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WorldCom preps for life after bankruptcy

Mar 31, 20036 mins

Prognosis mixed as customers, industry experts assess troubled carrier's future.

WorldCom is expecting to be released from the business world’s intensive care unit – Chapter 11 bankruptcy – sometime this summer.

CLINTON, MISS. – WorldCom  is expecting to be released from the business world’s intensive care unit – Chapter 11 bankruptcy – sometime this summer.

The prognosis remains guarded, at best. More alarming to some is the peaked appearance of customers who continue to question the carrier’s long-term health and competitors that fear a suddenly debt-free WorldCom might be tempted to spark a price war.

The good news is that WorldCom has managed to largely maintain prebankruptcy levels of network performance, according to customers and industry watchers, despite having to trim more than 10,000 employees from its payroll.

However, a number of recent developments do little to allay overall concerns:

• About 30% of CTOs Merrill Lynch surveyed recently say they do not intend to renew their contracts with WorldCom because of the company’s financial situation. Moreover, internal sales data revealed earlier this year on an unauthorized Web site painted a grim picture of the company’s inability to win a significant amount of new business in the latter half of 2002.

• WorldCom recently erased almost $80 billion worth of good-will assets from its already battered books, a move that experts say will help the company’s balance sheet once it emerges from bankruptcy, but only adds to the perception that there’s little left of what was once an industry giant.

• The company’s profit margins are reportedly down to 13% while it operates under protection from creditors, raising questions about its ability to invest in infrastructure and new services. Competitors AT&T and Sprint maintain margins of about 20%.

While WorldCom is in the midst of its bankruptcy proceedings it is not required to file the same detailed financial reports to the Securities and Exchange Commission as its competitors. This leaves the industry to question whether the carrier is bringing in enough cash to invest in its network and new services.

WorldCom filed its latest monthly operating report last week, and it showed a net profit of $155 million for the month of January, compared with a net loss of $580 million in December. However, sales of $2.16 billion were down slightly from $2.2 billion.

“Our three-year plan will clearly outline our [profit] margins and where we’re headed with the company when it’s presented in early April,” says Ron McMurtrie, vice president of global marketing at WorldCom. The carrier is expected to file its reorganization plan April 15.

One financial analyst says concerns over profit margins should fade once the carrier emerges from bankruptcy.

“WorldCom’s lack of debt gives it ample cushion in this instance,” says Vik Grover, managing director of equity research at Kaufman Bros. Whether WorldCom’s debt-free cushion is fair is debatable, but Wall Street will view the carrier in a more positive light anyway.

“But the company will not grow at the rate it had prior to bankruptcy,” says another financial analyst, who requested anonymity. “WorldCom is still in contraction mode. It has a big job ahead to build up its brand name and trust with users.”

While the future holds many questions for the company, a scandal-filled past continues to haunt it. When WorldCom CEO Michael Capellas announced his 100-day plan in January, he said the company’s board would conduct a review of events involving WorldCom’s financial improprieties. Additional employees would leave WorldCom based on that review and the company’s new zero-tolerance policy, he said.

A perception issue

The carrier also is fighting a perception issue that is not easily fixed.

That is the prime reason why FCX left WorldCom and moved to Sprint. FCX, which resells flow-control valve components, immediately started looking for a new provider when WorldCom filed for bankruptcy last summer, says Jay Bush, network manager at the Columbus, Ohio, company.

“Our biggest fears were that something could happen to the network and that the company would not be here in a year or two. The stability of the company was in question,” Bush says.

FCX talked with a handful of providers before moving its $1.5 million annual contract for frame relay and VPN services to Sprint.

It took about four months for FCX to move all its traffic to Sprint’s network. In that time, Bush says, he did not notice any degradation in service or network performance on the part of WorldCom.

FCX is not alone in shifting carriers. Sprint says that by the end of last year it had won $400 million worth of business from WorldCom. AT&T says it brought in $1.2 billion in new business from troubled carriers such as WorldCom by the end of 2002.

Like FCX, clothing retailer G&G left WorldCom. The chain moved its long-distance voice business to AT&T soon after WorldCom filed for bankruptcy last year, says Harvey Borden, director of IT at the New York City company.

“Our contract was coming up right around the time WorldCom’s financial trouble was coming to light, so we took an extra hard look at other providers. It was not prudent to stay with WorldCom considering its financial condition,” Borden says.

The carrier’s dwindling staff also concerned Borden. “We ultimately thought we would be affected by the number of layoffs at the company,” he says.

Borden says G&G chose AT&T to support its “several hundred thousand dollar” annual contract because of the carrier’s stability.

“AT&T will permanently benefit from the WorldCom debacle,” Kaufman Bros. analyst Grover says.

But WorldCom’s McMurtrie balks at claims that AT&T and Sprint are benefiting from WorldCom’s misfortunes. “If that’s the best [AT&T and Sprint] can do, they haven’t captured that much market share and their financials certainly don’t bear that they did,” McMurtrie says.

Nevertheless, WorldCom does retain its loyalists.

Toyota, which runs a 1,000-site VPN that connects all of the company’s car dealerships, says WorldCom’s network is running smoothly., which braced itself for network and customer service troubles after WorldCom’s financial woes came to light in mid-2002, has been pleasantly surprised, says Dan Agronow, vice president of technology at, The Weather Channel’s online arm.

“They have been consistently excellent,” Agronow says. “The network is reliable, and [WorldCom] provides excellent customer service.”

Industry experts back up these anecdotes.WorldCom’s IP network has run as reliably as most any other ISP, according to Tom Ohlsson, vice president of business development and marketing at Matrix NetSystems, an Internet monitoring company.

However, Ohlsson points out that an outage in early February resulted in dropped packets and more latency than normal. The network slowdown lasted several hours, although it was an event that would have lasted only minutes in the past, he says. “It’s our impression that resources are stretched, so when a problem does come up, WorldCom may not be able to address it as quickly as it would have in the past,” he says.