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Z-Tel, MCI amend crucial contract
By LOUIS HAU, Times Staff Writer
TAMPA -- Z-Tel Technologies Inc. warned Thursday that recent changes to a crucial contract with the MCI unit of bankrupt WorldCom Inc. could lead to an earlier-than-expected demise of their partnership. In a filing with the Securities and Exchange Commission detailing its third-quarter losses, the Tampa telephone company said it has restructured an agreement with MCI governing the two companies' partnership for MCI's "The Neighborhood" calling plan, which accounts for nearly all of Z-Tel's wholesale business. Under the plan, residential phone customers sign up for a package that includes both MCI long-distance service and local phone service that is provided by Z-Tel instead of dominant local carriers such as Verizon. The amended pact gradually will phase out the minimum $1.5-million licensing fee MCI pays Z-Tel every month to use its proprietary software for back-office support and premium phone services, such as voice-mail alerts via cell phone, e-mail or pager. But it increases per-line fees and per-usage fees that MCI is charged whenever Neighborhood customers use these services. The increase in those fees will mean more revenue for Z-Tel if customer enrollment and usage increases. But because the amended agreement also enables either side to exit the partnership as early as March, six months earlier than stipulated in the original contract, on "a worst-case basis, revenue from MCI could decline by 40 percent or more in the first quarter of 2003 and then cease entirely thereafter," Z-Tel said. Z-Tel said "much will depend on the focus" of WorldCom's bankruptcy reorganization plan. Nonetheless, Z-Tel views the change as beneficial because it grants the company more marketing flexibility, according to Sarah Bialk, director of investor relations. The Tampa company was barred from negotiating similar pacts with other major telecom carriers, she said. The amended contract removes that prohibition, Bialk said, and such talks are under way. She declined to identify the companies. "This is actually an opportunity because now we can market this offering to other significant carriers who may be in better shape financially and who have brand-name recognition equal to MCI," she said. Under the Neighborhood plan, consumers pay a flat monthly fee of $50 to $60 for unlimited local and domestic long-distance calls. The plan has signed up more than a million customers since it was launched in April. The Neighborhood is by far the most important part of Z-Tel's wholesale services business. Z-Tel announced earlier this year that it was shifting its focus away from retail telephone services to providing wholesale services to partners such as MCI. Although the Neighborhood got off to a fast start, WorldCom's accounting scandals and subsequent bankruptcy filing in July hobbled its ability to market the plan. Through Sept. 30, Z-Tel had received $18.4-million in revenue from its MCI pact. During the third quarter, the company reported total revenue of $58.7-million, down from $68.6-million a year earlier. The company posted a net loss in the quarter of $5-million, or 26 cents a share, narrowing from a loss of $11.9-million, or 77 cents a share a year earlier. Z-Tel's thinly traded stock closed Thursday at $1.33, up 3 cents. -- Louis Hau can be reached at hau@sptimes.com or (813) 226-3404.
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From the Times Business report Robert Trigaux
From the AP
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