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If there's a silver lining to the financial challenges facing Convergent Communications Inc., CEO Joe Zell says it's that Convergent's got a six-to seven month lead in finding a way out over companies that are just now running out of cash.
Convergent, an Englewood, Colo.-based telecommunications solutions provider, raised $134 million when it went public in July 1999. Seven months later its stock had fallen almost 50 percent from its initial offering price. It was using $15 million of cash a month and needed more money fast.
With only a couple of months of cash left, Convergent attracted the attention of Texas Pacific Group, headed by David Bonderman and known for investing in troubled companies. TPG was willing to invest $175 million, but only if a new management team could be brought in to carve out a profitable entity.
Convergent and TPG found Zell at U S West Inc., where the 40-year-old executive ran the Baby Bell's data network integration, broadband xDSL access, frame relay/ATM and Internet services. But last April, with U S West just months shy of being acquired by Qwest Communications International, Convergent seized the opportunity to lure Zell onboard, aided by a $20 million bonus.
Zell says he found Convergent trying to do too many things for too many potential markets. The departure of the company's chief financial officer shortly after its IPO and missed financial targets also had left a sour taste in the mouths of investors.
Since Zell arrived in April, Convergent has shrunk from being a big business trying to do a lot of things in 35 markets to a company doing only data networking in 18 markets nationwide. It's cut its workforce from 1,600 to 1,200, eliminating redundancies from a host of acquisitions. The pending sale of its key voice systems and PBX business to Inter-Tel Inc. will leave it with about 600 employees.
"What we want to do now is build this into an appropriately-sized company that can go out and be a strong provider of data integration and systems integration, computer networking, broadband network management support and web services support for small and medium size businesses. That's a much narrower definition than what the company had in the past," Zell says.
It's also an appropriate strategy for a company trying to survive in today's scaled-back marketplace. "The environment wants to reward companies that have built a strong viable service, that is a sustainable, repeatable offering, that allows them to do it profitably and allows them to fund their own growth," Zell says. It shies away from roll-ups, which four-year old Convergent previously relied on to build revenue.
Shedding the voice systems/PBX business, which generated 35 percent of revenue, lets Convergent carve out a niche that plays to its remaining strengths. Those are data integration technical expertise, a network operating center (NOC) and an ability to manage network services for businesses that don't have large IT staffs and struggle with new application implementations like the installation of a firewall.
Convergent is no longer trying to be an access, backbone, network services or hosting provider. Owning a large network backbone isn't the answer, Zell says. That can be outsourced. What matters is who's managing the network, what happens when it breaks and how fast does it take to fix it.
Through Convergent's network operations center, "we have visibility into the client site, to our network node and our carrier's networks. So we can tell when there's a problem, and we can troubleshoot it faster and get it fixed faster. For a little business, that's a big deal."
Convergent's goal is "to take the best of breed components, pull it through my NOC so I can monitor it, and then provide the technical integration expertise to help that client," Zell says.
Improving Convergent's creditability with Wall Street also is high on Zell's to-do list. Once the sale to Inter-Tel closes, the cash burn rate drops to around $7 million a month-less than half of what it was a year ago. That moves up the company's target date for breakeven operations to late 2001 from the second half of 2002.
Ironically, Convergent could be the example for other struggling telecom and technology companies attempting to put their houses in order, says William Blair analyst Bill Benton. With the capital markets closed to it, Convergent was forced to focus on which parts of its business it needed to be in and which it should shed.
"That could make them a model operator," says Benton, who rates the stock a "long-term buy."
Convergent says it expects to meet or exceed its own fourth-quarter estimates of $49 million to $53 million in revenue, and an EBITDA (earnings before taxes, interest, depreciation and amortization, or cash flow) deficit of $26 million to $28 million. Final numbers are due Feb. 27.
For the September quarter, the company lost $48 million on revenue of $53.5 million. Its EBITDA deficit narrowed to $30 million from $46.0 million a quarter earlier.
Convergent executives are beginning to look at whether the company's revised business plan will support its debt, which was $206 million as of Sept. 30. Ideas under consideration are possibly delaying some of the debt, replacing it with equity or some other approach.
Convergent would be profitable a lot more quickly if it weren't making $20 million a year in interest payments, Zell says.
With a narrower business focus, Convergent also has targeted its sales force, while reducing it in size. That will help build the top-line revenue by building its customer base for network services and also improve productivity. With the number of companies letting people go, Convergent expects to complete in two months its six-month goal of building an experienced 50-person broadband networking sales team.
With his plans falling into place, Zell could be looking at a few more silver linings to come.
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