Filed by WorldCom, Inc.
Pursuant to Rule 425 under the Securities Act of 1933
and deemed filed pursuant to Rule 14a-12
under the Securities Exchange Act of 1934
Subject Company: WorldCom, Inc.
Commission File No. 0-11258
November 3, 2000
The following transcript contains "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended, including statements concerning future operating performance, share of
new and existing markets, and revenue and earnings growth rates. Such
forward-looking statements, which are not a guarantee of performance, are
subject to a number of uncertainties and other factors, that could cause actual
results to differ materially from such statements, including vigorous
competition; the ability to establish a significant market presence in new
geographic service markets, and the success and market acceptance of new
products and services. For a more detailed description of the factors that
could cause such a difference, please see WorldCom, Inc.'s filings with the
Securities and Exchange Commission. The Company disclaims any intention or
obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.
We urge investors and security holders to read WorldCom, Inc.'s Registration
Statement on Form S-4, including the prospectus and proxy statement, when they
become available, because they will contain important information. When these
and other documents relating to the transaction are filed with the U.S.
Securities and Exchange Commission, they may be obtained without charge from
the SEC's website at http://www.sec.gov. Holders of WorldCom, Inc. stock may
also obtain each of these documents (when they become available) for free by
directing your request to WorldCom, Inc., c/o Investor Relations Department,
500 Clinton Center Drive, Clinton, Mississippi 39056. This communication shall
not constitute an offer to sell or the solicitation of an offer to buy, nor
shall there be any sale of securities in any state in which the offer,
solicitation or sale would be unlawful prior to registration or qualification
under the securities laws of any such state. No offering of securities shall
be made except by means of a prospectus meeting the requirements of Section
10 of the Securities Act.
WorldCom, Inc. and certain other persons referred to below may be deemed to be
participants in the solicitation of proxies of shareholders to adopt the
proposals which will be set forth in the proxy statement contained in WorldCom
Inc.'s Registration Statement on Form S-4. The participants in this
solicitation may include the directors and executive officers of WorldCom,
Inc., who may have an interest in the transaction including as a result of
holding shares of common stock and/or options to acquire the same. A detailed
list of the names and interests of WorldCom Inc.'s directors and executive
officers is contained in the Company's proxy statement for its 2000 annual
meeting, which may be obtained without charge at the SEC's Internet Website
at http://www.sec.gov.
THE FOLLOWING IS A PRESS CALL TRANSCRIPT ISSUED BY
WORLDCOM, INC. ON NOVEMBER 1, 2000
WORLDCOM
November 1, 2000
8:00 a.m. CST
Scott Hamilton Good morning. Thank you for joining us
today. My name is Scott Hamilton, and I'm
the Vice President of Investor Relations
for WorldCom.
WorldCom would like to draw your attention
to the cautionary statements and the
forward-looking statements in your binders.
Today's presentations will include
forward-looking statements within the
meaning of the Securities Act of 1933 as
amended, including statements concerning
future operating performance, share of new
and existing markets, revenue and earnings
growth rates. Such forward-looking
statements, which are not a guarantee of
performance, are subject to a number of
uncertainties and other factors that could
cause actual results to differ materially.
Such factors include vigorous competition,
the ability to establish a significant
market presence in new geographic service
markets, and the success and market
acceptance of new products and services.
For a more detailed listing of these
factors, please see WorldCom's filings with
the Securities and Exchange Commission.
The company disclaims any intention or
obligation to update or advise any
forward-looking statements, whether as a
result of new information, future events,
or otherwise. In addition, we urge you to
read our registration statement on form S-4
including prospectus and proxy statements
when they become available. They will
include important information.
Please also note that WorldCom and certain
other persons may be deemed to be
participants in the solicitation of proxies
of shareholders to adopt proposals, which
will be set forth in the proxy statement
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contained in WorldCom registration
statement, S-4.
With that, I'd now like to introduce
WorldCom's President and CEO, Mr. Bernie
Ebbers.
Bernie Ebbers Thank you, Scott, and thank you all for
being here this morning. Let me start by
telling you that before we get on the
script of what we're about here today,
something that I feel pretty strongly
about, and that is that we recognize as a
company that we have let you as investors
down. I've let myself down. And the
management team of this company is not at
all satisfied with where we are today. We
certainly don't look at this as the best
day of our life. By the same token, the
focus of the rest of the meeting is going
to be on why we think we can refocus our
company and get back to where you expect us
to be and, certainly, where my family
expects us to be.
I think about it, if I could just be
personal for a moment, about an experience
I had when I was about 16 years old. I was
a tall, skinny kid, six foot three and 130
pounds. I was trying to be the center on
the basketball team. I had just moved from
a school in New Mexico that had 53 students
in high school and I was one of six
Anglo-Saxon kids, the rest were Native
Americans, and the coach didn't speak
English. And I had just moved to a high
school in Edmonton that had 4,000 students
in grades 10, 11, and 12, and here this
skinny kid was thinking that he was going
to be a basketball player.
The person that I was trying to compete
with for the center position was a tight
end on the football team. He was every bit
my height and actually a 100 pounds
heavier. The coach had a hard time making
a decision one day. This other kid wasn't
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really aggressive. And in order to teach
the other boy a lesson, the coach threw the
ball and said, "We're going to have a
contest today." And he threw the ball out
on the floor and he said, "Whoever comes up
with the ball is the starter for the rest
of the year." Well, I came up with the
ball. And I feel just as strongly here
today as I did then, that we are going to
come up with the ball, and we are going to
right this effort like we never have
before.
So let's get on with some of the things
that we want to talk about today -- why
we're here. Well, we want to discuss two
things. First, we want to talk about the
formation of two operating companies.
Secondly, we want to give our best look at
the fourth quarter and 2001, so that you
have as complete a picture as we can give
you.
Recognizing that, we have to recognize some
things that I think are characteristic of
WorldCom. First, we have accumulated a lot
of different assets through this
acquisition phase that we've been in. And,
my fault, some of these assets should have
probably been disposed earlier, but we
didn't. And now we have to look at what
are the characteristics of some of these
assets, given the new environment that
we're in going forward.
The characteristics of some of these
assets, the changes are permanent. I don't
think we can change that. Technology has
changed. And we know that we're going to
see voice go to IP over a period of time,
at least to some degree, and at least as
far as it represents Intranets for
companies.
And the fourth thing that we have to be
aware of, with no question about it, and
I'm not trying to make excuses in any way
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(I fought for the Telecom Act), the fact is
that regulatory change has been very
significant since 1996. The intent of the
Act was to create competition. The
implementation of the Act has been to
refocus on the establishment of a monopoly.
Several things have happened in the
consumer end of the business, by and large,
that have made it very difficult. And
we're not the only ones in this predicament
that made it very difficult to look at a
long-term growing consumer business. We
have the CALLS plan, the slamming
characteristics, where we see more and more
that the states are going to take over
jurisdiction of slamming complaints (and
you can imagine what every elected public
service commissioner will do),
de-tariffing, which will be a significant
impact for us, local service, and then
mergers that were actually allowed in some
instances and rejected in others. So
-characteristics of this industry are
changing permanently is the point of what
I'm saying.
So, WorldCom, Inc. has decided that we
would form two business units, two
operating units, that characterize these
permanent things that have changed in our
industry. One will be known as MCI, and it
will have in it consumer, dial-up Internet,
wholesale, paging, and alternate channels.
And alternate channels are really an
accumulation of small pieces of business
like agent business, pre-paid cards, and so
on. The other side of our business will be
WorldCom, which will have in it data,
dedicated Internet, international, our new
generation d products that we'll be coming
out with and business focuses, and business
voice. The structure of this has enabled
us to put over 66% of our voice business in
the MCI unit and right around 30% of our
voice business left in the WorldCom; that
is by in large the piece of business that
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we'll be transitioning over a period of
time, as a result of new technologies.
Now why a tracking stock? First of all,
very important to us was the fact that we
get time to close quickly. We did look at
the possibilities of a spin-off. It's a
much more extended process, it would not
have been seamless to our customers. It
would not have had regulatory certainty,
and this allows us an interim step to get
ready for that if we choose to do it.
Financial flexibility would have been lost.
So we have decided that tracking stock is
the right thing to do for now.
One of the benefits of separation: first,
clarity. I think one of the things that
you've been frustrated with and I've been
frustrated with is the fact that we have
not had the clarity and the predictability
that we've needed where we could say with
absolute certainty that we will be at "x"
number for the next period of time, and we
have now structured our business where
we'll be able to do that, and we are
absolutely confident of that. We think
because of that we have not created the
shareholder value that we could, and we
feel like we can focus management more
appropriately in this new structure.
The operating strategies really won't
change. We'll have an aggressive build-out
of our data services. We'll have
leadership in Internet transport. We'll be
at the forefront of the IP implementation.
We'll attack new markets, and you'll hear
us talk about that today quite extensively,
global expansion, as we have done in the
past, and we'll protect the consumer market
share.
Now, just for a couple minutes, what are
the characteristics of the MCI unit again?
Consumer or mass markets, everything that
goes along with that and wholesale
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services, mainly switched wholesale
services. There is a little bit of
dedicated in there, but only because we've
identified certain customers who we don't
expect growth to occur in. Dial-up
Internet services, paging, and pre-paid;
these will be optimized for cash.
It will be a 100% stock dividend, one share
of MCI for each 25 shares of WorldCom.
It'll be a tax-free distribution. And
we'll pay $300 million dollars in annual
dividends in June and December of each
year. This will be a cash focused
business. The revenue mix, as you can see,
we'll have wholesale revenue in this unit
of 20%; mass market and consumer, 54%;
paging, 3%; alternate channels, 13%; and
Internet dial, 10%.
The financials for this business: Our
revenue will be about $15.2 billion;
EBITDA, $3.2 billion; and cash, $2 billion.
Now, what will we do with the cash? The $2
billion cash will pay a $300 million
dividend. We will spend or allow
approximately $500 million for capital
expenditures, but we will only make capital
expenditures if they increase cash flow; we
will not focus on the growth of the
business. And that will then give us cash
available for debt service; the debt
attributed to this unit will be $6 billion.
And the repayment of the debt, out of the
cash flow, will be $1.2 billion per year.
Now on the WorldCom side, the growth-engine
that we're proposing: It'll have data in
it, dedicated Internet, hosting, generation
d products, wireless resale (which is
growing very rapidly for us),
international, business long distance, and
business local voice. And as it said on
the slide, this will be a business focused
on growth.
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Our WorldCom revenue mix will be 30% voice,
32% data, 11% dedicated Internet and 27%
international (what I'm trying to
demonstrate in these slides is that voice
is coming down significantly); 26% voice
the next year in 2001, 33% data, 13%
Internet and 28% international. And then
by the year 2004, we're down to 11% voice.
My own opinion is that it may occur quicker
than that, depending on how quickly the
implementation of the transfer of voice
over Intranets goes. So we have reduced
significantly our exposure that everyone
has been concerned about to the switched
voice business.
Just a little bit about our major strategy,
and I'm not going to run this horse into
the ground because you're going to hear a
lot about that today, and that is that our
major strategy is to excel in the high-end,
high-growth areas of the business. We're
not abandoning the things that got us here:
data, Internet, and international. But
we're going to be a primary player in
global VPN's, IP VPN's, web-hosting and
related services, and Web customer service
centers. We think that - and Brian Brewer
later will give you some statistics on that
- in and of itself, gives us a tremendous
amount of opportunity, and those enhanced
opportunities are in none of our numbers
going forward.
The time line for this transaction is that
we will have the S-4 registration
statement, we hope, filed by the end of
this year. These are very conservative
dates, by the way. Special shareholder
meeting first half of 2001 - don't quote me
- but we really think that's going to be
closer to the end of the first quarter. We
really don't control that. That's an SEC
issue. Regulatory reviews, we do not
expect any-one of the main drivers behind
the structure of a tracker. And then stock
distribution would be soon after the
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shareholder meeting, but no later than the
first half of this year.
Now I would like to call on Scott Sullivan,
who will take you through some of the more
of the specific details, both about our
current business and our revised business.
Scott Sullivan Thank you, Bernie, and good morning.
Actually, this is a realistic morning, as
Bernie mentioned. Today I'll spend a few
minutes on the tracker, and then I'm going
to go through the financial profiles of the
two businesses. And then I'll focus on how
the separation allows each unit to behave
in the most rational, economic manner for
their distinct businesses.
Obviously, you've seen our press guidance.
I'll talk about the issues surrounding
guidance, how we got where we are, and why
it's thorough. And then on to the rest of
the presenters, we'll describe where we're
going and why we're comfortable with our
new plan.
Today we're announcing the formation of a
separate MCI long distance tracking stock.
It will be effected through a 100% stock
dividend of the MCI business to WorldCom
holders. There will be no change in the
number of shares of WorldCom, Inc., but at
the time of the separation, it will start
to track the digital business. The last
point is WorldCom will own no inter-company
interest in MCI.
Financial allocations under this model are
straightforward and simple. The metro
network and the fiber network will be
allocated to the WorldCom tracker. MCI's
allocation will include US long distance
switches, call centers, and dial modems.
Assets allocated to each group will
dovetail with the customer group that these
businesses serve. The plan is not to have
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significant inter-group borrowings; if
there are any they will be a market rate.
And lastly, debt; all debt will be held at
the WorldCom, Inc. level. Interest
allocated to the tracking units will be
based on credit profiles, initially
starting at $6 billion, will be the debt
allocation to MCI, initially starting at an
8.5% interest rate. And the balance of the
debt, $17 billion, to the WorldCom tracker.
That represents roughly 1.25 % over our
average borrowing rate to date at the
WorldCom, Inc. level.
MCI dividends will be paid quarterly.
Voting rights are proportionate with the
market cap of both stocks. And if at a
future date we decide to establish a
subsidiary, or to spin, or sell any of
these businesses, or the consumer business,
the redemption feature give us maximum
flexibility.
This shows the relative size of our two
businesses in terms of revenue and EBITDA
before the new guidance. I'll save you the
calculation, but WorldCom margins before
the new guidance is 41%. EBITDA margin of
41% for WorldCom is more like an RBOC that
has high, single-digit revenue growth - too
high for a company that we intend to grow
in the mid-teens.
