AXIA NETMEDIA CORP AXX
January 17, 2012 - 12:19pm EST by
Rearden
2012 2013
Price: 1.30 EPS $0.00 $0.00
Shares Out. (in M): 64 P/E 0.0x 0.0x
Market Cap (in $M): 83 P/FCF 0.0x 0.0x
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 59 TEV/EBIT 0.0x 0.0x

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  • Fiber
  • Multi-bagger
  • Telecommunications
  • France
  • Broadband
  • Sum Of The Parts (SOTP)
 

Description

As we peeled back the layers on Axia, its undervaluation stunned us. Axia owns and/or operates fiber broadband networks in several geographies. Its first network is in Alberta, Canada, where this virtual duopoly business produces $22m in annual EBITDA. With Axia’s Enterprise Value at $59m, just this high quality asset alone prices Axia at an absurdly low 2.6x EV/EBITDA.

In addition to Canada, Axia also owns 50% of a fiber broadband network in France. The other 50% was sold a few months ago to a European infrastructure fund for $92m ($42m upfront cash payment + $50m 3-year earn out). That implies Axia’s stake in the French broadband network alone is worth more than the EV of Axia. 

Further still, Axia has 3 more broadband networks–in Massachusetts, Spain, and Singapore. These fiber networks–which are just now beginning to “light-up”–stand to produce another $8m-$16m in pre-tax income.

As absurd as this sounds, Axia’s fiber broadband networks altogether stand to generate$28m-$57m in pre-tax income. Yet, the company’s EV today is $59m.

This tremendous earnings power is not yet visible to the market. It is masked because Axia has spent money to buildout its fiber networks over the past few years, i.e., “to lay pipe in the ground.” However, most of the build outs are now complete, and as these networks “light-up,” income from them should rapidly fall to the bottom line. That is the catalyst that should cause a repricing of the stock. 

Being virtually the only provider of fiber broadband in a geography is a tollbooth-like business. It provides a product people need to use everyday; it has stickiness, recurring revenues, no obsolescence risk, and huge tailwinds with the ever-growing use of data. We find that when we calculate what Axia is worth based on what its networks will earn, we get a valuation 3x-6x higher than the current share price.

 

About Axia - Selling Broadband Services Wholesale

Usually, we all purchase our broadband from our local telco. In your area, for example, Verizon may be the telco that built out and owns the fiber infrastructure. Owning the fiber, Verizon then proceeds to sell you services directly (TV, internet, phone, etc.)–no one else can sell services over Verizon’s infrastructure. Governments have grown to hate this model because they think it puts “monopoly” power in the hands of telcos.

Axia offered governments the chance to replace that model. Axia proposed to own and/or operate the fiber infrastructure, but to never sell services directly to the end user. Instead, Axia would sell wholesale broadband to RSPs (Retail Service Providers), who would then sell services to the end-user (TV, internet, phone, etc.). Any person can an open a business as an RSP, purchase wholesale broadband from Axia on the same terms offered to everyone else, and then try to make money by selling services to the end-user.

This creates a dynamic where Axia is the only company that owns the fiber infrastructure in a city, but yet there are dozens of RSPs competing to sell broadband services to businesses and residents.

Governments love the model that Axia proposes. They usually put up the capital for Axia to buildout fiber to areas where it is unprofitable for the private sector to do so.  

Axia’s first network was created seven years ago in Alberta, Canada, and it has turned out to be a huge success. 

 

Alberta, Canada (SuperNet): $10m-$21m pre-tax income

It all started with Alberta, Canada in 2005. The Government of Alberta put up several hundred million dollars for Axia to build out and operate a fiber network in rural areas. The network consists of over 13,000 kms of fiber. This network began operations in 2005 and has since produced a consistent annual stream of ~$15m net income.

The Alberta network is a great asset, with one caveat. Axia’s contract with the government of Alberta comes up for renewal in 2015. Speaking with Art Price, the CEO, one will get the impression he is confident the contract will be renewed on terms that will allow Axia to continue to earn at least as much as it did in the past.

The reason is because Axia’s contract with the Government of Alberta already has price adjustment language in the agreement–a clause where the government can demand a lower price if Axia is not offering a competitive price. So at any point, if the government thought Axia was overcharging, they could have already requested a price adjustment. So price is not that big of a motivating factor, because the government could argue if Axia’s prices aren’t reasonably competitive, that they should be adjusted. 

Furthermore, Axia currently earns ~40% margins on its Alberta network. This is in line with the 30%-40% margins that Canadian telcos earn (Tellus, Roger Communications, Bell Canada, etc.). Nevertheless, to be conservative, post-2015 we assume it is possible Axia might have to cut its margins down to way-below market rates of 20% in order to have its contract with the government renewed. Though Axia thinks Alberta will not get a profit cut (they think profits will actually be higher because data broadband use grows everyday), to be conservative, we provide a range of $10m-$21m pre-tax for Alberta’s network post-2015. 

