Mpower shares sink on earnings warning

Citing difficulties with building its new network and providing service, Mpower decreased the number of phone lines it expects to install and in turn decreased its revenue and earnings forecasts for the third and fourth quarter.

Stock in the company fell to as low as $8.63 today, a new 52-week low for the shares. The stock also slipped significantly yesterday ahead of the news and has now lost about half its value this week. Shares closed at $8.88, down $3.44 or 28 percent.

Mpower, which provides business customers with phone and Internet services, has been a strong proponent of offering voice services over high-speed digital subscriber line (DSL) Internet connections. Using new technology, companies such as Mpower can provide up to 16 phone connections over just one digitized phone line.

But the company, like many competitive local phone providers, has pointed its finger at the Baby Bell local phone companies for providing insufficient DSL network capacity. Competitors such as Mpower lease phone lines from the Bells and resell them to businesses and consumers.

Mpower's reliance on the slow Baby Bells led the company to retool its network to also provide traditional circuit-switched phone calls. But that process has proved taxing for the company.

"This initiative has taken longer than anticipated and has lagged behind the sales organization we put in place, and we have reached the point where our current sales and provisioning expense structure has outpaced our current...network deployment," Mpower chief executive Rolla Huff said in a statement.

The company, however, said it has put measures in place to correct the backlog.

Mpower now expects to install between 33,000 and 35,000 phone and DSL lines during the third quarter and about 44,000 to 48,000 lines during the fourth quarter. The company said it expects third-quarter revenue to come in at about $38 million to $39 million, while fourth quarter revenue should range between $43 million and $46 million.

In addition, third-quarter earnings before interest, taxes, depreciation and amortization (EBIDTA) should be a third-quarter loss of about $53 million to $58 million with fourth quarter EBITDA losses slightly narrower at $52 million to $55 million.

Merrill Lynch, a major investment bank, today downgraded its recommendation on Mpower to an "accumulate" rating from a "buy."

"We believe that voice-over-DSL, the main driver of Mpower's growth in the near term, is being significantly hampered by these line provisioning delays while costs associated with network rollout continue to increase," Merrill Lynch analyst Ken Hoexter wrote in a research report today. "We are therefore lowering our revenue estimates and widening our EBIDTA loss estimates for 2000 and 2001."

Hoexter suggested Mpower will not see significant improvement until "well into 2001."

Analysts said Mpower's cancellations at a few recent investor conferences, a move that often sparks speculation, contributed to this week's stock decline.