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Company Assessment (Services):	XO Communications
Report Date:	April 28, 2010
Analyst:	Whelan, Cindy
Market:	Business Network Services - U.S.
Current Perspective:

Fast Facts Links

Company Overview

Network Description

Select Customer Wins

Key Partnerships and Alliances

Key Mergers, Acquisitions, and Divestments

YellowBRIX News/PR/Financial

Current Threat Index

The Current Threat Index graphic is generated using ratings as provided below on aspects of the company’s business. The objective is to track momentum and energy during the recent update cycle, identifying changes to the company’s overall threat to competitors.

Uncompetitive (1 – 4): The company provides little or no threat to competitors in the market. Its products or services are behind the customer demand standard, and customers and partners are looking for alternatives. Recent activities may have, for example, diminished or ruined financial health, forced partners to seek other solutions, or instigated a product withdrawal.

Limitations (5 – 8): The company has important problems to resolve and is losing traction with customers and partners. Competitor sales teams are attacking the company to seek market-share opportunity. Recent activities may have included a missed product delivery, a major customer loss, or management shake-up and strategy shift.

Competitive (9 – 12): Solid but unspectacular position – very capable of winning business, but not disrupting the market, either. Recent activities may have included modest improvements to products or services that bring it up to par with competitors (or even provide a slight advantage), a good, strategic channel partnership, or the announcement of an interesting customer win.

Threatening (13 – 16): A company that competitors should be focused on very actively. A strong product/services line and good go-to-market plan, and capable of winning any contract. Recent activities may have included an important, proactive product or service delivery requiring action on the part of competitors, a solid acquisition, or an attention-grabbing customer win.

Leader (17 – 20): The acknowledged most important competitor for most in the market. Stable or strong financially, and a dominating presence that drives and creates markets with products and services. By default on every customer RFP list. Recent activities my include a market-changing merger, acquisition or partnership, or a new product or service that forces all competitors to change tactics.

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Rating Update Summary

XO continues to upgrade network capacity and reach, leveraging partnerships and new platforms to extend services to mid-size distributed enterprises.

Strategy

XO has long positioned itself as a local and national alternative to the incumbent local exchange carrier (ILEC), offering comparable services at competitive prices. Today, the carrier claims 90,000 business customers, including 50% of the Fortune 500s, in verticals such as finance, government/education, healthcare, media, professional services, retail and technology. XO targets business customers with a message of delivering solutions built around a company’s business, underpinned by the carrier’s nationwide and metro fiber networks. XO has focused on building up its “Core Broadband” service portfolio in recent years, which consists of the carrier’s data & IP services, and has posted strong results that are particularly notable given the economic conditions in 2008 and 2009. XO's Core Broadband service segment had $798.4 million revenues in 2009, an increase of 19%, or $128 million, from 2008. The carrier’s overall Core Services 2009 revenue gains were mitigated by a decline of 14% in its Core Integrated/Voice segment (local and long distance, integrated access, and carrier origination and termination).

Solutions/Services/Products

XO began a series of network enhancements in mid-2006 that enabled the carrier to appeal to larger enterprises, such as new last-mile access alternatives, VoIP services and high-capacity wavelength offers. XO has around 3,000 buildings connected to its fiber network, and complements that reach with access alternatives such as Ethernet-over-copper, which supports granular speed tiers and a lower price per megabit than T-carrier services from the incumbents. XO has expanded its VoIP solutions since 2008, adding a SIP Trunking service that has been certified with a range of platforms including Avaya, Cisco, Digium, Fonality, NEC, Panasonic, Sutus and Toshiba. XO also has launched multi-site VoIP solutions such as Enterprise SIP and IP Flex with VPN. XO carried around 20 billion VoIP minutes in 2009. XO has leveraged its carrier partnerships to support expanded connectivity to Asia and Europe, and offers MPLS IP-VPN and IP Flex services in all 50 states and MPLS IP-VPN in 22 countries. XO’s March 2010 launch of 40 Gbps wavelengths helps the carrier targeting large financial institutions and trading firms.