As Alberta turned out to be a huge success for the government, other governments began to take notice. With such a success under its belt, Axia was able to propose many similar models to governments worldwide and secure very profitable assets for itself. Its biggest asset is the one growing in France.

 

France (Covage): $10m-$20m pre-tax income

Covage is a new 3,700 kms fiber broadband network in France. Axia owns 50% of Covage and is the operator of the network. Cube Infrastructure Fund just purchased the other 50% for $92m ($42m upfront + $50m three year earn out). (Cube is primarily a passive financial investor in European infrastructure assets.) All the calculations below are based on Axia’s remaining 50% interest in Covage.

The Covage network has been recently activated and just generated a positive EBITDA. In FY 2011, Covage generated EBITDA of ~$4m. Covage’s current market is the 34,000 businesses that are currently within 100m of Covage’s fiber network. Penetration has consistently grown 0.6% each quarter (see Axia’s September 2011 presentation, Slide 29, for an illustration), reaching 6% penetration as of the latest quarter. Axia’s management has repeatedly stated they will earn ~$14m pre-tax at 15% penetration. (In Axia’s MD&A filings, it states “At a market penetration of 15%, we would expect to earn approximately 20% return before tax on our capital investment [in Covage].”)

Covage should reach 15% penetration by 2015. The only reason penetration is not increasing faster is because there is more demand than Covage can supply. It takes time for Covage to build out fiber from its major backhaul to the premise of each business (the current average wait time is ~50 days).

It is important to note that Covage has reached an inflection point. In its 2011 MD&A, Axia states “We are currently selling Broadband Services to about 5.4% of Covage’s addressable market although the cost of products and services sold for this NGN include a full complement of sales, marketing and operational staff and related activities which are capable of servicing a much larger customer base.

Management has also stated several times on conference calls that at 5% penetration, operating expenses become relatively flat and they expect incremental revenue to largely drop to the bottom line. Management also stated that margins should be in the 30%-35% range (which is line with the margins that other telcos produce, such as France Telecom, SFR, Tellus, Roger Communications, Shaw Communications). They reiterate that the nature of a fiber network is that its cost base is fairly fixed (it virtually costs nothing to light up an extra strand of fiber), and so the margin is based on the growth of revenues. “[A]ny incremental dollar now is effectively an incremental dollar that essentially drops to the bottom line.”

Covage is the only fiber broadband provider in its market. Currently, the majority of the remaining 94% of the market not served by Covage receive their broadband through copper (DSL). Copper is inferior to fiber–it cannot provide the speeds, the asynchronous upload/download, the constant connectivity, etc. that fiber provides. (A business that needs speeds in excess of 100 Mbps or constant connectivity to the cloud cannot use a copper connection.) Interestingly, our research revealed that the price for a fiber connection is now equivalent to a copper one, creating an inflection point.

The RSPs (Retail Service Providers that buy bandwidth wholesale from Covage and then resell it to end-users) we spoke with are aggressively pitching Covage’s fiber broadband. For them, it is better if a customer is on fiber rather than copper because it generates additional revenues. One RSP we spoke with has his business with Covage growing in excess of 20% per year. This RSPs business currently consists of customers on 10,000 lines of copper and on 1,200 lines of fiber–an 8:1 ratio. In 2012, he stated he is confident he will sell 3 lines of fiber for each 7 lines of copper. He is certain 30% of his customer base will soon be on fiber, and eventually, 100%.

Furthermore, all of Covage’s estimates do not count the residential market–that is a free option. (Residential users use much less broadband than businesses, so they don’t have the same dire need for fiber broadband. But as iPads, Apple TV, 3D HDTV, etc. grow, they will eventually have to switch to fiber, as well.) 

Also, there is nothing stopping Axia from achieving higher than 15% penetration of the business market. 85% of the market will not stay on copper DSL forever.

Given all the above, Covage should produce at least $10m-$20m in pre-tax income by 2015.

(Also, Axia just added the city of Nantes to its network. Based on our due diligence, that increased Axia’s addressable market to 39,000 businesses–a significant add.)

 

Singapore (OpenNet): $5m-$11m pre-tax income

The Singapore government put up SGD$750m to outlay the entire country with fiber to every premise–yes, fiber to every single premise. The Singapore government is hellbent on switching over the country to a fiber network. The cost of a fiber broadband account will be virtually the same price for DSL. (OpenNet has proposed wholesale prices of SGD$15 (US$10) per month per residential fiber connection and S$50 (US$35) per month per non-residential connection.)

