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INFONET — Global Clients Put Tech Firm On Fast Track

Although it’s far from a household name, El Segundo-based Infonet Services Corp. is quickly emerging as one of Los Angeles County’s biggest and fastest growing public companies.

Late last year, the company raised $750 million through its initial public offering, and last month it announced an agreement with Deutsche Telekom, valued at $1 billion, whereby the German telecom giant will sell Infonet’s data communications services to its global client base. That agreement followed an earlier one, also valued at $1 billion, with SBC Communications Inc., parent company of Pacific Bell, to sell Infonet’s products and services in the United States.

Despite these impressive milestones, few people have heard of Infonet, let alone know what the company does.

“Infonet provides value-added network services in the data communications space,” said Chairman and President Jose Collazo. “What that means is that multinational corporations, when they have applications that they need to deploy across global networks, can build their own network or they can turn to people like ourselves who will route those applications on our network.”

In other words, Infonet allows companies with operations around the world to send data back and forth between offices through their own dedicated networks, or intranets, rather than through the public Internet.

As such, Infonet provides its clients a combination of the physical infrastructure of its worldwide network and the management and support that allows this network to function at optimal efficiency. And the company’s more than 2,600 multinational clients include some of the world’s largest corporations, with Microsoft Corp., Pharmacia Corp., and Volkswagen AG among them.

As more and more businesses go global and become increasingly dependent on both Internet-based applications and international data networks, the demand for reliable and secure, high-volume global data services is expected to go through the roof in the coming years.

“If you look at all international data communications, annual growth will be in the 30 percent range,” said Dan Fletcher, an analyst with Lehman Brothers Inc. “But if you look at inter-continental data communications, which is Infonet’s strength, annual growth is expected to be closer to 45 percent over the next five years. At the same time there are only a handful of competitors in this market because of the high barriers to entry, in terms of capital and expertise.”

Building a network

The fast growth of the market for global data communications is one of the key reasons the company decided to raise capital through an IPO last year. To secure sufficient bandwidth for the rapidly increasing flow of traffic over its network, Infonet has initiated a plan to purchase capacity on fiber-optic cables, at an estimated cost of $350 million, rather than lease it as the company has done in the past.

In fact, the agreements with SBC Communications and Deutsche Telekom are expected to bring in such a huge flow of new business that the company announced last week it will upgrade its entire network to a capacity of more than 20 gigabits by March 2001, a full year sooner than originally planned.

“In the sizes that we are going to need, it’s not possible to lease bandwidth in large amounts,” said Collazo. “Also, it turns out that for people who can buy capacity, prices are coming down substantiality.”

While Infonet can afford to shoulder such big capital expenditures, it is sustaining losses in the process.

Its official results for the fiscal year ended March 31 will not be released until next month, but analysts’ consensus projection is for Infonet to post a net loss of $9.4 million (2 cents a share), vs. net income of $3.4 million (1 cent) in fiscal 1999.

However, Wall Street is more focused on Infonet’s revenue growth at this point, and the company is delivering in that department.

For fiscal 2000, Infonet has projected revenues of $408 million, up from $303 million for fiscal 1999, according to Morgan McCall Molthrop, Infonet’s director of investor relations.

For fiscal 2001, the company anticipates revenues to jump by over 90 percent, to $780 million. And analysts are projecting Infonet to post net earnings of $37.6 million (8 cents per share) in fiscal 2001.

“This is a growth company, and the Street is more focused on operating cash flow than it is on earnings,” said Kevin Roe, an analyst with ABN AMRO, who rates Infonet’s stock as a “top pick.” “Keep in mind that this is not a dot-com it’s a real company with an experienced management team, competing in one of the fastest-growing market segments in the telecommunications industry.”

Wall Street wary

Thus far, the market for Infonet’s shares has been pretty fickle. The share price did well for the first few months after the IPO, rising from the Dec. 15, 1999 offering price of $21 per share to as high as $33.69 in early March. But the Nasdaq selloff since then has taken its toll. As of last week, Infonet shares were trading below $15.

“For the most part, this is a consequence of the Nasdaq correction,” said Roe. “But also, this company is not as well known as people might expect. It’s still a bit of a hidden gem.”

The fact that Infonet is still something of an unknown entity outside the world of its corporate clients might be surprising given that it has been around for more than 30 years.

Infonet was founded in 1969 as a subsidiary of Computer Sciences Corp., the El Segundo-based information technology services company. Its original mission, in the dark ages before the Internet, was to provide data communications services for international corporations.

In a series of transactions, from 1988 to 1991, Computer Sciences spun off Infonet to a group of six international telecommunications companies, including Dutch KPN Telecom BV, Spanish Telefonica International Holding BV, and Australian Telstra Corp. Ltd.

These six telecom companies are still majority shareholders in Infonet and can block any takeover attempt by a competitor. At the same time, they have provided the company with the financial resources and a client base to build up its business over the years.

Thus, if KPN, for example, wants to sell a long distance contract to a Dutch multinational, it can include Infonet data communications services as part of the package, and avoid losing the contract to a competitor such as AT & T; Corp., which also can provide data as well as telecom services.

Because the telecom industry is going through a series of consolidations at an international level, however, there is a real question if and for how long a company like Infonet can survive as an independent entity. One of its main international competitors, Brussels-based Global One Inc., was recently snapped up by France Telecom Group.

With a merger between two or more of its principal shareholders increasingly likely, Infonet’s ownership structure could dramatically change.

“We’re not looking at Infonet as a takeover target in the immediate future,” said Roe. “However, as its European parent companies consolidate, there might be a shakeup in their priorities, and if Deutsche Telekom or any other major telecom player comes in with a great offer, they may feel obliged to accept it.”

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