Yipes Joins Chapter 11 Club
Take Yipes Communications Inc. The company says that filing for bankruptcy protection is step one toward making the market healthy, and the company doesn't consider the process a bad thing at all (see Yipes Files for Chapter 11).
"The bankruptcy has nothing to do with the strength of market demand or the value we see in the business," says Yipes CEO Jerry Parrick.
After burning through nearly $300 million in private funding, the privately held, two-year-old startup blames economic changes and an inability to raise more money for its current financial quandary. And it says it's ready to restructure to tackle these two formidable obstacles.
As part of its restructuring bid, Yipes wants its business partners to adjust the costs involved in making Ethernet services available to enterprise business customers, including creating access to office buildings and/or installing new fiber.
"We are aggressively negotiating with all of our suppliers of dark fiber, our transit providers, and our real estate providers, and we're making quite a bit of progress," says Parrick. He expects negotiations to be finished within a matter of weeks.
Parrick also asserts that the threat of bankruptcy adds an urgency where the suppliers haven't been eager to cooperate. "Bankruptcy gives us another vehicle with which to restructure our balance sheet."
Parrick insists the move to Chapter 11 is not a declaration of defeat. Ethernet is clearly the way to go for metro services, he insists. It's just that no one's spending on anything right now.
Like most greenfield providers that depend heavily on fiber access, however, Yipes may have been inadequately funded and unrealistic to begin with. History shows businesses dependent on fiber installation can never be overfunded -- and that their customers and revenues nearly always fail to meet projections.
"When an innovative company gets overleveraged in anticipation of a regular growth cycle, they're in trouble when the cycle doesn't materialize," says Cary S. Robinson, senior analyst with U.S. Bancorp Piper Jaffray. He says Yipes's bid for business customers has further hurt it, because most of them need to have access built from scratch in order to tap into the services Yipes offers.
Indeed: It's the startup costs of installing fiber access to get customers that likely hurt Yipes the most.
"The cost of getting enterprise customers linked to metro rings is exorbitant," says Jason Knowles, analyst with Current Analysis. "You have the cost of trenching, putting in the fiber... If you lease it, you're cutting into your margins."
Even with about $291 million in funding, Yipes has found it tough to cope with the costs of installing or leasing the facilities it needs. In a report on the access market published last year, CIBC World Markets estimated that the average cost of installing new access fiber falls between $300,000 and $700,000, most of which is labor, a cost that's not going down anytime soon.
Analysts like Robinson say that Yipes's focus on the enterprise network, where access often needs to be built, has put the startup in a tougher position than other startup carriers, like Telseon Inc., which sell bandwidth to carriers. Telseon itself has undergone difficulties, although it claims to be retrenching (see Telseon: Profitable in 2003?).
Another strike against Yipes may be the recent entry of RBOCs such as BellSouth Corp. (NYSE: BLS) into the Ethernet services market. It's going to be tough for startups like Yipes to compete with the facilities and customer reach that RBOCs have, even if they're suffering pains from the downturn, too.
Yet another disappointment has been the slow ramp of the Ethernet services market in general. In a report released this past January, analysts David Jackson, Arij Mawji, and colleagues from Morgan Stanley Dean Witter & Co. say Sonet, not Ethernet, services will dominate the services market for the foreseeable future: "Though important, [DWDM and Gigabit Ethernet services]... will likely account for less than 30% of the aggregate metro market in 2002," they write.
Some sources have hinted that Yipes hasn't spent its money wisely. They say there have been lavish expenditures on publicity, litigation, and building presence in places like San Francisco where real estate costs are among the highest in North America.
Parrick says he's satisfied Yipes has made the right business decisions. "We didn't get here by ourselves," he asserts. "I don't think any of us was able to foresee nine or six or even three months ago the accleration of financial difficulties we see in the market now."
What's next? Parrick says he'll stay optimistic that Yipes can get through Chapter 11 unscathed. Some observers think it's likely the carrier will take the merger route to greener pastures, as Cogent Communications Inc. appears to be doing. Others think the company could be bought by a larger provider.
"I can see them being taken over by a carrier like Verizon Communications Inc. (NYSE: VZ), that has an interest in data-centric services," says Knowles of Current Analysis. Verizon's already built out rings in significant U.S. cities like Dallas and Seattle, he says. But he notes that Verizon faces the same straitened outlook as the rest of the telecom world, so it may not be able to afford Yipes.
Parrick himself is philosophical about the chance of getting acquired. "It's not our objective. But one of the elements of going through Chapter 11 is that you lose some control over the options of running the company. We'll wait and see... When you have a judge worrying about bankruptcy along with you, everybody has a responsibility to make the best choices for the company and its stakeholders."
— Mary Jander, Senior Editor, Light Reading