Axia owns 30% of OpenNet and management has consistently stated its stake will produce SGD$6m-$14m per year, or $5m-$11m. (The only reason it is not more than SGD$14m is because the Singapore government capped it at that amount.)

 

Spain (Xarxa Oberta): $3m pre-tax income

Axia signed a contract with the province of Catalonia about a year ago, where it will so far have 1,900 kms of fiber. Axia will turn on their first services in April 2012. Spain will be an extension of France. The current market commitments (contracts) that Axia has in Spain is about 1/5 the size of France contracts.

 

Massachusetts, U.S. (MassBroadband 123): $1m-$3m pre-tax income

This network will be activated in 2013 and will serve the western part of Massachusetts. It will have 2,153 kms of fiber serving 124 communities, with 38,000 households and 44,300 commercial premises. 

Axia has revenue guarantees from 1,400 government institutions. The revenue from these committed sites will be sufficient to cover the operating and maintenance costs of the network. Any incremental sale of services to the private sector will be accretive. 

In our due diligence and speaking with players in the Massachuessets market, Axia does not stand to make a lot of money serving the communities that will be getting fiber. The estimates we received are about $1m-$3m. So that Massachusetts network should be viewed as more of a strategic foothold for Axia to establish itself in the U.S. market, rather than a substantial profit generator.

 

Management

We visited Axia’s headquarters and found Art Price and the management team to be very candid and transparent. Art sees Axia’s stock as being undervalued and has recently bought shares himself and initiated a share buyback program for the company. Alberta turned out to be a huge return on capital. The current projects looks like they’ll have great returns as well, while maintaing a solid balance sheet. 

 

VALUATION

All the telcos trade at around 10x EV/EBIT–and that’s with the fact that a large part of that EBIT is in old, legacy fixed-line business. To be conservative, we assume Axia should command at least a 7x EV/EBIT multiple. 

We also will not count the cash that Axia will generate over the next few years, as we will assume that will go towards CAPEX to finish building out its remaining networks. In several years, based on all the above, Axia should produce in the range of:

 

 

Low Case

High Case

 

Alberta, CA

10m

21m

France

10m

20m

Singapore

5m

11m

Spain

2m

3m

Massachusetts, U.S.

1m

3m

TOTAL PRE-TAX INCOME

28m

58m

At 7x multiple

196m

406m

Cash

30m

30m

Debt

(7m)

(7m)

AXIA VALUE IN 4 YEARS

219m

429m

 

$3.42/share

$6.70/share

 

Bottom Line

We find Axia to be a highly asymmetrical investment. They sell fiber broadband in a world that is increasingly using more data everyday. Axia is in markets where it is usually the only provider of fiber broadband and it is uneconomical for another competitor to enter its market. The earnings for all its networks have not yet fallen to the bottom line, which creates the dynamic of a high quality earnings stream that is trading for an absurdly cheap price. 

We believe Axia is cheap enough where it is hard to imagine a scenario where an investor would lose money, yet easy to see how they would make a 3x-6x return.

Catalyst

The fiber broadband networks that Axia built out reach an inflection point, and the revenue from new subscribers start to fall to the bottom line. As it becomes obvious to the market the amount of income these broadband networks can generate, there will be a repricing of Axia's stock–possibly 3x-6x from today's current price.
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    Description

    As we peeled back the layers on Axia, its undervaluation stunned us. Axia owns and/or operates fiber broadband networks in several geographies. Its first network is in Alberta, Canada, where this virtual duopoly business produces $22m in annual EBITDA. With Axia’s Enterprise Value at $59m, just this high quality asset alone prices Axia at an absurdly low 2.6x EV/EBITDA.

    In addition to Canada, Axia also owns 50% of a fiber broadband network in France. The other 50% was sold a few months ago to a European infrastructure fund for $92m ($42m upfront cash payment + $50m 3-year earn out). That implies Axia’s stake in the French broadband network alone is worth more than the EV of Axia. 

    Further still, Axia has 3 more broadband networks–in Massachusetts, Spain, and Singapore. These fiber networks–which are just now beginning to “light-up”–stand to produce another $8m-$16m in pre-tax income.

    As absurd as this sounds, Axia’s fiber broadband networks altogether stand to generate$28m-$57m in pre-tax income. Yet, the company’s EV today is $59m.

    This tremendous earnings power is not yet visible to the market. It is masked because Axia has spent money to buildout its fiber networks over the past few years, i.e., “to lay pipe in the ground.” However, most of the build outs are now complete, and as these networks “light-up,” income from them should rapidly fall to the bottom line. That is the catalyst that should cause a repricing of the stock. 

