Sunday
Dec112011

U-Verse Outgains FiOS in 3Q11

3Q11 Connections: U-Verse vs. FiOS

The duo of AT&T (NYSE:T) and Verizon (NYSE:VZ) added a combined 314k U-Verse and FiOS subscribers in the third quarter, as fiber services continue to provide much needed support for the wireline divisions at both companies.  AT&T led the gains, adding 176k U-Verse subs, good for 5.2% QoQ growth, while Verizon’s grew its FiOS customer base 3.1% QoQ, adding 138k subscribers in 3Q11.  

While Verizon has dominated the headlines over the past week with its $3.6b spectrum purchase from a consortium of cablecos, ceo Lowell McAdam has also made recent statements regarding the future of the telco’s FiOS expansion. Speaking at the UBS Media and Communications Conference this past Wednesday, McAdam confirmed that Verizon will halt its expansion of FiOS services in 2012 after the completion of its current rollouts. Verizon currently passes around 13m homes with FiOS, and plans to reach 16m homes by the end of 2012.

Verizon shelved the idea of additional FiOS rollouts, but its wireline segment has relied on FiOS for top line stability and ARPU growth in recent quarters. FiOS customers generated 60% of Verizon’s wireline revenue in 3Q11, and ARPU for FiOS users was $146—55% greater than Verizon’s overall wireline ARPU of $94.20. Similarly, U-Verse has been the main bright spot for AT&T’s wireline business. The ARPU for U-Verse customers was $170 in 3Q11, and U-Verse subs accounted for over 50% of AT&T’s wireline revenue. U-Verse’s ARPU compares favorably to FiOS’ per customer take, thanks to the fact 75% of U-Verse customers opted for triple or quad play bundles in 3Q11.

While U-Verse measures up better on ARPU, FiOS continues to achieve better penetration. In 3Q11, FiOS’ penetration of homes passed was around 30%, while U-Verse’s penetration was around 25% in service areas in which it has marketed service for at least three years. With AT&T’s fiber builds nearly complete, and Verizon ready to halt FiOS rollouts after 2012, the telcos’ ability to improve penetration in their current markets will determine if their fiber customer bases will continue to grow.

Verizon’s McAdam commented on Wednesday that he’d like to see FiOS penetration around 50% in the future, but delivering an additional 20% of homes passed could prove more difficult after its recent spectrum deal. As part of its purchase, Verizon agreed to cross-market the video services of its competitors, namely Comcast (Nasdaq:CMCSA) and Time Warner (NYSE:TWC), allowing the cablecos to bundle Verizon’s wireless service with their video options, even in FiOS markets.

Wednesday
Nov302011

ILEC 3Q11 Quarterly Results: Frontier Communications

Residential Customers Fall 10% in 3Q11

While the popular strategy amongst the ILECs of late has been to shift focus away from residential service to the business community, Frontier (NYSE:FTR) has chosen a different path.  As other LECs have transitioned into managed services and data center operations through M&A, Frontier put its stake in the ground when it acquired 4.8m access lines from Verizon (NYSE:VZ). As such, given the industry-wide trend of access line losses, Frontier’s sizable subscriber losses and revenue declines in 3Q11 did not come as a surprise.

Frontier lost 10% of its residential customer base YoY in 3Q11, ending the quarter with 3.1m subscribers. A small portion of the sub losses was associated Frontier’s effort to shake some of the unprofitable FiOS customers it acquired from Verizon. While the decline in residential access lines was predictable for Frontier, its loss of 31,000 business customers YoY, or 9.8% of its customer base, is more discouraging.

Frontier ceo Mary Agnes Wilderotter spoke to the $6m decline in commercial/business revenues on the earnings call. “The revenue decline in commercial was really one-time items. And it was clean-up of settlements and disputes that have been out there for a very long time. So we wanted to put all that behind us. That's a one-time issue.”

