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Optical/IP

Yipes Joins Chapter 11 Club

Sign of the times: Bankruptcies have become so common that companies are turning to new ways to spin them as positive events.

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
http://www.lightreading.com
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Peter Heywood 12/4/2012 | 10:44:12 PM
re: Yipes Joins Chapter 11 Club What proportion of companies that file for Chapter 11 survive and eventually prosper? A small proportion, I suspect.
Scott Raynovich 12/4/2012 | 10:44:12 PM
re: Yipes Joins Chapter 11 Club Lots of folks posting on the press release, was hoping I could draw some comments over here.

Sooooo, whaddaya think, LReaders? Yipes!
pablo 12/4/2012 | 10:44:11 PM
re: Yipes Joins Chapter 11 Club
Just curious - has any of the SPs that's gone into Chapter 11 ever managed to recover and move past that? It seems what happens is that, after a while, someone simply acquires them for pennies a dollar.

If I'm a business customer, would I sign up with a SP in Chapter 11? I doubt it. Quite the contrary, I would assume many customers are not going to wait for the network to remotely threaten to go dark before making their move - elsewhere, preferably to a good ole stable ILEC or IXC.

Going chapter 11 seems to be en vogue, since in the US it's a relatively easy way out of a truckful of financial obligations, but it is also , no matter what they say, the beginning of the end. The terminal patient room. I can't think of a dramatic turnaround story for a large telecommunications company after having declared Chapter 11.

It's das, since Yipes seemed to have a solid business model, with focus and execution and everything done right. This is rather discouraging. Ma Bell's victory is becoming more and more evident.
yit 12/4/2012 | 10:44:11 PM
re: Yipes Joins Chapter 11 Club My brother is a bankruptcy attorney who has handled a number of these filings in different industries - everything from Casinos to GX ...

He has said that he has generally seen two general themes for businesses that file:

1) A business is poorly run and gets its debt structure out of whack.

2) A bunch of companies in the same industry get their debt structure out of wack, and then begin to file Chapter 11 one after another.

Obviously our industry is currently undergoing #2 right now.

He says that companies can and do recover from #1. Very few companies recover from #2 - he then points out the airline bankruptcies from a few years ago.

There was no 'differentiation' between airlines - (NOTE that they were trying to differentiate on the 'routes' that they covered). Unfortunately the incumbents were able to come in and quickly service the 'differentiated routes' the startup airline businesses were quickly commoditized and many were put out of business.

< Does this 'route' stuff sound familiar? >

Tell me what Yipes differentiation is when companies like BellSouth can turn on Metro Ethernet services by leveraging their existing infrastructure? (Provided they get off their butts do it?).

The answer is very little.

Our industry suffers from complete lack of differentiation - Unfortunately we can look forward to a lot more bankupticies from SPs - likewise we can look forward to a lot more metro optical access platform companies going down.

(READ: if your company is building a box that breaks the bottleck between the last mile and core optical infrastructure then you may be <or already="" are=""> in trouble).

I guess that this is what capitalism is all about. But right now it certainly feels like it sucks!</or>
Steve Saunders 12/4/2012 | 10:44:10 PM
re: Yipes Joins Chapter 11 Club Yes, IG«÷m confused.

If I go bankrupt will people think that IG«÷m strengthening my financial position?

--Steve
Hanover_Fist 12/4/2012 | 10:44:08 PM
re: Yipes Joins Chapter 11 Club Isn't Extreme heavily inovolved with Yipes? Is this another case of vendor financing (black &) blues, or will Extreme also put a positive spin on this...

"We prefer all our customers to file for Chapter 11," said Gordon Stitt, CEO of Extreme. "This way, we guarantee them the lowest prices for our equipment."
fundamental_guy 12/4/2012 | 10:44:07 PM
re: Yipes Joins Chapter 11 Club Yipes bankrutcy filing provides some very usefull
information to the telecom industry.

#1:
The first message is that if your revenue growth
is mainly based on having only dark fiber access
to your customers than you are doomed for failure.

#2:
If you think using LAN technology you can build a
public network you will soon run out of money.

#3:
If you think IT departments are quite excited
about plugging their LAN traffic into directly
into a public then you dont understand your
customers.

Wonder what will happen at the next Yipes World
GEC conference ?


network
Hanover_Fist 12/4/2012 | 10:44:07 PM
re: Yipes Joins Chapter 11 Club I was recently at a financial conference and heard the analysts mention a new term for this situation - rotting on the vine.

There are a number of bankrupt service providers that no one is willing to touch - e.g., 360 Networks, [email protected], etc...that don't have any suitors even at pennies on the dollar - and there are many more like that out there...
pablo 12/4/2012 | 10:44:07 PM
re: Yipes Joins Chapter 11 Club
Yes, it's surprising that it is pitched as an effective negotation strategy to bend creditors' and business partners' arms, and someone will go and believe it. Oh yeah, the standing versus creditors and partners is everything, and never mind the effect it has on exisiting customer base and prospects...

With *every* service provider that's gone Chapter 11 thus far, the inevitable outcome seems to be that someone in the end snatches up the assets for a shamefully low amount of money.

I am surprised no one's come up with a business plan that simply focusses on buying up bankrupt SPs, attempting to create economies of scale by building a large network that's been bought very cheaply. It seems you can buy a $100M infrastructure for a fraction of that these days.
dbwbca 12/4/2012 | 10:44:06 PM
re: Yipes Joins Chapter 11 Club Covad is one SP that has entered Chapter 11 and then later successfully exited. Their long term prospects are open for debate, but they were able to emerge from bankruptcy in better shape. The shareholders kept most of the company while the debt holders got only about 20 cents on the dollar.

It appears that a couple of other SPs may come out of Chapter 11 more or less operationally intact, but shareholders will get nothing and debt holders will get pennies. I think McLeod and XO may fall into this category, and maybe even Global Crossing. There is a very long list of SPs with significant revenues that are teetering on the brink. (Williams, Focal, Allegiance come to mind.) I would expect the same (or merger/acquisition) from them rather than a shutdown and liquidation similar to Northpoint, Rhythms, etc.

The sting of bankruptcy can be quite different depending on whether you're an employee, customer, share holder, debt holder, etc.
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