Dan Moffat

As a wholesaler of DSL services, New Edge Networks is, in the eyes of many, a member of the most maligned sector in communications. In the past several months, some of the most visible data CLECs have fallen on very hard times in very public ways.

Yet New Edge is still around. Amid the chaos, in fact, the company pulled off a funding coup, announcing at the end of April that it had raised $77.5 million in equity and debt financing. The capital acts as a reprieve for New Edge. Before its latest round of financing was completed, the company had only enough money to carry itself through the summer or a bit beyond, though its business plan aims for profitability in 2002.

The new funding, says New Edge President and CEO Dan Moffat, will cover that gap, allowing the company to reach a cash-flow positive position in the second half of 2002.

To get to the verge of success, the company has had to make some tough decisions.

Originally, the broadband wholesaler had an aggressive rollout plan for its network, which consisted of 1200 central offices and an ATM backbone. Capital concerns last November, however, prompted a change in that strategy. After raising $140 million in its third round of funding in October of last year, New Edge almost immediately began cultivating a fourth round of financing. According to Moffat, the company found that the capital markets had tightened, leaving it without enough cash to complete its build.

“If you look at all these CLEC and data CLEC plans, they all show EBITDA break-even in year four,” Moffat says. “If you're two years in and the capital goes away, then you've got a footprint that's deployed but no operating capital to prove out the plan.”

To avoid such a fate, New Edge decided in November 2000 that cutbacks were necessary to make its available capital last longer. The company reduced its network build from 1200 to 600 central offices and reduced headcount to match, cutting about one-third of its work force.

Although the cutbacks in staffing were necessary, says Moffat, they came as a shock to the company's system. “It was an environment that was ‘go, go, expand,’ and we really didn't think about layoffs. When you have your first layoffs there's a loss of innocence.”

“There are good layoffs and there are bad layoffs,” says Part Hurley, DSL analyst for TeleChoice. “What's happening at NorthPoint and Rhythms is bad. I don't see New Edge as having to implement that type of layoff. I see it more as a refinement. They needed to get to profitability faster.”

In interviews conducted before the company announced its new funding, some analysts expressed serious doubt that New Edge, even with a scaled-back business plan, would be able to cover its funding requirements.

However, the company's small market strategy is one of its main differentiators.

“If you're gong to compete head-on with the RBOCs, you better get the company to viable size fast,” says Charles Carr, senior industry analyst with Dataquest Gartner. “You've got a very narrow window before RBOCs gain momentum. If you're looking at these smaller markets like New Edge is, you're not going to draw the attention of the RBOCs.”

Needing to speed up the time to self-sufficiency, in February New Edge announced that it would be putting more operational focus on its WAN offerings, which had seen greater success than its basic DSL service. Now, 75% of the company's revenues come from these services, while only 25% are derived from basic DSL offerings. For 2001, the company wants to reach a 50/50 revenue mix for these services, says Moffat.

Taking on a broadening portfolio is a trend in the broadband arena that allows companies to make better use of their assets, says Jeff Moore, network services analyst with Current Analysis. And when combined with the effects of line-sharing and improving economics on broadband, that strategy speaks of a brighter feature for DSL services.

“I think this funding is an indicator of much stronger help for competitive DSL providers,” says Moore. “I say that with a proviso that it's too late for NorthPoint and maybe too late for Rhythms, but for Covad and New Edge, this is an indicator of good long-term prospects.”