    Being virtually the only provider of fiber broadband in a geography is a tollbooth-like business. It provides a product people need to use everyday; it has stickiness, recurring revenues, no obsolescence risk, and huge tailwinds with the ever-growing use of data. We find that when we calculate what Axia is worth based on what its networks will earn, we get a valuation 3x-6x higher than the current share price.

     

    About Axia - Selling Broadband Services Wholesale

    Usually, we all purchase our broadband from our local telco. In your area, for example, Verizon may be the telco that built out and owns the fiber infrastructure. Owning the fiber, Verizon then proceeds to sell you services directly (TV, internet, phone, etc.)–no one else can sell services over Verizon’s infrastructure. Governments have grown to hate this model because they think it puts “monopoly” power in the hands of telcos.

    Axia offered governments the chance to replace that model. Axia proposed to own and/or operate the fiber infrastructure, but to never sell services directly to the end user. Instead, Axia would sell wholesale broadband to RSPs (Retail Service Providers), who would then sell services to the end-user (TV, internet, phone, etc.). Any person can an open a business as an RSP, purchase wholesale broadband from Axia on the same terms offered to everyone else, and then try to make money by selling services to the end-user.

    This creates a dynamic where Axia is the only company that owns the fiber infrastructure in a city, but yet there are dozens of RSPs competing to sell broadband services to businesses and residents.

    Governments love the model that Axia proposes. They usually put up the capital for Axia to buildout fiber to areas where it is unprofitable for the private sector to do so.  

    Axia’s first network was created seven years ago in Alberta, Canada, and it has turned out to be a huge success. 

     

    Alberta, Canada (SuperNet): $10m-$21m pre-tax income

    It all started with Alberta, Canada in 2005. The Government of Alberta put up several hundred million dollars for Axia to build out and operate a fiber network in rural areas. The network consists of over 13,000 kms of fiber. This network began operations in 2005 and has since produced a consistent annual stream of ~$15m net income.

    The Alberta network is a great asset, with one caveat. Axia’s contract with the government of Alberta comes up for renewal in 2015. Speaking with Art Price, the CEO, one will get the impression he is confident the contract will be renewed on terms that will allow Axia to continue to earn at least as much as it did in the past.

    The reason is because Axia’s contract with the Government of Alberta already has price adjustment language in the agreement–a clause where the government can demand a lower price if Axia is not offering a competitive price. So at any point, if the government thought Axia was overcharging, they could have already requested a price adjustment. So price is not that big of a motivating factor, because the government could argue if Axia’s prices aren’t reasonably competitive, that they should be adjusted. 

    Furthermore, Axia currently earns ~40% margins on its Alberta network. This is in line with the 30%-40% margins that Canadian telcos earn (Tellus, Roger Communications, Bell Canada, etc.). Nevertheless, to be conservative, post-2015 we assume it is possible Axia might have to cut its margins down to way-below market rates of 20% in order to have its contract with the government renewed. Though Axia thinks Alberta will not get a profit cut (they think profits will actually be higher because data broadband use grows everyday), to be conservative, we provide a range of $10m-$21m pre-tax for Alberta’s network post-2015. 

    As Alberta turned out to be a huge success for the government, other governments began to take notice. With such a success under its belt, Axia was able to propose many similar models to governments worldwide and secure very profitable assets for itself. Its biggest asset is the one growing in France.

     

    France (Covage): $10m-$20m pre-tax income

    Covage is a new 3,700 kms fiber broadband network in France. Axia owns 50% of Covage and is the operator of the network. Cube Infrastructure Fund just purchased the other 50% for $92m ($42m upfront + $50m three year earn out). (Cube is primarily a passive financial investor in European infrastructure assets.) All the calculations below are based on Axia’s remaining 50% interest in Covage.

    The Covage network has been recently activated and just generated a positive EBITDA. In FY 2011, Covage generated EBITDA of ~$4m. Covage’s current market is the 34,000 businesses that are currently within 100m of Covage’s fiber network. Penetration has consistently grown 0.6% each quarter (see Axia’s September 2011 presentation, Slide 29, for an illustration), reaching 6% penetration as of the latest quarter. Axia’s management has repeatedly stated they will earn ~$14m pre-tax at 15% penetration. (In Axia’s MD&A filings, it states “At a market penetration of 15%, we would expect to earn approximately 20% return before tax on our capital investment [in Covage].”)

    Covage should reach 15% penetration by 2015. The only reason penetration is not increasing faster is because there is more demand than Covage can supply. It takes time for Covage to build out fiber from its major backhaul to the premise of each business (the current average wait time is ~50 days).

    It is important to note that Covage has reached an inflection point. In its 2011 MD&A, Axia states “We are currently selling Broadband Services to about 5.4% of Covage’s addressable market although the cost of products and services sold for this NGN include a full complement of sales, marketing and operational staff and related activities which are capable of servicing a much larger customer base.

