CLECs separate in Q2 as recovery begins for some

Solid results from some competitive local exchange carriers (CLECs) in the second quarter suggest a recovery has begun for some CLECs while others continue to struggle. But the companies reporting growth say it’s not because the threat of recession-driven customer churn has abated but because they’ve increased their sales to offset that churn.

“The key is to continue to outsell the churn,” Larissa Herda, TW Telecom’s (NASDAQ: TWTC) chief executive officer, said on the company’s earnings call today.

TW Telecom’s revenue grew 1% sequentially and 4% from a year earlier in the second quarter – the latest in a slew of CLECs to report relatively positive results. Cogent Communications saw second-quarter revenue growth of 5% sequentially and nearly 8% from a year earlier, adding a smaller-than-expected net loss. And XO Holdings’ (OTCBB: XOHO) revenue grew 2% sequentially and nearly 5% from a year earlier. Meanwhile, CBeyond’s revenue was up nearly 4% sequentially and up 20% from last year.

Not everyone did as well. Paetec reported a wider loss in the second quarter as revenue slid 1% sequentially and nearly 3% from a year earlier, citing declines in usage-billed services like long-distance and basic telephony service. ITC Deltacom revenue was down nearly 3% sequentially and down 5% year over year. And Level 3 Communications’ revenue was down 2% sequentially and down 8% from a year earlier.

Despite an improving top line, churn is persistent, pricing pressure continues for big IP links and customers are negotiating hard for price discounts when contracts expire, TW Telecom said. The company’s average monthly customer churn was up sequentially in the second quarter to 1.4% but down from a year earlier. And its average monthly revenue churn, at 1.3%, was flat sequentially.

CBeyond, which, unlike TW Telecom, focuses particularly on the kind of small and medium businesses whose survival has been most imperiled during the recession, is running the same race against churn. After setting a new gross sales record in the first quarter of 3800 customers, CBeyond reported 4100 sales in the second quarter. But its churn increased slightly in the second quarter to 1.5%. The company doesn’t expect that number to rise any further but doesn’t expect it to drop any time soon, either.

“All of the increased churn that came about when the economy worsened over the last year and a half has been uncontrollable churn, from business closings and non-payment by customers, and this uncontrollable churn now stands at about 1.1% of the 1.5% that we reported,” said Jim Geiger, CBeyond’s CEO, on its second-quarter earnings call. “Over time once the economy improves, we would expect our churn rate to decline as business closings and contractions which feed the controllable portion of our churn rate start to decrease.”

CBeyond boasts a unique bundle of services that it says rivals can’t match. But despite this, it offers aggressive rebates and discounts for new customers, which has pressured the company’s average revenue per user. “We had expected…that the additional applications and lines we would sell would offset or outweigh the promotional changes and usage changes, but they have not, and the best answer I have is the economic environment,” Geiger said.

Similarly, Cogent’s average revenue per user for on-net customers continues to contract, despite the fact that the company has been offering those customers take-or-pay promotions based on volume purchases. And churn among its off-net customers ticked up by two tenths of a point in the second quarter. However, as the company has long positioned itself as a price leader, it claims to have an advantage in tight economic times, and its second-quarter results bolster that argument.

“[Customers] know they can’t disconnect from the world,” Cogent CEO Dave Schaeffer said on the company’s earnings call last week. “So they’re migrating other applications to the Internet.”

As the gap widens between carriers that are recovering from the recession and those still mired in it, healthier ones are taking advantage of weaker ones by opportunistically acquiring the assets of struggling peers. Cogent acquired two Chicago-area data centers in the second quarter essentially for free, in exchange for agreeing to take over the leases. TW Telecom has acquired more collocation space recently and spent $10 million buying dark fiber in the first quarter.