Donald Chaisson, Frontier cfo, later clarified the “one-time” items amounted for $4.5m-$5m of the $6m YoY decline in business revenues, which indicates the overall trend for commercial revenues was still downward in 3Q11.

Overall the access line losses led to revenue declines of 8% to $1.3b in the third quarter, and net income also dropped 30% to $20.4m. Frontier’s operating results however were not all negative. The company appears to have been successful thus far in realizing the cost synergies it projected when purchasing its Verizon properties. 

Wilderotter provided analysts with an update on the Verizon integration on the earnings call. “We generated $18m of incremental cost synergies (from the Verizon acquisition) in 3Q11. Our total is now $496m, putting us 83% of the way toward our $600m 2012 goal. The largest contributor to the synergies in 3Q11 was the full impact of traffic migration to our own national backbone. We will realize additional synergies as we convert the remaining acquired property systems onto Frontier's legacy system. In 3Q11, our cumulative synergies helped Frontier generate a 47% EBITDA margin.”

Frontier is also in the process of expanding broadband services to its acquired properties. It reached an additional 126k homes in 3Q11 with broadband access, bringing its year to date total to 352k homes. The upgrades to the former Verizon lines should improve monthly ARPU, as Frontier’s legacy access lines generate $85 a month, while ARPU inclusive of the Verizon lines was only $79.22 during 3Q11.

In addition to its broadband expansion efforts, Frontier has inked some reseller agreements in hope of giving its top and bottom lines a boost going forward. The telco has entered into agreements with both of the leading satellite providers, DirecTV (Nasdaq:DTV) and Dish Networks (Nasdaq:DISH), to resell their satellite TV packages and in November it signed a deal with AT&T (NYSE:T) that will allow the ILEC to provide wireless voice and data services to its customers.  Frontier plans to bundle wireless with its satellite TV, DSL and traditional wireline voice services. 

Tuesday
Nov292011

ILEC 3Q11 Quarterly Results: HickoryTech

Business Revenues Rise 10% YoY

Freshly named one of Forbes 100 Best Smallest Companies, HickoryTech (Nasdaq:HTCO) overcame a mediocre performance from its telecom segment in 3Q11 to turn in modest revenue and cash flows gains for the quarter. Overall, HickoryTech’s top line rose 4% YoY to $45.2m and operating cash flows improved 2.5% YoY thanks to continued strong performance from its business sector.

While telecom revenues slipped 4% to $17.9m in 3Q11, business revenues increased 10% to $28m, fueled by increased sales of Cisco voice and data communications equipment. Equipment sales in 3Q11 jumped sharply 35% YoY, or $4.3m. Hardware sales though tend to fluctuate quarter to quarter based on the timing of customer orders and new customer adds, so the growth HickoryTech enjoyed in 3Q11 is not likely be sustained.

The telco is however counting on its ongoing fiber build to deliver growth down the road. The company broke ground on its Greater Minnesota Broadband Collaborative project in August, a $24m initiative funded with $7.2m of HickoryTech’s funds and a $16.8m grant from the NTIA. While some of the costs associated with the build contributed to a decline in net income for the company in 3Q11, management believes it is an investment that will pay dividends long term.

On the 3Q11 earnings call, John Finke, ceo of HickoryTech discussed the fiber project and its future benefits. “The majority of the first fiber route will be completed in 2011 and we will begin construction on the northwestern Minnesota route in 2012. Upon completion of this project in 2013 we will add approximately 430 fiber route miles creating one of the most extensive fiber footprints in our region. The fiber route will serve customers in the healthcare industry, education and will create opportunities for us to offer HickoryTech business services in communities along these routes.”

The fiber build supports HickoryTech’s business and broadband strategy, which Finke believes has positioned Tech for “sustained and reliable growth.” Year to date, business and broadband services account for 70% of its revenue, a percentage that is certain to rise in the future.  

