Jazztel plays to the business customer: there will be consolidation in the Spanish fixed-line market, says CEO, Roberto de Diego Arozamena

Jazztel was one of many alternative fixed-line operators launched during the boom, though it differed from most in building out not only a backbone, but also extensive last mile connectivity. As of the end of 2003, the company had around 2,710 route km of local access in operation and around 5,750 km of backbone. (It has around 10,000 route km in total.) However, though it had a different strategy, Jazztel did not have a different fate, and it recently concluded its financial restructuring. Now, with new management and sales team in place, it is focused on "trying to win customers and trying to make the company as profitable as possible", says the CEO, Roberto de Diego Arozamena.

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Jazztel expects to see revenues grow by around ten per cent overall in 2004, Arozamena says. The focus is on "data services and value-added services" for SMEs. These services include VPNs with mobile data connectivity and IT outsourcing. "We are looking at increased incoming orders that will turn into revenue in 2004. Depending on the type of service, the installation cycle may take anywhere from one month to three months. That is when we will start seeing revenue for incoming orders," says Arozamena.

Arozamena is quietly confident about the outlook for Jazztel. The company expects to be EBITDA positive this year at "between [euro]4m and [euro]6 m" and to reach free cash flow positive by the end of 2005. The capex in 2004 is projected to be in the [euro]12-15 m range though, as this is driven by customer demand, the figure could be higher.

Jazztel still carries significant debt and--as its refinancing makes clear--it has struggled in the past to meet its financing costs. Its total non-trade liabilities at the end of 2003 were [euro]17.5 m and interest on its convertible notes alone was [euro]9 m. The sales revenues for last year were [euro]217 m. However, Jazztel recently asked its bond holders to swop their convertible debt into equity, which would both save the company interest expense and increase the scope for institutional investment in the company. "We proposed the conversion of the bonds because the people that could be interested in investing frequently saw the potential dilution [of the stock by the convertible bond holders] and the conditions of the [debt] agreement as an obstacle to investing in the company," says Arozamena. He adds that the company has no immediate need for cash to run operations, though there are other things that could be done with both greater stock liquidity and more money. "If we want to enter into any corporate agreement, or if we want to buy something, it could be [paid for with] a mixture of cash and stock. So, if we have the possibility of increasing our funds, that would allow us more flexibility in terms of increasing our potential consolidation opportunity," says Arozamena.

Jazztel's CEO fully expects consolidation in Spain, and he says that he has "no fixed ideas" on whether Jazztel would be acquired or do the acquiring. Competitors, apart from the incumbent Telefonica, include Auna, Lince Telecomunicaciones, which is owned by France Telecom, BT Ignite, COLT and the cable operator ONO. "I do think that we are in a sector where the economies of scale are significant and, therefore, it makes sense to think that there will be consolidation [in this space]," says Arozamena. Jazztel would not, he says, look for more infrastructure if it did set out to buy. "A customer base that is aligned with our strategy would be of interest, because then we could realise synergies," he says.

Jazztel does not release its gross margin figures. However, they are getting healthier, the CEO says. "Data services are growing significantly this year and they have a better margin than the voice services, so we expect a slight improvement in the overall gross margin figures," says Arozamena.

Overall, data services are expected to grow by around 50 per cent year-on-year--though the base has not been disclosed. Jazztel aims to do this by keeping its focus tight. "We have a revenue base that has a portion of wholesale services, a portion of mass-market services--SoHo and small SMEs--and a portion of mid-market services for more medium-sized companies. Because of the type of company we are and the revenue base we have currently, we need to focus on medium-sized enterprise, that is where we can add more value," says Arozamena.

This is being tackled by making a concerted group effort to offer integrated solutions. "We are managing the company as a group whereas previously the three segments--telecom, CCS, which has business applications and systems integration, and Adatel, the PBX maintenance and cabling service--operated on a stand-alone basis. Now, we are taking packaged services to our customers," says Arozamena.

He argues that Jazztel--thanks to its CSS and Adatel divisions--can offer some managed services that its competitors do not have. "[For example], our CCS division is the largest Spanish software house. We have business applications and we do integration services as well," he says. The mobile data service that Jazztel offers in conjunction with VPNs is supported by Vodafone, and talks are in progress with Telefonica Moviles to strike a similar deal. However, Jazztel has no plans to try to brand the mobile data access service as its own, preferring to focus on getting its own core business right. Similarly, voice is not yet part of the mobile package. "If we could reach an agreement with an operator, we could offer mobile voice. Right now, one of our divisions, Adatel, is a mobile distributor for Telefonica Mobile, but we cannot cross-sell our services yet. I think the mobile operators don't want to lose margin by allowing us to cross-sell," says Arozamena.

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