The fact that we got to this level of
margin is testimony to the depth and reach
of our network in the midst of high margin
Internet and On-Net data traffic. But we
are and we intend to continue spending at
higher levels in the growth portions of the
WorldCom business; and I'll get to that in
a moment.
This is a transparent separation, in terms
of the businesses. In terms of assets,
customers, services, brands, consumer
versus the corporate enterprise, the
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overlaps are few. They're simple and
they're beneficial. They're efficient from
a network prospective, taxes, overhead, and
the debt allocation that I talked about.
But we won't overlap at the customer point
of sale. And our brand methods will be
clear.
You'll hear more about MCI's strategy from
Wayne Huyard later. From my perspective
it's simple; it's cash. About paying
dividends, deleveraging, later potential
for share repurchase at the MCI level,
supported by minimal investment.
We look at the highlights of the MCI
business: Let me show you about economic
behavior at work. Under the old model from
1999 to 2000, long distance revenues grew
modestly, due to the Five Cents Everday
plan that we introduced in mid-1999. But
it came at a cost: lower EBITDA; and we're
not going to do that anymore. MCI will no
longer be driven by top-line revenue
growth. We will make the appropriate
decision to run the business for cash
generation. And the full impact of EBITDA
decline is being felt in the fourth
quarter. In fact, the final price point
set out under the old model drives the
reduction in 2001 EBITDA.
We're going to experience downward pressure
in 2001 at the MCI level, due to the
lingering effect of the rate reductions and
decisions. But we believe the new behavior
of managing yield per unit will save a lot
of the business in 2002.
Even with the EBITDA decline in 2001, MCI
will still have strong coverage ratios. We
expect them to stabilize in the 2002
period, at seven times EBITDA to interest
coverage in 2001, 1.6 times total debt to
EBITDA coverage in 2001. We would expect
ratios within the area of six times
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coverage in 2002 and still being under two
to one in the debt to EBITDA level in 2002.
As I've said before, the whole reason for
the separation is to focus both companies
to behave rationally for their markets.
Stand-alone WorldCom has 41% EBITDA. To
sustain mid-teens revenue growth, we need
to be in the mid-30's EBITDA area to be
able to spend and grow revenue. Unlike MCI
where value is driven by deleveraging and
the dividends, at WorldCom the economic
value is going to be driven by sustained
top-line growth with reasonable margin and
modest deleveraging over time. Here's the
rationale: WorldCom has unmatched global
assets. We intend to fully exploit that
position by investing for growth, as
opposed to milking an EBITDA margin that is
equal to an RBOC.
Credit ratios are strong, stable, and
proven; they stack up against anyone in
this sector. The leverage and the
coverages are stable. In a growing
capital-intensive business, at this level,
you have to have a good balance sheet and
WorldCom has the best balance sheet in the
industry. That's the plan. We think that
the separation is the best way to highlight
the value of our separate businesses and
focus our management on the right economic
behavior. It's the right thing to do. And
now I'm going to talk about our guidance.
We expect our 2001 revenue growth to be in
the 12% to 15% range at the WorldCom
tracker level. We'll start off the year at
the lower end and be closer to the higher
end of the range by the end of the year.
Obviously, this is a lower growth than
recent levels. The reasons are
self-evident. Our voice business, while
only 30% of the mix, isn't immune to
pricing pressures seen by other carriers.
That, combined with pricing pressure in
some areas of private line data, masks what
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is a 25% to 30% rate of growth for packet
data, Internet, and international. Even
with all that, we expect to grow a $26
billion revenue base in 2001 at a long-term
rate in the mid-teens.
In order to have confidence in a mid-teen
growth rate, we believe we have to
recalibrate EBITDA margins to the mid-30's
to have room to invest, room to grow,
resetting the bar. We think these are
reasonable revenue growth rates with very
reasonable EBITDA margin totals. In fact,
the EBITDA margins five years from now in
these projections are conservatively lower
than two years ago. These are healthy,
double-digit growth rates with reasonable
EBITDA margins.
We are resetting our expected growth
target. Year to date in 2000, WorldCom
grew almost 20% year-over-year. We believe
voice will continue to face pressure, as
there will be other areas as well. But
there is great potential in data and
Internet, especially when combined with
value-added services like hosting and IP
VPN. And John Sidgmore and Brian Brewer
are going to talk about those areas today.
This is our new guidance by business unit
as previously outlined in our press release
this morning. The $2.40 cash EPS number on
this slide is pro forma for Digex. I'll
also discuss how that matches up with First
Call and the Intermedia/Digex adjustment on
the next slide.
There are three main drivers to our new
guidance: The global economy and FX rates
that are out of our control effecting
Europe dramatically in the fourth quarter,
and effecting Brazil in the fourth quarter
at an accelerated pace. We've had pressure
all year long on Europe; more pressure in
the fourth quarter, telecom industry
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environment, global enterprise pricing,
consumer pricing and our additional
spending to support growth initiatives.
We're not going to slow down in that area.
We're spending on generation d costs that
comprise product marketing cost, customer
care cost, information system cost, and
product development, and that's
approximately $0.10 in the fourth quarter.
That number will be about $0.35 in the 2001
period. There's $0.02 of FX pricing impact
in the fourth quarter. We expect currently
$0.05 of pricing for the 2001 period,
although we can't predict that number.
Global major account pricing is putting
$0.04 of pressure on our fourth quarter and
is expected to alleviate in the major
accounts area by about the second quarter
of next year. There should be about $0.10
of pressure for next year.
At the MCI level, consumer and wholesale
pricing is pressuring the fourth quarter by
$0.06 a share. That's made up of dial-up
Internet pricing of $0.04, wholesale
international outbound $0.01, and Five
Cents Everyday mix of an additional $0.01
makes up the six cents. And then there's
an issue that we have and that we'll
address related to dial-up Internet traffic
and the amount of off-net dial-up traffic
that we have today on our network versus on
net where we can drive cost efficiencies.
The spending is what makes this different;
this is how we attract and retain customers
and grow at a mid-teen rate. Also in the
fourth quarter, we expect to incur costs
associated with continuing MMDS dilution of
approximately $0.02 a share, cash versus
stock retention for employees of about
$0.02 a share, and health and welfare
benefits (more in cash versus stock) at
about $0.02 a share.
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The new guidance is well thought out. It's
a realistic view of our fourth quarter and
2001. It reflects the state of the
industry and the different economics of our
businesses. With or without the new
guidance, the tracker is the right thing to
do.
WorldCom is well positioned to achieve
because we have a strong balance sheet. We
have a great set of global assets to serve
the corporate enterprises. We have
realistic guidance as a base to move
forward.
I'm going to turn it over to John Sidgmore,
thank you.
John Sidgmore Hello, everybody, and good morning. I
normally talk about how exciting these
times are for Internet companies, generally
for Internet-centric communications
companies and how much I love the Internet.
And I guess I'm going to do a little bit of
that, although I have to say this past year
some of the excitement has been a little
more fun than we can enjoy.
I will say right up front, I want to put
some perspective on what's happened in
Internet stock prices, because I think it's
confusing a lot of people, and I'll just
give you the way we think about it. I'm
going to put that in perspective first and
then talk about how we look at the Internet
opportunity going forward now, because I
think it has changed a little bit. What
hasn't changed is the way we look at the
growth potential. And what hasn't changed
is the way we believe that we can lead this
industry going forward. So what has
changed?
Well, one of the things that has changed
with the dot-com decline is, I think, the
perception that a lot of people had, I
guess, is that all things Internet would
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work, no matter what. Now I don't know how
we had this idea, but did we really believe
that every single dot-com that was going to
sell flowers or groceries or CD's on-line
was going to be a huge success going up
against main stream companies?
At the end of the day, I think the right
perspective is that this was a
rationalization. The stock market
correction among Internet companies was a
rationalization that will ultimately be
healthy. But I think without any question,
the growth opportunity here continues a
pace, and that's certainly the way we feel.
I think at the end of the day, that's the
way it will turn out.
I do think that only a few winners will
emerge in each sector. And again, this
should not be a surprise. If you look back
to the early days of the Internet,
generally speaking, there was only one
significant player, or maybe two, in each
sector. AOL was the dominant player in the
ISP sector. In fact its market cap equaled
the market cap of all other ISP's combined.
When UUNET went public, we had the same
phenomenon there in Internet access.
Netscape, same phenomenon there in Web
browsers. And for some reason, over the
last couple of years, we've forgotten that.
But at the end of the day, I think you're
going to see a few quality winners emerge
here.
But I think that the important point is
that the Internet revolution, the
extraordinary explosion of technology,
innovation, new ideas, new business models,
continues. And we are as committed to it
or more than ever. In fact, in a lot of
ways, we're doubling-down our bet on the
industry. And why do I think the industry
itself or this technology continues to
remain a unique opportunity for us? And of
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course, we believe, as you know, that we're
uniquely positioned here.
Well, there are two things about the
Internet that make it different: one is it
offers a tremendous reduction, potentially,
in the cost structure of previous networks.
There is no question about the fact that it
is a different cost structure than the
networks that came before it. But that's
not the big thing. That's true with any
new technology or any new industry. The
real difference maker about the Internet is
the second point there. It's the
ubiquitous nature. Because when you think
about it, and this is what really derives
e-commerce, for the first time in history a
business can ubiquitously access all its
customers, all its prospects, all its
vendor's, all its partner's, all its
employees, with a single network that's
simple to use, that's low cost, that
everyone potentially is connected to.
For the first time in history, we've
created a truly public Internet network;
and that is the thing at the end of the
day. That is the thing that changes the
business model. In my opinion is that
ubiquities access that makes a difference.
That's what allows new companies like
Amazon to explode into a very traditional
industry (the book industry is one of the
oldest industries on earth), create this
gigantic national brand all of a sudden,
with very little initial capital, with very
little distribution capabilities. That
would have been unheard of before the
Internet. It would have been impossible to
spend enough money to create that brand.
It would have been impossible to create the
distribution network required to distribute
books around the country. Internet changes
that model because of the ubiquitous
access. And I think it's what ensures a
growth on a continued basis of e-commerce.
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The chart you see here, this is a Forrester
chart. Forrester says that e-commerce,
although it starts out relatively modestly
now, by the year 2003 will deliver $1.3
trillion in e-commerce revenue. IDC says
it's $1.7 trillion. Giga says it's $4
trillion. So whichever analyst you pick
here, it's going to be a gigantic number
and even though it's had a slow start
relative to the hype, I don't think too
many people would argue that e-commerce is
going to be a dominant driver of change for
business over the next few years.
Look at the way the impact might take place
here: 2001, we're going to have a slow
start, like I said. Forrester says only 5%
of business orders will be done on-line in
2001. But if you parachute forward to
2004, if you believe the analysts,
two-thirds of all orders will be done
on-line over the Internet. That, to me, is
a dominant framework for change, and I
don't believe it could have possibly
existed without that. IDC says 55%. So
whichever one you pick, again, it's going
to be a huge number and somewhere in that
range.
Now, why is this happening? Well, it's the
savings at the end of the day, not the top
line revenue growth that I believe will
drive e-commerce from here. If you look at
that $1.3 trillion in revenue, Giga says
there are $500 billion worth of cost
structure reduction opportunities
associated with that, with the use of the
Internet for those orders. So what I think
is happening-and this is a bit of a change
here, it's the cost structure opportunity
that's going to drive this, not the top
line. And that cost structure opportunity
is largely going to accrue to what I would
consider to be mainstream traditional
corporations. And those efficiencies are
going to drive it. It's not the fact that
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you can sell books, CD's, flowers, or
groceries over the Internet.
A lot of it is going to come from what you
might have considered to be the boring,
corporate, traditional application of the
past. Every corporation that we talk to is
desperately trying to enable their
traditional databases and their traditional
in-house applications onto the Web. Why?
Because they want to make that data
available to their customers, so that their
customers can order from them directly. It
reduces their costs; so that they can do
customer service themselves. One of the
interesting things about all this, even
though you reduce your costs substantially,
you, generally speaking, have an
opportunity to improve customer service at
the same time.
The fact of the matter is it's an awful lot
cheaper to do business and transact things
on-line than it is in the real world; it's
much more efficient to sell over the
Internet. There's no question about it.
Not true in all cases, or with all
commodities, but it is almost always more
efficient to sell. It's currently more
efficient to provide customer service. And
these are dramatic changes in cost
structure here; dramatic changes, that are
potentially available.
And one of the most interesting things to
me is, and I said this before but I want to
repeat it, generally speaking, you get an
opportunity, particularly with customer
service on-line, not only to reduce your
cost structure but to give your customer
much more satisfaction. A customer would
rather sign on to a customer service
database and get answers than wait on hold
for three, four, or five minutes, which
often happens today. So I think that this
is an interesting opportunity. And I think
one of the major points that you're going
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to hear from us today is that the growth
opportunity in the Internet has really
switched, from our point of view, from
attacking cool, new dot-com's who are
coming on to the scene, and it will be an
important part of the growth, but I think
the mainstream businesses are going to lead
this chart and they're, generally speaking,
going to be responsible for that $1.3
trillion of business you see. And that's
why corporate hosting and value-added
e-commerce services are so important to us
right now. Brian Brewer is going to talk
much more in detail about that. But that's
why our strategy has shifted to a certain
extent to make sure that we attack this
huge opportunity in mainstream corporate
America, here in America; and mainstream
European business in Europe.
I think that this is the story of 2001
because I think that the GE's, the Exxon's,
the General Motor's, and all the
large-scale traditional companies we have
are going to need a ton of help, and I
think that we're probably in the best
position to help them at the end of the
day. So, when you think about e-commerce,
to finish up on this, I think e-commerce
does offer the opportunity to level the
playing field. But when we used to talk
about leveling the playing field what we
really meant was, we leveled the playing
field for small, new companies coming in
because they had lower advertising costs
than ever before. Like Amazon jumped in
and suddenly took on the book industry,
because the playing field was leveled; they
didn't need to half thousnds of stores.
