A CLEC With Confidence in its Outlook? Meet McLeod

It’s not often that a company gets praised for what it doesn’t do, but the
decision of one competitive local exchange carrier (CLEC) to get out of a
losing proposition has brought them within 18 months of cash-flow positive.

McLeod USA, an independent voice and data carrier out of Cedar Rapids, IA,
expressed confidence in its operations Tuesday as it announced the
withdrawal of an additional $175 million from its $1.3 billion credit
facility. At the same time, the CLEC said it was expecting to land itself
in the land of cash-flow positive in 2003.

That positive outlook, despite the fact it is drawing upon more of its
credit reserves, comes in large part from its decision earlier this year to
drop its wireless PCS deployment, a decision that will pump about $120
million into its coffers.

In 1997, McLeod paid $30 million for 26 D and E spectrum licenses that
covered much of the Midwest, part of the company’ strategy to trump analog
cell phone services in the area and become the leading wireless provider in
the region.

But the independent carrier had also been on a tear, acquiring competitors
left and right while pursuing its own land-based expansion throughout the
United States. Its fiber-optic mesh switch platform would span more than
31,000 miles and connect to 25 states.

McLeod’s buyout of fellow CLECs like Intelispan Inc., and CapRock
Communications Corp. gave it national clout at a time when investors were
keen on companies that had a business plan on rapid expansion through
acquisition and network builds.

When investor monies dried up, so did McLeod’s chances for a dual
wireless/wireline deployment. Deciding to opt with the latter, the safe
decision, the CLEC is now able to concentrate on its core voice and data
businesses.

While many CLECs were faced with dissolution in the face of competition
from incumbent local exchange carriers (ILECs), McLeod has been one of the
few independent carriers able to expand its operations and compete with its
main competitor (Qwest) while maintaining financial solvency.

The carrier has a track record of staying ahead of its earnings before
interest, taxes, depreciation and amortization and has met or exceeded its
revenue goals for 20 straight quarters. McLeod, unlike most high-tech
public companies in the nation, also has unspent credit reserves, to the
tune of $550 million.

Steve Gray, McLeod president and co-chief executive officer, said that with
more than a $500 million to call upon and the money it will get for the
sale of its wireless licenses, he is very confident of the CLEC’s long-term
outlook.

“This management team remains absolutely committed to meeting the
objectives we have established, including increasing investor value over
the long term,” Gray said. “We intend to maximize our cash flow, continue
solid growth in a challenging market, and manage through tough industry
conditions.”

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