Strategic Window: New Edge: The Definition of Corporate Success

Dan Moffat

While many in the industry have struggled in the past three years with closed capital markets, bankruptcies, credibility issues and more, New Edge Networks has raised nearly $400 million in debt and equity; acquired new network assets and customers through various deals; built what is arguably the largest ATM network in North America; and gone from zero to $60 million in revenue, with expectations of near doubling that this year.

Founded in 1999, the company began offering DSL service literally weeks after the industry downturn. Today, the company's revenue comprises a relatively even split between "business class" DSL (in approximately 360 small and mid-sized cities); dedicated Internet access (in about 30 "NFL cities"); and ATM, frame relay and IP services. (The company built what has become a 600-node multiservice nationwide network because it had a tough time finding other carriers to pick up the traffic from its DSL networks in second, third and fourth tier markets such as Quincy, Ill., and Walla Walla, Wash.)

President and CEO Dan Moffat expects the company to become EBITDA positive this month or next, with cash flow positive status following close behind.

That said, it would seem New Edge Networks' employees have had plenty to celebrate at their "Beer-30" gatherings each Friday afternoon at 4:30, during which they spend 30 minutes discussing the week's accomplishments and drinking beer. "It's been a tradition from day one, and it's still going," explains company spokesman Sal Cinquegrani. Moffat gathers the troops by ringing a school bell.

The fun doesn't stop there.

To doll up the company's 70 cents-a-square-foot office space, Moffat doled out a couple hundred dollars to each department for materials. Decorating themes at the Vancouver, Wash., headquarters include Mardi Gras, a Unix saloon, a gambling hall, a castle and a vineyard.

Then there was the "Hollywood-style" NENie Awards a year ago March at Liberty Theater in Camas, Wash. A press release about the employee-invented NENie (which stands for New Edge Networks Individual Excellence) Awards reads: "Employees will be dressed in suits, tie-dyed ties, dresses, rhinestones, and stiletto heels. Some will arrive in limousines." The affable Moffat, wearing a kilt, was master of ceremonies.

While Moffat, who regularly notes the important contributions of his staff, clearly knows how to have a good time, he hasn't shied away from acting decisively. That's been especially important for the company, considering the market downturn occurred literally weeks after New Edge Networks began offering service in early 2000.

Thirty days after raising $140 million, New Edge Networks, which had about 430 employees at its peak, was one of the first companies in the industry to announce layoffs, cutting 135 jobs. The company made a second, smaller staff cutback early in 2001. Since then, the company's staff has remained flat at about 274 employees.

While New Edge Networks has made some adjustments in light of the industry's tough times, the company is "about 95 percent on to our original business plan," says Cinquegrani.

"The strategy hasn't changed," says Moffat, who adds the company's motto is B3DS3 (which stands for better business broadband at DS3 and below). "What's changed is the focus to pick up distressed assets."

New Edge Networks' started its shopping spree back in November 2000 when it acquired West-Net Inc., a privately owned data communications network service provider in a stock and cash deal. West-Net provided service to about 600 business customers and about 4,000 permanent virtual circuit connections in 22 states.

The transaction accelerated New Edge Networks' strategic plans for offering advanced VPN services such as computer LAN-to-LAN internetworking and wide area networks -- delivered through New Edge Networks' national ATM backbone. The West-Net deal also provided New Edge Networks a strong revenue stream and an experienced sales and service team.

Then, in February 2002, New Edge Networks got approval from a federal bankruptcy court judge to purchase business customers and certain broadband access assets of AtWork, the commercial access division of bankrupt AtHome Corp.

New Edge Networks paid $1.5 million to acquire all affected AtWork customers, related premises equipment and network routers installed in 33 Internet hub locations in major U.S. cities around the country. The purchase, involving 1,300 AtWork business customers in 26 metropolitan areas in 21 states, represented about $18 million in new annual revenue for New Edge Networks. The deal included about $20 million in Cisco Systems Inc. equipment, says Moffat.

In addition to the new revenue stream, the transaction provided New Edge Networks enhanced Internet access capabilities and an expanded metropolitan footprint for frame relay and T1 services.

New Edge Networks last fall bought the rights to migrate Cable & Wireless USA Inc.'s U. S.-based data communications customers that chose to go with New Edge Networks. (Cable & Wireless USA the previous May had announced plans to divest certain aspects of its U. S. retail voice and data business.)

A key facet of New Edge Networks' strategy has been migrating customers from troubled service providers. The company also was a "safe haven" for thousands of customers displaced by the fall of Jato Communications Corp., NorthPoint Communications Group Inc. and Rhythms NetConnections Inc., says Cinquegrani

"We're growing our network," says Moffat. "We're actively looking for M&A related to ADSL, frame and IP."

New Edge Networks has the resources to grab some of the great deals now in the market because its investors -- which include Accel Partners, Crosspoint Venture Partners, Greylock, and investment funds affiliated with lead investor Goldman, Sachs & Co. -- have faith in the company, which is healthy and growing in an anemic market, says Moffat.

"We always like companies that can deliver the performance results," says Rich Shapero, managing partner at Crosspoint Venture Partners. "We certainly haven't lost any confidence in the market opportunity or the economic potential. The fact that there's a cloud over telecom is in some ways almost a positive, because it almost ensures the company is not going to have much in the way of competition." That, and the fact that New Edge Networks delivers services to markets that aren't well served or are served poorly has benefitted the company, he says, adding. "It's a high energy company with high morale and great management."

New Edge Networks recently announced its 2002 year-over-year revenue almost tripled to $60 million. Fourth quarter 2002 revenue was $18.4 million, more than double the $8.8 million for the same three-months period a year earlier. Fourth quarter and year-end 2002 results exclude revenue from data communications customers who transferred their service from Cable & Wireless. Booked orders for these transfers are expected to help push 2003 revenue over the $100 million mark.

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