Summary of ABOVENET INC - Yahoo! Finance

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read together with the Company's consolidated financial statements and related notes appearing in this Quarterly Report on Form 10-Q and in the Company's Annual Report on Form 10-K for the year ended December 31, 2008.

Business

Overview

AboveNet, Inc. (which together with its subsidiaries is sometimes hereinafter referred to as the "Company," "AboveNet," "we," "us," "our" or "our Company") provides high-bandwidth connectivity solutions primarily to large corporate enterprise clients and communication carriers, including Fortune 1000 and FTSE 500 companies, in the United States ("U.S.") and the United Kingdom ("U.K."). Our communications infrastructure and global Internet protocol (IP) network are used by a broad range of companies such as commercial banks, brokerage houses, insurance companies, investment banks, media companies, social networking companies, web-centric companies, law firms and medical and health care institutions. Our customers rely on our high speed, private optical network for electronic commerce and other mission-critical services, such as business Internet applications, regulatory compliance, disaster recovery and business continuity. We provide lit broadband services over our metro networks, long haul network and global IP network utilizing equipment that we own and operate. In addition, we also provide dark fiber services to selected customers. We also resell equipment and provide certain other services to customers, which are sold at our cost plus a margin.

Metro networks. We are a facilities-based provider that operates fiber-optic networks in 15 major markets in the U.S. and one in the U.K. (London). We refer to these networks as our metro networks. These metro networks have significant reach and breadth. They consist of over 1.9 million fiber miles across over 5,000 cable route miles in the U.S. and in London. In addition, we have built an inter-city fiber network between New York and Washington D.C. of over 177,000 fiber miles.

Long haul network. Through construction, acquisition and leasing activities, we have created a nationwide fiber-optic communications network spanning over 11,000 cable route miles that connects each of our 15 U.S. metro networks. We run advanced dense wavelength-division multiplexing ("DWDM") equipment over this fiber to provide large amounts of bandwidth capability between our metro networks for our customer needs and for our IP network. We are also members of the Japan-US Cable Network (JUS) and Trans-Atlantic undersea telecommunications consortia (TAT-14) that provide connectivity between the U.S. and Japan and the U.S. and Europe, respectively. We refer to this network as our long haul network.

IP network. We operate a Tier 1 IP network over our metro and long haul networks with connectivity to the U.S., Europe and Japan. Our IP network operates using advanced routers and switches that facilitate the delivery of IP transit services and IP-based virtual private network ("VPN") services. A hallmark of our IP network is that we have direct connectivity to a large number of IP networks operated by others through peering agreements and to many of the most important bandwidth centers and peering exchanges.

Business Strategy

Our primary strategy is to become the preferred provider of high-bandwidth connectivity solutions in our target markets. Specifically, we are focused on the sale of high-bandwidth transport solutions to enterprise customers. The following are the key elements of our strategy:

· Connect to data centers where many enterprise customers locate their information technology infrastructure.

· Target broadband communications infrastructure customers who have significant bandwidth requirements and high security needs.

· Provide a high level of customization of our services in order to meet our customers' requirements.

· Deliver the services we offer over our metro networks, which often provide our customers with a dedicated pair of fibers. This use of dedicated fiber is a low latency, physically secure, flexible and scalable communications solution, which we believe is difficult for many of our competitors to replicate because most of their networks do not have comparable fiber density.

· Use our metro fiber assets to drive the adoption of leading edge inter-city wide area network (WAN) services such as IP VPN services and long haul connectivity solutions.

· Intensify our focus on sales to media companies with high-bandwidth requirements.

· Fulfill the needs of customers that are required to comply with financial and other regulations related to data availability, disaster recovery and business continuity.

· Target Internet connectivity customers that can leverage the scalability and flexibility of fiber access to their premises to drive their electronic commerce and other high-bandwidth applications, such as social networking, gaming and digital media transmission.

We are able to provide high quality, customized services at competitive prices as a result of a number of factors, including:

· Our significant experience providing high-end customized network solutions for enterprises and telecommunications carriers (also referred to as carriers).

· Our focus on providing certain core optical services rather than the full range of telecommunications services.

