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Yipes Communications threw the industry for a loop on Friday, when it revealed it had filed for Chapter 11 bankruptcy protection the day before in San Francisco. Although questions about the viability of Gigabit Ethernet as a business model remain at the tips of all tongues, CEO Jerry Parrick is still bullish about his companys business plan and ability to continue service to its customers. However, the company must renegotiate its agreements with suppliers in order to obtain profitability and, in turn, secure additional funding.
With $291 million in equity funding, Yipes once had strong potential for survival compared to others in the so-called EtherLEC crowd who are shouldering enormous debt. Now, Yipes future is in question. But Parrick defends the companys Chapter 11 filing, saying that, as many other providers in the industry had to restructure their costs, Yipes had to do the same or it would have been “suicide.”
Q: What brought Yipes to Chapter 11?
A: As are all the companies in the sector, we are subject to the perversity of the financial markets, especially as a startup that is not fully funded. Our cost basis was largely established when we signed our contracts at the peak of the market. When that bubble was big and everyone was on top, costs were high. Living with those contracts clearly isnt beneficial once the market rationalized.
Q: What are you doing to come out of it?
A: We are doing two things: soliciting for additional investment and working hard to restructure our costs. We have been negotiating with our suppliers for quite some time. Suppliers want to protect those contracts, but we are trying to negotiate our costs down. Investors want to see a clear path to profitability, so the two are intertwined. When they are sure we can reduce our costs, well see the color of their money. Bankruptcy allows us to continue operating while we restructure our costs. It also gives us the protection that our suppliers cant disconnect our customers or our network or deny us services while the practice continues.
Q: Is the Chapter 11 filing a result of a failed round of funding, as some have said?
A: We had significant commitment for funding but within the context of working out enough of our costs, reflecting the current market. There is angst in the dark-fiber market. Providers are having problems of their own. Collocation providers are having difficulty. The real-estate market is depressed in some areas. The whole industry is going through a restructuring of cost. When your competitors are restructuring your costs, if you have any hope of surviving you must restructure your cost as well. For us not have participated would have been suicide. Its strictly a balance-sheet issue that has to be cleaned up. We still have lots of happy customers, and I like our underlying business model.
Q: When do you plan to come out of bankruptcy?
A: That is subject to different pressures. The judge will sit astride the negotiating process and watch out for the interest of our creditors. Its clearly in our best interest to emerge as quickly as possible and emerge still serving customers. I hope it will be in a matter of weeks.
Q: Do you plan to sell off assets?
A: That is up to the process, but I do not anticipate having to sell off assets.
Q: Were the cost of getting fiber to the building and the speed of turning up customers the reasons behind your financial troubles?
A: I dont believe that we have any operational problems. Weve demonstrated that we can get into buildings, and we have hundreds of customers. Its just a balance-sheet issue and one of us coming up again a financial market that has a huge amount of pessimism that has made restructuring cost difficult. Anyone that goes into communications-service business knows that it will require a lot of cash available over a number of years. We never indicated that we were fully funded. We were in the process of acquiring additional investment when the market turned down.
Q: What will Yipes look like after it emerges?
A: I am not anticipating that the company or our services will look all that different. I am not anxious to go after T-1s in the traditional format. We are not looking at wholesale services. Its simply a balance-sheet issue. I think the critical element to ensure is the ongoing willingness of our suppliers to figure out a relationship that makes sense and an ongoing willingness of our investors to provide necessary financing.
Q: What do you think about the viability of Gigabit Ethernet as a business model?
A: The genie is out of the bottle. And I dont think anyone can stuff it back into the bottle. It works and has tremendous advantages to the customer. The market will go on with success. All the service providers will go out and offer the services. Hopefully, we will get the opportunity to demonstrate that for all our customers.
Q: What are the top items on your to-do list?
A: We had had, and will have, conversations with all our suppliers, indicating that we are going to try and emerge. We are also spending a lot of time assuring our customers that they shouldnt do anything precipitous.