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ICG's Sinking Ship

CLEC's imminent demise may have dire implications for the rest of the optical networking industry

September 26, 2000

3 Min Read
ICG's Sinking Ship

ICG Communications Inc. (Nasdaq: ICGX), a competitive local exchange carrier (CLEC) with network build-outs in several major cities, is struggling to keep afloat.

Last Tuesday the company’s CEO and two of its board members resigned. And on Monday the company announced it was going to miss expectations. Since then the company’s stock has fallen to about 50 cents a share, down from a high of $39. Certainly this spells trouble for the fledgling CLEC, but it also could cause problems for the optical equipment vendors supplying it.

Cyras Systems Inc., which is preparing for an IPO filing, happens to be one of them. Even though the company hasn’t yet announced customers, sources have told Light Reading that the startup has secured $75 million in equipment commitments from several carriers, with ICG and at least one other CLEC making up the bulk of that commitment.

Cyras officials deny that ICG is a “significant” customer, though they admit that ICG is on the company’s soon-to-be-announced list. Still, they say that the company’s strategy has never focused on the CLEC market exclusively, and, in fact, the company is targeting larger carriers.

“We’ve never planned to build our business on CLECs,” says Ron Kelley, vice president of North American sales for Cyras. “That doesn’t mean that we don’t want their business, but we’re more focused on building a customer foundation that includes the Qwests, the MCI/Worldcoms, and the AT&Ts of the world.”

Even though analysts are confident the company -- and its IPO prospects -- can weather the demise of ICG, Cyras is still battling rumors that have surfaced since its CEO resigned earlier this month (see Cyras CEO Resigns).

Larger equipment vendors also stand to lose revenue as ICG takes its final breath. For example, Cisco Systems Inc. (Nasdaq: CSCO) has sold quite a bit of its optical gear acquired from Cerent to ICG in the past, and it had planned to sell even more over the next year. As of June 30, Cisco had agreed to provide $180 million worth of financing to the carrier with a three-year repayment schedule, according to the latest ICG quarterly report filed with the Securities and Exchange Commission.

But analysts don’t think that ICG’s troubles will affect Cisco too gravely. For one, Cisco’s Cerent customer base is spread out to well over 200 customers. Also, only 7 percent of Cisco’s overall revenue comes from vendor-financed deals and only 10 percent of that 7 percent is used to finance deals with CLECs, says a Cisco spokesperson.

Financial woes of CLECs have been lingering for quite some time. Other equipment vendors like Mayan Networks and OMM Inc. found themselves in tight situations when GST Telecommunications (Nasdaq: GSTX) went belly-up last spring.

And the problems won’t be going away anytime soon, say analysts and venture capitalists.

”The capital market for carriers has gotten terrible,” says Fred Wang, general partner at Trinity Ventures. “I tell my portfolio companies to be careful about selling to smaller carriers. They may be able to get the sales early on, but they won’t provide any growth or they won’t be able to collect revenue on them. I expect things will get worse for the CLECs over the next six months."

If the trend continues on a larger scale, it could seriously affect all equipment vendors large and small. Vendors like Lucent Technologies Inc. (NYSE: LU) could be one of the hardest hit, says Max Schuetz, analyst with Thomas Weisel Partners LLC. And smaller vendors who often look to CLECs for validation before going to bigger carriers could find that avenue closed off, too.

But overall, analysts don’t think there is anything to panic over yet. Some feel that the CLEC market has become overcrowded and this is simply a market correction. “With some of these players out of the market, more aggressive and healthy carriers will remain, which will be better for equipment vendors,” says Schuetz. “I have a hard time getting very worried about the situation.”-- Marguerite Reardon, senior editor, Light Reading, http://www.lightreading.com

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