· Our metro networks typically include fiber cables with 432, and in some cases 864, fibers in each cable, which is substantially more fiber than we believe most of our competitors have installed, and provide us with sufficient fiber inventory to supply dedicated fiber services to customers.

· Our modern networks with advanced fiber-optic technology are less costly to operate and maintain than older networks.

· Our employment of state-of-the-art technology in all elements of our networks, from fiber to optical and IP equipment, provides leading edge solutions to customers.

· The architecture of our metro networks, which facilitates high performance solutions in terms of loss and latency.

· The spare conduit we install, where practical, allows us to install additional fiber-optic cables on many routes without the need for additional rights-of-way, which reduces expansion and upgrade costs in the future, and provides significant capacity for future growth.

Our Networks and Technology

Metro Networks

The foundation of our business is our metro fiber optic networks in the following domestic metropolitan areas and London in the U.K.

· Boston

· New York City metro

· Philadelphia

· Baltimore

· Washington, D.C./Northern Virginia corridor

· Atlanta

· Houston

· Dallas

· Austin

· Phoenix

· Los Angeles

· San Francisco Bay area

· Portland

· Seattle

· Chicago

Including fiber acquired by us through leases and indefeasible rights-of-use ("IRUs"), as well as fiber provided by us to others through leases and IRUs, our metro networks consist of over 1.9 million fiber miles and over 5,000 cable route miles. The network footprint typically allows us to serve central offices, carrier hotels, network points-of-presence ("POPs"), data centers, enterprise locations and traffic aggregation points, not just in the central business district but across the entire metropolitan area in each market. Within our metro networks, our infrastructure provides ample opportunity to access many additional buildings by virtue of its extensive footprint coverage and over 5,000 network access points that can be utilized to build laterals or connect to other networks, thereby providing access to additional locations.

Key Metro Network Attributes

· Network Density - Our metro networks typically contain 432 and up to 864 fiber strands in each cable. We believe that this fiber density is significantly greater than that of most of our competitors. This high fiber count allows us to add new customers in a timely and cost effective manner by focusing incremental construction and capital expenditures on the laterals that serve customer premises, as opposed to fiber and capacity upgrades in our core networks. Thus, we have spare network capacity available for future growth to connect an increasing number of customers.

· Modern Fiber - We have deployed modern, high-quality optical fiber that can be used for a wide range of network applications. Standard single mode fiber is typically included on most cables while longer routes also contain non-zero dispersion shifted fiber that is optimized for longer distance applications operating in the 1550 nm range. Much of our network is well positioned to support the more stringent requirements of transport at rates of 40 Gbps and above.

· High Performance Architecture - We are able to design customer networks with a minimum number of POP locations and direct, optimum routing between key areas which enables us to deliver our services at a high level of performance. Because most of our metro lit services are delivered over dedicated fibers not shared with other customers, each customer's private network can be optimized for its specific application. Further, by using dedicated fiber, we can deliver our services without the need to transition between various shared or legacy networks. As a result, our customers experience enhanced performance in terms of parameters such as latency and jitter, which can be caused by equipment interface transitions. The use of dedicated fibers for customers also permits us to address future technology changes that may take place on a customer specific basis.

· Extensive Reach - Our metro markets typically have significant footprints and cover a wide geography. For example, the New York market includes a significant Manhattan presence and extends from Stamford, Connecticut in the north through Delaware in the south, covering a large part of New Jersey. Similarly, the San Francisco market extends through to San Jose and the Dallas network incorporates the Fort Worth area.

On-Net Buildings

Our metro networks connect to over 1,900 buildings in our U.S. markets and approximately 300 in London through our lateral cables, which cover over 1,000 route miles and over 100,000 fiber miles (which are part of the 1.9 million fiber miles previously described). These connected buildings are referred to as on-net buildings.

· Enterprise Buildings - Our network extends to over 1,400 enterprise locations in the U.S. and over 200 in London, many of which house some of the biggest corporate users of network services in the world. These locations also include many private data centers and hub locations that are mission critical for our customers.

