Yipes raises more funds in comeback bid

FRAMINGHAM (09/16/2003) - Yipes Enterprise Services Inc., which this week announced a fresh infusion of venture capital, is an Ethernet service provider looking to make the most of a second chance.

The original Yipes was a poster child for the telecom meltdown, burning through hundreds of thousands of dollars between its founding in 1999 and its Chapter 11 bankruptcy protection filing in March 2002.

The new Yipes, which announced its rebirth in July of last year, has now added US$9.5 million in funding to $54 million previously raised. Investors include Norwest Venture Partners, Sprout Group/CSFB and others. Yipes was reborn last year when a group initially calling itself PHX Communications - PHX, as in a phoenix rising from the ashes - acquired the network operations and assets of the old Yipes under approval of the U.S. Bankruptcy Court in San Francisco.

Like its earlier incarnation, the new Yipes offers scalable (1M bit/sec to 1G bit/sec) Ethernet services via metro and long-haul connections. The bulk of the privately held company's undisclosed revenue comes from its Internet access offering, though its fastest-growing service is a city-to-city connectivity service. The San Francisco-based carrier now zeroes in on 10 markets, including New York, Philadelphia and San Francisco, after selling off its networks in Boston and other cities. Its new funding is dedicated exclusively toward these 10 markets, where Yipes plans to become cash-flow-positive by next June.

Company executives say things will be different - and better - for Yipes this time around for several reasons. For one, the company renegotiated its contracts with suppliers - contracts that initially were written during the height of the Internet bubble, says CEO Dennis Muse, a 25-year telecom industry veteran who has been with WorldCom and MFS, among other carriers.

"The restructuring enables the business to have its costs in line with today's economy, not with the old economy," says Muse, whose team is a mix of new and original Yipes employees, including the company's original network architect. "On a cost basis, the overall network was out of line. It was not sustainable."

Whereas Yipes was paying on the order of $90 a square foot in some markets during the bubble, it is now paying $20. In buying out the old Yipes' assets, the new Yipes got equipment for 20 cents on the dollar. The company is also controlling costs by keeping headcount down - it's now at about 135 employees vs. 400 before the bankruptcy filing.

Another reason Muse says Yipes will be successful is that it is only extending its network where it has contracts to cover the costs. That differs from the original Yipes, which operated in a period during which it was fashionable to get big fast and hope the business would follow.

With its lean cost structure, Yipes is still able to offer the sort of "disruptive" pricing that originally captured the attention of customers, Muse says. However, he adds that since WorldCom filed for bankruptcy protection, price pressure in the market has lessened. Yipes charges on a megabit basis, touting that its customers can buy a 100M bit/sec pipe between buildings in a metro area for the same it would cost for a DS-3 link from another provider. Yipes says it is serving 90 more buildings now than it was a year ago, bringing total buildings served to 474.

Gauging from industry watchers' predictions, the timing for Yipes and other Ethernet service providers might be better now than it was a few years back when such services were only starting to roll out. Vertical Systems Group, for instance, last week promoted a new survey that projects the Ethernet services market in the U.S. will explode from $300 million this year to $1.3 billion by 2007, good for a 35% compound annual growth rate. Vertical says metro Ethernet services account for the bulk of revenue, though long haul services have a higher growth rate (Projections for Ethernet services, however, vary widely among industry watchers. A study issued by Gartner last year says the North American Ethernet services market was worth $850 million last year and would expand to $4.9 billion by 2006).

Others chasing the market include the Bells and companies such as Time Warner Telecom, which serves 44 mainly tier 2 and 3 cities via its national and local fiber nets. Muse says that while the Bells and large IXCs are his big competitors, they've been more talk than action in Ethernet services to date.

"Look at Verizon and how many fronts they have a war going on," he says, pointing out that Ethernet services might not be one of Verizon's top priorities given that it is busy battling cable operators, cellular providers and IXCs on long distance.

Looking ahead, Muse says Yipes hopes to raise its next round of financing between December and next March. On the technology front, Yipes is testing 10G bit/sec Ethernet in its labs and is interested in layering new applications, such as voice over IP, on its network, he says. While focused on 10 markets for now, Muse is eyeing some 34 key U.S. markets, plus a handful in Canada and Europe.

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