But leveling the playing the field cuts the
other way too. It can mean that it can
make large businesses more agile; it gives
them better information. It makes them
more intimate with their customers. Those
were advantages that used to accrue only to
small companies.
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I think the point is, and I think this is
what has happened over the last year,
mainstream America, mainstream Europe,
mainstream businesses have awakened to the
fact that they can use this new medium to
fight back and lower their cost structure
dramatically. And I think that is the big
shift here that we see. And it's clear
that the Internet can be as important in
cutting costs out of the supply chain as it
can in raising top-line growth. And I
think that's what you're seeing here this
year.
Now, this is going to be a huge driver of
growth, obviously. What are some other
drivers of growth? I'm just going to hit
these very quickly. In the last 24 months,
and you guys know this as well as we do,
there really have only been two themes in
communication. One is wireless and the
other is Internet. And I think over the
next couple of years you're going to see
more of the same driven by a few things.
First of all, you're going to see the
continued deployment of broadband and,
ultimately, that will bring video
applications, which is going to bring a
huge amount of new demand. I'm going to
talk more about that in a minute. Wireless
data and devices, obviously, are going to
continue to explode and proliferate and as
those devices get cheaper and cheaper,
you're going to see more and more of them.
They will just become, in effect,
ubiquitous and they'll be communicating
on-line in ways we don't understand yet.
But there's one other one on the bottom
that I want to talk about for a minute,
which is voice. Because I think this is
going to be a huge driver of growth,
ultimately. And I'm not talking about
consumer-to-consumer voice; I'm talking
about voice browsers here. I think the
challenge for us over the next couple of
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years is to make the Internet a lot easier
to use. There is a myth that says
everybody is connected to the Internet. In
reality today, hardly anybody is connected
to the Internet by some measures.
There was a study done about nine months
ago that was trying to find out how many
regular users of the Internet that there
actually were. And the way they define
"regular," by the way, was that they went
out and asked American families first how
many of them signed on to the Internet more
than three times per month; that was how
they defined "regular." Now, that's not
regular for me or for you, but that's how
they defined it. And by that definition,
only 26% of American families define
themselves as regular users. That means
that in the US we have four to one headroom
on new users coming on.
It's worse everywhere else. Fifteen
percent of families in England say that
they are regular users. It's 8% in
Germany, one of the world's great
economies. So we have an enormous
opportunity here.
One of the problems, again, is that I think
that the Internet is still much too
difficult to use. An example: my
97-year-old grandmother will never use the
Internet. Why? Because she is not going
to learn how to use a personal computer, go
to the log-on process, figure out why the
modem doesn't work, and go through all that
stuff; it's just not going to happen. But
if she could walk over to the phone and
bark some instructions into the phone, like
she's done for 97 years, she might use the
Internet. And she might use it for real
applications that would be important to
businesses, like ordering travel tickets or
whatever.
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<PAGE>
You can't do that today. But I believe
that the technology for voice browsers is
very close. Six to twelve months from now
this will be natural. I don't want to go
through the details of the technology, but
the point of this is that by making the
Internet easier to use, if we could make
the Internet accessible by natural voice
interaction, through voice recognition
(which is really just about here), you'll
see a huge influx of new users and new
applications on the Internet. Imagine
truck drivers running around always
connected to the Internet by a voice
computer; this stuff is really happening.
I talked about broadband access; everybody
focuses on the near-term benefits. You're
going to see some of these benefits.
You're going to have faster downloads, and
that is going to reduce frustration; but
that's not going to be a big deal. I think
the near-term benefit of broadband really
is going to be the always on feature. A
lot of research shows, very simply, that if
you don't have to go to the login process
and you're always on, then people use the
Internet much, much more regularly; and
that's going to continue.
But the big deal about broadband comes in a
couple of years when we have much more
ubiquitous broadband deployment. Because
that means that for the first time, we have
the potential to get real video.
Video conferencing was the sensation of the
1964 World's Fair. It never took off
because the cost was so enormous that
nobody could use it. But if we actually
get broadband out to the end-point so we
could enable it, you could make some of the
visionary applications of the past work;
and these visionary applications are
business applications. Telecommuting, for
example, could be a huge deal for business
around the world. It's very, very
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<PAGE>
difficult to recruit people today in the
technology arena. But if you could
recruit, not just in your one building or
your four buildings, but you could recruit
anywhere in the world and put people to
work productively wherever they live, that
could be a huge difference maker for the
business community.
Telecommuting doesn't work because audio
conference calls basically don't replace
personal interaction. So work groups just
don't work if somebody is at home with an
audio conference. But again, research
shows that if you have a large screen TV
with high definition at home, and with the
work group at work, and you could naturally
interact with it, you never had to sign on
or off, it was just always on, that really
does replace personal meetings in many and
a very high percentage of situations.
There are lots of other applications,
distance learning, etc. But when we get
broadband video out there, I think the
demand, generally speaking, for Internet
bandwidth, is going to dramatically
increase.
Wireless computing: The wireless revolution
over the last many years has really been
all about consumer voice to voice
conversations. Over the next couple of
years, the growth is going to come from
wireless data. And everybody focuses, when
they think about wireless data, of people
running around as consumers with these
gadgets downloading music and all that kind
of stuff, and there will be plenty of that.
But to us that's not the important thing.
There are real business applications coming
and they are coming soon.
I'm not saying the gadgets won't explode;
there'll be an extraordinary explosion of
gadgets that people wander around with.
But the real important things for us will
be real computers in real objects, like
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cars, for example. We're working with
virtually every car company in the world
who wants to install wireless IP interfaces
in their cars. Why do they want to do
that? Because they want to be able to do
remote diagnostics on your car as you drive
around. So if there's a problem with it,
they can instantly inform you by sending
you a signal so you come into their
dealership and spend money faster that's
one thing. And interestingly about that
again is in creating a revenue stream for
themselves is pretty much as sure as an
annuity, they also dramatically increase
customer service. That'll be a huge
benefit to you. And that's just going to
happen next year. This is not something
we're talking about years out. And these
car companies are going to spend a huge
amount of money on that.
Coke machines, as an example: It turns out
to be pretty expensive to send the coke
machine guy out to fill up a coke machine
if it's already full. If you could put a
little sensor on the coke machine and call
over the Internet back to the distribution
center when it needs service, that would be
tremendously efficient. Because not only
could you save to send the guy out, you
could say we need three orange, two diet
cokes, four regular cokes, etc. Think of
the efficiency inherent in that. So you
provide super efficiencies on one side to
lower cost structure; and secondly, you
provide better customer service. These are
the kinds of applications that are coming.
So, in summary, the Internet opportunity
has changed but it still offers, I think,
explosive growth over time for real, live
business application. And real life
business applications are going to come
from traditional companies: e-commerce to
drive cost structure efficiencies, wireless
data for real business application, video
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<PAGE>
applications. So the point I think here is
real companies are going to need this stuff
and need it in the short-term. And this
is, again, one of the reasons why we are
changing our focus. We are doubling down
our bet on the Internet but we're doing it
in a slightly different way.
We believe that the digital world is more
central to us and more important than ever.
And as the traditional businesses get on
line, at the end of the day, we have to
change the way we attack this market. And
we have to attack it with much more
resource, more scope than we ever have
before.
There's an interesting quote here from Jack
Welsh, who I worked for GE for 14 years.
He's, perhaps, the greatest CEO of all
time, other than Bernie Ebbers, who's my
favorite CEO of all time, and I just wanted
to say that he was very late coming to the
Internet party. For years, he really
missed the Internet. A year and a half
ago, Jack figured out those cost structure
charts and he realized that he could go out
of business if he didn't respond with force
to those issues. And today he says, "When
you stop breathing, you have to feel about
the Internet the way you do about
breathing." Trying to avoid it is like
commanding the tide not to come in.
I want to just leave you with one other
thought. I've always said that the
Internet was the greatest explosion of new
technology in history. You could make an
argument that there was an analog 100 years
ago with the development of motorized
transportation and, perhaps, there was. I
want to say one thing. In the 1920's, a
high proportion of new companies created
had either engine or motor in their name,
or something like that. And a 100 years
later, most of those companies are out of
business. But if you think about the ones
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<PAGE>
that are still in business, like General
Motors, Caterpillar, Ford, McDonald
Douglas, and Boeing, they created a huge
percentage of the GNP and the GNP growth
over the last 100 years.
And I would argue if you look at the
Internet companies today, a 100 years from
now, most of those Internet companies will
be out of business. But the ones that
survive will create a tremendous percentage
of the GNP and GNP growth over the next 100
years; and we intend to be one of those.
And with that, I'm going to bring up Brian
Brewer, our Senior Vice President of
Marketing.
Brian Brewer Thank you, John. I'm going to talk for the
next few moments about our marketing
strategy and more about our plans for the
majors. Our goals in marketing are pretty
straightforward. First, we're synching up
our marketing and our product strategy and
our market positioning between our business
units. Now we'll have better products and
services and more market clarity for our
customers with a cohesive plan for our IP
services and our traditional services
around the globe complement one another.
Second, we're very, very focused on
building products and services and getting
them in the development pipeline that will
come on-line and reach maturity to off-set
slowing growth in our older, more
traditional services and having a much,
much better product pipeline.
Third, and something you've heard Bernie
talk about before, we're shifting our
product strategy from broad and shallow to
narrow and deep. And what that means in a
nutshell, we're going to focus on several
new high-growth areas. Now that's not to
say we're abandoning our core services,
just that we're intensifying our efforts on
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<PAGE>
several new services that will not only
provide growth in and of themselves, but
will drag along and lock in revenue in some
of our more traditional services. And last
but not least, we're very, very focused on
getting the marketplace perception of
WorldCom in line with who we are today and
where we're headed, and as you've might
have guessed that is what generation d is
all about.
WorldCom, and Bernie mentioned this
morning, has traditionally grown in three
ways. We've grown by acquisition. We've
grown by opening up networks in new
geographies. And we've grown by launching
new products and services across all of our
service markets. And over the last several
years, we've been pretty focused on growing
through major acquisitions. And there was
a time when that strategy served the
company very well. However, to insure
that we can achieve and then maintain the
growth levels that Scott talked about this
morning and you, as investors, require, we
have to have a much more balanced attack in
all of those areas simultaneously. And
that balance is at the heart of the
strategy that I'm going to be discussing
with you over the next few minutes.
Bernie and Scott both mentioned this. We
have an unsurpassed set of global data
services, and businesses run on data
services. And in spite of the rapid growth
of the Internet, there is and still will be
a requirement for private, ultra-secure
networks for years to come. And WorldCom
is well positioned to compete in this
marketplace. And we're convinced we can
execute better than we have in the past by
properly positioning our private networking
services in relation to our public IP
services.
Bob Hartnett will talk more in a few
moments about how we're optimizing our
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<PAGE>
sales channels to focus even better in the
data marketplace.
Second, John talked about this: We are the
leaders in the Internet. The strength of
UUNET technologies is now woven into our
enterprise sales and marketing forces as we
moved from being two separate companies, a
telco and an Internet company, into one
company, a digital communications company.
And we'll leverage our IP network and reach
into complimentary areas, like hosting and
security services; and I'll talk more about
those.
Industry analysts forecast that the market
for IP services is going to continue to
grow rapidly. UUNET has been successful in
supplying network services to both
commercial retail customers and in really
becoming the ISP's ISP. But you're going
to see us focus much more aggressively on
the commercial retail market. Now I don't
want you to think that means we're going to
scale back our efforts in supplying
infrastructure to ISP's and ASP's. In
fact, we'll be intensifying those efforts.
But relatively speaking, we're going to
stage an all out, frontal assault to be the
IP infrastructure supplier of choice for
business, especially for businesses who
need mission critical carrier class
performance from their communications
provider.
And finally, and you heard Bernie talk
about this, is our majors: We are declaring
selected high-growth, high-return
opportunities where we're going to focus a
great deal of our energy, both from a
product development standpoint and from a
sales and marketing standpoint.
When we look around at companies who are
capitalizing on the tremendous growth that
this economy is generating, we see very
clearly a common denominator. And that
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<PAGE>
common denominator is focus. Segment
leaders are extremely focused on being best
of breed in a specific market area or a
specific technology. Now that doesn't mean
that they are a single product or market
company; it just means that they've
established a reputation for excellence,
even to the point of establishing
themselves as the defacto market leader in
a specific product or service area. Once
you get to the point where you've
established yourself as the defacto
standard, you can use that strength to
build complementary products and services,
and you can milk that position for all it's
worth.
WorldCom will continue to provide high
grade communications services across the
range of platforms and protocols, but we're
also going to concentrate like we've never
concentrated before. We're selecting a few
key areas where we can lead the
marketplace, just as Cisco leads the market
for routers and Oracle does in Internet
databases. We've picked a few high-growth,
high-visibility markets, and we fully
intend to set the standard for those
markets and become the defacto industry
leaders.
Now we selected these concentrations for
our majors based upon a few key criteria.
First, is it important to where our
customers are going? Is it strategically
important to them? Is it what they want to
talk to us about in terms of where their
business is going? Does it take us to
where the market is going before the market
gets there?
Second, does it represent a market that is
going to be growing very fast? WorldCom
needs to generate several billion of net
revenue growth each year to satisfy you, as
investors. So, we simply have to focus on
fast growing, multibillion-dollar global
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<PAGE>
markets that really line up with our
network.
Third, is it a market in which we can
legitimately expect to be one of the top
two players? If you can't be number one or
number two in the marketplace, you're
always following somebody else's lead;
you're always reacting to the industry
leaders. So in our estimation, why bother.
Finally, is it a market service that builds
upon what we have today: our
infrastructure, our network, our people,
the assets that Bernie and Scott have
assembled to form WorldCom? These majors
represent the markets where we fully intend
to lead. That is, shape the industry in
market direction and reap the revenue and
margins that reward industry leaders.
Let's talk about the majors. To date,
we've defined three: hosting and related
services, global IP VPN's, and Web centers.
Now I'm going to talk about each of these
in a little more detail but let me tell you
right up front, we're probably going to
need more than three majors over time. I
expect over the next quarter or two, we'll
define two or three additional majors. But
for now, let me walk you through each of
the majors that we've declared thus far.
