CLECs strategize for the second half

Following a rocky second quarter, competitive local exchange carriers (CLECs) updated their view of the market at the Jefferies investor conference this week, offering more details about how they’re navigating the current economy.

TWTelecom, which had reported macroeconomic “headwinds” in the second quarter, notified investors this week that “economy-related pressure” seen in Midwestern markets in the first half of the year was continuing and could potentially extend to the Southeast and individual markets elsewhere. The carrier has been distinguishing these effects from churn among the small-business customers it inherited through its Xspedius acquisition, since TWTelecom doesn’t target small business customers. And Larissa Herda, the carrier’s CEO, said sales continue to look strong going into the second half.

“Sales in the first 8 months, including August, have been good,” Herda said. “It’s the revenue in August that wasn’t that good…We’re not expecting sales to change. But we do have the headwinds of all these disconnects.”

Off-net unpaid disconnects cost TWTelecom more because it leases lines from other carriers (often the local incumbent) to reach those customers. When they stop paying, TWTelecom gives them several weeks to pay up or contest their disconnection, during which time the carrier has to continue paying its own costs for the line – a cost it avoids when serving customers on its own network. The company serves nearly 31,000 customers but connects directly to less than 9,000 buildings.

Softness in the Midwest is probably related to hard times in the auto industry, Herda said, adding that new sales at TWTelecom have more than made up for losses due to problems in the home mortgage sector. In another presentation at this week’s conference, CBeyond, which focuses on small businesses, also reported softness in Detroit in particular (the auto industry’s epicenter) as well as Chicago to a lesser extent.

Another CLEC, Paetec, which cut its expectations for the year this summer, reported seeing broad softness throughtout the US that is nonetheless “exacerbated” in certain local markets based on their unique characteristics. In Florida, for example, Miami and Ft. Lauderdale are more problematic than Tampa or Jacksonville, the company said. Paetec executives expect this softness to last 18 to 24 months.