Marketing/Sales Strategy

XO had its start delivering services to the small and mid-size business (SMB) market. During 2008, the carrier began shifting its focus to the mid-size enterprise market, investing in network infrastructure and services, making changes to its management team and organizational structure, and along the way developing a reputation for aggressive pricing through marketing campaigns that included guarantees around low prices and installation. XO’s National and Strategic Accounts (NAS) organization targets enterprise users with an annual telecom spend of more than $250,000. NAS is comprised of a nationwide enterprise sales and customer support organization with account managers, core sales engineers, project coordinators, and legal and financial experts. XO has expanded its business services portfolio to offer solutions targeting multi-site enterprises; it also broadened service availability to more U.S. markets and to international locations. XO claims some big names as customers, giving the carrier the opportunity to upsell these clients on its new services, and to attract new logos.

Customer Service and Support

XO operates six Customer Care Centers, a National Repair Center (NRC) and a Network Operations Center (NOC). The NRC provides trouble ticket management and first-level escalation for local service issues. The NOC proactively monitors network elements for faults and performs initial troubleshooting on issues identified during monitoring, manages network changes and maintenance, and provides second-level support for data, switch & transmission services and for complex operational issues. XO states that 80% of incoming calls to its Customer Care Centers are answered in 20 seconds or less, and the carrier in 2010 plans to place an increased focus on the customer experience: XO plans to evaluate the customer experience from end-to-end including service ordering, service delivery, service consumption, post-sales service, and maintenance and billing. XO also provides customers with the XO Business Center, a customer-facing Web portal that provides access to billing and account management, customer care, XO VoIP service/features configuration and usage statistics for Internet access circuits.

Partnerships

XO has established carrier partnerships to further its reach and has developed a channel of third-party agents to complement its direct sales capabilities. XO’s partnerships with Hibernia Atlantic and Pacific Crossing provide the carrier with additional capacity to support traffic to Europe and Asia respectively. XO Business Services has agreements with more than 250 third-party national, regional and local agents and agency firms. XO’s channel support organization is distributed, with the majority of the carrier’s channel support personnel based in local markets where they can work with agents and customers directly. XO’s Business Partner Channel Program is segmented into “Choice” and “Select” master partners. Choice partners include ChaselTek, ConnectHere Communications, Gryphone Telecom, Intelisys, PlanetOne Communications, Rhino World, Inc., Telarus (ShopforT1.com), Telecom Brokerage, World Telecom Group and X4 Communications. Select partners include CSNG, Data-Tel Communications, KeaneTel, One World IP Networks, Overflow Communications Group and USAccess LLC. XO has also has achieved equipment vendor certification for key service, including Cisco TelePresence Connection Certification for its MPLS IP-VPN service, and certifications of IP PBX platforms from Avaya, Cisco, Panasonic and Toshiba with XO SIP.

Perspective Current Perspective

We are taking a positive stance on XO Communications, because the carrier has steadily improved its network and service portfolio to offer business customers a full suite of communications services. XO continues to generate positive EBITDA each quarter: The carrier is currently carrying no long-term debt, and for 2009 XO posted year-to-date net income of $21.8 million. XO has undertaken internal initiatives to drive down expenses and increase efficiency of its operations, initiatives that contribute to the carrier’s ability to maintain its reputation for aggressive pricing. The company’s cost management strategy does not seem to have had a negative impact on XO’s continued investment in the infrastructure and resources necessary to attract enterprise clients. The combination of network services that enterprises demand, delivered at compelling price points and backed by solid customer service, will help the carrier achieve its goal.