The first one is IP VPN's. Internet
protocol based IP VPN's are the wide area
networking tool of choice for new
e-networks today, and they'll be the tool
of choice for all networks for the next two
years. Now global IP VPN's are hot because
they can connect corporate Intranet, data
centers, and remote users, via the public
Internet. A VPN instantly expands a data
network's reach via the Internet and it
does so without sacrificing the security
and the reliability of private networks.
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<PAGE>
This slide depicts how a VPN architecture
might look for a typical business
application. You might say it looks very
much like the topology for a private
network, and you'd be right. For WorldCom,
the difference is in how we provide the
security, the encryption and/or the
tunneling protocol that allow for secure
communication across the IP backbone. But
for the corporate customer, the difference
is ease of use, price, and that ubiquitous
reach that John talked about.
The Yankee Group believes that the IP VPN's
are going to dominate the growth in data
communications over the next five years. I
told you a few minutes ago that we felt
that frame and ATM still have great growth
potential, but let's be real. These are
products that are a little bit more mature.
And over time, IP VPN will replace those
networks and services.
Now WorldCom has the chance to get out in
front of this transition. We can pick up
not only on the migration of our own
customers' networks from frame and ATM to
IP VPN's, but that of our competitors'
customers. To make this a growth arena
rather than a cannibalistic strategy that
would eat away at our own base, we're going
to have to be aggressive; we're going to
have to be very aggressive. That means
we're going to have to attack AT&T's base,
Deutsche Telecom's base, BT's base, France
Telecom's base, everyone's base, who
doesn't really believe that the VPN
phenomenon is going to prevail.
The strength of WorldCom's approach into
data marketplace couldn't be better
illustrated than it is on this slide. You
see here several components ranging from
traditional frame and ATM solutions to
public IP solutions on the right hand side
of the graph. Now our competitors tend to
focus on either one, or the other end of
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<PAGE>
this spectrum. As you might expect, the
new entrants hype the next generation IP
networks. They do that because that's all
they have to sell. The more traditional
carriers, they're going to do what you
expect as well, they're going to focus on
frame and ATM and they're going to
disparage the IP-centric approach.
The reality is that one size just doesn't
fit all. Some applications are very much
optimized for the public networks and some
only make sense, at least today, when
operated over a private network. Customers
are looking for a migration path; they want
to know how to get from "point A to point
B." They all want to end up on the VPN,
but they don't know how long it's going to
take to get there, or what the security
measures are going to be along the way.
The strength of WorldCom's approach is that
we have the right tool for the job, either
public or private, or even a half-step in
between. We have a set of services called
private IP that allows customers to take
existing private networks, frame or ATM
networks, and IP-enable them to reduce
operational costs and to increase reach.
And most importantly we provide secure and
reliable links among these three worlds,
allowing data and applications to literally
sit on the fence, sit across the
boundaries, kind of the right tool for each
job -- this is WorldCom's edge. And this
is where our heritage as both a traditional
telco and an Internet company becomes an
advantage rather than being a burden.
Let's move to our second major, hosting.
As you know, the business and technology
cycle have come full circle. The Internet
start-ups and the emerging dot-Com's in
many ways issued a wake up call to the
so-called "old economy companies." Now
those old economy companies figured out
they could either face continuing market
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<PAGE>
share and price erosion at the ends of the
Internet-based up-starts, or they could
fight back and beat them at their own game.
There's been a lot written lately heralding
the resurgence of these so-called old
economy companies.
There's a really simple reason for that
and, when you think about it, it makes
perfect sense. It's a whole lot easier to
take a business you already know and
understand and bolt a new approach on to it
than it is to come into a marketplace only
knowing E and figuring out how to run a
business you don't know anything about.
They say old dogs can't learn new tricks,
but there's a lot of old economy companies
who are showing us that's not true.
Likewise, the dot-Com's and the new
entrants see this trend and they're working
very hard to try to keep the gains they've
made. Well, that spells one thing for
WorldCom and that's opportunity. Very
clearly the market is hungry for somebody
that can bring mission critical, carrier
class capability on a global scale to bear,
and that company is WorldCom.
UUNET technology's already placed WorldCom
in the top tier of hosting providers. The
acquisition of Intermedia and controlling
interest in Digex gives us capabilities
that are ideally complementary to the
hosting capabilities we already had, and
their capabilities in the managed and
enterprise space not only catch us up in
the management and enterprise services, but
they put us ahead of our competitors.
Now I want to take a minute and put hosting
in context with our network. Our
definition of the Network is going to
continue to expand. It's no longer simply
a way to connect point A to point B, it's
expanded to encompass the management of
edge devices. There's been a lot written
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<PAGE>
about this lately - routers, other hardware
that has traditionally been on the
customers' premise. Well, we're going to
push that envelope on where the edges of
our networks are.
Any number of what today are currently
defined as edge services are going to
become integral to our network. For
WorldCom, we view hosting itself just as an
extension of the Network. Now that really
is an advantage that we'll have over the
other hosting players who have to buy their
network from somebody else.
So we'll not be stopping there. Content
caching and Network storage are likely next
steps and you should anticipate a broad
range of security services and turnkey
managed services that leverage our
networks, our hosting capabilities and our
content distribution services.
Now, you might be picking up on a theme
here, and that's purely intentional. We are
going to leverage one of WorldCom's key
assets - our network and our global reach.
There is no one in this industry who is
better positioned to set the tone for the
marketplace than we are.
Hosting is at the backbone of every single
e-business application and this is an
exploding market. But we don't want other
things to be true. If we host a company's
e-enterprise applications, we're going to
get the network transport, too. And again,
we're going to leverage the majors to build
on the foundation we have in the Network.
So the final major I'm going to talk about
this morning is Web centers. You have to
think of Web centers as kind of a next
generation call center, and this is an
emerging trend that has been spawned by the
explosion of the Internet and e-business.
The problem in the e-space today is not
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being able to get information on a product
or service out; there are thousands of Web
sites to do that. Or even to get a product
shipped. It is in getting service after
the sale in case something goes wrong and
very often something does go wrong. A Web
center coordinates all the points of
contact, from wireless to wireless, from
voice to text. So whether the contact is
initiated via a traditional toll-free
number or whether it's done over a Web page
or e-mail or via a wireless device like a
PCS phone or a PDA, the contact becomes a
living record throughout the Web center.
Customer service professionals can
interface with customers the way that is
most convenient for the customer, not for
the supplier.
So we think the number of basic call
centers is going to be kind of flat in the
marketplace, but we really do believe the
number of Web centers is going to grow very
aggressively. And our mission is to be the
first in the market to really establish
ourselves as the entrenched incumbent in
this space. By the way, no one really
knows how big this market is going to be or
can be because it's very much in its
infancy. The folks who are doing the
software in this space are all very small
companies, for the most part. But I
honestly believe that the market estimates
here are grossly understated. I think this
could easily be a multi-billion dollar
global market and one that WorldCom can
clearly lead.
The potential for each of the initiatives
I'll talk to you about is great, but we
also have to be realistic. Some are going
to ramp faster than others. When we buy
our entry, like we have with Digex, that's
going to go very fast. Others like Web
centers, where we're growing them
organically, they're clearly the future but
they'll take a few more quarters to gain
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traction. But we are very confident that
this is the right direction for our company
and that this makes the most of our network
and resources.
Now, we not only have to attack revenue
growth through new services, through the
majors, and through the utilization of our
network for traditional data services, we
simply have to do a better job of
protecting the revenue we already have.
Now, we've already started an initiative -
and this is a major initiative across our
sales and marketing channels - is to help
our account teams better manage rate
erosion.
Now part of that is through aggressively
offering you product and services, so that
as you're renewing contracts and writing
them down to more market rate, you have new
revenues to sell into that customer to
offset the write-down. But we're also
going to be a lot more aggressive on
setting floors for specific products and
specific rate elements. And being
completely honest with you, we're going to
lose a few customers in this attack. But I
honestly do believe that over time we can
slow the rate of erosion and get our rate
back into equilibrium.
Now don't get me wrong, I'm not saying, and
we don't believe, we can push up rates. We
can't defy the laws of gravity. But I am
saying that we do believe we can slow the
rate of erosion a bit, and I don't think
we'll be alone in the marketplace in
embracing this approach.
Last, and certainly not least, we're going
to continue to better align the marketplace
perception of WorldCom with who we are
today. We are today more than ever,
especially with today's announcement, a
data and Internet infrastructure company.
We provide the building blocks for the
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emerging e-centric companies and the global
1000 companies alike, and we're going to
continue to grow our service offerings in
this area.
Take a look at the generation d Digital
Sourcebook we handed out when you came in
this morning. This is a sales tool that
we're going to be publishing quarterly to
keep our customers and our prospects aware
of trends in the industry and about
WorldCom's products and services. What you
see in this book is about as far removed
from a long distance company as you could
possibly be. It's all about leveraging the
emerging digital technologies to open up
new markets, lower costs and improve
competitive positions for our customers.
And the image that's portrayed in this
piece and in the advertising that we're
going to be using to support the measures
illustrates the kind of aggressive stance
WorldCom's going to be taking in the
marketplace in this regard.
So in closing, we have the network, we have
the people and we have the marketing might
to reset industry benchmarks and
expectations, and that's exactly what we
intend to do. Now here's a video that
illustrates how we're going to be
positioning the majors with the
marketplace.
(Video being played; no audio)
Ron Beaumont Good morning. I'm Ron Beaumont. I'm
responsible for operations and technology
for WorldCom. I'm sporting my new
generation d beard.
This morning I'd like to talk about our
network. I'm going to talk about our
network strategy, what the capital trends
are that we're experiencing, and then I've
picked out three network highlights that I
think are important for us to talk about:
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the introduction of terabit transmission
systems, Internet, and Web hosting growth;
and managed voice over IP.
Now what is our strategy? Our strategy is
to increase network capacity and scale
across all platforms -- be it an IP
platform, frame relay or ATM -- lower the
capital costs per unit, increase global,
geographic coverage; and enable value added
products and services, such as Web Hosting,
Content Distribution, IP VPN's and
e-commerce.
Now I'd like to talk about capital trends.
In the narrow band voice switching world,
capital requirements are declining. We are
rapidly approaching a maintenance of our
existing switches. This is occurring
because we are deploying soft switches in
our network. I didn't put a lot of slides
here on soft switch, but most of you know a
soft switch routes Internet dial up traffic
from the ILEC directly to our modem bank,
bypassing our class five switches. This
eliminates the use of two ports on the
class five switch and gives us a cost
reduction of 90% in handling that traffic.
Transmission systems will see an increase
in capital. That's driven by the Internet
growth, which is growing at anywhere from
four to eight times, depending on where in
the network we look; Hosting, generation d
products, and the unit cost is declining
dramatically. So, if we look at long-haul
transmission, which is measured in DS-3
miles, that's decreasing at 50%
year-over-year. If we look at local
transmission, measured in VGE's, that is
declining at 40% per year.
The data and the Internet platforms will
see a modest increase in capital. The unit
costs in capital utilization is improving
significantly due to the soft switch that I
talked about and also the MSS --
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Multi-Services Switch. The Multi-Services
Switch is an integrated access technology
that we're deploying. It provides input
for IP, frame relay, ATM and voice all in a
single box. We no longer have the need of
putting out an IP router, an ATM switch, a
frame relay switch and a voice switch. We
do it all with the Multi-Services Switch.
We can get a capital reduction because of a
single box versus many boxes. And
secondly, we get a trunking efficiency
because now we only have to trunk back one
box versus multiple boxes. That capital
efficiency improvement is anywhere from
50-75%.
In hosting, you'll see our investment
decline modestly. The infrastructure was
built out in the United States over the
last year. We invested roughly $1.2
billion building brick and mortar. We
built the infrastructure, which is the
buildings, the emergency generators, air
conditioning systems and UPS system to make
it ready for business.
Where do we go from here? We expand
internationally and our investment will
shift from the bricks and mortar that I
talked about to managed services. And what
does managed services require -- servers,
routers, data storage devices, software to
run those. So, that's where the capital
would be going.
I summary, what is happening with capital?
Well, while transmission volumes are
increasing, cost per unit is declining.
The soft switch and the Multi-Services
Switch are lowering cost of switching and
routing and improving transmission
utilization. Our investment is
transitioning to high end growth areas such
as hosting and generation d services in the
network that we need to build to support
those services.
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<PAGE>
Now I'm going to talk about more
specifically about what's happening in the
network and I'm going to talk about terabit
transmission. Terabit transmission will be
introduced into our network in four phases.
First, we will deploy high density optical
pipes across the network. Secondly, we
will deploy ultra broadband cross connect
systems. Thirdly, we will deploy optical
cross connects. Then we will also deploy
ultra long-haul transmission systems. I'll
go into each one of these.
First off, we ought to start with where we
are today. Today we operate a network with
dense wave division multiplexing. Last
time we had one of these conferences, I
talked a lot about dense wave division
multiplexing. Today we are at 32 channels
or lamdas operating at 10 gigabits, OC-192
transmission rate, and we regenerate every
400 kilometers. Regeneration is when we
take a signal from an optical signal,
convert it to electrical, clean it up, then
convert it back to optical and transmit it
down the fiber.
At the end of this year, we will be
deploying hyper-dense wave division
multiplexing, and you can see here that
I've identified two vendors. We will be
deploying two vendors' equipment into our
network. Vendor A's equipment will support
160 channels at 10 gigabits. That's a 1.6
terabit system, operational and will be
deployed in the network. Vendor B,
slightly different architecture, to force
176 channels again at 10 gigabits. Our
first deployment of this will be between
New York City and Baltimore which is
scheduled for the end of this year.
Next, we will implement ultra broadband
cross connects into the network. Now the
ultra broadband cross connect allows us to
groom SONET signals, OC-3, OC-12, OC-48 and
OC-192's. And we'll be able to patch
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OC-192 signals from an input fiber to an
output fiber. Previous to this, we had to
actually go and do a manual cross connect
on a fiber patch panel to cross connect
OC-192's. These will be deployed about
mid-next year.
