THE BITTERSWEET SMELL OF SUCCESS : Some CLECs have managed to weather the economic meltdown

America's Network, March 1, 2002 by Terry Barnich, Greg Mycio

An oxymoron, according to Webster's dictionary, is a figure of speech in which contradictory ideas are combined. For many, especially the investing public, the topic "CLEC success stories" qualifies as a painful example of the term.

Indeed, in the first three months of 2002, success in the absolute sense for the competitive telecom sector appears elusive at best. Readers of America's Network are intimately aware of the carnage that has befallen the competitive local exchange carriers: tens of billions in market cap evaporated, innumerable bankruptcies and fears of continuing weakness across the sector.

But through it all remains a $53.2 billion competitive local exchange industry (Table 1). Some companies are doing some things right. It's just that the implosion of the telecom stock index has caused a fog, obscuring a lot of operational success.

Table 1: CLEC Revenue Breakdown for 2001

Revenue category                                2001

Switched local service[1]              $9.49 billion
Long-distance[2]                       $2.95 billion
Dedicated access and private line     $10.11 billion
Data[3]                               $24.85 billion
Total CLEC service revenue            $47.39 billion
All other revenue[4]                   $5.79 billion
Total Revenue                         $53.18 billion

Notes:

[1] Includes Resale Revenues.

[2] Includes Resale Revenues.

[3] Includes all data and data-related services (e.g. frame relay,
ATM, Internet access, DSL, and other enhanced data and Web-related
services).

[4] Includes miscellaneous telecom revenues (e.g. reciprocal compensation)
as well as non-telecom related revenues (e.g. network development).

Source: New Paradigm Resources Group Inc.

Financially speaking, success today in the competitive telecom sector equates to survival. Nonetheless, some companies do not spend every waking moment in the search for outside investment. Of the 165 facilities-based competitive carriers, a few dozen are working to actually execute on their business plans. These carriers are going about their business, building and operating telecom companies.

Based on a range of operating criteria, NPRG believes that four CLECs in particular that merit mention as CLEC success stories. While this is not an exclusive nor exhaustive list, and we believe other competitive carriers will survive the present shake out and remain viable businesses into the foreseeable future, these four appear to have the best mix of factors necessary to continue operations at a high level.

HOW TO MEASURE IT

Success in the present telecom environment means two things more than anything else: surviving today and surviving tomorrow. We know who has survived, so our analysis focuses on future prospects. To assess companies' fitness for the future, NPRG has applied eight criteria (Table 2).

Table 2: Measuring success

Cash life
Financial security
Strategy
Growth
Financial performance
Quality of management
Quality of customer base
Quality of OSS

Source New Paradigm Resources Group Inc.

Cash life is the minimum number of quarters before cash and cash equivalents are exhausted by cash burn. For companies in need of immediate cash infusion, all other considerations are secondary.

Independent of considerations about cash burn and cash life, there is a consideration of financial security. If the company has a secure source of guaranteed funding, a short cash life is not necessarily a severe constraint.

The effectiveness of each company's strategy needs to be evaluated based on considerations of service offering mix (long-distance, data services, transport), revenue driver trends (reciprocal compensation, data), customers (residential, business, carriers) and markets (geography, number of competitors).

Regarding revenue growth, it could be argued that "no growth" or "negative growth" is acceptable during a period of restructuring or cash conservation. But in general, a company that is still able to grow, even in this period, should receive a bonus from this category.

Even though current negative EBITDA may be due to investments that will lead to better financial performance in the future, today's performance is, nonetheless, today's performance -- and gains are better than losses.

In assessing the quality of management, a high rating is given to officers with direct operating experience in entrepreneurial communications companies.

As for the quality of customer base, some are "higher quality" than others because of their high per-unit revenue or low likelihood of churn, for example.

Back-office issues have strongly impacted competitive carrier profitability. Quality operations support systems (OSSs) are those that consist of a complete set of functionality (from order entry to provisioning to network management to billing) using mature software products.

FOUR WHO BEAT THE ODDS

Using these criteria, NPRG has selected the following competitive carriers as CLEC success stories (in alphabetical order):

Allegiance Telecom Inc.
CTSI
ITC^DeltaCom
Time Warner Telecom