XO’s investment in network and service development has raised its visibility and strengthened its position in the enterprise market, but one area where the carrier’s message is weak is cloud computing. Competition will continue to intensify as carriers compete for available enterprise communications budgets, and virtualized services are key strategic elements for XO’s larger competitors. XO either operates or leases space in 37 data centers in 27 U.S. markets. XO has launched a few hosted services the carrier should consider building on these offers to gain an additional competitive edge.

Ratings

Market	Perspective	Market Perception	Momentum	Vision	Innovation
Data Center	Negative	Moderate	Negative	Negative	Negative
Network Access and VPNs	Positive	Positive	Positive	Positive	Positive
Voice and Unified Communications	Moderate	Moderate	Positive	Moderate	Moderate

Strengths and Weaknesses Strengths

• XO continues to deploy new generations of long-haul optical network gear to support demand for high-capacity services. The carrier has deployed the Infinera ILS2 line system in 2009. XO offers a 40 Gbps wavelength service today, and the upgrade prepares the carrier to offer 100 Gbps services when the equipment is commercially available.

• XO offers a full suite of VoIP services, including network-hosted and premises-based options and managed VoIP, and the company can deliver these services nationwide. The carrier’s December 2009 launch of its Enterprise SIP solution, which can support distributed enterprises with hundreds or thousands of branches, supports XO’s strategy to continue to reach upmarket to serve larger enterprise customers.

• By deploying Ethernet services over a mix of optical fiber, fixed wireless, bonded-copper wire pairs and NxT1/DS3 TDM circuits, XO can reach over four million business locations with some type of Ethernet-based access. XO supports transport speeds of 10, 20, 30, 40, 50, 70, 200, 300, 400 and 500 Mbps to locations served by fiber; 3, 5, 15 or 20 Mbps services over copper pair; 44, 88 and 100 Mbps via DS3 and NxDS3 access; and up to 800 Mbps throughput via Ethernet over fixed wireless.

• XO has retired its long term debt and the interest payments that go along with it and boosted its cash position, an important move in the current economic environment. XO has the flexibility, resources and service portfolio to strengthen its position as a contender in the enterprise market.

Weaknesses

• XO has a long history of operating and net losses. XO’s net loss for 2009 was $47.2 million, an improvement over a net loss in 2008 of $84 million, but a loss all the same. Although XO has alleviated some of its financial issues, the carrier still needs to demonstrate that it can become (and remain) a net profitable business.

• XO’s Business Center portal provides customers with billing and account information, and application management and VoIP configuration features, but it does not have the level of integration and sophistication that competitors like AT&T and Verizon Business have established for their respective customer portals, BusinessDirect and Verizon Enterprise Center.

• XO touts 3,000 buildings on its fiber network, a number that has not changed for years. This is an impressive footprint, but it is much smaller than the extensive access fiber networks owned by the incumbent local carriers, and XO does not have standardized pricing available to all of these buildings. XO has deployed Ethernet-over-copper, Ethernet-over-DSx and fixed wireless access to reach customers off-net, but higher-speed services may be too expensive or simply unavailable to some locations.

• XO has worked hard to raise its visibility and strengthen its position in the enterprise market, but one area where the carrier’s message, and offer, is weak is in cloud computing. While there is certainly some hype around the term “cloud computing,” there does seem to be demand for these services by mid-size and large enterprises that would support an additional revenue stream for the carrier. XO has the network capabilities and data center coverage to gain a competitive edge in this market if it chose to.

Recommended Actions Recommended Vendor Actions

• XO can emphasize its clean balance sheet with no debt and $363 million in cash as a sign of stability in an unstable economic environment. The carrier can emphasize plans to continue to invest in its Business Services portfolio and organization and, if possible, provide prospective clients with some visibility into service plans for 2010 and 2011.

• XO should consider expanding its XO Business Center portal to offer more self-service tools and additional network and service information. XO does have high-quality monitoring, maintenance and provisioning systems that need to be adequately explained and described to potential customers, especially as competitors tout their own customer monitoring and management systems, such as AT&T’s BusinessDirect portal and the Verizon Enterprise Center portal. As XO looks to move further upmarket, Web-based tools will help differentiate the carrier from competitors.

