Aleron Bankruptcy Jolts Universal Access

A collapse in the carrier’s market, including a large bankruptcy filing, knocked a hole in the first quarter revenue of Universal Access Global Holdings Inc., forcing the Chicago-based company to trim its workforce and narrow its focus. The company now will limit its concern to helping telecom providers provision circuits where their networks do not extend.

Universal Access (www.universalaccess.net) on Thursday announced its latest measures to conserve cash and reestablish positive EBITDA (earnings before interest, taxes, depreciation and amortization) in the second half of the year. The company reported a first quarter loss on EBITDA of $7.6 million, down from a negative EBITDA of $1.3 million in the fourth quarter of 2001.

Universal Access owns information systems detailing the availability of capacity and pricing information on networks throughout the country and resells that off-net connectivity to carriers, including AT&T Corp. (www.att.com), Cable & Wireless plc (www.cw.com), WorldCom Inc. (www.worldcom.com) and Williams Communications Group Inc. (www.williamscommunications.com).

The company also owns and operates 19 Universal Transport Exchanges in 16 cities, where carriers interconnect their networks and sell each other capacity.

Stung by the bankruptcy filing of a large wholesale customer, Aleron Inc., Universal Access posted first quarter revenue of $29.1 million, down from $35.7 million in the fourth quarter of 2001. The company posted a net loss of $12.6 million, or 13 cents per share, versus a net loss of $14.2 million, or 15 cents per share in the fourth quarter.

Universal Access ended the first quarter with $42.8 million in cash on hand, and executives said the company was fully funded to reach profitability. Management has not publicly offered guidance on when the company expects to reach a net profit.

To further trim expenditures Universal Access is renegotiating real estate leases, postponing a software project designed for carriers and looking at renegotiating wholesale prices with its underlying carriers. Management said the cost-cutting measures would be reflected on the balance sheet over the next few quarters. Universal Access last week eliminated 40 jobs.

The bankruptcy filing of network services operator, Aleron, put a drag on first quarter revenue and margins. Through the U.S. Bankruptcy Court, Universal Access was still required to provide service for the bankrupt customer, but lost out on $4.8 million in anticipated revenue for the quarter. Universal Access last week was granted permission to disconnect circuits over the next two months, said Chief Executive Patrick Shutt.

Aleron is not the only company responsible for a lackluster first quarter.

The sales cycle on new contracts is longer than Schutt said he has seen in his 12 years in telecom sales. The primary reason: In the wake of a barrage of restructurings and bankruptcy filings, attorneys have been engulfed in long contract negotiations.

Universal Access also had anticipated signing an agreement in the first quarter with Teleglobe, the embattled carrier that recently announced it might have to file for Chapter 11 protection under the U.S. Bankruptcy Code. WorldCom’s UUNET also moved circuits onto its own network, a move Universal Access had anticipated before the beginning of the year.

Management said the company’s path to profitability was mostly within their control. But with each customer bankruptcy filing comes an uncertainty. In the case of Aleron, Universal Access was not able to collect money for network services rendered. On the other hand, Williams Communications continues to do business with and pay Universal Access. The carrier’s carrier, based in Tulsa, Okla., filed a Chapter 11 bankruptcy petition last month.

Still, yet another bankruptcy filing has put a thorn in the side of Universal Access’ management. In a New Jersey bankruptcy filing earlier this year, Sphera Optical Networks (www.spheranetworks.com) had reached an agreement with Universal Access to sell its metropolitan networks. But Universal Access recently withdrew its bid to buy the assets even after providing $2.1 million in debtor in possession financing.

In Universal Access’ first quarter conference call Thursday evening, a Goldman Sachs (www.gs.com) analyst said he heard the bankruptcy court ruled Universal Access would not be entitled to a refund on the DIP financing and that Sphera’s assets would be up for sale for another bidder. Shutt declined comment, saying the legal case was moving forward. Sphera spokesman Larrry Chesel could not be reached to comment on the DIP ruling.

Brad Sampson, Universal Access’ vice president of investor relations and public relations, said the court ruling involving Sphera “is far from resolved yet” and that any ruling on the DIP financing was a small piece of the big puzzle.

On Friday OnFiber Communications Inc. (www.onfiber.com) announced acquiring network assets and customer contracts from Sphera for approximately $2.3 million as part of Sphera’s Chapter 11 bankruptcy case.