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Venture with MCI gives Z-Tel a boost

Z-Tel Technologies Inc. has signed an agreement with MCI that could put some of the Tampa telephone company's excess capacity to use and help it reach elusive profitability.

The announcement Thursday was enough to convince one analyst to upgrade Z-Tel, believing the new partnership will spark the company's turnaround. Its shares closed Thursday at $2.41, up 8 cents.

Z-Tel, which lost $170.5-million on sales of $275.9-million last year, said the agreement with the MCI unit of WorldCom Inc. will allow the giant phone company's local service customers to use Z-Tel's back office support and some proprietary services, such as receiving voice mail over the Internet, in certain markets.

MCI offers local service in about 10 states and has 1.5-million local residential subscribers.

Z-Tel is certified to offer local service in 37 states; its biggest markets are New York, Texas, Illinois, Michigan and Pennsylvania. Z-Tel, started in 1998, provides local and long-distance service to 254,000 customers.

A spokeswoman for Z-Tel declined to put a value on the contract, but said it allowed for both licensing and per-usage fees. Further details will be included in a filing with the Securities and Exchange Commission by April 1.

As part of the deal, MCI also was given 1-million shares of Z-Tel stock, which has ranged from a high of $4.80 a year ago to 50 cents during the summer. The transfer of shares makes MCI the fourth-largest investor in Z-Tel.

Charles Pluckhahn, telecom analyst for Stephens Inc. in Boston, said the shares give MCI a stake in Z-Tel's success.

"In financial terms, I'd expect the fees that Z-Tel will get from MCI for services will far outweigh the value of the shares," he said.

MCI will be using Z-Tel's technology and proprietary services as it rolls out local service in unidentified markets.

Sarah Bialk, director of investor relations at Z-Tel, said MCI will be plugging into Z-Tel's back-office capabilities for activation, billing and customer service. MCI's customers also will be able to access Z-Tel's specialized services such as message-notification via e-mail devices.

"This validates our investment in our technology development," Bialk said. "They are our first wholesale customer, and we're very excited to partner with such a dominant player."

That's part of the reason analyst Pluckhahn revised his recommendation on Z-Tel to "market outperform" after downgrading the stock in February.

"I downgraded it because of regulatory concerns," Pluckhahn said, saying the FCC expressed worries after Sept. 11 about security risks in permitting competitive local carriers, such as Z-Tel, to lease an established carrier's networks. "To have MCI firmly in Z-Tel's camp ensures its survival."

He said Thursday's agreement also validates Z-Tel's system, which has had its share of problems in the past.

"MCI is very customer-oriented," Pluckhahn said. "They wouldn't have picked Z-Tel to do this unless Z-Tel's systems work."

_ Kris Hundley can be reached at hundleysptimes.com or (727)892-2996.

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