· Network POPs - We operate over 120 network POPs with functionality ranging from simple, passive cross-connect locations to sites that offer interconnectivity to other service providers and co-location facilities for customer equipment, including over 20 Type 1 POPs. These POPs are typically larger presences located in major carrier hotels complete with network co-location and interconnectivity services.

· Central Offices and Data Centers - Our network connects to buildings in which over 200 central offices and approximately 400 data centers operate.

· Additional Buildings - In addition to the on-net buildings that we connect to with our own fiber laterals, we have access to additional buildings through other network providers with which we have agreements to provide fiber connectivity to our customers.

Long Haul Network

We operate a nationwide long haul network interconnecting each of our metro networks that spans over 11,000 route miles. With the exception of the route between New York and Washington, D.C., which we constructed and own, our long haul network is based on fiber either leased or acquired, typically under long-term agreements. We have deployed DWDM equipment along this network that provides significant bandwidth capability between our metro networks. This next generation network is based on ultra long haul technology that requires fewer intermediate regeneration points to deliver our services between major cities and expands our high-bandwidth service capability between our metro markets.

In addition to our U.S. based facilities, we are a member of the TAT-14 consortium, which provides us with undersea capacity between the U.S. and Europe. We are also currently a member of the JUS consortium, which provides us with undersea capacity between the U.S. and Japan. We use leased circuit capacity in continental Europe to provide connectivity among our key IP presence locations. We also operate lit networks in the U.S. connecting to certain key undersea cable landing stations including Manasquan and Tuckerton in New Jersey to connect to the TAT-14 and have leased capacity to Morrow Bay, California to connect to the JUS. In the U.K., we have leased fiber between the TAT-14 landing stations in Bude and London over which we operate a high-capacity DWDM system. Together, these networks provide us high-bandwidth capability among our metro networks and certain key markets in Europe and Japan.

IP Network

We operate a global Tier 1 IP network with connectivity in the U.S., Europe and Japan. In the U.S., most of our 15 metro networks have multiple IP hubs where we can provide Internet connectivity. We peer and provide connectivity in high-bandwidth data centers and Internet exchange locations, including many of those operated by the major providers, such as Equinix and Switch & Data. We have extended our ability to provide IP connectivity through our metro networks by using our fiber to bring our services to a wider set of customers. In addition to the U.S., the IP network has a presence in each of London, Amsterdam, Tokyo, Paris and Frankfurt, including the major exchanges in these markets such as LINX, AMS-IX, and JPIX.

The core portion of our IP backbone network is based on multiple 10 Gbps long haul links and utilizes advanced Juniper and Cisco routers and switches to direct traffic to appropriate destinations. Our IP core infrastructure is based on next generation equipment that supports advanced IP services such as VPNs and is optimized to support high-bandwidth customers.

As a Tier 1 IP network provider, we have peering arrangements with most other providers which allow us to exchange traffic with these other IP networks. We have devoted a substantial amount of time and resources to building our substantial peering infrastructure and relationships. We believe that this extensive peering fabric, combined with our advanced network, results in a positive customer experience.

Network Management

Our network management center ("NMC") is located in Herndon, Virginia and provides round-the-clock surveillance, provisioning and customer service. Our metro networks, long haul network, IP network and the private networks we set up for our customers, which link together two or more of their locations, are constantly monitored in order to respond to any degrading network conditions and network outages. Our NMC responds to all customer network inquiries via a trouble ticketing system. The NMC's staff serves as the focal point for managing our service level agreements, or SLAs, with our customers and coordinating network maintenance activities.

Rights-of-Way

We have obtained the necessary right-of-way agreements and governmental authorizations to enable us to install, operate, access and maintain our networks, which are located on both public and private property. In some jurisdictions, a construction permit from the local municipality is all that is required for us to install and operate that portion of the network. In other jurisdictions, a license agreement, permit or franchise may also be required. These licenses, permits and franchises are generally for a term of limited duration. Where necessary, we enter into right-of-way agreements for use of private property, often under multi-year agreements. We lease underground conduit and overhead pole space and license rights-of-way from entities such as incumbent local exchange carriers (ILECs), utilities, railroads, state highway authorities, local governments and transit authorities. We strive to obtain rights-of-way that afford us the opportunity to expand our networks as our business further develops.

