KMC Telecom Reports Third Quarter 1999 Financial Results - KMC Telecom Holdings - Company Financial Information

Cambridge Telcom Report, Nov 15, 1999

KMC Telecom Holdings, Inc., (KMC), Friday reported financial results for the three month and nine month periods ended September 30, 1999.

Total access lines in service at September 30, 1999 were 98,431 compared to 77,474 at June 30, 1999, an increase of 27 percent. Access lines served on-switch, either by means of direct connections to the Company's network or via unbundled network elements (UNE's), continued to show rapid growth, increasing from 36,026 at the end of the second quarter to 71,986 at the end of the third quarter 1999. This 100 percent increase was fueled by the addition of 20,957 new lines and the conversion of 15,003 existing resale lines to KMC on-switch status. Dedicated circuits increased by 56,283 DS-0 equivalents to 169,769 or 50 percent for the quarter.

Total revenue for the three months and nine months ended September 30, 1999 was $15.6 and $42.3 million, respectively, compared to $6.3 million and $13.6 million reported in the corresponding periods of 1998.

Michael Sternberg, president and chief executive officer of KMC commented, "During the third quarter we made tremendous strides in improving the efficiency of our service provisioning center and focusing on converting resale lines to our own facilities. Access lines served on-switch doubled during the third quarter increasing from 36,026 at the end of the second quarter to 71,986 at the end of the third quarter. Over 20,000 of these lines are attributable to new customers. In addition, we converted another 15,000 lines of our resale base of customers to on-switch service.

"Following on our announcement last quarter regarding service contracts with MCI and UUNet, our capability as a provider of data services has been further recognized and acknowledged through our recently signed three-year agreement with Qwest Communications. In all 23 markets currently served by KMC, our robust local fiber-rich networks are data gateways for reaching long haul networks designed for high-speed data services including IP, frame relay and ATM."

As a result of the recent decision by the Louisiana Public Service Commission (LPSC) that local traffic to Internet service providers (ISPs) is not eligible for reciprocal compensation under KMC's interconnection agreement with BellSouth Telecommunications, Inc., KMC recorded an adjustment to reduce revenues by $4.4 million in the third quarter. This adjustment reversed all reciprocal revenue recognized related to ISP traffic in Louisiana for 1998 and the first nine months of 1999. The Company has been advised by its regulatory counsel that this decision appears to be well out of the mainstream on the issue. To date, Louisiana is the only state which has rendered a decision, pursuant to an existing agreement, that has permitted an incumbent carrier to use a competitive local exchange carriers' (CLEC's) facilities to complete calls without compensation to the CLEC. Thirty-three other states have ruled that the originating carrier must compensate the terminating carrier for such use. Many of these decisions have been affirmed by state and federal courts on appeal and none have been reversed. KMC intends to appeal the decision to the appropriate authority.

KMC will also offer DSL based services in all the markets it serves in one of the first national rollouts of high-speed broadband data to smaller U.S. cities. KMC's business strategy is to provide a broad range of retail and wholesale services including local dial tone, private line, long distance, data and Internet access to communications intensive entities. Its focus is on businesses, government agencies, institutions, ISPs and other telecommunications providers in Tier III cities.

Revenue Components: KMC's revenue, after giving affect to the adjustment resulting from the LPSC ruling, was $15.6 million and $42.3 million respectively for the three month and nine month periods ended September 30, 1999, compared to $6.3 million and $13.6 million for the corresponding periods in 1998.

Jim Grenfell, chief financial officer of KMC stated, "We like to focus on services delivered on-net and via UNE's because of the positive margin implications. Prior to the effect of the Louisiana reciprocal revenue reduction, we experienced over a 50 percent increase for these revenue categories in the third quarter over the second quarter. Also, our resale to on-switch conversion program has rewarded us with a 36 percent decline in resale lines from the second quarter. Attendant to increases in the number of customers using our facilities are the related long distance and access services that we provide. These categories of revenue made significant increases in the third quarter when compared to the second quarter."

KMC's annualized revenue run rate, based on September 1999 single month results excluding the adjustment for Louisiana reciprocal revenue, was approximately $86 million.

                    Revenue Components
                     ($ in millions)

Three months
 ended        9/30/99     6/30/99     3/31/99    12/31/98  9/30/98
On-net/UNE     $14.1        $9.3        $4.9        $4.0      $2.1
Resale           5.9         6.3         6.2         4.8       4.2
Total Revenue
 before LPSC Adj.20.0       15.6        11.1         8.8       6.3
LPSC Adjustment(4.4)          --          --          --        --
Total Revenue  $15.6       $15.6       $11.1        $8.8      $6.3