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End of an Era?

In the saga of the post-UNE-P world, Trinsic Inc. has entered a new chapter 11, that is. After years of customer losses, overspending and botched service offerings, the former Z-Tel Technologies Inc., the one-time star of competitive telecom, has filed for bankruptcy protection. Executives touted plans to emerge from bankruptcy with absolved balance sheets and sharpened focus but, at press time, PHONE+ learned Trinsic was bound for the auction block. Anonymous sources speculated the CLEC would be defunct by the time this article was published. Trinsic executives in earlier interviews had said the company would return with a renewed focus on the Bell resale model, saying the strategy would work because money would be more wisely spent the second time around.

Whether Trinsic sells or makes a comeback, carriers that long ago abandoned the UNE-P model say Trinsics bankruptcy barely impacts the industry. The company was past its prime, they say. But Trinsic had active business relationships chiefly, deals with master agents. Some of those companies risked losing tens of thousands of dollars if Trinsic couldnt pay them no small sacrifice when they had survived even bigger telecom implosions. Weve never had to take a hit, not even during VarTec or WorldCom [bankruptcies], says one agent speaking on condition of anonymity. If Trinsic does survive, it faces supporters and doubters. Agents are waiting to see if they will get paid and what Trinsics appeal will be. Competitors wonder why Trinsic didnt shed its UNE-P model.

Trinsics financial troubles landed the company in an Alabama bankruptcy court on Feb. 7. Trinsic officially is headquartered in Tampa, Fla., but it owns facilities in Alabama and has indicated it would relocate. There was no single tipping point for Trinsics fall from glory. It was just a case of constant, gradual customer attrition, says Brian Washburn, senior analyst for Current Analysis. In January, investor Thermo Credit LLC saw a default coming and told Trinsic it was uncomfortable continuing to fund the CLEC. Thermo Credit buys customer payments at a discount for cash. Seth Block, executive vice president of Thermo Credit, says his company could have pulled funding altogether, but instead provided $11 million for Trinsic and its four affiliates to operate during reorganization. We think Trinsic will come out of this as a better company or theyll merge with somebody else, Block says. Trinsic really had few options. When it filed bankruptcy, the company reported assets of $27.6 million against debts of $48.3 million. Two days later, three of the companys directors resigned. About 48 hours after that, another director defected.

At the end of 2004, the federal government, in a widely predicted move, killed UNE-P. CLECs then had a little more than a year to switch business models to meet the March 11, 2006, deadline. Many companies had anticipated the ruling and had already started making changes. Some transitioned to UNE-L/switch-based models while others installed softswitches to provide VoIP over UNE-L or wholesale DSL. Others resold hosted VoIP or TDM services from a facilitiesbased CLEC. And still others merged with rivals, as Talk America did last year with Cavalier Telephone.

Trinsic, on the other hand, moved too slowly, too late. CEO Trey Davis has blamed the bankruptcy on the loss of UNE-P, but the reasons went far deeper than that. Trinsic had lost big-time clients; it didnt get its VoIP initiative far off the ground; and it made little headway with its version of unified communications, Personal Voice Assistant. Michael Rogers, Trinsics vice president of sales and marketing, also attributes the bankruptcy to the loss of UNE-P. It kind of took us by surprise, he says. We saw it coming over the last couple of months of 04, but that was about it. Once UNE-P was gone, Trinsics margins kept shrinking. Cable and VoIP competition ate into retail profits. Commercial agreements, higher than UNE-P rates, catapulted expenses. Trinsics wholesale focus wrapped up when the company bought nearly 112,000 local access lines from former customer Sprint Nextel Corp. And attempts to move to IP flopped, culminating in the sale of those lines and subscribers to privately held CommX. We never got enough customers to cover our expenses, to make a profit, says Andrew Graham, vice president of legal for Trinsic. All of this, combined with overspending on marketing, and back-office and product development, resulted in a bankruptcy filing that seems to have surprised no one.

We saw this coming a year and a half ago, says Pete Keane, president and CEO of KeaneTel, explaining he transferred as much business as he could from Trinsic. Another master agent, who asked to speak on background because he still works with Trinsic, could forfeit thousands of dollars. Theyve asked us to eat a months worth of commissions, he says. Trinsic wants to honor agent money owed prior to Feb. 7, but there is a chance those unpaid commissions will be considered part of the companys bankruptcy debt. Were still working the ins and outs of what we can do under bankruptcy law and financially, Rogers says. He cant offer details, but says he will talk with agents individually.

