Will Diversification Save Universal Access?

With a stock price hovering around $1 and a disclosure that its auditor has expressed doubt about the company’s ability to continue, Universal Access Global Holdings Inc. has seen better days.

The company warned in regulatory filings it might be forced to seek bankruptcy court protection if it cannot raise capital or improve its operations.

Universal Access has been posting losses since its inception in 1997.

“We are attempting to raise additional capital or seek a strategic alliance or merger to meet our shortterm and long-term liquidity needs, but have not completed any transactions,” the company stated in a Securities and Exchange Commission filing April 14.

“These conditions raise substantial doubt about our ability to continue as a going concern.”

During an interview with PHONE+ in late May, Universal Access CEO Randy Lay declined to comment specifically on the company’s plans to raise capital or strike a possible alliance through consolidation.

“There is a good deal of consolidation going on in the industry for lots of good reasons and, obviously, we keep ourselves active in those discussions,” he says.

Universal Access has carved a niche by developing comprehensive databases detailing network infrastructure information, including the availability, price and location of telecommunications networks from around the country. Universal Access has helped U.S. carriers assemble private-line circuits outside of their networks, and the company has managed those assets.

As a throng of ISPs and other communications companies went belly-up in recent years, demand for Universal Access’ services did not materialize as swiftly as the company projected, and circuit disconnections last year hurt the company’s bottom line. For the 2003 fiscal year, Universal Access posted revenue of $70.26 million, down 30.5 percent from $101.16 million in the previous year. The Chicago-based company posted a net loss of approximately $23 million for 2003.

“The decrease in revenue in 2003 compared to 2002 was attributable to circuit disconnections and lengthening new sales cycles,” the company reported in the 10-K filing. “We expect that continued negative trends in the telecommunications industry will continue to adversely affect our revenue.”

In the first quarter, the company also posted a decline in revenue over the same period a year ago.

Universal Access attributed the decline to termination of circuit contracts, price compression and excess capacity.

Lay, the former CFO, took over the helm as chief executive last July when Universal Access announced closing a $16 million equity investment through CityNet Telecommunications Inc. CityNet contributed the funds and network assets in exchange for a 55 percent stake in the company.

Since that time, Universal Access has been seeking to reduce its dependence on the U.S. carrier market.

Under Lay, Universal Access has been diversifying its business to generate revenue from cable companies, international carriers, city governments and large technology firms like Booze Allen Hamilton that work with the federal government.

The U.S. government wants to gather detailed information about the national telecommunications grid to support homeland security, Lay says; and Universal Access can provide such data as the number of service providers operating in a particular city, where fiber and copper networks are running, and the location of interconnection hubs.

Lay says Universal Access is not working directly with the federal government but supporting such customers as Booze Allen Hamilton and EDS. He says the new division booked $250,000 in 2003.

Cities also are seeking information to optimize their networks and learn where their networks are vulnerable to attack and damage, according to Cyrus Bamji, chief marketing officer of Universal Access.

Universal Access executives say the company is in discussions with officials in Chicago, San Francisco and Oakland, Calif.

Universal Access’ fastest growing business over the last year has been in the cable market. At the beginning of 2003, Universal Access very few relationships with cable operators; today cablecos represent about 30 percent of the company’s revenue. Universal Access helps cable companies, including Adelphia Communications and Comcast Corp., manage backbone longhaul circuits. The business has been predominantly driven by growth in the high-speed Internet market.

As the cable companies expand into new markets, they frequently lease circuits between cities and states before building their own network, says Bamji.

Universal Access also generates approximately 28 percent of revenue through international carriers, and Lay says Asia and Latin America are the fastest growing markets.

The U.S. carrier segment seems to be a different story. Citing “continued negative sales and disconnect trends in 2003 and 2004,” Universal Access stopped paying monthly rent on certain leases earlier this year.

In May, Universal Access announced an agreement to transfer 10 colocation facilities to Last Mile Connections in return for assuming about $23 million in payments over the terms of the leases.

Universal Access said the transfer of the facilities will help the company eliminate some long-term liabilities and reduce operating costs by an estimated $1.3 million annually.

Last Mile Connections
Universal Access Global Holdings Inc.

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