    Management has also stated several times on conference calls that at 5% penetration, operating expenses become relatively flat and they expect incremental revenue to largely drop to the bottom line. Management also stated that margins should be in the 30%-35% range (which is line with the margins that other telcos produce, such as France Telecom, SFR, Tellus, Roger Communications, Shaw Communications). They reiterate that the nature of a fiber network is that its cost base is fairly fixed (it virtually costs nothing to light up an extra strand of fiber), and so the margin is based on the growth of revenues. “[A]ny incremental dollar now is effectively an incremental dollar that essentially drops to the bottom line.”

    Covage is the only fiber broadband provider in its market. Currently, the majority of the remaining 94% of the market not served by Covage receive their broadband through copper (DSL). Copper is inferior to fiber–it cannot provide the speeds, the asynchronous upload/download, the constant connectivity, etc. that fiber provides. (A business that needs speeds in excess of 100 Mbps or constant connectivity to the cloud cannot use a copper connection.) Interestingly, our research revealed that the price for a fiber connection is now equivalent to a copper one, creating an inflection point.

    The RSPs (Retail Service Providers that buy bandwidth wholesale from Covage and then resell it to end-users) we spoke with are aggressively pitching Covage’s fiber broadband. For them, it is better if a customer is on fiber rather than copper because it generates additional revenues. One RSP we spoke with has his business with Covage growing in excess of 20% per year. This RSPs business currently consists of customers on 10,000 lines of copper and on 1,200 lines of fiber–an 8:1 ratio. In 2012, he stated he is confident he will sell 3 lines of fiber for each 7 lines of copper. He is certain 30% of his customer base will soon be on fiber, and eventually, 100%.

    Furthermore, all of Covage’s estimates do not count the residential market–that is a free option. (Residential users use much less broadband than businesses, so they don’t have the same dire need for fiber broadband. But as iPads, Apple TV, 3D HDTV, etc. grow, they will eventually have to switch to fiber, as well.) 

    Also, there is nothing stopping Axia from achieving higher than 15% penetration of the business market. 85% of the market will not stay on copper DSL forever.

    Given all the above, Covage should produce at least $10m-$20m in pre-tax income by 2015.

    (Also, Axia just added the city of Nantes to its network. Based on our due diligence, that increased Axia’s addressable market to 39,000 businesses–a significant add.)

     

    Singapore (OpenNet): $5m-$11m pre-tax income

    The Singapore government put up SGD$750m to outlay the entire country with fiber to every premise–yes, fiber to every single premise. The Singapore government is hellbent on switching over the country to a fiber network. The cost of a fiber broadband account will be virtually the same price for DSL. (OpenNet has proposed wholesale prices of SGD$15 (US$10) per month per residential fiber connection and S$50 (US$35) per month per non-residential connection.)

    Axia owns 30% of OpenNet and management has consistently stated its stake will produce SGD$6m-$14m per year, or $5m-$11m. (The only reason it is not more than SGD$14m is because the Singapore government capped it at that amount.)

     

    Spain (Xarxa Oberta): $3m pre-tax income

    Axia signed a contract with the province of Catalonia about a year ago, where it will so far have 1,900 kms of fiber. Axia will turn on their first services in April 2012. Spain will be an extension of France. The current market commitments (contracts) that Axia has in Spain is about 1/5 the size of France contracts.

     

    Massachusetts, U.S. (MassBroadband 123): $1m-$3m pre-tax income

    This network will be activated in 2013 and will serve the western part of Massachusetts. It will have 2,153 kms of fiber serving 124 communities, with 38,000 households and 44,300 commercial premises. 

    Axia has revenue guarantees from 1,400 government institutions. The revenue from these committed sites will be sufficient to cover the operating and maintenance costs of the network. Any incremental sale of services to the private sector will be accretive. 

    In our due diligence and speaking with players in the Massachuessets market, Axia does not stand to make a lot of money serving the communities that will be getting fiber. The estimates we received are about $1m-$3m. So that Massachusetts network should be viewed as more of a strategic foothold for Axia to establish itself in the U.S. market, rather than a substantial profit generator.

     

    Management

    We visited Axia’s headquarters and found Art Price and the management team to be very candid and transparent. Art sees Axia’s stock as being undervalued and has recently bought shares himself and initiated a share buyback program for the company. Alberta turned out to be a huge return on capital. The current projects looks like they’ll have great returns as well, while maintaing a solid balance sheet. 

     

    VALUATION

    All the telcos trade at around 10x EV/EBIT–and that’s with the fact that a large part of that EBIT is in old, legacy fixed-line business. To be conservative, we assume Axia should command at least a 7x EV/EBIT multiple. 

