Howard Janzen

In the evolution of Williams Communications Group, this is the year it should emerge as a full-fledged adult company, ready to take on the world after having gone through its gangly stage as a division of a large energy concern. Generally slowing economic conditions, however, may result in a company that is all dressed up with nowhere to go.

After completing a spinoff from its parent, The Williams Companies, WCG certainly has the tools to become a major player. With a core fiber network that covers 125 cities across the global and 33,000 route miles, the company is among the top-tier carriers in terms of capacity and ability to move bits from one location to the next.

In the current market, though, external factors such as a slumping stock price and the inevitable entry of RBOCs into long-distance has set off speculation that the company is destined to be a division of another large company — SBC Communications.

But Howard Janzen, Williams' president and CEO, says the Tulsa, Okla.-based company is not going to play second fiddle to anyone's grand schemes. In fact, he envisions the company as one of the surviving entities that winds up selling very large data pipes and related services to other carriers.

“Our focus is solely on the network so we can leverage systems,” says Janzen. “Our customers are looking at ways to conserve their capital. We offer them the perfect way to do that. They don't have to fire up capacity. With the market being down, it actually makes our proposition that much better.”

Janzen thinks WCG's new independence is best suited to the current market and fairer to shareholders' objectives.

“If we kept energy and communications in the same company, we wouldn't be able to grow as fast,” he says. “Shareholders that have been interested in both are interested in very different ways.”

As the capital markets reopen, the company likely will continue growing its network. But for now, the emphasis is on conserving cash and riding out the storm. “I characterize this market as an ultra long-haul flight, and all the fuel you have, which is cash, is what you have on board. You can't stop to refuel anywhere along the way.”

And while that's good for the long term, the short-term outlook is one that will make Williams look like it's cutting back. That's especially true if one only looks at the balance sheet. In the last quarter of 2000, the company spent about $822 million, mostly on completing its network. This year, Janzen says, expect that number to begin a long downward trend.

“Our capital expenses last year were largely non-discretionary. Now more than 50% is discretionary. Next year it will be 70%. You are seeing a high level of scrutiny, but we're doing it in a careful way.”

Such talk is exactly what analysts want to hear, according to Jerry Borowick at KPMG. In fact, because WCG was able to close a round of funding before its spinoff from The Williams Companies, it's in a better position than most.

“They have enough cash to complete their network, and that puts them far ahead of others in this market,” says Borowick. “Part of it is being in the right place at the right time, and they were this time.”

Timing, however, is not on the side of the dozens of start-up optical vendors, many of which look to Williams and its technology farm system as a first stamp of approval. A number of companies, including Sycamore Networks, cite Williams' cash conservation measures as the reason behind its disappointing earnings in the first quarter.

Timing, however, is what led WCG to sell off its Solutions unit to Platinum Equity in January. At the time, Solutions, which combines enterprise services along with bandwidth from the Network group, was expected to produce about $1.3 billion in revenue in 2000. Not counting Solutions, WCG reported annual revenue of $839.1 million, with the majority of that coming from the Network group and the remainder contributed by the Vyvx Broadband Media Services group.

And while some may view the sale of the largest revenue producer as a warning signal, Janzen says the transaction was made with the future in mind. “Solutions was a very slow growth business,” he says. “Our growth opportunities are all centered around Network. Our revenues [in Network] have been growing at 100% per year, and we're on track to do that this year.”

That rosy outlook hasn't stopped investors from hammering the stock, though. WCG has seen its stock slide from north of $40 in mid-2000 to around $5 by late April. Janzen blames investors who lump WCG in with other backbone carriers.

“All the stocks are moving in unison, which tells me investors are not taking the time to sort out who are the winners in this sector. I think we will come out of that as we begin to post results.”

What form the company will take if and when it emerges from the pack also is under some scrutiny. Since 1999, WCG has had a close relationship with SBC that only grew closer after the RBOC agreed to take a 10% stake in the company early last year. That investment, the maximum allowable under the Telecom Act, set off speculation that SBC was simply placing its marker on Williams and would acquire it when it had the necessary Section 271 approvals.

And while Janzen doesn't deny that such a scenario could play out, he adds that the investment wasn't made with that purpose in mind.

“SBC made a decision for the best way for them to get a network was to outsource to us. They've been very happy with that arrangement. The investment was just a way to make sure SBC had enough influence in our business. That was really the design behind the arrangement. They don't have to spend billions to build networks and keep up with technology.”