SOURCE: XO Holdings, Inc.

XO Holdings, Inc.

November 15, 2010 17:20 ET

XO Holdings Reports Third Quarter 2010 Financial Results

HERNDON, VA--(Marketwire - November 15, 2010) - XO Holdings, Inc. (OTCBB: XOHO) today announced its third quarter 2010 financial and operational results.

Total revenue for the third quarter of 2010 was $385.7 million, an increase of $3.7 million, or 1%, compared to the year-ago period. Adjusted EBITDA was $60.8 million in the third quarter of 2010, an increase of $16.7 million, or 38%, compared to the year-ago period. Net income in the third quarter of 2010 was $12.4 million, a decrease of $6.6 million, or 35% compared to net income of $19.0 million in the third quarter of 2009. The company's net income for the third quarter of 2009 principally resulted from gains from the sale of marketable securities of approximately $16.3 million.

"Our strong year-over-year EBITDA expansion and continued revenue growth within our core Broadband offerings this quarter underscore that our long-term business plan is working," said Carl Grivner, chief executive officer of XO Holdings. "We remain focused on executing upon this strategy in the future."

                            Financial Results

($ in millions)                               Q3 2010   Q2 2010   Q3 2009
                                              --------  --------  --------
Revenue                                       $  385.7  $  383.6  $  382.0
                                              --------  --------  --------
Adjusted EBITDA (1)                           $   60.8  $   40.5  $   44.1
                                              --------  --------  --------
    Adjusted EBITDA % (2)                           16%       11%       12%
                                              --------  --------  --------
Net Income (Loss)                             $   12.4  $   (1.2) $   19.0
                                              --------  --------  --------
Preferred Stock Accretion                     $  (17.5) $  (17.7) $  (19.9)
                                              --------  --------  --------
Net Loss Allocable to Common Shareholders     $   (5.1) $  (18.9) $   (0.9)
                                              --------  --------  --------
Capital Expenditures                          $   50.1  $   57.6  $   57.2
                                              --------  --------  --------

    (1) Adjusted EBITDA is a Non-GAAP financial measure. See the footnote
        discussion accompanying the financial statements.

    (2) Adjusted EBITDA % is adjusted EBITDA divided by revenue. See the
        footnote discussion accompanying the financial statements.

Revenue

In the third quarter of 2010, XO's Broadband offerings generated $228.8 million in revenue, an increase of $25.0 million, or 12%, from the year-ago period. This increase resulted from sustained growth in XO's diverse Broadband offerings, such as IP-VPN, IP Flex, Ethernet and Dedicated Internet Access services.

The revenue growth in XO's Broadband services is partially offset by the year-over-year decline in Integrated/Voice and Legacy/TDM services, such as carrier long distance termination services. Revenue for Integrated/Voice services during the third quarter of 2010 was $51.7 million, a decrease of $13.6 million, or 21%, compared to the third quarter of 2009. Revenue for Legacy/TDM services during the third quarter of 2010 was $105.2 million, a decrease of $7.7 million, or 7%, compared to the year-ago period. This expected decline in Integrated/Voice and Legacy/TDM services reflects XO's ongoing strategy to shift away from traditional telecommunications services toward a broadband-driven business model.

                             Service Revenue

                                                                  % Change
                                                                  Q3 2010 -
($ in millions)                     Q3 2010   Q2 2010   Q3 2009   Q3 2009
                                   --------- --------- --------- ---------
Broadband                          $   228.8 $   220.0 $   203.8        12%
Integrated/Voice                   $    51.7 $    56.8 $    65.3       -21%
Legacy/TDM Services                $   105.2 $   106.8 $   112.9        -7%
                                   --------- --------- ---------
Total Revenue                      $   385.7 $   383.6 $   382.0         1%
                                   ========= ========= =========

Third Quarter Network and Operations Highlights

During the third quarter of 2010, XO continued to execute upon its strategy of providing advanced communications solutions to wholesale and enterprise customers throughout the United States. From an operations standpoint, XO continued to implement its company-wide transformation plan, focused on enhancing network reach and capabilities, realizing operational efficiencies across the organization and accelerating revenue growth within its Broadband product set.

