PAETEC Stumbles

August 1st, 2008 by · 18 Comments

Today PAETEC (PAET) announced preliminary results that aren't going to make anyone happy. While the final numbers won't be in for another week or two, revenue is expected to come in at $401-406M and ebitda to be substantially the same as in Q1, or $59.5M. After adjusting for the McLeodUSA acqusition which closed in February, this implies non-existent sequential organic growth, if not a decline.

As a result, PAETEC admits it will not make its yearly guidance for either revenue ($1.645-1.685B) or ebitda ($294-304), a fact that basic mathematics would lead us to anyway. To make the low end of guidance they would need to average something like $442M in revenue and $87M in ebitda for Q3 and Q4, and that would take some major growth.  The company blamed the economic environment for its troubles, which would seem to contradict other datapoints so far. However, PAETEC is different from those who have reported in that they compete in the mid-sized enterprise space using almost entirely leased facilities. They do not underprice the incumbents, they out-service them. But during difficult economic times, this means they can face substantial pricing pressure since customers become more and more cost conscious. And in fact, churn and repricing on customer renewal are where PAETEC puts the blame for their troubles.

PAETEC is one of the most successful of the 'we don't need no stinking fiber' school of CLECs, and one can't really argue that much with their results when compared to the high fiber group over the last few years. But when you have your own fiber, your customers are stickier, and this gives you staying power that PAETEC is currently missing. So perhaps we should backtrack a bit from the assertion that the economy is not affecting telecom, those who depend on facilities built and maintained by others may be more vulnerable.

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Categories: CLEC · Financials

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18 Comments So Far


  • Parkite says:

    In my experience, PAET does underprice the LEC by 10-15%. And their service, particularly billing, is just absymal. You are right on with your point about their customer base being less sticky due to lack of facilities. That said, I have heard good things about their mgmt team.

  • toddforthree says:

    the rbocs raised special access prices and if you ride on their stuff you might have an issue. apparently paet is having an issue.

  • Rob Powell says:

    parkite, I would guess that Paetec’s pricing varies widely by market, especially over the geography of their various acquisitions.

    todd, it is certainly possible that special access prices are causing some of the pricing pressure they are facing, but they haven’t yet mentioned it. We will have to see what they say on 8/13 when they formally release results and hold their conference call.

  • F-hat says:

    PAET, will not only undercut the LEC they undercut other CLEC’s. I have seen quotes from their call center that claimed an additional savings 20% saving to the prospect as no agent commissions were being paid.

    It sounds like there are experiencing some churn from the former McLeod base which was fairly solid previously.

  • You can only buy so much growth. Paetec plays the same game as all the other CLEC’s – I’ll save you money. (No one plays that as bad as Nuvox though). CLEC’s are stuck right now because T1 is limiting in bandwidth, expensive via Special Access, and elusive as more ILEC facilities go fiber. No Differentiation other than “It’s Our People”. (That works when you are 1000 employees not at 3900).

    According to Dave Rusin at telecomstraightshooter.com, CLEC’s has had 12 years to move to facilities and haven’t even started yet.

  • Parkite says:

    Dave Rusin’s business model at AFS is very, very different than a pure CLEC like XO or PAET. The capital required for a CLEC like XO or PAET to lay fiber to end-users isn’t available, and when it was, the return was never there. The CLEC business, which has always been to compete on price, is a difficult at best.

  • Greg Wilson says:

    “CLEC’s are stuck right now because T1 is limiting in bandwidth, expensive via Special Access, and elusive as more ILEC facilities go fiber.”

    I agree with this, but I think the solution is around the corner. Most CLECs can afford and justify laying fiber into a corporate headquarter or multi-tenant building. It’s reaching their customer’s branch locations that puts them at the mercy of the ILECs.

    If they can hang in there until we have a viable wireless local access via Sprint or T-Mobile, then their pricing advantage over the ILEC won’t be 10-15%, it will be 30-40% and the circuit speed limitation will likely be removed.

    Now, the ILEC will be in a pickle, not only will special access reveune go away, but their own copper circuit revenue will drop in order to compete. Even if they are able to offer their own wireless access, they will still loose significant revenue and margin dollars (not %).

  • F-hat says:

    Sprint and T- Mobile will never price 30-40% below the LEC. Too much money left on the table. Sprint will be top dollar and have the “Sprint Quality” perspective.

    I agree with GW, the strategies of the future will include a combination of the already mentioned access methods with a traffic aggregation at the corporate HQ’s or data centers. There will almost always be a needfor some LEC somewhere, but I see that need reducing in the future.

  • Greg Wilson says:

    I probably wasn’t clear. I meant that a CLEC, including PAETEC, could offer a network that cost 30 – 40% less than an ILEC if they substituted wireless (e.g. wimax) local access for the copper T1 special access that they would have otherwise had to provision from the ILEC. It’s not Sprint or T-mobile pricing 30-40% below the LEC, it’s a wimax circuit being that much below copper. Hope that clarifies my point.

  • Parkite says:

    I just can’t see a wimax circuit displacing a PSTN copper T1. Not reliable enough. I think wimax technology will be accepted like wireless (best effort)…….if you have a dropped call, dial again. That won’t cut it for even the small enterprise.

  • The_highwayman says:

    Have to agree with Parkite here…Wi-fi, Wi-Max is not going to be the savior many think it is, line of sight issues, fade, etc all play into this, but the real issue right now for wi-max is ROE/ROW into bldgs….it is one thing to obtain ROE to install a 24 pair riser ready, it’s entirely different trying to get antennae ROE, etc….

    I know of CLWR effort right now that is being killed by BNSF, because the CLWR signal would interfer with BNSF Uw patterns….

    wi-fi was suppossed to by the killer last mile and while it has displaced some things it has not at all come to full term as many have thought….

  • Cheryl says:

    Arunis was too busy acquiring more companies to post a good profit. Instead, he was hiring at substantially lower pay than the market . Then no raises for 3 years to the employees who did the work and kept the company going , again using the money instead to acquire more companies.
    Hmmm. Looks like planning for a buyout has been on his mind for some time (3 years)?
    The latest (perk) of the job instead of a raise was allowing the workers to wear jeans and sneakers to work until September! What a deal!
    After that, eliminating positions and laying off the employees in those positions to make a buyout look better. Way to go , Arunis- you got your wish!

    • Anonymous says:

      Why did anyone take a job “at substantially lower pay than the market”. Maybe that lower pay IS the market.
      I’ve got zero love for this merger but I don’t understand this sentiment.

  • Anonymously says:

    Yeah I feel you……..But he was awarded 700,000 shares if I’m correct on Jul 01. They had a plan.

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