reproduced, displayed, modified, distributed, transmitted or disclosed, in whole or in part, or in any form or manner, to others outside your organization without the express prior written
October 29, 2010
33
consent of Cowen. Cowen research reports are distributed simultaneously to all clients eligible to receive such research prior to any public dissemination by Cowen of the research report or information or opinion contained therein. Any unauthorized use or disclosure is prohibited. Receipt and/or review of this research constitutes your agreement not to reproduce, display, modify, distribute, transmit, or disclose to others outside your organization the contents, opinions, conclusion, or information contained in this report (including any investment recommendations, estimates or price targets). All Cowen trademarks displayed in this report are owned by Cowen and may not be used without its prior written consent. Cowen and Company, LLC. New York (646) 562-1000 Boston (617) 946-3700 San Francisco (415) 646-7200 Chicago (312) 516-4690 Cleveland (440) 331-3531 Atlanta (866) 544-7009 Dallas (214) 978-0107 London (affiliate) 44-207-071-7500 Geneva (affiliate) 41-22-707-6900
COWEN AND COMPANY RATING DEFINITIONS (a)

Rating Outperform (1) Neutral (2) Underperform (3)
(a) Assumptions: Time horizon is 12 months; S&P 500 is flat over forecast period.
Definition Stock expected to outperform the S&P 500 Stock expected to perform in line with the S&P 500 Stock expected to underperform the S&P 500
COWEN AND COMPANY RATING ALLOCATION (a)

Rating Buy (b) Hold (c) Sell (d) Pct of companies under coverage with this rating 48.7% 47.7% 3.6% Pct for which Investment Banking services have been provided within the past 12 months 3.8% 1.3% 0.0%
(a) As of 09/30/2010. (b) Corresponds to "Outperform" rated stocks as defined in Cowen and Company, LLC's rating definitions (see above). (c) Corresponds to "Neutral" as defined in Cowen and Company, LLC's ratings definitions (see above). (d) Corresponds to "Underperform" as defined in Cowen and Company, LLC's ratings definitions (see above). Note: "Buy," "Hold" and "Sell" are not terms that Cowen and Company, LLC uses in its ratings system and should not be construed as investment options. Rather, these ratings terms are used illustratively to comply with NASD and NYSE regulations.
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34
October 29, 2010

Telecom and Data Services: Fiber: A Sector Evolves

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Telecom and Data Services: Fiber: A Sector Evolves

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Telecom and Data Services

Fiber: A Sector Evolves

Please see addendum of this report for important disclosures.