PAETEC Reports First Post-Merger Earnings

In its first earnings call since its merger with US LEC Corp., PAETEC Holding Corp. reported first quarter revenue of $194 million, which represented a 37.8 percent increase over first quarter 2006 revenue of $140.8 million. Adjusted EBITDA for the 2007 first quarter increased 52.5 percent to $34.2 million over adjusted EBITDA for the 2006 first quarter of $22.4 million.

The company posted a small loss compared to the first quarter last year, mostly because of costs related to the merger, it said.

Results included three months of performance from PAETEC and one month for US LEC. PAETEC completed its merger with US LEC on Feb. 28, creating one of the largest competitive telecommunications providers in the United States. PAETEC, which was privately held prior to its combination with publicly held US LEC, began trading March 1 under the symbol PAET.

In Wednesdays earnings call, PAETEC CFO Keith Wilson said the increase in revenue was due to the addition of US LECs results for March 2007 and an increase in sales of network services, notably MPLS VPN service and integrated T1s.

Net loss for the 2007 first quarter was $5.8 million compared to net income of $12.5 million for the first quarter of 2006. This resulted primarily from the write-off of $9.8 million in debt issuance costs related to prior credit facilities that were terminated on Feb. 28 as part of the merger closing transactions. Increased depreciation and amortization expense of $5.6 million and increased interest expense of $11.8 million related to the merger also contributed to the change, the company said.

Wilson offered a clearer glimpse at the results of the combined companies by providing a pro forma snapshot of results had the merger closed Jan. 1, 2006. PAETEC Holding’s revenue would have increased to $267.6 million for the 2007 first quarter from $243.6 million for the 2006 first quarter, yielding a growth rate of 9.9 percent. Adjusted EBTIDA would have demonstrated an increase of $11.4 million, or 30.6 percent, from $37.2 million in the 2006 first quarter to $48.6 million in the 2007 first quarter.

PAETEC CEO Arunas Chesonis reported that integration of the companies is progressing better than expected.

He said the company has organized its sales into direct, agent and carrier channels and consolidated its commission and compensation plans, including extending residual commission plans favored by PAETEC to the former US LEC staff.

The company also has extending its customer advisory board, a three-year program encompassing some 500 PAETEC customers, throughout its new, larger territory.

EJ Butler, PAETEC COO, said the least-cost routing tables were completed ahead of schedule as were reassignment and renegotiation of carrier contracts. PAETECs network grooming activities are ongoing in former PAETEC territories and overlapping geographies and will be applied to the US LEC service areas.

Butler said cross-selling has begun for certain products, including PAETECs equipment for services program and US LECs data center services. He said this activity will increase in the second half of 2007.

Chesonis said consolidation of the companys two legacy billing systems will be pushed to 2008.

The company plans to expand organically in Northern California an area not impacted by the integration. Wilson expects $5 million in capital expenditures in fourth quarter for the purchase of a 5ESS switch and a softswitch, which will be deployed in the San Francisco Bay area. Adjacent builds at sub $1 million price tag are not planned for this year, he added.


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