• XO can point out its involvement in the evaluation and testing of next generation technologies that will support customer needs for high capacity services. Although 100 Gbps Ethernet standards are still evolving, XO has been involved in 100 Gbps Ethernet trials with Infinera's DTN DWDM transport system and has already made a 40 Gbps wavelength service commercially available.

• XO should consider developing a cloud computing strategy and message.

Recommended Competitor Actions

• Price is an important consideration in the enterprise market. XO touted “we’ll beat any price” promotion for wavelength services back in 2008, and competitors can expect XO to continue to price aggressively on its long-haul routes. Enterprise customers large enough to require wavelength services are likely to need a variety of other services at many locations. AT&T and Verizon Business can emphasize their broad range of network and professional services designed for large enterprise users.

• Competitors such as AT&T and Verizon Business can also emphasize extensive IP VPN product portfolios and sophisticated customer-facing Web portals, which offer customers network management abilities and network performance information. Sprint can highlight its Compass online network management application, which provides visibility into class of service configuration and reporting, and can monitor performance and view statistics for domestic and international locations.

• AT&T, Global Crossing, Level 3 and Verizon Business can all emphasize their direct international reach. While XO is adding capacity domestically and has some international reach via its European peering network and an international MPLS IP-VPN partner, the carrier cannot match the RBOCs' blanket regional U.S. reach or the direct international presence that these competing carriers can offer.

• Competitors can paint efforts by Carl Icahn to obtain full ownership of the company and the lawsuit and complaints filed by minority shareholders stating that Icahn has not acted in the best interests of XO as creating an uncertain future for the carrier. While these events do not have direct bearing on the carrier’s day-to-day activities, competitors can imply that this is a distraction for the carrier’s management, and the uncertainty could have a negative impact on the carrier’s employees and operations.

Recommended End-User/Customer Actions

• U.S. businesses that are considering the migration from legacy services to an IP-based voice and data solution should investigate XO’s services. Enterprise customers with sites in the U.S. and overseas should first be comfortable with any XO out-of-region network interconnection plans for MPLS IP-VPN. Enterprises will want to understand the timing for these agreements and the locations covered before signing on with XO for the service.

• End users that require high-speed access but do not have access to fiber and are therefore limited to copper can consider XO’s last-mile alternatives. The carrier’s mid-band Ethernet (Ethernet-over-copper) service reaches over 600,000 U.S. businesses nationwide. XO actively offers fixed broadband wireless service in 36 U.S. markets, and it claims service availability in more than 80 markets nationwide. Including Ethernet-over-DSx, XO touts a reach to over 3 million commercial buildings.

• Businesses seeking to migrate from circuit switched voice and legacy business data services such as frame relay, to IP and MPLS-based voice and data services, should evaluate XO's services portfolio. The carrier has extensive experience in both traditional voice and IP telephony and can manage the migration process for customers that wish to transition to IP-based services. XO has steadily enhanced its IP portfolio.

Fast Facts Company Description

Company Name	XO Communications
Company Type	Facilities-based CLEC
Headquarters	Herndon, VA
Public/Private	NASDAQGS: XOHO.OB
Revenue	Consolidated: $1.52 billion (2009), $1.47 billion (2008). Core Broadband: $798.4 million (2009), $670.6 million (2008). Core Integrated Voice: $271.8 million (2009), $317.4 million (2008). Legacy TDM: $451.1 million (2009), $489.6 million (2008).
Primary Markets	XO operates 41 metropolitan fiber networks in 24 states and Washington, D.C., the carrier has connectivity to markets across the U.S. through its own nationwide IP/MPLS network facilities and carrier partnerships.
Employees	4,021 (February 2010), including 1,725 in Business Services and 338 in Carrier Services.
Target Customers	Small to large enterprises, mid-market customers, government agencies.
Key Customers	Bank of America, Morgan Stanley, U.S. Postal Service, University of Memphis, Memphis Coalition for Advanced Networking, Abercrombie & Fitch, Gold’s Gym, Populous, IASIS Healthcare, United HealthCare, eBay, Kawasaki Motors.
Sales Structure	XO operates three business units: Business Services, Carrier Services and Concentric. Business Services and Carrier Services each have its own president, finance, marketing, product management, sales, and service delivery team. XO also sells to businesses through third-party partnerships with telecom agents and subagents.
Service Lines	Core Services – includes Broadband, Integrated/Voice, Fixed Wireless and Managed Services. Legacy/TDM – includes TDM voice and Hosting/Hosted Applications.

