PAETEC like a slew of other voice and data providers is looking to differentiate itself but perhaps its biggest asset is CEO Arunas Chesonis (pictured) whose unique style allows him to impress you about the company's direction without coming off as boasting. In fact in a recent conversation with Arunas, he told me the company is still growing and hiring. He mentioned a large non-cash charge this last quarter which made the quarter look worse than it was. I researched a bit and in the company's recent conference call there is a discussion of a goodwill impairment charge which is related to the company's acquisition of McLeodUSA. PAETEC is taking a charge now because it is not sure it can have positive net income for four years allowing it to recognize the benefits from carry forward losses. The company has some of these details in a press release and the transcript of the conference call is available for those people who like a heavy dose of financial acronyms mixed in with their telecom nomenclature.
Chesonis is optimistic about the future and the reason has to do with changes in the economy. You see much of their revenue revolves around providing outsourced services and as companies cut heads, they are in more need of assistance. For example the its Pinnacle division which handles telecom expense management among other tasks is more useful to companies who have less available people to crunch spreadsheets.
He further explained incumbents are cutting back as well and they have fewer resources to support customers with bills in the $10k/month range. Chesonis says this level of customer is good for PAETEC. Interestingly he says companies are more willing than ever to look to alternatives now that the economy is slow and savings are becoming more important.
Another interesting data point is the fact that the company has more software financing contracts out to market now than in any other six-month period as a result of reduced CAPEX budgets. And this is exactly the type of sale which makes PATEC happy because as Chesonis explains, "If you can do 20% of revenues from the DMARC inside [such as] managing Cisco gear, routers and enterprise software, it's a stronger bond and tough for a competitor to displace you."
I asked Arunas if his company is getting lots of calls from companies who want to be acquired. He says yes and that the callers are much more flexible on their terms and conditions. I received a mixed answer as to whether the company is looking to pick any of these companies up. On the one hand he said they would have to get a no-brainer price to go through the extra work. On the other he mentioned he would rather pay up for stronger assets - mentioning, "What else is going on if the price is so low?"
And it was here where Chesonis made the comments that few company leaders make and it should remind us all that a bit of humility can be healthy, no matter how successful you are... He said, "We have our own issues to fix. We are a strong B student but have more to do," referring of course to the integration of past acquisitions the company is still digesting.
What can we expect going forward?
The company is continuing to expand overseas selling Allworx (SMB IP-PBX) and Pinnacle solutions and they hope to be in 15-20 countries in ten years. In addition, they are focusing more on their energy business and they think the time is right as CIOs are getting involved in energy purchase decisions than ever. So while I have heard the argument from some that all CLECs are the same, this one is going to put natural gas and electricity on invoices in the next few years.
The Chesonis lost me. He said energy costs are going higher. Half of me wanted to get up and leave . Are you serious I thought ? Didn't we already burst that energy bubble? My brain just couldn't help thinking and as more neurons fired I said to myself, can we just keep oil at $30-$45 for ten more years? Please? Then reality hit me - I was in an interview after all, I better pay attention. After all, Arunas will still talking and I must have missed at least two sentences. And this guy doesn't waste his breathe. He makes great points - what was that he said? Oh yeah, apparently he thinks it will take 20-30 years for renewable energy sources to make an impact - does Obama know about this I wondered? Then he went on to say most customers spend four to five times more on energy than on telecom. Sounds like a big opportunity.
PAETEC has 3.8% market share in the northeast and the company's goal is to duplicate this share in other parts of the US. They have 1.1% share in the west, 1.3% central and 2.5% in the south. To help make this happen he tells me his company cares more, every new employee gets stock options and they get fair bonuses. In the end I can't speak for the thousands of employees at PAETEC who I haven't met but what I can tell you is this CEO is accessible and is always selling, saying smart things and seems to care. Will this translate into world domination? That isn't for me to decide but with a suite of software solutions, web hosting options, SMB phone systems, VAR relationships with communications hardware makers, an energy business and more going on at the company there is enough diversity of revenue to protect the company from shocks in one part of the business. The flipside challenge is managing a business which has as much diversity as a typical ILEC while keeping the "we care more" mantra at the forefront of the minds of 3,700 employees. And Chesonis is a weapon - I think he is the right guy to motivate a team going up against the big guys in the market. Now let's see what the economy has in store for PAETEC and the rest of the market this year and next.