After a grimace-filled 2001, WorldCom ( WCOM) CEO Bernie Ebbers finally smiled this year. The good news? The company's rate of customer cancellations was finally starting to slow.

Such is the state of today's phone service business. Thursday saw WorldCom turn reed-thin evidence of stabilization in its lost-business column into a 5% sales growth projection for 2002. That's below the analyst-consensus 9% rise, and aided by weak year-ago comparisons. The stock, having lost nearly half its value over the span of a month, jumped 13%.

All this said, WorldCom has two factors working in its favor, observers say: industry attrition and the return of equilibrium to the supply-demand picture.

"There are going to be fewer companies around that provide all the services that WorldCom does," says Flag Investors Communications fund's Liam Burke, who has no position in WorldCom. "If people are disconnecting at a slower rate, that at least shows the decline in demand is slowing and suggests, if not an upturn, at least a stabilization."

Fourth-quarter revenue fell short of analysts' expectations, and WorldCom once again trimmed capital spending plans by $500 million. The bulk of that cut will fall on data equipment spending -- bad news for network-router suppliers Juniper ( JNPR) and Cisco ( CSCO). WorldCom also cleared the way to take a $15 billion to $20 billion charge in the first quarter to account for bubble-era acquisitions it overpaid for with its own stock.

"It wasn't a great quarter by any means," says RBC Dominion Securities analyst David Bank, who has no rating on WorldCom and a hold on Sprint and Qwest ( Q). "But hopefully we are getting to the point where there's not a lot more bad news left to come out."

WorldCom used its earnings conference call to address the financing and accounting concerns that had whacked half the value out of the stock since the year's start.

"They did a good job of making their case that the financial collapse rumors are nonsense," says accounting watchdog Glenn Reynolds of CreditSights, a New York debt research shop. "They are overleveraged. Their core business is under pressure. They may end up as acquisition fodder. But they do not have a liquidity crisis."

Still, the company's not entirely out of the skillet.

While WorldCom said in the fourth quarter that it had quit cold turkey on the booking of capacity sales known as indefeasible rights of use, or IRUs, it's not clear we've heard the end of that story just yet. In IRUs, companies simply lease network capacity to one another; the proceeds are recognized incrementally over the length of the contract.

As our own Detox highlighted last summer, companies like Qwest had a history of strong IRU sales. Critics of the practice say these deals boosted revenue but skewed the sales picture because IRU deals aren't part of a predictable recurring business. Qwest has since seen demand for IRUs drop and doesn't expect to book any this year.

Furthermore, critics say, IRUs can be abused by companies that use them to pad revenues without bumping up expenses. These people point out that it's perfectly legal to book IRU proceeds as revenue while booking purchases of IRUs from other telcos in the capital spending line, where it doesn't reduce earnings.

Now investors are keen to the tactic and focused on the recurring quality of revenues and the slashing of capital spending, however. "All the places you used to be able to bury this stuff is gone," says Flag's Burke. "And if you used IRUs to make your numbers, then Wall Street knows you really didn't."

That means not only that the IRU game is over as companies report earnings in coming periods, but that we may be seeing some more telecom earnings restatements in the near future as well.

"Regulators may call for greater transparency on IRU transactions," says RBC's Bank. That could mean some restatements, but investors will likely shake off any but the worst surprises. "Restatement may already be built into people's assumptions at this point, but the real measure of a company is whether they have a realistic business from here forward," says Burke.