As part of this plan, XO significantly grew its market reach and expanded its network footprint across the United States during the third quarter. This included increasing its Ethernet over copper network by more than 30 percent, which expanded the company's coverage in 39 existing markets and enabled it to launch services in Charlotte, N.C., Buffalo and Rochester, N.Y. Additionally, XO expanded its network presence in the Los Angeles and Atlanta metropolitan areas. Through these network enhancements, XO is now well-positioned to deliver Ethernet services to nearly four million buildings and as many as ten million business locations within the U.S.

XO and its leadership team also received several industry accolades during the third quarter of 2010. For the third consecutive year, XO was named to the InformationWeek 500 list, which recognizes the nation's most innovative users of business technology. Additionally, XO received the 2010 North American Competitive Strategy Leadership Award in the VoIP access and SIP trunking services market from Frost & Sullivan, a global market research firm.

Corporate Highlights

On October 8, 2010, XO Communications entered into a Revolving Promissory Note (the "Promissory Note") with Arnos Corp., an affiliate of Carl C. Icahn, the Chairman of XO's Board of Directors and majority shareholder, in which Arnos Corp. provided access to $50.0 million at an annual interest rate equal to the greater of LIBOR plus 525 basis points or 6.75%. The Promissory Note also includes a fee of 0.75% on undrawn amounts and matures on the earliest of (i) October 8, 2011, (ii) the date on which any financing transaction, whether debt or equity, is consummated by the company or certain of its affiliates in an amount equal to or greater than $50.0 million, or (iii) at the company's option, a date selected by the company that is earlier than October 8, 2011. As of November 15, 2010 no amounts have been drawn on this Promissory Note.

On October 12, 2010, XO announced its intent to offer holders of its common stock the right to purchase shares of a new class of non-convertible preferred stock. The company will seek to issue up to $200.0 million of non-convertible preferred stock through the announced rights offering, which would seek to raise funds to continue XO's transformation plan, to take advantage of opportunities which may arise, to enhance the company's competitive position, to fund general corporate purposes and to repay any outstanding debt.

Based on XO's current level of operations, management believes that cash flow from operations, cash on hand and marketable securities will enable XO to meet working capital and other obligations for at least the next 12 months. However, additional capital, including cash available under the Promissory Note, is necessary to continue to implement the company-wide transformation plan and also provide resources to take advantage of strategic growth opportunities. To date, the company has not been able to generate sufficient free cash flow to fully fund the transformation plan or to pursue other strategic opportunities. Accordingly, the company believes it is necessary to raise additional capital.

Guidance

XO met its third quarter 2010 guidance and reiterates its previously stated full-year 2010 guidance for revenue, adjusted EBITDA and capital expenditures and updates its previously stated full-year 2010 guidance for the ending cash balance as follows:

                                   Full Year 2010 Guidance
                                       ($ in millions)
         Metric                          (approx.)
                                       ---------------
         Revenue                       $ 1,520 - 1,530
                                       ---------------
         Adjusted EBITDA (1)           $  190 -    200
                                       ---------------
         Capital Expenditures          $  210 -    220
                                       ---------------
         Ending Cash Balance (2)       $  45  -     60
                                       ---------------

      (1) Adjusted EBITDA is a Non-GAAP financial measure.
      (2) Assumes no borrowings under the Revolving Promissory Note
          and no closing on any additional financing transactions.

About XO Holdings

XO is a leading provider of 21st century communications services for businesses and communications services providers, including 50 percent of the Fortune 500 and leading cable companies, carriers, content providers and mobile operators. Utilizing its unique and powerful nationwide IP network, extensive local metro networks and broadband wireless facilities, XO offers customers a broad range of managed voice, data and IP services in more than 80 metropolitan markets across the United States. For more information, visit www.xo.com.