    We also will not count the cash that Axia will generate over the next few years, as we will assume that will go towards CAPEX to finish building out its remaining networks. In several years, based on all the above, Axia should produce in the range of:

     

     

    Low Case

    High Case

     

    Alberta, CA

    10m

    21m

    France

    10m

    20m

    Singapore

    5m

    11m

    Spain

    2m

    3m

    Massachusetts, U.S.

    1m

    3m

    TOTAL PRE-TAX INCOME

    28m

    58m

    At 7x multiple

    196m

    406m

    Cash

    30m

    30m

    Debt

    (7m)

    (7m)

    AXIA VALUE IN 4 YEARS

    219m

    429m

     

    $3.42/share

    $6.70/share

     

    Bottom Line

    We find Axia to be a highly asymmetrical investment. They sell fiber broadband in a world that is increasingly using more data everyday. Axia is in markets where it is usually the only provider of fiber broadband and it is uneconomical for another competitor to enter its market. The earnings for all its networks have not yet fallen to the bottom line, which creates the dynamic of a high quality earnings stream that is trading for an absurdly cheap price. 

    We believe Axia is cheap enough where it is hard to imagine a scenario where an investor would lose money, yet easy to see how they would make a 3x-6x return.

    Catalyst

    The fiber broadband networks that Axia built out reach an inflection point, and the revenue from new subscribers start to fall to the bottom line. As it becomes obvious to the market the amount of income these broadband networks can generate, there will be a repricing of Axia's stock–possibly 3x-6x from today's current price.

    Messages


    SubjectQuick correction
    Entry01/17/2012 01:03 PM
    MemberRearden
    In the rush to post the idea, we missed the line on corporate SG&A in the above table. Corporate SG&A runs at $7m a year. So the total pre-tax income range in the above table should be $21m-$51m. Sticking with the same multiples, you get a valuation of $170m-$380m, or $2.66/share - $5.93/share.

    Subjectbusiness model
    Entry01/17/2012 02:27 PM
    Membertyler939
    Rearden, would you mind expanding on Axia's business model?  Some specific questions I have are:
     
    Whatis the life cycle of a fiber optic project, and who owns the assets when that project is completed?
     
    Why does the company need to spend so much of the EBITDA that Alberta (and now Covage) are generating on its projects in development?  Reinvesting profits isn't necessarily a bad thing, but is there a pathway to the business maturing and paying cash flow through to shareholders or are they going to be stuck funding their expansion out of operations for years?
     
    Does Axia sell its NGN services by bandwidth used?  What I'm driving at is whether the company is exposed to potential high bandwith usage (e.g., one of its customers offers broadband to residential users and suddenly Netflix usage is clogging up Axia's network).
     
    Are there any major conflicts of interest in Covage and Axia's other joint ventures?
     
    When contracts come up for renewal, what is the barrier to entry?
     
     

    SubjectRE: business model
    Entry01/17/2012 04:42 PM
    MemberRearden

    The life cycle of a fiber project and who owns the fiber depends on each project. In Alberta, the government paid the cost of Axia's fiber buildout, and therefore, they own the fiber. The government then has a 10 year renewal option with Axia. If the government for some reason does not renew the contract in 10 years, then the life cycle of Axia's Alberta project would be a decade. If it gets renewed, then it would be 2 decades, and so on and so on. (Aside from the fiber in the ground, Axia owns all the other assets in Alberta, such as the operations center, equipment, customer lists, etc.). 

    In France, however, Axia paid to build out the fiber and they own it.

    But in each case, Axia partners with the government to penetrate markets with less risk. They do this by either having the government subsidize the cost of the building and/or have the government provide revenue guarantees. 

    Either way, if you speak with Art Price, he will tell you he targets at least 20% returns pre-tax in order to justify taking on a project.

    The Alberta network is still growing and expanding to new customers, and that is why you will see growth CAPEX in addition to maintenance CAPEX. (There is huge growth in the oil sands area, with the major oil companies having Axia build fiber to their towns.) Either way, CAPEX has not been that significant given it was only $2.5m in FY11, and that included Massachusetts. If you look at FY10, you will notice it was only $1m.

    Covage is still growing its market, so there will still be CAPEX there, as well. As for how much Axia decides to reinvest profits vs. maturing the cash flow and paying it out, that is something up to Art Price. We spoke to him about this question, and he stated it depends. If Axia can reinvest the profits at high returns with little risk, that might be the best option. If Axia's stock price is depressed and it needs to show the market its true earnings potential to cause a stock repricing, that may be the best option if Axia has a good opportunity to use its stock as currency.

