KPNQwest says 15% of revenue came from swaps By Martin Arnold
KPNQwest, the pan-European data communications provider, on Tuesday reported its first annual operating profit but revealed that it had earned 15 per cent of its revenue from sales to customers from which it had made reciprocal purchases.
The company said about E120m ($105m), out of total revenues of E810.1m last year, had come from sales of optical capacity to customers from which it had in turn purchased assets or capacity for use on its own network.
The statement comes as the accounting practices of newly formed alternative telecoms carriers come under increasing scrutiny, following the bankruptcy of Global Crossing, one of the most ambitious operators in the sector, last month.
The Securities and Exchange Commission has requested documents from Qwest, KPNQwest's US parent, relating to its dealings with Global Crossing. The SEC's inquiry is believed to be focusing on the so-called practice of "hollow swaps", or trading of blocks of capacity between operators' networks to artificially inflate revenues.
KPNQwest defended the reciprocal purchases, saying they were necessary to provide capacity outside its own network footprint or to "enhance the resiliance of the EuroRings network".
Cyrus Mewawalla, telecoms analyst at Nomura, said falling broadband prices had put the revenue streams of high-speed network operators under increasing pressure. "In these circumstances the focus of investors on earnings releases may shift from the revenue figures to the composition of those revenues and the accounting treatment used to produce them."
KPNQwest said on Tuesday that about E438m of its sales came from "long-term optical capacity agreements", which gave customers the right to use part of its network for the lifetime of the agreement.
It said revenue for these agreements was recognised on the date of delivery, not spread over the life of the agreement.
Despite moving into operating profit last year, KPNQwest was cautious about its outlook for 2002, warning that earnings before interest, tax, depreciation and amortisation (ebitda) would be at the bottom end of its previous estimates of E175-200m. The news sent its shares, which have fallen nearly 40 per cent in the last month, down a further 1.8 per cent to E5.63.
Jack McMaster, chief executive, said he expected sales growth in 2002 to be slightly lower than the 75 per cent rate set last year. But he said revenues would still rise 60 per cent year-on-year to E1.3bn this year.
Full year ebitda in 2001 was E13.7m, compared with a loss of E122.5m in 2000. Fourth-quarter ebitda was E16.8m, up from E2.7m in the third quarter.
However, a fourth-quarter restructuring charge of E51.6m widened pre-tax losses to E310.3m, compared with E184.8m the previous year. Net losses were E266m, compared with E138.6 previously.
The restructuring charge was partly made up of E16.1m of redundancy payments and E9.8m of office space termination fees, which related to the integration of GTS and Ebone acquisitions. The company said the "streamlining programme" was expected to cost E80-90m in total, and the remainder would be incurred in 2002.
The company also wrote down the value of certain assets worth E25.7m, which it said were determined to be permanently impaired.