Cautionary Language Concerning Forward-Looking Statements

The statements contained in this release that are not historical facts are "forward-looking statements" (as such term is defined in the Private Securities Litigation Reform Act of 1995) that involve risks and uncertainties. The company's forward-looking statements are based on currently available operational, financial and competitive information and management's current expectations, estimates and projections. These forward-looking statements include: expectations regarding revenue, expenses, EBITDA, capital expenditures and financial position in future periods; the company's ability to broaden its customer reach and expand its market share; pursuit of growth opportunities; the potential need to obtain future financing; and the company's ability to fund its business plan. Management cautions the reader that these forward-looking statements are only predictions and are subject to a number of both known and unknown risks and uncertainties. Should one or more of these risks and uncertainties materialize, or should the company's underlying assumptions prove incorrect, actual results, performance, and/or achievements of the company may differ materially from the future results, performance, and/or achievements expressed or implied by these forward-looking statements. These risks include any failure by the company to: generate funds from operations sufficient to meet its cash requirements and execute its business strategy; prevail in its legal and regulatory proceedings; increase the volume of traffic on its network; realize benefits from its enterprise-wide transformation initiative; and achieve and maintain market penetration and revenue levels given the highly competitive nature of the telecommunications industry. Other factors to consider also include the risk factors described from time to time in the reports filed by XO Holdings, Inc. with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 2009 and its quarterly reports on Form 10-Q. XO Holdings, Inc. undertakes no obligation to update any forward-looking statements, except as otherwise required by law, whether as a result of new information, future events or otherwise. These forward-looking statements should not be relied on as representing the company's estimates or views as of any subsequent date.

This press release contains certain non-GAAP financial measures. Financial statements associated with the company's Annual Report on Form 10-K for the year ended December 31, 2009 and its quarterly reports on Form 10-Q are located at http://www.xo.com/about/Pages/investor.aspx.

This press release shall not constitute an offer to sell, nor the solicitation of an offer to buy, any securities, nor shall there be any sale of securities mentioned in this press release in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state. It is intended that the proposed issuance of rights will be registered under the Securities Act of 1933, as amended and the rights offering will be made only by means of a prospectus.

                            XO HOLDINGS, INC.
              Condensed Consolidated Statements of Operations
                  (In thousands, except per share data)

                              --------------------  ----------------------
                               Three Months Ended     Nine Months Ended
                                  September 30,         September 30,
                              --------------------  ----------------------
                                2010       2009        2010        2009
                              ---------  ---------  ----------  ----------
                             (Unaudited)(Unaudited) (Unaudited) (Unaudited)

Revenue                       $ 385,701  $ 382,000  $1,138,897  $1,145,448

Cost of service (exclusive of
 depreciation and amortization) 218,345    217,712     645,687     667,281
Selling, general and
 administrative                 106,601    120,331     361,650     369,418
Depreciation and amortization    46,016     43,288     136,188     129,593
Impairment of LMDS licenses           -          -           -       8,282
Loss on disposal of assets          830        912       3,952       4,989
                              ---------  ---------  ----------  ----------
  Total costs and expenses      371,792    382,243   1,147,477   1,179,563
                              ---------  ---------  ----------  ----------
  Income (loss) from
   operations                    13,909       (243)     (8,580)    (34,115)

Investment gain, net                  -     16,271       5,376      34,291
Interest income (expense), net   (1,202)     3,556      (1,283)      9,756
                              ---------  ---------  ----------  ----------

Net income (loss) before
 income taxes                    12,707     19,584      (4,487)      9,932

Income tax expense                 (282)      (552)       (883)     (1,362)
                              ---------  ---------  ----------  ----------

Net income (loss)                12,425     19,032      (5,370)      8,570

Preferred stock accretion       (17,523)   (19,942)    (55,402)    (59,325)
                              ---------  ---------  ----------  ----------