Network Description

Geographic Network Coverage	19,000 route-miles of intercity fiber connecting PoPs in 75 U.S. metropolitan markets, 37 metro broadband fiber-optic networks in 22 states and the District of Columbia. Service reach to all 50 states and 23 countries via NNIs.
Fixed/Wireline Network	U.S. metropolitan area networks: more than 9,000 route miles of fiber optic cable connecting over 950 ILEC end-office collocations in 41 U.S. cities. XO has more than 3,000 on-net buildings. Inter-city fiber network: 16,000 mile network connecting more than 60 U.S. cities in the U.S. and Canada, including most of the metropolitan markets served by XO’s metropolitan fiber networks. National long-haul network primarily comprises 18 strands of fiber in conduits that also house Level 3 Communications fiber. XO also has inter-city fiber IRUs from AboveNet and Qwest for routes totaling another 3,000 route miles. IP Network: Nx10 Gbps Ethernet-based backbone that runs along the same routes as XO’s inter-city fiber network. The core of the XO IP network is a mesh of multiple 10 Gbps circuits, connecting ten IP core nodes in the U.S., four IP core nodes in Europe (Amsterdam, Frankfurt and London and Madrid) and one IP core node in Hong Kong, as well as 70 IP PoPs located in XO’s 38 U.S. markets. XO has deployed Cisco CRS-1 for its nationwide MPLS/IP core, and supports Ethernet IP Transit service to an expanded 83 markets. The carrier has deployed Juniper MX 960 platforms in backbone nodes and IP PoPs to for 1 Gbps/10 Gbps Ethernet access. The MX960 enables XO to offer class of service (CoS) with Ethernet and VPLS (virtual private LAN service). All metro PoPs use dual aggregation routers for redundancy. XO’s mid-band Ethernet (MBE) solution utilizes Hatteras Networks gear to deliver 3, 5, 15 or 20 Mbps over copper pairs; XO uses Anda Networks equipment for 44/88/100 Mbps Ethernet services via DS3 and NxDS3 access. XO has also deployed Foundry BigIron and Ciena LE-311v switches nationwide to support next generation Ethernet services. XO utilizes Nortel DMS-500 central office switches and Sonus softswitches for its voice infrastructure. The carrier has more than 300 DSL access points in 45 markets through a partnership with Covad Communications.
Mobile/Wireless Network	XO holds 91 licenses in the LMDS wireless spectrum (28-31 GHz range) and ten 39-GHz licenses. These licenses cover 75 markets. Licenses are renewable for ten year terms. The 39-GHz licenses are up for renewal in 2010, one LMDS license has a renewal date in 2016; the remaining 90 LMDS licenses are up for renewal in 2018. XO’s wireless services are provisioned through exclusively licensed LMDS fixed wireless spectrum or common carrier spectrum. XO does not offer mobile wireless services.
Network Upgrades or Enhancements	Wireline network: In January 2010, XO announced a new gateway in a carrier-neutral facility on the U.S.-Mexico border to serve Latin America. XO also added 800 miles to its fiber network in Texas to support diverse long-haul routes to San Antonio and Houston. In 2009, XO completed the third upgrade to its national core network, deploying Infinera’s ILS2 platform. The upgrade delivers 160 wavelengths per fiber pair, creating an additional 1.6 Tbps of optical capacity, enabling XO to provision any service from 1 Gbps to 40 Gbps between any two points on the network in ten days or less. XO also upgraded the pairs of edge routers in metro IP PoPs to the Juniper MX 960 platform. Also in 2009, XO expanded its reach into the Inland Empire of California (includes Palm Springs, San Bernardino, Riverside and Ontario), and in Raleigh, NC. Wireless broadband network: XO added broadband wireless coverage in Northern VA.
Expansion or Upgrade Plans	Network investment plans not disclosed. XO anticipates increasing the maximum capacity of its wavelength services from 40 Gbps to 100 Gbps once the equipment to support this level of capacity is commercially available.
Network Operation Center (NOC)	NOC – St. Louis, MO. National Repair Center (NRC) – Lone Tree, CO.
Data Centers	Atlanta, Austin (2), Baltimore, Boston (2), Chicago, Columbus, Dallas (2), Denver, Englewood CO, Detroit (2), Houston (2), Weehawken, Los Angeles, Memphis, Miami, Minneapolis, NYC, Phoenix (2), Pittsburgh, Portland OR (2), San Antonio, San Francisco (2), Santa Ana CA, Seattle, St. Louis (2), Tampa, Washington DC (2).
Support Centers	Dallas TX, Nashville TN, Sandy UT, Lone Tree CO, Saginaw MI, Wyomissing PA.

