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Z-Tel: Lost in Transition

Light Reading
News Analysis
Light Reading
9/2/2004
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It's fair to say that the past few weeks have been a total bummer for Florida-based CLEC Z-Tel Technologies Inc. (Nasdaq: ZTEL), which is trying to make the transition from leasing lines from incumbent carriers under the UNE-P model to being a facilities-based IP service provider.

It's finding that shift troublesome. In addition to the regular CLEC issues of tackling regulatory issues (see FCC Suggestion Spurs (More) Conflict), and competing with the incumbent ILECs, and other competitive carriers, Z-Tel has in the past few months encountered financial, workforce, and supplier relationship problems.

Yesterday the operator announced it is cutting 150 jobs, about 15 percent of its workforce, in an effort to reduce costs (see Z-Tel Cuts 150 Jobs). That leaves the service provider with about 815 employees, a spokesman confirms.

The news was released just after the markets closed, but investors had already spent the day deserting the stock, which fell 15 cents, nearly 23 percent, to 51 cents. That values the operator at just $18.5 million. Its 12-month share price high, achieved in February, is $4.79.

That plummet was the result of Tuesday's notification from Nasdaq that Z-Tel faces delisting for failure "to comply with Nasdaq's $35 million market value of listed securities requirement for continued listing on the Nasdaq SmallCap Market." Z-Tel is appealing but is due to drop off the list on September 9.

That delisting notice came just days after two of the carrier's main executives, president and CEO Greg Smith and CTO Charles McDonough, quit Z-Tel to form a new company based on an enhanced service platform that had been under development at Z-Tel's Atlanta facility (see Z-Tel Loses CEO and CTO). Yesterday's announcement of job cuts included reductions at that facility.

The rest of the board decided that continued investment in new technologies and software was inconsistent with the carrier's new focus on VOIP and broadband services. Smith and McDonough disagreed. Now Z-Tel is negotiating with the duo to license its intellectual property to the pair. The technology in question includes OSS, voicemail, and voice recognition systems.

So now it's up to acting CEO Trey Davis and the remaining board members to try and pull the company into profit, and further cost cutting might be needed to get the company out of the red. Z-Tel stated yesterday it would "continue a thorough, company-wide evaluation of our other ongoing operating expenses." Yesterday's job cuts will result in a charge of about $2.5 million in the third quarter, but they promise to save the company $12 million in yearly salaries.

Z-Tel spokesman Andy Graham says further cuts are unlikely to include further staff losses, though that cannot be ruled out totally. He adds that Z-Tel is not currently searching for a new CEO or CTO.

Z-Tel has a long way to go to achieve its aim to turn a profit. In its second quarter, the company posted a net loss of $11.1 million on revenues of $63.8 million. It ended that quarter with $8.2 million in cash. In the full year 2003, Z-Tel lost $16.1 million from revenues of $289.2 million.

Now it's in the full throes of its switch from providing traditional voice services over leased ILEC lines to developing its own IP and data access services and managing and operating its own equipment, though it continues to seek partnerships to help it expand its service area (see Covad, Z-Tel Offer DSL and Covad, Z-Tel Split Lines).

To do that it has been investing in new hardware and software, spending $2.4 million in capex in the first three months of this year and another $2.3 million in its second quarter.

In February it made a big splash in announcing its VOIP services, based on gear from Cisco Systems Inc. (Nasdaq: CSCO), SIP servers from Ubiquity Software Corp., OSS from Telution Inc., and session border controllers from Acme Packet (see Telution Tackles VOIP OSS, Z-Tel Offers VOIP to Businesses, and Z-Tel Gets Into VOIP).

Z-Tel, which has about 175,000 consumer and 45,000 business UNE-P customers, launched its VOIP service in Tampa, Fla., and Atlanta in May. Now it plans to launch its VOIP service in New York, where the majority of its customers are, hopefully before the end of the year, says Graham.

Acme didn't last long as a supplier, and rival session border controller vendor Netrake Corp. was soon boasting of its deal with Z-Tel (see Netrake Wins Z-Tel Deal). Without the least hint of sour grapes, Acme's VP of marketing described the loss of the Z-Tel deal as no big deal, describing the CLEC as a "high maintenance" customer (see Session Controllers Storm Chicago).

— Ray Le Maistre, International News Editor, Light Reading

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