PAETEC Close to Naming New South Region Channel Chief

PAETEC (PAET) expects to name a new South region president by Thanksgiving, chairman and CEO Arunas Chesonis said on Thursday in an exclusive interview with PHONE+.

“That way the person can be involved in budget planning for 2010 so they don’t inherit something they didn’t have influence on,” he said.

John Leach vacated the top channel chief position in September for a post at Windstream Corp. (WIN) Now, after almost two months of interviews to find Leach’s replacement, a decision could come at any time.

“I think we’ve got the leading candidates down to the final two or three,” Chesonis said.

Each of the contenders already works at PAETEC, and that’s good, Chesonis said. That way, the new regional head will be familiar with the CLEC’s operations and employees, so the break-in curve will take less time.

Battling the Recession

News of the soon-to-be-announced channel executive came the same day as PAETEC reported its third-quarter 2009 earnings. The numbers weren’t mind-blowing, but the company’s standing as it rides out the recession is promising.

“Even though we are still experiencing a difficult economic environment, we grew enterprise business over 1 percent from the second quarter to third quarter of this year,” Chesonis said in a conference call with analysts.

Yet, on a regional basis, and like its peers, PAETEC is dealing with fewer sales in areas where unemployment is high and demand from verticals such as real estate is low.

“You can expect that in locations like California, Florida, [business] still tends to get harder hit,” Chesonis told analysts.

However, PAETEC is “actually seeing some good sales results” in parts of the Midwest, even as key markets such as Michigan have been slammed by the automotive industry’s collapse, Chesonis said.

All of those factors contributed to PAETEC’s third-quarter losses of $6.5 million. Still, that’s better than the same period last year, when the Rochester, N.Y.-based company lost $6.9 million. Revenue was down, though – in 2008, sales amounted to $406.1 million. This time around they came to $395.7 million. Fewer carrier-services sales helped account for that drop – those deals fell by $1.5 million.

More M&A? Coming Right Up

Nonetheless, Chesonis doesn’t seem to be obsessing over near-term results. Rather, the company is planning for growth, much of which will be achieved through further M&A. PAETEC in the last four years has purchased several rivals, including US LEC in 2006 and McLeodUSA in 2007. But before much more acquisition activity takes place, PAETEC wants to finish integration duties.

“I think US LEC is virtually done,” Chesonis said. The final task is to migrate a few stragglers onto PAETEC’s billing platform. That will happen at the end of the year, marking the “last piece” of the US LEC integration, said Chesonis.

It’s a different story for McLeodUSA. Integration work is about two-thirds complete and should be done in nine to 12 months, Chesonis said. The transition is taking a little longer because McLeodUSA used a “home-grown” billing system based on older technology, he explained.

But even in the midst of those projects, PAETEC executives are watching for other M&A targets. To that end, the CLEC’s board has approved a new five-year strategic plan “to start looking a little bit more aggressively,” said Keith Wilson, PAETEC’s CFO, on the conference call.

If the situation warrants, the company might be willing to leverage a purchase four times its operating cash flow. That is, if, in “a very short period of time … we can see network cost and expense synergies quickly bringing that down … just like we did with US LEC and McLeod,” Wilson said.

Meanwhile, PAETEC also expects to invest in “high-quality people,” as well as product development, said Chesonis. That’s because, as the economy recovers, albeit slowly, companies still will rely on broadband to replace face-to-face meetings and to facilitate collaboration worldwide. In fact, broadband adoption only will increase from here on out. Nevertheless, while the demand bodes well for PAETEC, it does not necessarily translate into more customers, who have yet to rehire “the people they laid off in the last 18 months,” Chesonis explained.

“We’re optimistic but we’re cautious about how fast everything’s going to crank up as far as new jobs created,” he said. “But that doesn’t mean usage can’t go up.”

Direct Sales Initiatives, Opportunities for Agents

Finally, sales strategies are shifting at PAETEC, as they seem to be throughout the telecom industry.

First, similar to rivals such as XO Communications (XOHO.OB) and Level 3 Communications Inc. (LVLT), PAETEC is sniffing out more data-centric sales experts.

“It’s not so much of focus on people that have traditional competitive telecom industry experience, but it’s people that can come in and really speak to the office of the CIO,” Wilson, referring to direct sales recruitment, told analysts.

PAETEC also wants those internal marketers to be knowledgeable about national accounts, “rather than just the traditional relationship managers,” Wilson said.

At the same time, the CLEC continues to diversify its network services, and indirect agents can take advantage. PAETEC has been experimenting as an energy broker for “several hundred” gas and electric customers in New York, to determine if an additional focus on the utilities sector makes sense. It does, Chesonis said.

“More CIOs and IT directors are being pulled into energy-purchasing decision-making,” he said. That translates into the need for data centers with redundant backup power, green efficiency methods, disaster recovery and more.

PAETEC’s energy business represents just a small piece of the company’s overall revenue, “but it sort of plants the seeds for the next five to 10 years,” Chesonis said.

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