Then in addition to the ultra broadband
cross connect systems doing the grooming on
the network, we will also be deploying
optical cross connect systems. This will
occur towards the fourth quarter end of
next year. What the optical cross connect
does for us, it has 256 fibers on the
input, 256 fibers on the output, and we can
switch a wave length or a channel from an
input fiber to a wave length and a channel
on an output fiber. This gives us the
ability to provide restoration in the
network based on these cross connects.
About mid next year, we will also be able
to deploy ultra long-haul systems. You've
heard a lot about ultra long-haul, and the
answer to what ultra long-haul drives us to
is that it eliminates the need for
regeneration so we can transmit from San
Francisco to Chicago without having to go
through regeneration. The signal remains
optical throughout the transmission
network. Now this will be used in
conjunction with our hyper-dense
transmission because we will use the ultra
long-haul for express routes between cities
and then the hyper-dense for short
distances where we have to add and drop
signals along the way. It will be used in
conjunction and this will be ready to go
mid next year and each route will be looked
at on an economic basis.
Now what's happening in the optical arena?
Well, we've talked about today we're 320
gigabits, 32 channels at 10 g. At the end
of this year we'll move to 1.6 terabits per
fiber pair. That's 160 wave lengths at 10
gigabits. The next move occurs at the end
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<PAGE>
around 2002 we will move to 80 channels at
40 gigabits. 40 gigabits being OC-768. So
that will be the next move that you'll see
in technology.
Then, we'll move to 40 gigabits at 160
channels. The next evolution that will
occur somewhere out around 2004 and the
crystal ball gets a little bit cloudy when
we look out this far, but we're looking at
160 gigabits of transmission. So you need
to start remembering a term called OC-3072.
But this is reality and it says that we're
getting a lot of capacity and life out of
the fibers that exist out there. That the
technology continues to expand the capacity
that we have available to us.
I'm going to talk now about the Internet
and Hosting. If we look at the Internet
coverage today, this pictures shows you
where we have access or customers have
access to the Internet, our Internet
network around the world. Now we're going
to dramatically improve that in 2001 and
add an awful lot of new countries out
there. This will be for dedicated access
and again, for also dial up access. It
will be implemented both on an IP basis
only and it will be implemented using the
Multi-Services Switch where we bring in
frame, ATM and IP altogether as part of the
architecture.
This year, we built out an OC-192 backbone
for the Internet, so our regional networks
and our backbone networks today operate at
OC-192 and in Europe at SDM-16, SDM-64 and
SDM-16's across the Atlantic, for example.
So we have a very robust, very robust
backbone network for moving traffic around
on the Internet.
If we look at Hosting, because this is
really the future of where we see things
going for us on the Internet, Hosting
today, and I know these are kind of hard to
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<PAGE>
see up here and you can tell that most of
these are major cities in the US, major
cities in Europe and major cities in Asia,
we have 47 Web hosting centers or sites
that are open today. About 350,000 square
feet of space.
Now I talked about that we had
substantially invested in building more
square footage and you will see that by the
mid 2001 we will have 82 sites and roughly
2 million square feet of Web hosting
facilities available. Now what you see on
here is we've added a few new cities and
we've built out additional facilities in
existing cities. So it's both building
more of what we have in the major
metropolitan areas and adding a few more
cities around the world to that.
Now Brian talked about, and you saw in the
movie, various flavors of Web Hosting. So
I'd like to walk you through a little bit
of what the differences are between
co-location and managed services.
Co-location is where a customer brings his
equipment to us to house in our facility.
We provide them with a cage, a wire cage
that their equipment goes in. We provide
them with a physically secure environment;
and we provide them with smart hands - we
can turn power on and off, we can reboot a
server if necessary. And typically these
are geographically dependent. The customer
wants to be close to his equipment. He's
going to be putting his equipment in our
space, he wants to be able to drive over to
it, manage his own equipment, he wants to
do his own software upgrades. Therefore,
it's geographically dependent. You want to
have those available close to the customer.
Managed Hosting, on the other hand, is
higher level services. We provide all of
the equipment, we provide proactive
monitoring of the equipment, we provide
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<PAGE>
7x24 customer support and management of the
systems, we guarantee service level
agreements and we provide network security.
And on both of these we also provide
connectivity to the network - either IP
connectivity or connectivity out to modem
banks and so forth.
When we're doing managed services, it's
usually geographically independent. The
customer's not going out to touch the
equipment -- he doesn't own the equipment
-- he's buying the service. We're managing
that service for him, so it could be
managed anywhere that we choose to do it -
Washington, DC, Los Angeles, Dallas. The
customer really doesn't care. And the
difference between collocation and managed
services is significant. Managed
collocation produces eight times the
revenue per square foot that collocation
services do.
Now, I'm going to talk about voice over IP.
And first off, before I really get into the
slides here, I want to address this basic
misconception about voice over the
Internet. And I know that you've been to
meetings like this and there are other
companies up here that talk about how
wonderfully cheap it is to move voice over
the public Internet. Well let me tell you
a little bit about that.
First off, that is truly nothing more than
an access arbitrage. All they're telling
you is that if you don't have to pay access
and you don't have to pay termination, that
indeed it's cheaper to process a long
distance call. Well that's not regulatory
acceptable. So when we look at, take the
access piece off and just look at what is
the real transmission piece of this and
look at it from an engineering perspective,
if I had to move one minute of long
distance across my network, what would be
the best way to do it? Would I move it
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<PAGE>
over the traditional voice switch network?
Or would it move it over an IP network?
The switched network, switch voice network,
requires 64 kilobits to move that voice
call over. That's what we provide, 64
kilobits for a voice call. When I do that
over the Internet, I have to break that
into packets and I have to put addresses on
them. So I now have to move 80 kilobits
across the Internet. And, the Internet has
latency issues - congestion and latency
issues. So if you want it to work where
the service is acceptable to the callers,
then you have to grossly over trunk the
network so that there never has the ability
for congestion and therefore long latency
to occur. So from my perspective, IP is
not a great way to move voice traffic
around. And from a pure transmission
standpoint, it's more expensive. Roughly
1.5 times more expensive then it is to move
it over a circuit switch network that
exists today.
Now that being said doesn't mean that voice
over IP isn't something that we're going to
do and that it isn't important, but it has
certain applications. It's just not voice
over the public Internet.
I'm going to talk about a business
customers today. This is a typical
business customer that we have out there
today. He has a switched voice network
with just a virtual private switched voice
network, which we call VNET, and he has a
data network. That data network could be a
frame relay network, could be an ATM
network, could be an IP network, a
UU-secure or a business class IP network
that he uses to move data around.
Now, beginning in the second quarter of
this year we started with a couple of
customers to trial a new service. We
installed an enterprise gateway and this
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<PAGE>
works in conjunction with the customers
voice network and its data network. The
enterprise gateway is a piece of customer
premise equipment that works with the PBX,
it could be located inside the PBX, that
converts voice into IP packets. It takes
those IP packets and moves them over to the
customer's data network and moves them to
all of his own net locations where he has a
data network. So if you're calling and
you're on net, then we would route that
traffic over the data network to the end
user location on the network. If the
customer's location is off of his data
network, then the calls would be routed
over the VNET just as they are today.
Now, that was phase one and that worked
pretty good. Then we said, "Well, we need
to make this more efficient and easier to
manage," so we installed a SIP server -
Session Initiated Protocol server - that
would interface with the customer's data
network over the Internet and would allow
us to manage that service. So before we
put this in, every time the customer added
a new location, you would have to go out
and reprogram each one of these enterprise
gateways. Well, this allowed us to change
the call routing, to change the locations,
add locations, delete locations from a
central location, and it allowed us to
interface into the database the customer's
dialing plan and its call routing database.
This was installed in the third quarter and
is working today.
The third phase of this, which is very
important to the customer, is to interface
the customer's data network now to the
public switch network. So, as you see here
today, on this slide - and this is being
deployed as we speak in the fourth quarter
of this year - there's no longer a line
from the customer's PBX to the long
distance network. Now all of the
customer's long distance traffic is
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<PAGE>
converted to IP, it's moved down to the
data network, it's moved across the data
network, and if it's on Net it carries it
right across the enterprise gateway on the
other end, converts it to voice and it
rings on their phone. If it's off Net,
you're calling home, you're calling your
brother, then it takes the voice
information, converts it to data, moves it
across the data network to the closest
point to the terminating call and
relaunches that call into the public switch
network as a local call. This gives you
the ability for calling on Net, calling off
Net through the public switch network, and
allows you to have calling coming in from
the public switch network which then is
moved across your data network.
Now fourth, and this is where you really
start seeing why you wouldn't want to start
moving some voice over IP, and that's
because now we've introduced two new
elements, and this occurs in the first
quarter of next year. First is, we are
introducing the ability to handle SIP
phones, Internet phones. And you've read
this in the press, the Session Initiated
Protocol (SIP) phone, the Internet phone,
which I think is easy to visualize, it's
kind of a combination of a browser, a
miniature PC browser, and a telephone. And
from that you can call using standard
telephone number or you can call using your
e-mail address. So if you wanted to call
me and you have a SIP phone, you can put
[email protected] and it will find me
in the network and process that call coming
to me.
Now that SIP phone supports a number of
features in the network. It has dynamic
registration. So when you enter the
network, the network now knows where you
are. It knows if you're in the office in
Dallas or you're in the office in
Washington, DC., or where you happen to be.
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<PAGE>
That allows it to then do "call find me"
call routing. So when you're called, it
doesn't matter where you are, the call
finds you.
It allows you to do call forwarding and
call screening. So you can look at what's
coming in and you can also block. You can
block URL's if you don't want to receive
calls from them, you can block numbers that
you don't want to receive calls from.
Then we've also introduced the Feature
Server. The Feature Server really does a
couple of things for us. One, it handles
voice mail. So now as an enterprise, you
have a global, unified voice mail system.
It's something that's been hard to come by
with all the disparate voice mail systems
that are out there today. And it supports
unified messaging. Now unified messaging
is receiving any kind of message in any
kind of format. Therefore, if you're
calling in and you're on a cell phone,
you're on a telephone and you want to take
your e-mail, the e-mail is converted to
voice and played out to you over the phone.
If you want to take your voice mails, and
you happen to be at your PC or with your
PDA, the voice mail is converted into text
and presented to you on that device in a
textual format. All this is taken care of
in the network.
In this space what you're seeing up there,
we've developed our own in-house software
on a SIP server. Other than that,
everything up there again is off the shelf,
commercially available, but we provide the
expertise and the management in being able
to do this. We are the first movers in
this area. We will be the first to bring
this to market and this is scaleable. This
is not a hobby shop, it's not a one-off,
this will support hundreds of thousands of
customers moving over to this type of
network.
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Now, in summary, our network capital
spending is to support high growth, value
added generation d products. The Network
Growth Plan is cost effective and will
scale to meet the expected growth. You've
seen us talk about cost savings of 40%,
50%, 75% and 90%, depending on the
applications. Our Internet backbone
continues to increase in scale and in
reach, geographically. The capital
investment for Web hosting is shifting from
infrastructure, bricks and mortar, to
managed hosting, routers, servers, storage
devices, software to support that. And,
WorldCom's network is second to none in
quality or in cost efficiency. We are a
large, large buyer of communications
equipment. I will tell you that nobody
gets better discounts then WorldCom on
anything we buy. And I will stack up our
cost efficiency on any unit with any other
company that exists out there. We have the
best cost structure in the industry.
Thank you.
Now, I'd like to introduce Bob Hartnett,
our President of Global Sales.
Bob Hartnett Thank you, Ron. Good morning, everybody.
It's my pleasure to speak to you today
about how WorldCom goes to market with our
sales organizations and we'll also take a
quick look at some of our generation d
strategies and how we're deploying our
assets and our sales team to take advantage
of this significant growth opportunity.
As Brian mentioned earlier, our growth has
traditionally come from three sources:
acquisitions, products and geographic
expansion. In the sales channels, our
approach has been to leverage all three of
these opportunities to take advantage of
the growth initiatives within them. So my
objective today is to show you how we're
positioned in each of our sales channels to
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<PAGE>
capitalize on those opportunities,
opportunities WorldCom has played a
significant part in creating, and also in
rolling out our new enhanced services and
continuing to grow in new countries.
In addition, I'll show you how we're
focused on increasing our growth in the
core products, in data, Internet and
international, while at the same time
investing our training and resources to get
our teams up to speed in the new
initiatives that Brian spoke to you about
earlier.
I'll also show you how we're continuing to
grow our teams geographically and our
global accounts sales program in Europe,
Asia and Latin America. But first, I'd
like to give you an overview of each of our
sales units.
We use the same customer-facing sales team
approach around the world. And as you can
see on the chart, we have a small and
medium enterprise group in the US and we
have a parallel group in Liam Strong's
organization internationally. The next
tier up, we have a corporate account team
to work the higher end with more national,
international, and more complex customers
with higher end services. And at the top
of the chart, we have our global account
program, which we run as one seamless team
around the world to support the
multi-national customers. And they are
truly the customers looking to build
networks between continents, within
continents and countries to reach their
customers, their employees, their vendors
and to reach and communicate in some of the
new e-business initiatives you've heard
about earlier.
So, let me give you a closer look on our US
sales teams, our global account teams, and
our terrific UUNET sales organization.
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<PAGE>
Then following me, Liam Strong will give
you an idea of those same channels and
their performance internationally.
First, the small and medium enterprise and
corporate account channel in the United
States is over 1,800 quota bearing sales
representatives strong. Again, their
focused in a territory environment in the
small and medium enterprises, while the
corporate teams are focused on a listed set
of accounts with dedicated account team
support. Both sales organizations can sell
the full range of WorldCom's products and
services to their customers.
And at WorldCom, we like to use the
products and services we sell to our
customers to further support the efforts of
our sales team. So to that end, our entire
sales organization is armed with
state-of-the-art, latest generation laptop
and sales automation tools that empower
them to improve their areas in prospecting
and customer identification, has pricing
and proposal tools on-line, contact
generation to keep in contact in letter and
e-mail into their customers. Probably most
importantly is order input -- to speed the
order entry and delivery process for our
customers. These enable all of our
representatives to improve their sales
performance and productivity by using
Web-based systems to generate customer
relationships and orders processed.
