Description

LVLT is not a value company in the true Buffett methodology but there are surprising Buffett principles applied by this company as I will discuss below. The company was founded in June 1997 in the same building as Berkshire's HQ in Omaha.

The business of LVLT is telecommunications. It is building an international end-to-end all fiber internet protocol network. The network has 12 conduits but only one is now filled. Each conduit contains 96-244 fibers. The network is perpetually upgradeable.

The company has three sustainable competitive advantages: (1) Silicon economics and disruptive pricing; (2) Horizontal business model; and (3) Technology adaptability.

Silicon economics comes from Moore's Law of microchips and price elasticity. For every one percent drop in the price of bandwidth demand increases more than one percent; price elasticity. LVLT can undercut its competitors on price because its network is all optical fiber and without circuit switches. It can also be upgraded as fiber improves.

LVLT focuses only on bandwidth. It doesn't try to be all things to all people. It is a horizontal business model like AOL.

Buffett has said he disfavors tech because of the rapid change. LVLT turns that problem into an advantage because of its unique ability to add new improved fiber. It announced just last week the first new fiber placement.

The other Buffett principle employed by LVLT is its focus on hard assets. As of May 2000 a full 85% of capital raised is in hard assets.

Another barrier to entry is its almost $7 billion in cash and the fact that it is pre-funded its buildout through Phase 6.

One important business division is its co-location facilities aka gateways aka telecom hotels. These buildings house computers and routers which are hooked into LVLT's network.

It costs LVLT $450 psf to build a gateway and it can rent the space at $35/sq. ft/mo. The company stated at the last annual meeting that it expects $8 in telecom revenue for every $1 in rent. With 6.5 msf in gateways (#1 in the world) LVLT might see revenue of $24.5 billion.

LVLT is a relative value to two of its competitors: EXDS and MFNX. EXDS has roughly the same market cap as LVLT but only two-thirds the revenue. EXDS will lag LVLT in both square footage and cities in which the gateways will be built. EXDS does not own any fiber.

MFNX is in the fiber optic business like LVLT but it will serve only 26 US cities compared to LVLT's 77. In addition to a smaller network, MFNX can't upgrade the way LVLT can. MFNX's market cap is $20 billion on sales of $111 million.

Finally LVLT sales for 2q were up 120% year over year and 32% compared to the first quarter.

The company moved from Omaha to Denver two years ago in order to attract the 4,000 plus employees it now has.

Catalyst

Once LVLT completes its network this year it can completely stop leasing fiber from other carriers. This should enable LVLT to really cut prices and handle the demand for bandwidth.
The CEO has stated at the last two annual meetings that LVLT has more business than it can handle. This should change once the network is completed in 4Q '00.