To say that FiberTower Corporation (NASDAQ: FTWR) experienced a disastrous November 2011 would be an understatement of epic proportions as the wireless backhaul services provider was forced to reduce their workforce by approximately 40%, failed to file their quarterly report and fell into non-compliance with NASDAQ listing requirements, endured the resignation of their Chairman of the Board along with two other Board members, and failed to make a $1.3 million semi-annual interest payment due with respect to their 9.00% Convertible Senior Secured Notes Due 2012.
The monumental collapse from their 52-week high of 4.70 back on January 6, 2011 carried into December as they sunk to a new low, 0.15 and while shares have spiked on Monday, jumping more than 60% to a high of 0.25 with trading volume eclipsing the 6 million mark the writing appears to be on the wall as it concerns FTWR’s future.
In reality the writing has been on the wall for some time as FTWR reduced their workforce by 10% back in March, an indicator that tough times were ahead. While investors may not always see employee scale-backs as a negative in this case FTWR was acting out of necessity. With a further 40% of their workforce now gone FTWR has halted all capital and project related spending in an effort to conserve existing liquidity, essentially they are in survival mode.
That survival mode was been heightened due in large part to a number of customer early service terminations experienced in the quarter ending September 30, 2011, impairing FTWR’s network equipment and construction-in-progress value. By FTWR estimates the impairment charges for the third quarter 2011 relating to its FCC licenses, as calculated in accordance with GAAP, was in the range of $158 to $170 million, dropping the carrying value of FTWR’s FCC licenses to somewhere in the range of $87 to $129 million. That’s a dramatic collapse from the $287.5 million carrying value of FCC licenses held at December 31, 2010 and through June 30, 2011.
With all of their problems FTWR is having a hard time convincing investors that they are a leading alternative provider of facilities-based backhaul services to wireless carriers, especially with Clearwire and AT&T terminating service contracts with the company.
While FTWR has offered up the idea that cost cutting efforts has played a significant role in the service contract terminations the more likely reason is the simple fact that there has been a shift from TDM-based T-1 circuits to Ethernet-based circuits. This shift has been caused due to an increase in data usage by cell phone users with 4G data services, something the Ethernet-based circuits are better able to handle. This trend is not going away, meaning FTWR will almost certainly see their T-1 backhaul service impaired across the board and while they do provide Ethernet backhaul service they have not been able to convert the terminated service contracts related to the T-1 circuits to this service.
Further reductions from AT&T aren’t the only doomsday scenario for FTWR as they face the possibility of losing Sprint Nextel and T-Mobile as a customer; if that occurs then FTWR will be in a world of hurt. About the only positive thing going for FTWR is the fact that the announced merger of AT&T Mobile and T-Mobile has hit a roadblock with the FCC but if that merger follows through then FTWR would almost certainly see additional cancellations due to redundancy.
It should also be noted that FTWR is in an extremely competitive industry, battling it out with a range of diversified telecommunications services providers that include, according to them, (1) Incumbent and Competitive Local Exchange Carriers, or ILECs, including AT&T, Verizon, Embarq and Qwest; (2) Cable Multiple Systems Operators, including Cox, Time Warner Cable, Bright House and Comcast;
(3) wireless carriers; (4) Fiber Service Providers, including Level 3 Communications, Time Warner Telecom, Zayo Broadband, DukeNet and FPL FiberNet; and (5) other fixed wireless backhaul providers, including Tower Cloud and Telecom Transport Management Inc.
Given the heavyweights that they face it’s hard to see how FTWR will climb their way back up the ladder. They say they will need to replace lost service contracts with new service contracts yet they have failed to do so thus far and with a serious reduction in workforce it doesn’t appear as if they are equipped to meet this need.
FTWR incurs a significant cost in property and equipment and it is vital that they generate revenue from their service contracts to offset those costs. As those service contracts are terminated and not replaced it puts FTWR in a financial hole that only gets bigger. Since inception FTWR has incurred net losses and negative cash flows as their operating expenses have continually exceeded their revenues. Without question they are facing even tougher times ahead and how they plan on surviving is anybody’s guess.