Our global account teams lead the industry.
With the assets of WorldCom around the
world and our terrific data and Internet
resources, we've listed 1,000
multi-national accounts, headquartered
worldwide, and we have dedicated over 850
sales representatives to focus specifically
on this list of very large, very complex
application customers. These
representatives are typically located in
their customer's headquarter city, but work
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with the WorldCom global account team
around the world to focus on initiatives
and sales opportunities for their customers
in any country globally.
And the one network, one contract, one team
and one company approach is literally
unmatched in the industry. In fact, I know
you'll be in a few of these meetings with
some of our competitors, and I'd like you
to match up our global sales program to
really anybody else out there in the
industry. It was designed on customer
feedback for what they're looking in their
global service applications. One company,
around the globe, with WorldCom sales and
support representatives on the ground to
service their network needs, their support,
their add-on services, and then taking them
into IP based services, WorldCom leads in
the network, in the reach and the one
company approach, and certainly in our
ability to deliver solutions over
Internet-based product lines.
Again, it's a full range of end-to-end
solutions and a significant growth
opportunity for us from our large US-based
sales teams. In Europe and Asia, we put
teams in place. In fact, we've added to
that team over four-fold in the last year
to line up with our teams around the world
in creating that customer representation.
We've also implemented a sales automation
program for global accounts with the same
state-of-the-art laptop benefits I spoke
about earlier. But most important for
global accounts, it gives us a global view
of each customer, with the status of each
of their network activities, projects in
place, and sales opportunities so our reps
in Europe can coordinate with Latin
America, the US and Asia Pac on each
customer with each activity that they're
working on.
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That's a brief overview of our go-to-market
sales channels in the United States and our
global account program worldwide for
WorldCom. Let me give you a brief overview
of one of our key assets in the company and
that's UUNET. UUNET is the recognized
global Internet leader. As you heard
earlier, over 2,500 POP's on five
continents. And with UUNET we have an
additional 1,000 quota bearing reps solely
focused on Internet and hosting
opportunities. These specialized
representatives, literally the best in the
world, work with all of our WorldCom sales
teams in supporting the customer efforts
and initiatives for our core services, our
Internet sales and the newer initiatives
that Brian spoke about earlier.
This unified sales approach really
leverages UUNET's Internet expertise and
the large customer base WorldCom has in
each of our sales organizations. It allows
us to provide a continuum of services -
frame, ATM into IP-based services - to give
our customers end-to-end service and
support, and the sales expertise they
require in each of these areas. And it
also speeds the transition on embracing and
implementing the new generation d products,
for our sales team and for our customers
around the globe.
And just as we embrace these products, we
continue our focus on our core data and
Internet initiatives and our international
sales growth. In fact today in global
accounts, frame relay, ATM, Private Line
and Dedicated Internet represent over 80%
of our new acquisition sales. If you look
back a few years ago, that would have been
about 50/50, but 80% and growing are data
initiatives for our largest customers
around the world. And as our customers
continue to move more towards a digital
world, we have the industry-leading
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products and services to support their
requirements.
We're also seeing a growing trend among
these large multi-national corporations, to
not only purchase data and Internet
network, but to outsource the management of
those networks to companies like WorldCom.
At WorldCom we have a global solutions
organization that has over $1 billion in
revenue today, with this type of managed
and professional services.
Global services extends our capabilities to
support customer networks beyond the
network and into the management of their
equipment, of their worldwide reach, and in
many cases their personnel, to provide a
turnkey managed services for their
offering. And due to the growth in this
area, we're continuing to increase our
support in Europe and Asia Pac to take
advantage of these opportunities for
customers' headquartered around the world.
In addition, at the same time we're focused
on our core initiatives, we are investing
in the new major initiatives that Brian
spoke about. For example, in Hosting, we
already have 150 fully trained up to speed
sales specialists to support all of our
sales channels around the world for the
hosting opportunities. In VPN, we have
over 350 trained sales experts to support
the over 5,000 sales personnel selling
today business opportunities.
Another natural extension for our sales
force and our expertise is moving into the
Web based call centers, translating our
expertise in call centers as a company, and
turning that into new applications for
e-business, e-commerce, for our customers,
and providing that specialty sales support
from our field-based teams.
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In order to do this, training is a critical
component today, and going forward. And
that's why we've implemented a web-based
training program, with today over 30
courses tied to our core and our generation
d initiatives. We have programs such as
routing protocols, security concepts, IP
VPN, and this year, by the end of this
year, our representatives will have
completed over 76,000 web-based courses,
passed the certification testing, and move
on to the next generation of courses we're
providing. We'll have over 60 courses on
this web-based system through the first
half of next year.
As I mentioned earlier, we continue to grow
our core and new initiatives around the
world. We'll continue to expand our
applications as we open new markets, and
add in each of our customer sales channels.
And even in countries today, where our
company owned and operated network doesn't
reach, we still have our relationships with
the PTT to provide services to over 200
countries worldwide. Literally, everywhere
our customers are, we provide end to end
services and total contract management for
our global offering. As we expand our new
countries and open them quickly, we lead
with IP to get in very quickly, and launch
our sales teams, and then add in the full
complement of our data services.
I hope I've given you a good overview of
WorldCom's United States sales channels,
our global account program, and how we've
unified our sales approach with UUNET.
We're not just planning this strategy-this
is in place, being executed today. Our
sales teams are very customer focused and
customer defined channels, and they're
trained and continually updated on our core
and enhanced service offering. We're
aggressively moving forward to embrace and
sell quickly our hosting, VPN and Web
centered product lines under generation d.
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Our approach is defined by our customers,
our product support, and we're located
around the world to sell these to them in
each of our customer organizations.
And now to tell you a little more about our
sales teams and our growth initiatives
internationally, let me introduce to you
the president of international, Liam
Strong.
Liam Strong Good morning. WorldCom is now a major
player in the high growth international
market. We have operating companies in 23
countries, in every major economy, in
Europe, Asia and Latin America, our own
facilities, our own feet on the street,
playing their part in providing the end to
end global service that is the essence of
the WorldCom proposition.
This morning I can tell you we're on
schedule in executing our international
strategy. I want to share with you how
we're moving into the second phase of
European development, to the way in which
Europe is evolving as a fully deregulated
market. In Asia, I'll explain how we're
implementing a somewhat different market
strategy from Europe, since that region is
deregulating country by country, with
different time scales.
Overall, our main priority in international
is to continue to get closer to our
customers, delivering more advanced
products, and evolving our organization and
its capabilities.
Europe deregulated in January '98, and
WorldCom's strategy for the 98-2000 period
has been very clear. We have a
comprehensive set of broadband assets ready
for service in the first half of '98 to
support a Pan-European sales force, and to
build a large customer base by selling end
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to end voice data and Internet services.
We have executed that strategy.
By the end of '99, WorldCom in Europe had
built a backbone network connecting all
European countries. We had built 20 major
city networks-we now have 26. We had built
four international networks in the UK,
France, Germany and Belgium, and we built
comprehensive data networks, 38 ATM nodes,
and 22 ATM nodes.
By Q4 2000, we will have deployed 845 sales
people across Europe. We have linked
almost 15,000 buildings to our network, and
most importantly, we have 150,000
customers. Of these customers, almost
two-thirds are small businesses, companies
with less than 100 employees. These
represent about 70% of Europe's telecom
spend, at good margins. We started
building a dedicated sales and marketing
unit for this sector in the second half of
1999. We now have 450 sales people, and we
are continuing to expand. We are adding
between 17,000 and 20,000 customer support
which represents a conversion rate of
appointments to orders 33%. We believe
that in order to have a substantial and
sustainable telecom business
internationally, we must build share in
each national small business sector.
Europe is now moving into the first stage
of maturity as a fully deregulated market.
It's no longer sufficient to offer an
alternative broad band network with
international connectivity. Many players
are now building out a backbone, metro or
access network. It's not yet clear how
many of these players have the financial
staying power to build comprehensive
European coverage. In the last ten months,
we certainly have seen a very visible
slowing down in investment in builds. It's
unlikely that many will rival WorldCom's
already installed Pan-European reach.
However, it is clear that city by city,
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region by region, there are going to be a
number of competitors offering simple
bandwidth at very low prices.
To meet this challenge we are constantly
upgrading our products and services. We
still at this stage of deregulation have a
series of enhanced voice services to launch
across Europe in 2001. Advanced Toll Free
is our feature rich global call center
product, with a consistent look and feel
across Europe and the USA. We will be the
first company in Europe to offer a full
feature set in national as well as
international markets. This is a $3
billion market in Europe currently, and
it's a big revenue opportunity for us in
2001.
Carrier pre-select and number portability,
are services that the US takes for granted,
but which European deregulation only allows
us to offer in most countries for the first
time in 2001. Those products are important
tools in taking small business customers
away from the incumbent BTT. In 2001,
we're also working hand in glove with Brian
Brewer and Bob Hartnett to launch the
majors across their international network.
IP VPN from Q1 onwards, initially for the
corporate market, and then progressively
into the small business sector. In Europe,
we expect the IP VPN market to be circa $2
billion in 2004, which would put it at
about 30% of the total world markets which
Brian indicated earlier.
We project the European hosting market to
be worth around $5 billion in 2004, and we
will launch the US hosting product
progressively between Q 1 and Q3. And as
I've already mentioned, the traditional
European call center market is currently
worth $3 billion, and we will launch Web
centers into this market from Q3, 2001.
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In 2001, we will continue to expand into
the small business sector. Our next target
is very small companies, with no more than
five employees. Now this sector of small
business generates about 40% of European
telecom's revenue, and it's not cost
effective to contact these customers
through the direct sales organization. So,
we're testing a Web based customer
acquisition approach, and our Web sales
portal launches in the first half of 2001.
And finally, we started around the middle
of 1999 to move the European organization
from a country based structure, ripe for
the first phase of deregulation, to a
Pan-European center. We complete this
shift in the last quarter of this year.
The new structure, allowing sales and
marketing with our target customer
segments, and organizes service delivery
and network management on a Pan-European
basis, for scaleablity and cost efficiency.
The European structure now mirrors
precisely the US.
It would be unrealistic to leave our
business in Europe without touching on the
challenges we face in what is turning out
to be an extremely rapidly evolving market.
Challenges we will no doubt also come to as
Asia reaches this state of deregulation.
Our overriding objective in Europe is to
increase our share in data and Internet.
And our biggest issue currently is finding
and training staff capable of managing the
more advanced enterprise products we plan
to launch in 2001. Competition for
trained, data capable sales marketing and
service staff is intense. We interview
about 200 potential candidates every week,
through our own dedicated European
recruitment center, which uses a Web based
virtual recruitment process so we're able
to interview across Europe in a range of
languages.
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Secondly, we see the pressure on pricing
pretty intense in the voice sector in 2000,
shifting to data in 2001. A lot of
bandwidth financed during the first phase
of deregulation in 1998 hits the market in
2001. And this will take, we think, about
a year to work through the marketplace, and
undoubtedly, it will add to pressure on
pricing in 2001.
Through most of this year, as Scott
indicated in his presentation, the strong
dollar, the sterling and euro exchange
rate, has meant that we've had to work
quite a bit harder to maintain our
sequential growth in dollars quarter over
quarter. The impact of this continues, in
fact somewhat accelerating adverse exchange
rate will be most marked in the last
quarter of this year.
Finally, the high level of growth we've had
in Europe inevitably has put a lot of
pressure on our back office systems. We
are now seeing in Europe that the quality
of customer service is becoming a
competitive differentiator. And while we
just got a leading industry award from
customers in the UK for our quality of
service, it is a constant effort to achieve
end to end systems that put our people in
control for the service, quality and cost.
It's no accident that apart from our
ongoing investment in network capacity, the
only two areas where we will significantly
increase CAPEX internationally in 2001 will
be in product development and business mix
improvement.
If we now turn to Asia, we find a region
some years behind Europe in terms of
deregulation. Australia, Japan and
Singapore fully deregulated; Hong Kong,
Taiwan and Korea expected to fully
deregulate in 2001. But for the other
major markets-India, China, Thailand,
Indonesia and the Philippines, the
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timetable is not yet clear.
Notwithstanding that, market growth in Asia
continues to accelerate, and our strategy
is to expand our network and services
geographically behind deregulation. We
will not invest where the regulatory
timetable is unclear.
As each market does deregulate, we can
offer progressively, Internet access and
international data, followed by
international voice and finally,
international services. In Europe, which
liberalized in one go, all at one time,
across every country, we immediately, in
'97-98, built a high speed regional
backbone and city networks. In Asia, our
infrastructure investment is guided by the
state of deregulation, country by country.
The key opportunities we are investing in
currently are first of all data networks,
to support Pan-Asian traffic, and 72% of
all traffic stays within the region.
Internet access services, since the number
of Asian users and computers connected to
the Web is growing exponentially across the
region, and data centers, to serve the
booming Internet sector.
Unlike Europe, where we built our own
cable, and since there were no deregulated
systems available, in Asia we can buy
regional cable capacity to support the
intra-regional traffic. And we also have a
strong position on the new cables linking
Asia to the US, with the US-Japan, US-China
and US-Australia cables coming into service
in 2001.
This strategy is supporting strong growth.
Here's a snapshot of our position today in
the region. We operate in 10 countries, a
net increase of five since the beginning of
2000. We have the most Frame and ATM
nodes of any carrier, both in the region or
externally; in Asia Pacific, 34 in total.
We have city networks where regulation
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permits, currently in Australia and Japan.
Singapore since April, 2000, also permits
facilities based carriers, and we are
building there currently. Singapore is a
good example of our ability to be first
into a country just as soon as regulation
permits. We offered services on April
first, which was the first day of
deregulation.
As of today in Asia, we have 237 sales
people in the region. Of courcse, Bob's
global team is in addition to that.
Average age is 28, highly educated, and I
can honestly say the most aggressive sales
team that I've ever had the privilege to
work with. The best indication of that
ability is the fact that our customer base
in Asia measure is doubling every 14 weeks.
