Bankruptcies Take Their Toll

To understand the impact of the growing list of telecom bankruptcies, look no further than Universal Access. Just two months ago, the interconnection provider announced higher-than-expected earnings and an operating (EBITDA) profit. It was a moment of sunshine amidst the gloom, offering the industry evidence that a company could navigate the wreckage and execute a business plan. That moment didn't last.

On Friday Universal Access told Wall Street that customer bankruptcies have left management unable to make reliable projections about the company's revenue. The bankruptcy of a single customer, Aleron, will shave $4.8 million off first quarter income. The threatened chapter 11 filing by another unnamed customer (almost certainly MFN) has put another $3.3 million in 1Q revenue at risk.

Not surprisingly, the news sparked a steep selloff today in the company's shares, even though UAXS emphasized that it has a "sound cash position" and limited debt. With new sales slowing, the driver behind its performance may now be cost-control measures. That's the case at more and more companies, which creates a Catch-22 cited elsewhere in Universal Access' announcement, which noted a lengthening sales cycle as potential customers cut or postpone planned spending.

You watch your pennies carefully when you're worried about customers' solvency. Sure, they may look healthy today. But in the current environment, the wheels can come off quickly. Two months ago, Universal Access had an upbeat story. Sometimes it's the customers' customers you have to worry about.