XO's big bet pays off

XO Communications privately presented the chart below to top investors last December to illustrate the carrier's recent and dramatic shift in spending.

After having been outspent for years by larger rivals, XO poured money into sweeping network upgrades over the course of the past two years. Using gear from Cisco Systems and Infinera, respectively, XO doubled its IP core capacity and added 800 Gb/s to its cross-country routes in 2007. Those investments helped XO trim its losses despite flat revenue last year because the efficiencies yielded $48 million in cost-of-service cuts.

With sweeping network upgrades largely behind the company, XO has vowed to spend more conservatively this year, with a projected capex range roughly between 12% and 15%. It also plans to shift spending from infrastructure to customer support. Network investment will drop from $50 million to $15 million this year, while “success-based” spending will grow from 57% of total capex to 67%. That restraint will be important, given that XO expects another year of essentially flat revenue in 2008.

XO's spending spree came while its biggest rival, Level 3 Communications, was beset by months of integration headaches, struggling to tie together several acquisitions before saying goodbye to its chief operating officer this month. But it also comes as XO itself is facing its own tough choices, meeting with banks and weighing various options for managing $377 million in debt — which begins to mature next spring — in a notoriously rocky credit market.