Broadwing discontinues optical cross-connect

Unable to sell its optical cross-connect switch, Broadwing is shutting down that portion of its equipment business and will consolidate all remaining equipment activity in its communications services business. In announcing improved earnings and significant revenue growth in the second quarter of this year, the company also said it doesn’t expect significant revenues from its new Broadwing Converged Networks service, announced June 1, until the first half of 2006.

Broadwing had announced its intention to sell the Optical Cross-Connect System, the major product in its equipment division, in April.

“We had discussions with a number of potential buyers,” said Chief Financial Office Lynn Anderson. Interest in the OCS lagged, however, due to “lack of sales backlog and continued slowness in equipment segment.,” he said.

The OCS was invented by Corvis and David Huber, Broadwing’s chairman and CEO, and was the initial tie between the two companies that led to their merger in 2003. Jim Bannantine, former president of Broadwing’s equipment unit, left the company in April when the decision to sell the OCS was announced. All remaining pieces of the equipment business “will serve strategic goals in the ongoing operations of our network,” Huber said. Broadwing will no longer report separate results for its equipment business.

For the second quarter, total company revenue was $222.2 million, up $80.1 million or 56% from $142.1 million earned in the second quarter of 2004. Of that, $18.3 million or 13% year-over-year, was the result of organic growth in Broadwing’s services, mostly in data/Internet and broadband. The rest is attributable to Focal revenue, including local and long-distance voice. The company posted a consolidated net loss for the second quarter of $38.3 million, or minus 52 cents per share, as compared to a reported net loss of $38.1 million, or minus 78 cents per share in the second quarter 2004. Voice revenues declined by one per cent.

“We had a solid second quarter,” Huber said in the conference call announcing the earnings. “There is still a lot of tough competition -- pricing is firming but still see price pressures in some areas. We are in position to take advantage of the volatility in the industry.”

Broadwing’s primary advantage is its converged network, Huber said. The company believes it is at least a year ahead in launching a Converged Network Service, but is now going what it expects to be a length sales cycle that includes extensive testing, he added.

“We are in the installation and testing phase with many enterprise customers right now,” he said. “We do not expect significant revenues from converged services until the first half of next year. We are ahead of our competition and we continue to build on our momentum.”

The company said increased depreciation expenses, largely triggered by the write-off of some acquired Focal assets, had a significant impact but was offset in part by higher gross margins and lower interest expenses. Going forward, Broadwing is still facing increased expenses in areas where it has not fully eliminated duplicate facilities, said CFO Lynn Anderson.

“Our cost savings are tracking to plan,” he said. “As we execute on the final efforts of the Focal integration, we will face one-time charges.”

Where the company had dual DS-3 hubs following the merger, it is migrating customers onto a second facility, but must carry the cost of the duplicate DS-3 hub until the final customer is migrated and them pay termination fees, Anderson explained.

Communications services revenue grew 2% year-over-year to $221.2 million while revenue from sales of data/Internet and broadband services was up 5% from the first quarter of 2005 and 21% year-over-year to $115.2 million. Voice services revenue slipped 1% from the first quarter of 2005 to $106 million.