By Brian Graney (TMF Panic)
May 10, 2000

Fixed-rate bandwidth supplier Metromedia Fiber Network (Nasdaq: MFNX) posted its Q1 results today, turning in a loss of $0.16 per share. Seeing as the company is firmly in the development stage of the business maturity spectrum while it builds out its end-to-end optical network game plan, no one is expecting profits anytime soon. Still, the loss was not as bad as the $0.25 per share loss expected by analysts, so the red ink can be viewed as more positive than negative. Revenues for the quarter rolled in at $31.9 million, up 23% sequentially. On a year-on-year basis, revenues increased at a 73% rate, up from the 66% growth rate in Q4.

Figuring out eventual profitability with development stage companies is a big question that is always on investors' minds, but a solitary bottom-line focus will lead one astray when looking at a company such as Metromedia Fiber. Sure, businesses are ultimately valued based on the amount of cash they will throw off during their lifetimes, but different factors play a role in determining those cash flows in the first place. For instance, margins can play a big role in the value creation story for manufacturers, while asset management can be the keystone for retailing cash flow. Those types of metrics are quantitative items that can be crunched pretty easily with the information regularly disclosed by companies in their financial statements.

But in the bandwidth supply business, the main valuation touchpoint is the strength of the company's network itself. Building a snowballing, defendable competitive advantage in its business area through its end-to-end network is what Metromedia is focused on right now. Not surprisingly, that's where the attention of investors should be focused, too.

Three years after billionaire John Kluge and his company Metromedia put Metromedia Fiber on the map with a substantial investment, the company has built itself into a major player on the fiber optic landscape. The first peg of the firm's strategy was to build fiber optic networks in major metropolitan areas, with the purpose of providing dedicated fiber to every single customer in every building -- the so-called "last frontier" in fiber optic networks. The breadth of those assets continues to grow, with Robertson Stephens analysts predicting the firm will have 3.6 million fiber miles in place in 67 major North American and European cities by the end of 2003.

But the company isn't stopping just at the metro level. With last year's acquisition of AboveNet Communications, Metromedia Fiber picked up valuable Internet connectivity abilities with a provider that is ISP- and content provider-neutral. Earlier this year, Metromedia Fiber announced that it would spend $1.4 billion to deploy a scalable long-haul network to connect everything together, providing its customers with an end-to-end optical Internet presence. And reading between the lines of this week's deal to buy Pacfic Gateway Exchange's (Nasdaq: PGEX) stakes in two transoceanic fiber optic cable consortia, the company is well on its way toward taking its end-to-end optical strategy global.

Figuring out what this whole ball of fiber is worth is a daunting challenge using the standard valuation gauges typically found in an investor's toolbox. A more reasonable way of putting a price tag on Metromedia Fiber would be to examine just how much it would take another firm to replicate the firm's now global footprint, a figure which would easily be in the billions of dollars. Currently, the company's enterprise value is around $14.5 billion, with its stock off 47% from its all-time high in late March.

While many investors have backed away lately from companies lean in the earnings department, it's important to keep in mind that profits ultimately derive from a firm's underlying assets. At this point in the story, that's where any meaningful valuation work on Metromedia Fiber should begin.

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