    Yes, Axia primarily sells its services by amount of bandwidth used. Also, we found it interesting that fiber broadband theoretically has unlimited bandwidth potential in the pipe. All it requires is new switch equipment to pulsate the light faster. In addition to that, the Alberta network still has many strands of fiber unlit. Management indicated to us that it could double bandwidth usage tomorrow and it still wouldn't be close to full capacity.

    My apologies, but I don't understand your question: "Are there any major conflicts of interest in Covage and Axia's other joint ventures?" If you could give me an example of what you're asking, I'd be happy to take a stab at answering it.

    In Alberta, the barrier to entry when that contract comes up for renewal are political optics, cost, and customer lists. Axia is a proud employer in Alberta, which is usually only known for its energy industry, not telecommunications. Furthermore, the whole reason the government of Alberta partnered with Axia is to decrease the power of incumbent telcos. So for an incumbent telco to bid in 2015 for Axia's contract would require surpassing that political hurdle and investing probably about $15-$25m to replace Axia's equipment throughout the networks (and somehow obtain its customer lists). We think it's unlikely Alberta does not renew with Axia in 2015, but it's possible.


    SubjectRE: Historical economics
    Entry01/17/2012 04:57 PM
    MemberRearden

    Hey Snarfy,

    I'm not sure I can agree that historical returns on capital were weak. On its Alberta network, Axia made back the money it invested in ~1 year. That's as good as it gets. 

    As for its other networks, they all take a few years to build out. So you have a ton of fixed costs initially, but once you light up the fiber, it starts cash flowing large amounts. To judge Axia, you have to look at it by segments for each geography, which Axia breaks out in the MD&A. 

    We actually find it a bit ironic that the market priced Axia's stock at $7 a few years ago, based on the earnings potential of all the networks Axia started to build out. Now that these networks are finally built–the costs have been sunk, the networks are reaching an inflection point and are about to start throwing off cash–the stock is the lowest its ever been.


    SubjectCovage
    Entry01/18/2012 11:33 PM
    Memberbriarwood988
    One additional question on Covage. If in this instance Axia owns the fiber, does government regulation still restrict the upper bound of the pre-tax income potential even in a scenario where the adoption of fiber vs. copper occurs at a faster rate than you consider in your write-up? 
     
    Thanks in advance -

    Briarwood

    SubjectRE: Singapore question and France question
    Entry01/19/2012 12:33 AM
    MemberRearden

    Hey katana,

    1. Yes, we did spend time clarifying that situation. Luckily, we think it is a simple one: the Singapore government made it clear that it wants a separation between the company that controls the ducts through which the fiber is run (the Asset Co.) and the companies that control the fiber.

    Singtel, being a typical incumbent company, tried to get cute and own a piece of the asset co and the operating co. Axia called them out on it. As far as we understand it, Singtel needs to spin-off control of one of the two companies to resume being compliant with the government's mandate.

    2. We mean just Axia's 50%. The numbers we used in our writeup for Covage were based solely on Axia's 50% interest. (If you view the MD&A, you will see Axia shows the financial statement for all of Covage and also a separate statement with just their 50% interest.)

    Hope that helps.


    SubjectRE: Covage
    Entry01/19/2012 12:35 AM
    MemberRearden
    Hey briarwood,
     
    There is no cap on Covage. The cap is only applicable to Singapore.

    SubjectRE: RE: Alberta, Contracts
    Entry02/02/2012 04:05 PM
    MemberLukai

    Thank you for the reply. We have one follow up for you regarding Covage...

    We’re attempting to triangulate management’s comment regarding the earnings potential of Covage: 15% penetration would result in 20% pre-tax return.

    This comment was made, I believe, before Nantes so we'll use 34k sites. That's 5,100 active connections then at 15% penetration. In addition, using your number of $14m pre-tax to Axia, the implied total Covage pre-tax earnings would be $28m (due to Axia owning 50%).

    Getting Covage to $28m pre-tax at 5,100 active connections requires much higher assumptions compared to Alberta. At a high level, Alberta is at 4,800 connections and doing an annualized $17m pre-tax; roughly 40% below the Covage target at a similar level of connections.

    In more detail, if we assign Covage the following…

    • 45% blended gross margin (higher than Alberta’s new run rate following Bell contract expiration)
    • Flat SG&A and Depreciation ($1.9m and $12m respectively)
    • $5m revenue for connection/other services

    …Broadband revenue (plug) would have to be $88m to get to $28m pre-tax. At 5,100 connections, that’s $1,440 revenue per month which is almost exactly double Alberta’s revenue per month per active connection in the September quarter. While noting that Covage is currently higher than this at $1,540 (using avg. q-q connections), monthly revenue has come down 30% since 1Q10 and is down 14% sequentially in 1Q12.

    Do you believe that Covage’s revenue per month per connection can sustain at $1,440, roughly double that of Alberta’s?