Monday
Nov282011

ILEC 3Q11 Quarterly Results: Shenandoah Telecommunications

Stock Price Falls 35% in 3Q11 as Costs Rise

Investors have punished the stock price of Shenandoah Telecommunications (Nasdaq:SHEN) of late, driving its price down 35% during 3Q11 to close at $11.14 (and more recently trading closer to $9/share). While Shentel has turned in acquisition-fueled top line gains in recent quarters, rising costs have outpaced the gains in revenue, and on its 3Q11 conference call, management signaled more cost concerns in future quarters.

In 3Q11, revenues at Shentel increased $9.4m YoY, or 17.7%, to $62.7m, thanks to a $4.6m jump in cable revenue and a $3.5m increase in wireless prepaid revenues associated with an increase in Sprint prepaid customers. The cable gains however remain inflated by acquisitions as only two months of Jet Broadband revenue are in included in the 3Q10 totals and Shentel’s 4Q10 purchase of cable assets from Suddenlink is not factored into the YoY comparison.

While Shentel reported decent top line growth in 3Q11, rising costs and capital expenditures were the hot topics for analysts in its 3Q11 conference call. Shentel’s  earnings fell 25% YoY to $3m in 3Q11 as operating expenses jumped 42.8% YoY during the first nine months of 2011, compared to just a 34.6% rise in revenues. Shentel has spent $20.9m on capital projects during 3Q11, a 34.9% jump YoY, and is on pace to spend $77.6m through the end of the year. A majority of its 2011 capex to date, $26.m, has been spent to upgrade the systems it acquired from JetBroadband in 3Q10. Despite the acquisition and upgrades, Shentel reported a steeper operating loss in its cable segment in 3Q11 of $6.4m, down 2.1% YoY.

With upgrades to cable systems in its West Virginia and Maryland properties set to continue through 2012, analysts on the earnings call expressed concern about the growing cable operating expenses. Shentel’s ceo Chris French attributed the rising cable costs, and the delay in expected JetBroadband synergies, to redundant expenses that he expects to go away in 2012. “Because in 2011 we have some duplicate expenses where you had facilities that Jet had in place that we needed to turn down while we were bringing up our own facilities so there will be some economies showing up in the 2012 results.”

Management however warned analysts that the rising programming costs that have been hitting cablecos and ILECs alike will likely hit Shenandoah’s cable segment in the near future. With regards to the cost of content, coo Earle Mackenzie commented “it’s just become very pricey. We’re in the process of negotiating a retransmission agreement that has been in the press. The broadcasters were asking for significant increase over prior years.  We’re starting to break that out on the customer’s bill and so the customers can see the amount that that he is being charged or we’re paying for retransmission fees. We think that will be helpful to educate the customer that free TV is not really free.”  Shentel’s “don’t kill the messenger” argument is understandable, but a tough selling point to customers when relatively cheaper OTT video options have flooded the marketplace.

When Mackenzie finished fielding questions on rising cable costs, analysts moved onto Shentel’s wireless segment, where it is expected to invest significant capital to fund tower upgrades as part of Sprint’s network modernization plan, referred to as Network Vision. “On the wireless side, the big impact will be Network Vision as we’ve been under discussions or in discussions with Sprint for the last several months about modifying our contract in order to be able to do Network Vision. And assuming that everything moves as we anticipate, we should be able to get started next year on that Network Vision upgrade and we anticipate that the range of the project will be somewhere in the $100 million to $120 million to do Network Vision in our footprint.”  Shentel later added that the company may need to take on additional debt to fund the tower upgrades. Sprint recently set an aggressive target for its Network Vision plan, potentially forcing Shentel to increase its wireless capex more rapidly than it had planned. 

While investing in its wireless network is not a cause for concern, the worry is that Shentel already has significant capital projects ongoing, and that layering on significant wireless spending could spread the company too thin. Add in the fact that Shentel’s wireless margins have already been pinched in 2011 by increased handset subsidies for prepaid customers and a 35% jump in wireless fees paid to Sprint, and an additional $120m in costs might spell more trouble for Shenandoah's bottom line looking ahead.

