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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