Asia is a terrific opportunity for
WorldCom, and we believe we are very well
placed among the new entrants to exploit
it.
In summary, we are on track to deliver
WorldCom's growth plan internationally. In
Europe in 2000, we're laying the
foundations for the next stage of growth,
getting ever closer to our customers, and
offering enhanced products and services.
In Asia we're investing judiciously and
carefully in data and Internet capability.
Already off of a small base, we're
experiencing explosive growth, and we see
that trend continuing for some time to
come.
And now it's my pleasure to introduce Wayne
Huyard.
Wayne Huyard Good morning. As this is my first time
before you representing the new MCI, my
intention today is to explain our structure
and purpose, our goals and objectives, our
opportunities and risks, and our key
strategies. Let me tell you straight away
what I'm here to say.
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It's this: of all the things that we do at
MCI, now and in the future, if it makes
money we'll keep doing it, and if it
doesn't and it can't, we won't. And as we
look beyond what we already do, we'll
proceed and invest in a low risk,
calculated fashion to defend, extend and
expand cash flow over time. Today begins a
future of hard work, and a single direction
toward a clearly defined purpose: to
generate cash to support dividends and
retire debt. And to this we'll apply all
of our capital, both human and financial.
Cash inflows will be generated by an
orchestrated effort to create and keep high
yield customers. Cash outflows will go to
dividends and debt.
Our first objective is to maintain cash
flow. Every strategy and tactic will serve
it. We'll start by optimizing every
resource to maximize operating margins.
We'll rank every product, every program,
every customer, and every customer cohort,
and we'll cut or prune as appropriate. And
established businesses will drive costs
down, and we'll stabilize overall and per
customer margins by managing pricing. Here
we'll establish and maintain rates that are
rational and healthy and beneficial for
all.
The more challenging objective, frankly,
will be to extend those cash flows
indefinitely. Scale and technology driven
efficiencies will be an immediate and
ongoing focus, and calculated steps will be
taken to expand product scope, to capture a
greater share of the consumer wallet and
the business budget. And we'll make debt
repayment a top priority.
There are essentially five business units
that will underpin the new MCI. They are
mass markets, wholesale, Skytel, Internet
dial and alternate channels. Mass Markets
is essentially the consumer and small
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business long distance operation from the
original MCI. It's approximately $9
billion in annual revenue, 23 million
customer relationships, a strong sales and
marketing capability, which includes
operations in 25 call centers across the
country. And it's the organization that
has brought consumers brands, such as
Friends and Family, 1-800 Collect, 5 Cent
Sundays, and 10-10-220.
Wholesale is over $4.5 billion in annual
revenue, with approximately 1,000 customers
using both switched voice and data
services. Internet dial is approximately
$1.5 billion a year, and IP dial services
provided to about 100 customers on a
private label basis. Skytel is a premiere
messaging company, with about $600 million
a year in revenue, with a base of about 1.5
million customers, including 70% of the
Fortune 500. Alternate channels is $1
billion in annual revenue, and includes
sales agents and affiliates, small business
direct sales, and pre-paid calling cards.
All five businesses operate in challenging
markets, yet opportunity exists.
Mass markets holds the dominate revenue
position in MCI. Third quarter revenue for
mass markets is approximately $2.2 billion,
representing nearly half the revenue for
MCI, with EBITDA of $750 million of the
$1.1 million in total third quarter EBITDA.
And wholesale is next largest, with $1.2
billion in third quarter revenue,
generating $200 million in third quarter
EBITDA.
Given it's size and contribution, Mass
Markets serves as a cornerstone for the new
business enterprise, and very much
determines the financial performance of
MCI. It's marketing strength lies in
opportunistic, creative, fast execution.
Mass Markets has a rich history of
expanding margins, with 25% expansion in
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per customer profitability since 1997,
based on operating efficiencies, success in
the intra lata market, and increased
customer size through partnership programs.
And for the past three years, Mass Markets
has grown revenue far faster than all
competitors combined.
While AT&T's challenges in the consumer
long distance market are well documented,
and RBOCs are beginning to gain entry into
this market, we'll take more than one full
point of revenue market share in the year
2000, ending with over 20% revenue share in
long distance. At $8 billion in consumer
long distance, we're still a relatively
small player in this $75 billion consumer
wire line market. And we believe it
represents opportunity to exploit our
existing customer relationships, and
leverage our sales and marketing strength,
while still achieving the overall MCI
objective of maximizing cash.
Our strategies for long distance -- to
stabilize rates -- which we have done by
launching a new portfolio of products on
August 1 that will stabilize rates going
forward. New entrants are also pricing
rationally, and furthermore, the reduction
of access rates for long distance have
found their way to consumers, and will soon
cease to impact the market pricing as they
have.
In addition to pricing, in a rational way,
we'll work to diversify revenues in the
future as we have in the past, with
services like 1-800-Collect and 10-10-220.
And through a continued focus on
partnership programs, which now account for
50% of all consumer minutes. And despite a
shrinking long distance market, it's our
goal to increase market share, if we can do
so while achieving our primary charter, our
primary purpose.
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Our strategy in local, to defend and extend
profit. It's that simple. We'll invest in
building the state entry capabilities, and
where it's profitable, we'll enter. Where
it's not, we'll use it only as necessary to
optimize overall cash and margins in that
space. It's very much our desire to
participate in local, but we'll only do so
where that serves our charter, so we're
urging the FCC to create a vibrant,
competitive consumer local market, by
insuring first and foremost wholesale
pricing that is just and reasonable.
Where we are participating in local today,
we're winning. Let's just take a quick
look at New York. We entered New York in
April of 1999 utilizing UNEP, and Verizon
entered 8 months later, in January of this
year. Not only have we been able to pick
up 420,000 local customers, representing 7%
market share in Verizon territory, we were
able to grow net long distance customers by
300,000 on the same pace that we gained net
long distance customers prior to Verizon's
entry. Today, a full 30% of our New York
customers use us for both local and long
distance service.
While I don't plan to speak to other
organizations in MCI at any level of detail
today, I do wish to share the general
strategy for all of them.
Put simply, cash flow is king, and all of
our energy will be applied to defending,
expanding and extending it.
We'll be quick to restructure, both on
profitable accounts and channels. We'll
recognize pricing opportunities wherever
they exist, and of course, we'll continue
to pursue operating synergies, and overall
efficiencies.
To be clear, and I hoped have been, our
priority is cash. We'll be guided by that
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single, clearly defined purpose. Now I'd
like to invite Bernie and Scott up to the
stage for questions and answers.
Question Today you've spoken a lot about Web hosting
and the importance of managed hosting to
your business and that Digex will play a
large role in that. My question is, if the
Intermedia transaction is postponed, will
you still hold your shareholder vote?
Bernie Ebbers Mike Salsbury - that's our general counsel
and can answer that more accurately than I
can.
Michael Salsbury I'm not sure why we would be postponing the
transaction. We don't see any hangups in
the regulatory approval process.
Question In terms of the Digex shareholders lawsuit
right now to get a preliminary injunction
to be held November 29. Obviously that
could hold up this whole process.
Obviously I know your view right now is
that that will not hold up the process, but
if it were, for whatever case, to hold up
this process, would you still have the
shareholder vote?
Bernie Ebbers Mike, we will address that issue when it
comes to the point where we have to. We
certainly don't expect that to occur.
Question You talked in the beginning about the
potential at a later date of depending on
the regulatory environment, and how these
things trade, but I'm curious if you can
kind of lay that out, how that would look,
because I guess from my perspective, it
seems like it would be rather difficult to
do a physical spin off, especially on the
wholesale side. Maybe the consumer side
might work with the right kind of transfer
pricing, but can you just elaborate on the
logistics and the regulatory issues of
doing a spin at a later date?
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Bernie Ebbers Well, there are a couple of regulatory
issues that have to be addressed. One is
that the PICC has to be changed. That's a
significant issue, because I guess we could
get a universal slamming complaint or
something like this. That's one of the
issues. There are some state issues with
respect to regulatory and so on, but those
are issues that, if we decide we end up
wanting to spin off, which we certainly
haven't completely resolved that yet, we'll
address over time.
But I do not see any difference in the spin
out of wholesale as opposed to consumer.
They are, together, the business units that
are being put in MCI, are together within
WorldCom completely separate operating
units. They have, for years, had their own
P&L statement and so on. The only thing
that could affect wholesale would be the
price at which they buy service from
WorldCom, and by virtue of the nature of
trackers, you have to have some independent
committee referee that so that both
shareholders' interests are looked after.
But I certainly don't see that as a
significant issue going forward.
In fact, if you did completely spin out MCI
and it had wholesale in it, wholesale may
negotiate a lower price with somebody else,
if that were the case, over a period of
time. So you can't make those contracts
indefinite, because you have to look out
for the interests of the shareholders. But
I don't see that at all as an issue with
respect to spin out.
Question Let's talk about pricing. You have slashed
these numbers 32 cents. I haven't seen a
price cut like that since last Wednesday.
How you parse that out between the
different units, and what is it exactly
that's going on in pricing, and what's your
strategy for responding?
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Scott Sullivan The significant thing that I would say,
Dan, is in May of 1999 we changed our major
and national new acquisition rate by 25%.
That drove a lot of revenue in the third
and fourth quarter of last year, and it
didn't impact the income statement because
we had on-going synergies from MCI. But
what you're seeing this year, in the fourth
quarter, and will continue into the first
quarter, but will alleviate in the second
quarter, is the tail end of that
acquisition pricing. In other words, where
the embedded base of business in majors and
nationals becomes priced similar to what
your new acquisition rate is in the
marketplace.
We have seen no new change in pricing in
that area since May of 1999, but it's been
very painful going through the last few
quarters of getting your embedded base down
to that rate. On consumer, it's driven by
MCI every day. More that 50% of the dial
one base has moved to that, and it's been
pretty dramatic in the third and fourth
quarter.
Earlier in the year, in the first and
second quarter, we were able to keep these
impacts from affecting the bottom line
because we were still at the point of $100
million sequential increase in cost savings
on MCI. In the third quarter, we had more
than $170 million savings on access.
Well, what's happening in the fourth
quarter is you're really starting to get
down to where your dial-one base is
significantly on this MCI side - every day
rate, and that is impacting profitability.
Question Does that subside next year? Your guidance
on the consumer side actually shows a
slight improvement in the rate of change.
Scott Sullivan That pricing point that is already in the
marketplace right now will continue to
drive down EBITDA in 2001, as we showed on
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the consumer slide. There are some actions
that Wayne can take on the yield side that
could be more positive. But next year is
going to be driven by the price points that
were set in the marketplace this year on
consumer. On the wholesale side, it's a
lot easier to fix. That's account by
account basis. It's a lot easier to manage
now that it's in the MCI business.
We were in a situation where we could no
longer manage in that business revenue
growth, EBITDA growth and net income, and
it makes sense, because it is a mature
business, to run it from the cash
perspective.
Question You've given us the earnings growth outlook
for the new WorldCom. What's the capital
spending outlook?
Scott Sullivan The capital spending outlook for next
year-it's about $500 million at the MCI
tracker level, and the bulk of that is
switching and consumer expenses. When we
look at 2001 in total, including that $500
million, we're going to be about $8.2
billion at the WorldCom level, and $500
million at the MCI level. And about $3
billion in the data area, which is more
than we spent this year. That will be
about $2.8 billion this year.
Less in the local area; that will be about
$2 billion next year, which this year will
come in around $2.7 billion. International
will be about a couple hundred million
less, just because we have achieved most of
the network build that we're doing over
there. So it will be in the area of $1.5
billion. Then Internet, I would expect to
be about the same as this year, with all
the initiatives that John talked about. It
was $2.3 billion this year, and it will run
about that next year.
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It is based, at the end of the day, on mix
of revenue, but there are certain areas
next year that we will not be spending on
that we did this year. We are effectively
ahead of $9 billion when we expected to be
$8 to $9 billion this year in collocation
and modem deployment, and having duplicate
spending on MIAP switches, the soft
switches which Ron talked about, the same
time that we continue to deploy class 5
local switches, is impacting the year.
Next year, as Ron mentioned, we'll start to
get the benefit of MIAP and not having to
spend on 5-5 local switches to the extent
that we have this year, and it will start
to take the pressure off that number.
So we're going to have plenty of capital
for growth. We're not cutting back in any
area that's going to affect growth. But
there's things like undersea cable
facilities, where on short term contracts,
it makes more sense to buy that rather than
build that. We're not going to put anyone
into business with any long term contracts.
There's some very good, short term flat
rates where it's more cost effective to buy
it from a vendor.
Question I'm a little confused about the handling of
the debt in the new entity. Am I to
understand that the debt is going to stay
at the consolidated parent company to try
to maintain your credit quality, and then
the $6 billion will be inter-company loan
to MCI? And then, why the focus on
repaying debt at MCI when it appears that
the other side of the house is going to be
borrowing to fund future growth? Do I
understand that correctly?
Bernie Ebbers Yes, you do.
Question So the overall debt position of the
consolidated entities, you will be adding
debt to fund future growth?
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Bernie Ebbers As a matter of principle, by and large,
we're going to be spending our cash flow in
the data division, and paying down
allocated debt in the MCI division.
Question Can you talk about the absolute growth in
data tracking, and how it relates to
revenues?
Scott Sullivan Data growth today is in the range of 23 to
26%. We have a phenomenal, if you look at
it, mix of data revenue. About one third
of it is local; one third is frame and ATM;
and a little bit less than 20% is private
line. There's private line pressures on
major city routes-New York to Los Angeles;
Atlanta to New York, those types of routes.
So that is being impacted. But one of the
things that you have to remember is we have
a very far reaching network. Less than 50%
of our private lines run on major city
networks. We get a lot of revenue growth
in the San Antonios, the Dallas, off of the
major cities. So you're getting some
pressure that is continuing on the private
line side on the major city routes.
Question I guess my question really is, is there any
slow down in the overall industry?