Monday
Nov282011

ILEC 3Q11 Quarterly Results: Alaska Communications

ACS Revenue Flat Despite Wireless Gains

From a financial perspective, Alaska Communication’s (Nasdaq:ALSK) 3Q11 was relatively non-eventful.  Revenue ticked up $500k YoY or 0.6%, as its wireless revenue rose $2m or 5.2% and its enterprise segment grew by $1.1m or 8.9% YoY. Business growth and wireless gains offset a $2.6m decline from its legacy wireline segment, which was down $2.6m or 6.5% in 3Q11, after losing 5.2% of its access lines. Overall, ACS’ net loss in 3Q11 was $0.8m, or $0.02 per share, compared to net loss of $3.0m, or $0.07 per share in 3Q10.

ACS added 817 wireless subs in 3Q11, increasing its total wireless connections to 117.5k, but it has lost nearly 6k subs since 3Q10. Its wireless revenue growth in 3Q11 was fueled by an increase in demand for mobile data and a jump in roaming fees. Data ARPU from postpaid subs was $16.86 in 3Q11, up 4.6% QoQ and 43% YoY, while roaming charges from non-ACS customers were up $3.9m or 15.2% from 3Q10.

With wireless providing ACS with the slight growth it has reported in recent quarters, the success of its ongoing $20m 4G LTE network build is critical to the company’s future. ACS however is not the only wireless provider investing in 4G in Alaska. In September, General Communications (Nasdaq:GNCMA) launched 4G wireless service in Anchorage and plans to rollout 4G in other Alaskan communities later this year and in 2012. And a new potential entrant onto the Alaskan wireless scene was the subject of ACS’ focus during its 3Q11 earnings call: Verizon (NYSE:VZ).

The leading wireless provider in the U.S. has made moves to enter the Alaskan wireless market, and ACS ceo Anand Vadapalli spoke to this fact on the call. “It certainly appears that Verizon is taking more action to enter the market. We had several parcels of surplus land. We sold one of those to Verizon, and we certainly see them doing some ground work. We also understand that they have feet out on the street for both backhaul and cell towers.” Vadapalli added that ACS expects to see a decline in roaming revenues starting in 2013, when it will begin losing fees associated with Verizon customers.

Roaming fees may be the least of ACS’ worries with Verizon moving into Alaska. While Vadapalli would not speculate on what Verizon’s intentions were in expanding up north, one would be safe in assuming that Verizon is not looking to be the #2 or #3 wireless provider in the state. In addition to trimming its roaming revenues, ACS stands to lose subs with Verizon jumping into the competitive mix, adversely impacting ACS’ most profitable segment. Wireless currently accounts for 45% of ACS’ revenue, and has generated $12.5m in net income through 3Q11, while all other ACS segments have lost a combined $13.2m during the first nine months of the year.

With ACS currently operating at a loss, and wireless competition ramping up, the viability of company’s $0.86 dividend has come into question. On the earnings call, cfo Wayne Graham put to rest the idea of borrowing more cash to finance the dividend, but Vadapalli was non-committal when asked about cutting the dividend. “With regard to your question on the dividend guidance; clearly, this is one where we’d like to take one step at a time and not get ahead of ourselves. If and when the Board takes any action in this regard; clearly, that action will be in the context of a longer range business plan and we’ll be able to share more when we are ready with that,” commented Vadapalli. Not exactly a ringing endorsement for the long term safety of its dividend.

Meanwhile, shareholders have taken notice of ACS’ troubled outlook and have traded its stock price down to the $5 range, 55% off its recent 52-week high of $11.65 a share. At these current trading levels, ACS is paying around a 16% dividend. But based on Vadapalli’s comments, whether that dividend will exist a year from now is far from certain.