Net loss allocable to common
 shareholders                 $  (5,098) $    (910) $  (60,772) $  (50,755)
                              =========  =========  ==========  ==========

Net loss allocable to common
 shareholders per common
 share, basic and diluted     $   (0.03) $       -  $    (0.33) $    (0.28)
                              =========  =========  ==========  ==========

Weighted average shares,
 basic and diluted              182,075    182,075     182,075     182,075
                              =========  =========  ==========  ==========

Total adjusted EBITDA (1)     $  60,812  $  44,085  $  131,847  $  109,298
                              =========  =========  ==========  ==========




                            XO HOLDINGS, INC.
                  Condensed Consolidated Balance Sheets
                          (Dollars in thousands)

                                                 September 30, December 31,
                                                      2010        2009
                                                   ----------  ----------
                                                   (Unaudited)
Cash and cash equivalents                          $   49,272  $  363,159
Marketable securities                                     375       1,320
Accounts receivable, net                              143,889     153,745
Other current assets                                   28,536      29,248
Property and equipment, net                           814,876     749,930
Intangible assets, net                                 45,233      45,233
Other assets                                           62,559      67,123
                                                   ----------  ----------
  Total assets                                     $1,144,740  $1,409,758
                                                   ==========  ==========

Accounts payable and other current liabilities     $  285,151  $  297,799
Other long-term liabilities                           138,251     125,731
Class A convertible preferred stock                         -     255,011
Class B convertible preferred stock                   647,676     614,912
Class C perpetual preferred stock                     242,749     223,958
Total stockholders' deficit                          (169,087)   (107,653)
                                                   ----------  ----------
  Total liabilities, preferred stock and
   stockholders' deficit                           $1,144,740  $1,409,758
                                                   ==========  ==========



                            XO HOLDINGS, INC.
              Reconciliation of Net Loss to Adjusted EBITDA
                          (Dollars in thousands)




                           Three Months Ended          Nine Months Ended
                     -------------------------------- --------------------
                     September    June     September  September  September
                        30,        30,        30,        30,        30,
                       2010       2010       2009       2010       2009
                     ---------- ---------  ---------  ---------  ---------
                    (Unaudited)(Unaudited)(Unaudited)(Unaudited)(Unaudited)

Net income (loss)
 before income taxes $   12,707 $    (883) $  19,584  $  (4,487) $   9,932

Depreciation and
 amortization            46,016    45,304     43,288    136,188    129,593

Loss on disposal of
 assets                     830     1,213        912      3,952      4,989

Impairment of LMDS
 licenses                     -         -          -          -      8,282

Investment gain, net          -    (5,374)   (16,271)    (5,376)   (34,291)

Interest (income)
 expense, net             1,202       103     (3,556)     1,283     (9,756)
                     ---------- ---------  ---------  ---------  ---------

EBITDA                   60,755    40,363     43,957    131,560    108,749

Stock-based
 compensation                57        92        128        287        549

                     ---------- ---------  ---------  ---------  ---------
Adjusted EBITDA  (1) $   60,812 $  40,455  $  44,085  $ 131,847  $ 109,298
                     ========== =========  =========  =========  =========

(1)  Adjusted EBITDA is defined as net income or loss before depreciation,
amortization, (gain)/loss on disposal of assets, interest expense, interest
income, investment gains or losses, income tax expense or benefit,
cumulative effect of change in accounting principle, and stock-based
compensation. Adjusted EBITDA is not intended to replace operating income
(loss), net income (loss), cash flow, and other measures of financial
performance reported in accordance with generally accepted accounting
principles in the United States. Rather, Adjusted EBITDA is an important
measure used by management to assess operating performance of the Company.
Adjusted EBITDA as defined here may not be comparable to similarly titled
measures reported by other companies due to differences in accounting
policies. Additionally, adjusted EBITDA as defined here does not have the
same meaning as EBITDA as defined in our SEC filings.

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