Cash flow funding

New money for New Edge; Funding expected to take company to cash-flow positive - Company Financial Information

Bucking the trend in the troubled world of competitive broadband, DSL provider New Edge Networks has raised $77.5 million in debt and equity. According to the company, the money will fund its existing business plan to cash-flow positive sometime in the second half of 2002.

The funding came in the form of $40 million in private equity from GS Capital Partners III and related investment partnerships of Goldman, Sachs & Co.; Crosspoint Venture Partners; and Greylock and Accel Partners, all of whom were previous investors in the company. First Union National Bank was the lone new investor, providing New Edge with $37.5 million in the form of a term loan and a revolving credit facility.

The new funding means privately held New Edge has raised $380.1 million since its inception in 1999, more than $217 million of which has come in the last seven months.

Since October, though, the company has made significant adjustments to its business plan, cutting the number of planned central offices to 600 from 1200 and laying off almost one-third of its work force. According to New Edge President and CEO Dan Moffat, the new funding justifies these changes.

"What those cutbacks were about was resizing the plan based on the capital that was available," he said. "That's what investors want to see. They want to see you realistically and aggressively manage your business."

Following the bankruptcy of NorthPoint Communications and severe financial troubles of Rhythms NetConnections, this funding announcement is the best news to hit the DSL sector in months.

But New Edge was able to raise the money it needed largely because it is not a pure-play DSL provider, said Jeff Moore, network services analyst with Current Analysis. DSL providers that are moving beyond pure-play offerings to more advanced data services, such as virtual private networks, are more attractive to investors, he said.

New Edge also was helped by the lack of competition in the small and medium-sized markets in which the company operates as well as the effects of line sharing, which are finally being realized, Moore said.

"This is an indicator of much stronger help for competitive DSL providers," he said. "I say that with a proviso that it's too late for NorthPoint and it may be too late for Rhythms, but for Covad and New Edge, I think this is an indicator for good, long-term prospects."