Select Customer Wins

March 2010	Kawasaki Motors, Inc.	Kawasaki is using XO MPLS IP-VPN and IP FLEX with VPN to connect its U.S. headquarters, sales offices, distribution and manufacturing facilities across five states. Kawasaki is also using XO Applications Performance Management to attain better visibility into applications running on the network and to optimize network performance.
March 2010	Memphis Coalition for Advanced Networking	Deployed dark fiber ring across Memphis metro area to enable 10 Gbps services across MCAN network. Supports collaboration between MCAN organizations (University of Tennessee Health Science Center, University of Memphis, Memphis Bioworks and St. Jude Children’s Research Center).
Q1 2010	EdisonLearning	EdisonLearning is using XO MPLS IP-VPN to connect 54 schools. EdisonLearning is also using XO Applications Performance Management to attain better visibility into applications running on the network and to optimize network performance.
Q1 2010	Village Voice Media Holdings	Village Voice Media Holdings is using XO MPLS IP-VPN to connect its operating companies, including 14 weekly newspapers and daily news Web sites.

Key Partnerships and Alliances

Hibernia Atlantic	XO’s partnership with Hibernia Atlantic provides XO with capacity on Hibernia Atlantic’s trans-Atlantic cable system to expand its coverage to Europe, and Hibernia Atlantic will leverage XO’s national network to support its planned U.S. expansion. The collaboration with Hibernia has allowed XO to bolster its IP operations and peering structure in London, Amsterdam, Frankfurt and Madrid, resulting in an estimated 30% percent increase in its trans-Atlantic capacity.
Pacific Crossing	XO has linked to Pacific Crossing’s (which was acquired by NTT Communications in October 2009) PC-1 network at XO’s Grover Beach, CA, landing station. The station carries data to and from Pacific Crossing landing stations in Shima and Ajigaura, Japan. The partnership gives XO access to 160 Gbps of capacity between the U.S. and Japan.

Key Mergers, Acquisitions, and Divestments

June 2004	XO acquired fellow CLEC Allegiance Telecom. The acquisition gave XO more POPs in its local markets and a greater ability to serve business customers without using incumbent carriers’ access services. (see <a href=http://www.currentanalysis.com/COMPETE/TS/Report.aspx?rid=10937>XO Completes Allegiance Acquisition -- Company Positioning as Business Only CLEC,</a> July 1, 2004)

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