TWST: What is Xanadoo Company?
Mr. Verlin: Xanadoo is a wireless broadband provider using a technology that will develop into a WiMAX service offering. Today, we offer services in four cities, three in Texas and one in Oklahoma. Within 30 to 45 days we will open up a fifth market in Illinois. In order to offer wireless broadband services, we use licensed frequency. So, in addition to having operations, we are an owner of or control licensed frequencies in 45 markets covering 8 million in population. In addition, we own 700 megahertz frequencies that cover over 150 million in population. Xanadoo has been our name just for about 24 months. We were formerly known as Pegasus Communications and were a large satellite TV provider as well as a cable operator and a television broadcaster. Those properties were sold over the last three years and we have been wholly in the wireless broadband business since then.
TWST: If we were speaking 18 or 24 months ago, what was the agenda, what were your priorities, the to-do list? What have you done over that period that brings you to today?
Mr. Verlin: While we were in the cable business and in the satellite business, we largely worked in third-tier markets and rural markets and, as a video provider, we've become acutely aware of the need for broadband to be delivered to smaller markets and in rural territories. So we started looking for solutions to do that. We originally tried a satellite-delivered solution, which we found to be very expensive and not a high-enough quality for our subscribers. We then tried a terrestrial wireless technology, but that was unlicensed and while we discovered there was a lot of market demand for the product, we found that the use of unlicensed frequencies could not provide a good enough coverage or reliable enough signal. So we looked for and found a licensed solution in the 2.5 gigahertz range and that's what we've been pursuing most avidly over the last 18 months. We've been acquiring the frequencies and rolling out services, as I said, in largely third-tier markets such as, in Texas - Lubbock, Wichita Falls and Abilene. Generally, our bread and butter size market would be 100,000 to 750,000 in population. We have over 12,000 subscribers in the four markets where we are offering service today.
TWST: Give us the financial snapshot - balance sheet, P&L. What's been accomplished and what's to do?
Mr. Verlin: The big accomplishment for 2007 is we financed the Xanadoo 2.5 business in May of this year with a $30 million debt facility that should take us to cash flow sustainability over a four-year period. We also sold our corporate real estate, which gave the parent company some financial flexibility. So that's the only debt we have on the balance sheet right now, that $30 million facility. From an operating perspective, as we launch markets, we consume more capital, so the way we think about it is at the market level. Our first market that we launched was Lubbock, Texas, which we launched in the second quarter of 2006. We've reached premarketing cash flow profitability in the fourth quarter of 2006 and we expect to reach EBITDA breakeven for the first market early in the fourth quarter of 2007. We expect all our markets to follow a sort of similar trajectory, somewhere between nine and 12 months to premarketing cash flow breakeven and somewhere between 15 and 18 months for EBITDA breakeven. Lastly, from a corporate standpoint, we'd expect somewhere between 25,000 and 30,000 subs to be cash flow sustainable at a corporate level, and we'd expect that to be sometime in early 2009.
TWST: What are the key metrics investors should focus on as they track your performance toward those goals?
Mr. Verlin: I think it's just the traditional type of metrics that you'd look at for any type of a telecommunications service provider. We are looking at ARPU (average revenue per unit), which has been very stable for us at around $25 a month, and pre-marketing cash flow margin and how quickly we can get there at a market level. We expect at some level of maturity our pre-marketing cash flow margins to be approximately 50% of revenue. And EBITDA, both how long it takes, how quickly we can get to EBITDA breakeven and then EBITDA margin - we'd expect that our EBITDA margins could be in the mid-40s in terms of percentages. Lastly, in terms of the effectiveness of what we build is how much capital do we invest to cover a market, and we expect that we can adequately cover a market for initial build at somewhere between $10 and $15 per covered pop for the initial level of capital expenditure, and capital expenditures after that should be success based. And the last important metric would be our CPGA, our cost per gross addition, and we'd expect that we can acquire subscribers consistently between $250 and $300 per gross addition.
TWST: What compels investors to include Xanadoo in their current portfolios and in their longer-term investment strategies?
Mr. Verlin: I'd say three fundamental issues. One is, it's an incredibly exciting space. Wireless broadband is just in its infancy, and I expect that wireless broadband will continue to get market share in the same way that wireless voice, in terms of the cellular industry, took market share from fixed voice. Wireless broadband will take market share from fixed broadband wireless. People just prefer mobility to a fixed service. So getting in technology early when the adoption curve is on your side is very much the right place to be. Number two, the spectrum holdings that we have were accumulated at very attractive prices and I think, because of the demand from the consumer for mobility, that the spectrum holdings that we have will prove to be extremely valuable. And lastly, because we are not on investors' radar screens, our securities are trading at prices that don't reflect either what our competitors are valued at or what the fair market value for our assets are.