Scott Sullivan If you're talking Internet specific-I was
talking data component excluding IP-no,
that number tends to bounce around. It's a
very high growth item for us, so it can
bounce anywhere from 40 to 50 to 70. It
was 59% in the fourth quarter, 53% in this
last quarter. But we expect to see it in
the 40 to 50 range, and higher towards that
range. There's no slow down in that area.
Bernie Ebbers That's dedicated Internet.
Scott Sullivan Yes, on the dial side, there has been slow
down, pricing and everything that we've
gone through, and it grew 5% in the
quarter.
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Question Your new guidance takes $0.35 out of
WorldCom tracker earnings for investment in
growth. I'm not exactly clear on what
you're spending on here that you had not
intended to in your original budgeting.
Scott Sullivan It's a combination of two things. You have
revenue in the fourth quarter, consolidated
company that is projected to be in the 7 to
9% area, versus being in the 11 to 12%
area. At the same time, you have no slow
down in expenses towards the growth area.
You have a pick up significantly in the
area of generation d: product marketing
costs, customer care costs, information
costs, product development. That's $0.04
right there of additional spending in the
fourth quarter.
In addition to that, MMDS is diluting us
more than what we anticipated, and that's
$0.02 in the fourth quarter. And we're
being impacted by the environment that
we're in today - cash versus retention - in
terms of cash retention vehicles is
impacting the fourth quarter, will impact
next year, and that's about $0.01 to $0.02.
And the same goes for health and welfare
benefits, where we were scheduled to make a
reduction this year, but we're not going to
do it based upon the rest of the employee
benefit package.
Question This summer you realigned your sales force
to eliminate all of the channel conflicts
between UUNET, MFS and WorldCom. Can you
elaborate on how that process is going and
whether or not it's increased sales force
and/or customer churn at all?
Bob Hartnett You are correct, we aligned UUNET with our
mainstream sales organization. But keeping
their focus, that was 1,000 reps that went
through, that had the pure IP, dedicated
IP, hosting, VPN experience. And it ties
back to what John Sidgmore said about a lot
of the growth historically has been on pure
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Internet service, application service,
providers, dot-coms. With the advent of
virtual private networking, we're seeing
much more commercial applications.
What we're doing now, I called it a unified
sales approach, is leveraging WorldCom's
feet on the street in every customer
channel around the globe, and the vertical
focus on IP services, both on dedicated
Internet and in the advanced services
through those accounts.
So in global accounts, that organization
has been in place with teams for the last
couple of years, because that's how those
customers want to buy, and
organizationally, it's been in place since
June. And then in our small and medium
enterprise in corporate that I talked about
that we have in the US and throughout the
world with Liam, we are lining up those
initiatives right now. So as we launch
into 2001, especially with the new growth
areas, UUNET will provide that expertise in
hosting, VPN and high level network
applications on Internet into the
commercial marketplace. So it's really a
bridge into the commercial marketplace that
was much more of a vertical ISP/ASP and
some Internet access that's moving into a
commercial networking environment.
I think it's going very, very well. The
teams are terrific. I've met with most of
the UUNET teams around the world, and I
think everybody sees the direction because
that's where our customers are going. So I
think it's going very well, and we're in
the final stages right now to line it all
up to enter 2001.
Question Could you just give us a sense of
explicitly your Brazil strategy,
particularly with Embratel. You run
separately these UUNET operations in
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Brazil.. How do you plan to coordinate
that?
Bernie Ebbers Well, let me tell you that we've had some
discussions about that this week. When we
acquired our interest in Embratel we
expected that Embratel would be the basis
for all of our expansion in South America.
And we are going to reestablish that
principle.
Question You talked about the data pricing pressure
in Europe - I was wondering how that looks
in America? Number Two, a lot of people
like Genuity, Level 3, Qwest, say your
network is yesterday's network.
Bernie Ebbers Ron made it very clear about the quality of
our network versus the claims of others.
Ron Beaumont Remember that we are one of the largest
networks in the world. Therefore, we have
the buying power second to none. And with
all the things I talked about we're
installing, the hyper and the new
technology and soft switches, and
multi-services switches, larger routers,
OC-192 backbone. But when all that is
occurring, we're pulling the old equipment
out of the network. So we turn that
equipment over relatively quickly, so our
network is state of the art throughout the
network. It's just that we have to do a
little more work than a Level Three or
Qwest, because if you don't have customers,
you don't have to groom them up into the
new networks. So it's a lot easier when
you don't have customers to build networks
and run them. But we pull out the old
stuff, put in the new stuff, and we have a
price point that no one can match. Level
3, Qwest do not have the ability to
maintain the unit cost that we have.
Question My question is, is there data pricing
pressure in the US?
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Bernie Ebbers Absolutely.
Question The final question is on your wireless
strategy for larger corporate accounts.
What is that strategy, and does Nextel look
more interesting to you at these prices?
Bernie Ebbers No, it does not. Let me tell you, our
wireless strategy is not changed. We do
not run into corporate accounts asking for
wireless pricing or wireless service in
conjunction with their general RFPs. We
have not run into that. I think it's
evident from what you see happening in the
marketplace, the last integrated wireless
unit into a major company in the United
States has just been separated out in a
combination of wireless operation of SPC
and Bell South. And now there is no major
company in the United States-AT&T is going
to spin their wireless out-that has an
integrated wireless component in their base
business.
And we know that because of our
distribution capabilities that we have
demonstrated-you notice on a lot of the
wireless reports now that the subscribers,
they put "and affiliates," who's selling
the revenue for them or the units for them.
So I'm thankful some of that is us. And we
are growing very rapidly in the resale
business, as happened in this industry.
Resale is given a free competitive
environment, free of FCC intrusion, and
generally works in a very competitive model
and works to our satisfaction over a period
of time. And we expect to continue the way
we have been doing.
Question I was hoping you could talk about pricing a
little more. One of the comments made
during the presentation was that you can't
fight gravity, and one of the reasons we've
seen such terrible negative revisions not
only your earnings, but everyone else's, it
seems, is that pricing keeps falling. Is
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there any structural support mechanism, or
any level at which pricing will stop
falling, or are we going to see perpetual
negative revisions in this industry?
Bernie Ebbers I would suggest that it depends on the
conduct of others, to a large degree. In
the consumer pricing, the MCI side of the
pricing, I think Wayne would support
that-when was the last price increase,
Wayne? August 1st, the first time in the
history of MCI in the consumer business
that our subscription product had an
increase. And we are very pleased that
that has not had a significant detrimental
effect on our productivity.
I think there will become more
rationalizations in this. Brian Brewer
talked about in his presentation how we are
going to approach that on the business
side. What has happened is-I'll give you
an example. This is how crazy it gets
sometimes, but I think people are going to
come to their senses over this period of
time. We bid on an account, on K-Mart, and
we went through the RFP process. And the
RFP process is supposed to have a sense of
integrity to it. You bid. They tell you
that if you win the bid, you're going to
get the business.
We won the bid, fair and square. The CFO
and CIO called us and said, "You have won
the bid." About three days later, we got a
call back from them and said that they had
received a personal phone call from Mr.
Armstrong, who said, "If you'll not leave
us, I'll give you $5 million less than
whatever WorldCom's bid was."
Well, I said, "Well, I won't quit," never
intending to take the business, just trying to figure out what
would happen. And so I said, "I'll go back
and quote $2 million less than him." Now I
have to tell you that when we get there
we're below profitability. Well, they
lowered their bid again, just blindly. And
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I wanted our people to go back again and
lower it again, just so we could set an
example here, but because they had given up
their integrity in the RFP process, we
never would have taken the business. We
would have got the price down and then told
them we don't want the business.
But that's what has happened occasionally
in our industry. And I think that people
that have a little better sense are going
to see that that's a no-win situation for
everybody. And as Brian talked about, our
process for reviewing contracts-we used to
do everything we could to get people to
sign a long term contract, only to have
them not be real meaningful. So we are
just putting 1000% more effort in
judiciously making decisions on every
account that we have under contract, to see
how this thing prevails. But I believe
that we're going to get substantial
stabilization in rates, and potential for
some realistic increases.
Question You mentioned in your remarks that with the
benefit of hindsight, some of the assets
you acquired during the growth phase of
WorldCom are maybe assets you should have
looked to dispose of at some point. As you
look at the two new companies going
forward, do disposal of assets play any
part in your thinking? And conversely, as
you look at the growth objectives you want
each company to achieve, does the
acquisition of assets play any part, or can
those two companies do what you want them
to do effectively with their own internal
resources?
Bernie Ebbers Let me talk first about the MCI side.
There are some assets that have been
assigned to Wayne in the MCI side that we
will have to make judicious decisions
about. Prepaid, for example. I don't know
if we'll stay in that business or not at
this point in time, but we certainly won't
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unless it has a positive cash impact.
That's one of the beautiful things about
operating to generate cash. There may be
little pieces, like the agent business, or
some of the other things like that. What
is the pricing structure going to be longer
term in wholesale, and that type of thing.
But we do not see any of those issues in
what is left in WorldCom.
Now, if you're asking is WorldCom going to
be an acquirer, we would very much like to
look at-you have to keep in mind, we have
to operate within the givens of our
livelihoods here. We cannot make Internet
acquisitions. In the failed merger attempt
with Sprint, the Justice Department
determined within a gnat's hair that we
were close to dominance. So whenever we do
something, we are closely scrutinized as to
whether it increases the backbone. We have
to grow that ourselves from now on.
But there are a significant number of our-I
don't want to name them, because we're
looking at several of them. There are a
significant number of what I'm going to
call generation d enhancers, that may be
small start up companies, may be non-public
companies. Digex is an example, but a much
bigger example than most of them, in that
Digex gave us a 12 to 18 month head start
in a piece of the business we think is
absolutely critical.
When we get to content distribution and
some of these other things, there may very
well be some opportunities that we could
take advantage of, given our stock price
gets a little better, that we could take
advantage of in either smaller companies
that have employee expertise, that can
contribute to our generation d initiatives.
But that would be the focus of what we do.
Question Strange as it sounds, I'd like to
congratulate you for taking the blame for
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what's happened, for drawing the EPS down
to the bottom line, so that can go through
the stock within. And for what you've done
in New York, which I think means there is
actually some future for the MCI piece.
Having said that, last week I took down my
numbers on AT&T to about half in 2001, but
then cut them considerably further in 2002.
We haven't really talked here about 2002
for you guys. As I do my mental arithmetic
on the business section, it looks to me
like between now and 2004, roughly $3
billion in cash flow disappears in the
business segment out of the voice piece and
that means that the rest of the business
has to grow something like 30% to make your
15 to 17% EBITDA targets. If there's
something wrong with my arithmetic, I'd
like to understand it.
Bernie Ebbers The capex that is being spent in MCI today
is within $100 million or $150 million or
so what they already spending. It just
hasn't been attributed to them that way.
Question Right, but I'm not talking about capex.
What I'm talking about is the core new
WorldCom business EBITDA projection growing
15 to 17% between now and 2004. Given what
you said happens to the voice business
means some very high growth rates in a
period when the RBOCs will be entering this
market. And everything I've heard you say
about a stable pricing environment,
especially on the consumer, means that your
cash flow is dying and theirs is protected.
Scott Sullivan I think you're being really harsh with $3
billion on the voice business. I can't
think of a business account that provides
$3 of profit on $7 of revenue. We've got
$7 billion of voice business left in the
new WorldCom, and the margins aren't
anywhere near the margins in the consumer
business, albeit the consumer business is
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declining. But if you got rid of $7
billion, all of voice revenue, you wouldn't
get rid of $3 billion of cash flow. So I
think that's harsh from an assumption of
what will happen on the top line revenue,
especially to the profitability of business
voice. It's real tight in some of Bob's
areas and all the areas that Brian looks
over, in terms of major nationals and
globals and the smaller middle market.
So I think it is very likely that we have
14 to 16 top line growth in the group, and
we are not projecting heroic margin
increases. The business is being driven,
the data and IT, where you have better
margins. Not less margins than in the
voice business. So I think we have been
very diligent in terms of where we have set
out the expectation. If I had to do it all
over again, we didn't want to every single
quarter bring down the revenue expectation.
It's been a frustration for us as much as
for you.
The worst thing that ever happened was in
the third quarter of 1997, we grew at 12%.
And we just grew at 12% in this latest
quarter. But between the third quarter of
1997 and the third quarter of 2000, we went
up to 19%, and everybody loves
acceleration, but a lot of times what goes
up does come down. The 19% revenue growth
in the third quarter of 1998 comprised a
10% increase in voice revenue. That just
wasn't sustainable. And there were some
low quality drivers that drove that voice
revenue, and I think we are taking a
completely reversed action today in terms
of what we're looking at, in terms of
growing the business, and the exposure we
have remaining in the WorldCom unit to the
voice business.
So the attempt here is to reset the table,
not to constantly get back here each
quarter after quarter after quarter. I've
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got to tell you, if we had a crystal ball
and we could have seen it two years ago go
up to 19% and come down to 12%, we would
have been a lot better with guidance in
terms of what we gave you.
Question If you felt that the stock price is
bottoming here, I might expect to see
WorldCom buying back its own shares. Can
you comment on why there hasn't been any
initiative on that front?
Scott Sullivan At this point it's not been something that
we've openly talked to the board about, so
we would talk to them before we said
anything in this meeting. At the same
time, I'll also tell you that we will
balance our credit ratio against anything
that we ever brought to the fore, but I
think that's premature to comment on that.
Question You had four phases for your voiceover IP,
all coming due within about a year. Is
that something where a customer would go
through all four phases, and might not that
be a little difficult?
Ron Beaumont That is not the case. I brought you
through the four phases of the development
of managed voiceover IP. We took two beta
customers through that phasing. When we
get to phase four, which is available in
the first quarter of 2001, that is a fully
developed product. Customers will go in
with a full suite of features and
functionality.
Bernie Ebbers Thank you very much. We very much
appreciate your attendance here today. Let
me tell you again that we feel very
confident that we have set the bar at a
very achievable, sustained rate over the
next few years. We look forward, the next
time we meet, to having an environment
where we have something positive to think
about, and not go through this again.
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We certainly thank you for your
forbearance.
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