Renamed Deltacom off to rocky start

A month after shortening its name from ITC^Deltacom to Deltacom, the competitive carrier’s first-quarter earnings came up short as well.

The East Coast carrier’s first-quarter operating revenue was down nearly 13% from a year earlier (and down 0.5% sequentially) to just under $120 million. And its net loss increased 263% from a year earlier to nearly $15 million.

Revenue was down from a year earlier in all three of the company’s business segments: communication services (down 14% to $94 million), equipment sales (down 18% to less than $5 million) and wholesale services (down 5% to $21 million).

Part of the reason for the year-over-year decline was the discontinuance of the company’s residential UNE-P business and the sale of its managed services business, e^deltacom, last fall. Those two business contributed a combined $5.3 million to first-quarter 2005 revenue.

But the revenue slide came mainly from the depletion of local, long-distance and data services. Competition drove a 7% erosion of the company’s total long-distance minutes. And although the number of bundled local and long-distance lines remained relatively flat, the average revenue from those lines dropped due to price competition, Deltacom said.

Part of the company’s access line loss is strategic, as it endeavors to improve profitability by favoring facilities-based local service over resale and UNE-P lines.

The company did reverse a decline in active retail business lines, adding nearly 7,700 lines for a total of 374,905, which is just shy of the number it had a year earlier. Wholesale lines increased slightly sequentially to nearly 63,000, though still down 13% from a year earlier.

Also hampering first-quarter earnings was $330,000 spent restoring damage caused by Hurricane Katrina, which caused widespread disruptions in the company’s service to New Orleans as well as Biloxi, Gulfport and Hattiesburg, Miss., and affected service in several other markets to a lesser degree.

Going forward, the company said its biggest risk is rising interest rates, as a large portion of its debt accrues interest at variable rates. All of the company’s $318.5 million in long-term debt is based on a variable annual rate. At the end of the first quarter, that rate was 13%, which the company paid “in kind,” as it is allowed to do (under the terms of some of its debt) for any rate above 12%. In other words, the interest charge was not paid but merely added to the principal.

“A change of one percentage point in the interest rate applicable to our [debt] would result in a fluctuation of approximately $3.2 million in our annual interest expense,” the company wrote in regulatory filings. “At our option, approximately $2.6 million would be payable in kind and $0.6 million would be payable in cash.”