Services

Initially, our primary business was to lease dark fiber to telecommunications carriers, enterprises, Internet and web-centric businesses and other customers that wanted to operate their own networks, often under long term agreements. Since 2003, we have shifted the focus of our business by leveraging our extensive fiber footprint and deploying capital to extend our fiber footprint to customers with high-bandwidth requirements within and between our metro markets. This transformation has allowed us to serve a much larger marketplace with differentiated services principally provided over our dedicated fiber.

In late 2008, we modified our service groupings and related revenue to more accurately reflect our focus on delivering high-bandwidth services. The new groups are: fiber infrastructure services, metro services and WAN services. We recasted our revenue into these groupings, as applicable, for 2007 and 2006 for comparative purposes and trend analysis. However, our revenue for 2007 compared to 2006 included in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," in our Annual Report on Form 10-K for the year ended December 31, 2007, reflects the original service groupings as reported. These groupings consisted of: fiber services, metro transport services, IP services and long haul services. Our data centers, which represented a fifth service, were sold in 2006.

Our services are grouped into three categories, as described below: fiber infrastructure, metro and WAN services.

Fiber Infrastructure Services

Our fiber infrastructure services focus on the lease of dedicated dark fiber to telecommunications carriers, enterprises, Internet and web-centric businesses and other customers that operate their own networks independent of the incumbent telecom companies. In addition to leasing dark fiber, we offer maintenance of dark fiber networks, the provisioning of co-location and in-building interconnection services, typically at our POP locations, and also provide certain telecommunication services on a time and materials basis.

Our fiber infrastructure services feature:

· An extensive network footprint that extends well beyond the central business district in most markets.

· The expertise and capability to add off-net locations to the network in a cost competitive manner.

· Modern, high quality fiber with direct routing that meets stringent technical requirements.

· Customized ring configurations and redundancy requirements in a private dedicated service.

· 7x24 monitoring of the network by our NMC.

Demand for fiber services is driven by key business initiatives including business continuity and disaster recovery, network consolidation and convergence, growth of wireless communications, and industry-specific applications such as high definition video transport and patient record management. Typically, Fortune 1000 and FTSE 500 enterprises with telecom intensive needs in industries such as financial services, social networking, technology, media, retail, energy and healthcare comprise the target customer base for our fiber optic infrastructure offerings.

Metro Services

We offer a number of high-bandwidth metro service offerings in our active metro markets ranging from 100 Mbps to 40 Gbps connectivity. These services range from simple point-to-point ethernet connectivity to complex multi-node wavelength-division multiplexing ("WDM") solutions. Our metro services have a number of important features that differentiate us from many of our competitors:

· A substantial portion of our metro services are deployed over dedicated fiber from end-to-end, representing a private network for each customer.

· This dedicated fiber provides customers with significant scalability for any increasing traffic demand.

· A service based on dedicated fiber provides a high level of security, a key concern for many high-bandwidth customers across a range of industries.

· The absence of a shared network eliminates many of the equipment interfaces of most other networks that can impact performance such as latency and cause service interruptions.

· Some of our metro services are offered without the need for the customer to provide space and power, which may be difficult or expensive to obtain in many data centers.

We offer private, customized optical network deployments that we build for our largest customers with very specific needs. These customers are typically large enterprise companies that have significant bandwidth requirements and value a completely private solution. These solutions often involve extensive network construction to specific critical customer locations such as private data centers and trading platforms with dedicated WDM equipment configured in accordance with the customer's needs.

In the past several years, we have expanded our metro services capability beyond customers with very high-bandwidth (multiple wave) requirements by offering a number of wave and ethernet products aimed to serve more moderate bandwidth/circuit requirements. These offerings include Basic and Enhanced Wave services, which are based on dedicated, private fiber and equipment infrastructure from end-to-end and provide a solution for customers looking for a WDM-based service between two metro locations. The Basic Wave offering provides our lowest cost wave service, while our Enhanced Wave service has a slightly higher initial cost, but provides the customer substantial ability to expand its service capabilities.

