FOOL PLATE SPECIAL: An Investment Opinion
The Debt Load of Telecom Carriers

Telecom carriers can't get around the extremely high costs of building out their networks and debt is part of their game plan. Investors need to keep an eye on debt, however, particularly for AT&T and WorldCom. If the current market environment changes, their debt levels could be crushing.

By Bill Mann (TMF Otter)
July 11, 2000

A stark reality for investors in telecom carriers is the extreme capital intensity required to build out a network. Even for the established carriers, the rapid rise of customer bandwidth requirements has meant that they spend heavily on upgrading their networks. To do so these companies have engaged in acquisitions, internal buildouts, or both.

Companies such as AT&T (NYSE: T), WorldCom (Nasdaq: WCOM), Qwest (NYSE: Q), and Verizon (NYSE: VZ) have all consummated strategic acquisitions in the last year in order to expand their services or their territories. But they also each continue to allocate enormous capital resources to their physical plant.

It's even harder on the competitive local carriers and the smaller long distance carriers, which have much smaller physical and customer bases. For these companies, there is no choice but to spend heavily on marketing and networking. Teligent (Nasdaq: TGNT), for example, has a long-term debt level of $817 million, but only had $23 million in revenues in the first quarter. Teligent's sales and administrative expenses alone are more than twice its operational revenues.

At the same time, Teligent, an innovative and well run company, is probably well within the range its management expected to be. Companies like Teligent are not focusing upon profitability today. They can't. The networks are too expensive. It is unrealistic to expect telecom carriers not to take on deb in this environment. In fact, too little debt is a sign that a carrier is relying heavily on equity financing, diluting current shareholders.

For the biggest two long distance carriers, it would be wise to watch those debt levels. AT&T carries a debt load of $76 billion, WorldCom's exceeds $25 billion. These companies are large enough to manage their debt payments under current environments, but should margins shrink, interest rates continue to rise or revenues slow, this debt level could be crushing.

AT&T just garnered some $9 billion in cash from its issuance of a tracking stock for AT&T Wireless (NYSE: AWE), but even so its cash-to-debt ratio would still be 0.11. If there was any question who the major beneficiary was from the AT&T Wireless spinoff, one look at AT&T's debt should give a strong hint. WorldCom, for it's part, had a net debt payment that was 82% of operating income in the first quarter of 2000.

Your Turn:
If you are investing in telecom carriers, are you concerned with the debt levels and/or operating losses? How much weight do you give revenue growth for carrier companies in deciding to invest? Come over to the Telecommunications discussion board and give us your thoughts.

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