Most partners say Trinsic has been candid and forthcoming with them communication they appreciate. But that doesnt necessarily mean they would send business Trinsics way, post-bankruptcy. It depends on the value proposition, Keane says, echoing his industry counterparts. Yet another agent who would only talk on condition of anonymity says, Its going to be difficult to start sending business to them because of what just happened.

Agents are gun-shy because, other than spending money more efficiently, Trinsic doesnt plan to do much differently. The company might install facilities if it achieves enough density in one area, says Graham, but there are no guarantees. Services would remain the same POTS and Internet and the company still would rely on the appeal of nationwide coverage that it provides through commercial agreements with the LECs. Thermo Credit sees hope, as well. Trinsic just happened to be strapped with too much debt from events that happened years in the past, and those events finally came to a head, Block says. Restructuring, he adds, will give them the relief they need.

Others disagree. Its a do-over, says Craig Clausen, senior vice president and COO of research firm New Paradigm Resources Group.

Its scary. What are they going to do differently? says an executive with a UNE-L CLEC, speaking on background. He recommends, along with several other sources, that Trinsic become as independent as possible, not rely on the ILECs for total service. Another analyst, who also spoke on background, says Trinsic needs margins and that it likely wont get them with its proposed approach. You have to add differentiated services, he says. The most profitable resellers offer prepaid residential service, he says, which Trinsic does not. Washburn, too, says the resale model can work, but that a provider must sell valueadded services to businesses. The trick actually isnt in making the margins on operating resale-based dial tone services; its in customer acquisition at low-enough costs, he says. Washburn points to Bullseye Telecom, Granite Telecommunications LLC and Birch Telecom as some of the former UNE-P CLEC success stories. But even these companies have experienced the strain of a changing model. Birch, for example, filed for chapter 11 bankruptcy in August 2005 and laid off one-third of its workers.

Trinsic leaders know their company has a lot to prove. Its all on us. We understand that, Rogers says. Then he adds: While Im 100 percent confident in our abilities to emerge one way or the other as a real successful entity, there are times even my head gets bowed.


Trinsics Rocky Road

Z-Tel, which became Trinsic in 2004, was a star in the CLEC world that developed after the 1996 Telecom Act. Z-Tel was founded in January 1998 and made its name as the first national local telephone service provider in the United States. In mid-2002, even though it was suffering flat growth, increasing bad debt and laying off workers, the company snagged an enviable $50 million contract with WorldComs MCI Group. It planned to focus more on wholesale than residential services. But a few months later, WorldCom went under.

Z-Tel recovered somewhat when, in 2003, Sprint Nextel became a wholesale customer.

Hard times really started in 2004. Commercial agreements were about to replace UNE-P. But Tampa, Fla.-based Trinsic had spent millions of dollars and several years developing back-office functionality for provisioning UNE-P services. It then announced it would pursue VoIP and started building those networks. In September of that year, Trinsic laid off dozens of employees.

In early 2005, the stock market was losing faith in Trinsic. Trinsic turned to Thermo Credit for funding, agreeing to sell the investor $22 million in receivables. A month later, Trinsic officially launched its IP business. It boasted customers including Weston United Community Renewal Inc., a Harlem, N.Y.-based nonprofit organization that works with the homeless, and Thacher Proffitt, a Wall Street law firm that serves the financial industry. The Weston contract was good for three years and $250,000. Then, in September of that year, the company was in danger of being delisted in the NASDAQ SmallCap Market. In 2006, Trinsic executives offloaded the VoIP business because it was costing too much. Trinsic sold its VoIP lines to CommX Holdings Inc., a privately held provider also headquartered in Tampa.

At the same time as it was trying IP, Trinsic bought 111,697 UNE-P local access lines from Sprint, a move that concluded Trinsics wholesale business. In fact, Sprint was Trinsics only wholesale customer in 2005 and 2006, the company said in SEC filings. Last year turned out to be the clincher for Trinsic. It said it expected its retail and wholesale revenue to decline in 2006, which it did, because it sold more access lines to another CLEC, stopped wholesale operations and IP, lost customers, and paid more for commercial agreements than it did for UNE-P.

Links
Birch Telecom www.birch.net
Bullseye Telecom www.bullseyetelecom.com
Cavalier Telephone www.cavtel.com
Current Analysis www.currentanalysis.com
KeaneTel www.keanetel.com
Granite Telecommunications LLC www.granitenet.com
New Paradigm Resources Group www.nprg.com
Sprint Nextel Corp. www.sprint.com
Thermo Credit LLC www.thermocredit.com
Trinsic Inc. www.trinsic.com

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