We also offer a full range of Metro Ethernet services including point-to-point and multi-point service configurations at 100 mbps, 1,000 mbps and 10,000 mbps speeds. We offer three different classes of our Metro Ethernet services with three different price points (higher, middle and lower) based upon level of service: (1) Private Metro Ethernet, which utilizes customer dedicated equipment and fiber to deliver a completely private service with all of the associated operational, performance and security benefits; (2) Dedicated Metro Ethernet, which utilizes shared equipment with reserved/guaranteed capacity, delivered to the customer location through dedicated fiber; and (3) Standard Metro Ethernet, which utilizes shared equipment on a shared capacity basis, delivered to the customer location through dedicated fiber.

WAN Services

We offer a number of wave, ethernet and IP-based services within our WAN Services offering. Most of these services provide connectivity solutions between our metro markets and target high-bandwidth customers requiring transmission speeds of at least 100 mbps. In addition, we provide high-speed Internet connectivity to our customers including high-end enterprise, web-centric and carrier/cable companies. Each of our WAN services is differentiated by our significant metro fiber resources that allow us to extend the capability of our core networks to the customer in a secure and cost-effective manner.

Our long haul services provide inter-city connectivity between our 15 U.S. metro markets at a variety of speeds ranging from 1 Gbps to 10 Gbps. We have deployed a next generation ultra long haul network that takes advantage of significant capacity and distance improvements available in next generation networks. As a result, our service offerings require a minimum of regeneration sites, which improves our ability to be competitive from both a price and speed of installation perspective while reducing the number of equipment interfaces required to deliver our service.

The attractiveness of our long haul services to our customers is further enhanced by our ability to extend the service from our long haul POP to the customer's premises through our metro networks, thereby providing an end-to-end solution. This flexibility and reach enables us to provide our long haul services on a differentiated basis.

We operate a Tier 1 IP network that provides high quality Internet connectivity for enterprise, web-centric, Internet and cable companies. We offer connectivity to the Internet at 100 Mbps, 1 Gbps and 10 Gbps port levels in most of our active metro markets in the U.S. and in London, Paris and Frankfurt. In addition, we offer IP connectivity in Amsterdam through resale partners. We believe our extensive number of peering partners, global reach and uncongested network approach result in a positive experience for our customers. In addition to selling IP connectivity at data centers and other major IP exchanges, we offer our Metro IP service where we combine our metro fiber reach to deliver Internet connectivity to customer premises. This service offering extends our significant IP capability, without the dilutive impact of traditional, shared access methods, to the customer location over dedicated fiber that will support full port speeds.

We also offer a suite of advanced ethernet and IP VPN services that provide connectivity between multiple locations in different cities for our customers. These services provide flexibility such as the ability to prioritize different traffic streams and the ability to converge multiple services across the same infrastructure. These advanced VPN services, which include virtual private LAN services, offer point-to-point and multipoint connectivity solutions based on Multiprotocol Label Switching technologies with the same high-bandwidth scalability that our IP connectivity service allows. Unlike most of our competitors, these services can be extended from our POPs to customer locations within one of our metro markets through dedicated fiber, thereby avoiding transitions through shared or legacy networks that can reduce performance quality.

Sales and Marketing

Our sales force is based across most of our current 15 U.S. metro markets and London. Our U.S. sales force is comprised of over 60 sales professionals and is supported by a team of sales engineers who provide technical support during the sales process. Our sales force primarily focuses on enterprise customers, including Fortune 1000 companies in the U.S. and FTSE 500 companies in London, that have large bandwidth requirements. This represents a change from our focus on wholesale sales to carrier customers in previous years. Since 2004, the vast majority of our new sales have been to enterprise customers.

Our sales strategy includes:

· Positioning ourselves as a premier provider of private fiber optic transport solutions and Internet connectivity services.

· Focusing on Fortune 1000 enterprises as well as content rich and data-driven companies (i.e. media, web-centric, and financial services) that require customized private optical solutions.

· Expanding our sales reach through independent sales agents who specialize in specific geographic and vertical markets.

· Emphasizing the high quality, cost effective, secure and scalable nature of our private optical solutions.

· Communicating our capabilities through targeted marketing communication campaigns aimed at specific vertical markets to increase our brand awareness in . . .