    Your comments would be much appreciated...

     

    Lukai


    SubjectInflection point has finally arrived for AXX?
    Entry05/15/2013 08:36 AM
    Memberrab
    Is anyone still following Axia NetMedia?  The company reported Q1/13 results yesterday and operating leverage is finally taking hold, particularly at Covage (France).  Total company EBITDA is near $7mm/qtr (and growing double digits due to op leverage), implying a full year run-rate of $30mm+ versus an EV of around $80mm (2.7x EBITDA)
     
    Additionally, the company is finally throwing off some cash due to the vast majority of sizable capex being behind it.  
     
    Assuming a $35mm run-rate for EBITDA in 2013...
     
    4x EBITDA  --  $2.33 stock (97% upside)
     
    I could see AXX selling for > 4x EBITDA but you get the picture.  Seems like a no-brainer that is being overlooked due to small size, lack of promotion and potentially its location in Canada.  
     

    SubjectRE: Inflection point has finally arrived for AXX?
    Entry05/15/2013 11:07 AM
    Memberotto695
    this looks interesting.  In terms of the Alberta contract renewal in 2015, is there any possibility it gets extended in 2013 or 2014 or will we not know about the renewal/new terms until 2015?  Also, the writeup seems to suggest that the outcome is only a matter of price/margin.  is there any possibility that they are not awarded the renewal (i.e., it is given to a competitor) or is only a matter of what the terms of the new contract will be?

    Subjectasset sale justifies high end?
    Entry05/28/2013 02:07 PM
    Memberotto695
    seems like the asset sale justifies the high end of your valuation for the Spain subsidiary.  Is there a read-through on this to France or their other subsidiaries? any thoughts on strategically why they sold down 35%? 

    SubjectRE: asset sale justifies high end?
    Entry05/29/2013 06:38 AM
    Membergvinvesting
    This is good news... Spain was still generating losses, the sale should significantly improve the balance sheet and income statement.  We are quite happy to see the company cutting business development expenses, shedding a non-core lossmaking asset (is Mass. next?) and focusing on their core business.

    SubjectThoughts on OpenNet sale (Singapore)?
    Entry08/22/2013 09:47 PM
    Memberrab
    Valuation looks a little low (roughly 4x EBITDA) but this further cleans up the corporate structure.  
     
    Does anyone have any additional thoughts on this sale?

    SubjectRE: Thoughts on OpenNet sale (Singapore)?
    Entry08/23/2013 02:53 AM
    Membergvinvesting
    The valuation looks low to me as well.  They will have to record a loss on the sale, as they were carrying the investment in Opennet at $35m.  
     
    The parent was running very low on cash at the end of last quarter.  It appears to me that the sale may have been rushed, could have to do with funding needs in Covage or North America.  

    SubjectRE: RE: Thoughts on OpenNet sale (Singapore)?
    Entry08/23/2013 07:51 AM
    Memberrab
    I don't think the parent was running low on cash.  They have a net cash position, lines of credit and imminent proceeds from the sale of Spain.  I think it was probably more likely a result of lack of control/direction in Singapore.  

    SubjectRE: RE: Thoughts on OpenNet sale (Singapore)?
    Entry08/23/2013 04:09 PM
    Memberlpartners
    SingTel was trying to get out of its obligations to spin -off the ducts used in OpenNet into a seperate and independent entity. Without significant action by Singapore government, the investors could have been stranded. There was significant uncertainty in that dynamic that Axia and other investors choose to just get out. Axia has some other uses for this capital that they believe can have a much better ROI. There is the possibility to build their own intercity connect grid in Urban Alberta that will expand their existing 0.5MM private sector mkt by another 2MM and can be used as the basis for contract extension post 2015. Estimated cost is $20MM. Covage has multiple opportunities to bid on RFPs that are expected to be available under the French government's framework, that are expected to be high return projects as well. I find deploying capital in these core areas with proven return profiles to be a better use of capital then distractions in Singapore and Spain, where after years of headache, the best we have done is get our capital back.

    SubjectHalted
    Entry08/28/2013 11:57 AM
    Memberstraw1023
    Anyone know what the reason is?

    SubjectRE: Halted
    Entry08/29/2013 11:16 AM
    Membergvinvesting
    Alberta contract extended through 2018.

    SubjectQuarterly Dividend Initiated
    Entry01/07/2014 02:06 AM
    Membergvinvesting
     
    2% yield with a lot of room to grow.

    SubjectAxia Coverage Initiated
    Entry01/18/2014 12:59 AM
    Membergvinvesting
    $4.50 price target.  Does anybody have access to this report they can share?
     
    http://www.stockhouse.com/companies/bullboard/t.axx/axia-netmedia-corporation?postid=22104845
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