Entries in 2Q11 Earnings (19)


Shenandoah Telecommunications Increases Wireless and Video Revenues During 2Q11

Working to Upgrade Acquired Video Properties and Expand Wireless

Shenandoah Telecommunications’ 2Q11 financial results displayed top line growth line driven by its wireless and video segments, while, like so many other ILECs, its wireline revenues continued to shrink.

Revenue growth at the company’s wireless operations was the result of an increase in both prepaid and postpaid subscribers.  Shenandoah got into the prepaid game back in the second half of 2010 when it acquired the right to serve Virgin Mobile customers within its service area from Sprint along with the right to sell Sprint Nextel’s Boost product.  Since July 8, 2010, the company added 91,332 prepaid subscribers with 11,089 of those coming in 2Q11.  While the addition of those customers was great for the top line, Shenandoah’s management was quick to point out that the higher costs associated with acquiring prepaid customers, such as handset subsidies, commissions and marketing, contributed to higher operating costs dragging down wireless segment operating margins. 

On the postpaid side, Shenandoah had 3,037 net additions and reported that churn was down slightly to 1.7% from 1.6%, which according to management was most likely the result of more smartphone customers who tend to switch carriers less.  Much like the prepaid business, operating margins were also getting squeezed at postpaid operations as higher handset subsidies for new and existing customers related to smartphones and 4G devices were driving up expenses. 

Shenandoah’s cable operations saw revenues increase 1.58% in 2Q11 over 1Q11 and up 300% YoY, the effect of properties acquired from JetBroadband back in July of 2010 as well as the properties acquired from Suddenlink in December of 2010.  The video operations continue to be a work-in-progress as Shenandoah is in the process of upgrading the networks of the acquired properties.  Through the end of 2Q11, Shenandoah had completed the upgrade of 10% of the properties and reported a slight increase in digital video subscribers but a decline in overall basic video subscribers.  Management attributed the decline to seasonal effects of providing service to three colleges and expects that number to increase next quarter.  Management did report that a growing number of customers at its video properties were subscribing to only high speed internet and/or voice service. 

With respect to the video network upgrades, Shenandoah expects to complete upgrades at all Virginia properties by the end of this year and complete the West Virginia and Maryland properties by the end of next year.

At its wireline operations, 2Q11 financial results showed that YTD revenues were down 4.8% YoY.  Although, total connections of access lines and DSL were relatively stable as DSL subscriber additions offset access line losses.    

Going forward Shenandoah will focus capital outlays on upgrading the purchased video properties and upgrading its wireless network adding EVDO capacity to support the growing data needs of its smartphone users.


Insight and Cablevision Report Lackluster Earnings

Video Losses and Mediocre Internet Adds Limit Growth

We are well into earnings season and it is abundantly clear that cablecos across the board experienced a bumpy ride in the second quarter. It has been the same of old story for cable providers of all sizes: lagging video subs and moderate Internet gains have translated into a period of low growth.

Aware of this trend, I was shocked yesterday to find Insight Communications announcing front and center on its website: 'Insight’s Aggressive Growth Plan Leads to Jump in Revenue.' The headline made more sense after the link directed me to an article written in March 2010. As a rule of thumb, it is probably not a good sign for a company that on the day it's set to report quarterly earnings, the best news it has to offer is over a year old.

For Insight ceo Michael Willner, March 2010 was a better time. 1Q10 marked Insight’s 5th straight quarter of over 10% YoY revenue growth, as it expanded its fiber optic network and added broadband customers at a rapid pace. Growth has since declined steadily in subsequent quarters, and in 2Q11 Insight grew revenue only 2% YoY to $270.5m. Insight also lost 2% of its customer base in 2Q11 as its broadband growth slowed, and the penetration of homes passed dropped for its phone, Internet and television services.

Insight’s lackluster 2Q11 earnings validate The Carlyle Group’s effort to sell its 42% stake in the company earlier this year. Carlyle, however, timed the exit from its investment poorly, with Insight well into its slowdown before Carlyle announced its auction. Better timing and Carlyle could have received an offer closer to the $4b price tag that it wanted in the deal.

Cablevision (NYSE:CVC), which at one point expressed interest in purchasing Carlyle’s ownership in Insight, also reported 2Q11 earnings this week. Let’s see if these results sound familiar… pro forma revenues up just under 2% YoY (to $1.69b), Internet adds lower than expected (5k), and video sub declines (23k). The same old song and dance, and yet the market reacted sharply to these results, driving down Cablevision’s share price 13%. For anyone paying attention to cable earnings over the past few weeks, these underwhelming results should not have come as a surprise.

While YoY revenue was up around 9.8% for Cablevision, nearly all of the increase was attributable to its acquisition of the Bresnan properties. Cablevision cfo Gregg Seibert suggested in the earnings call, that the current marketplace is not favorable for cable deals down the road.

“I don’t see anything on the immediate horizon in that regard (acquisitions). Given the disruption in the markets at this point in time, it would be very difficult to go out and ring-fence a transaction today. The high-yield markets locked up quite a bit over the last few months,” commented Seibert.

Without deals to rely on for “growth,” Cablevision is joining Comcast and other cablecos in pushing mobile video services in an effort to stabilize its television losses. Its new app for IPads and IPhones allows a customer to view on demand content from any room in their house. Through these apps Cablevision looks to better compete with over-the-top providers like Netflix and Hulu in the video on demand space. The free app will not directly provide incremental revenue, but management hopes it will make its video services more “sticky”—a universal goal for all cablecos heading into 3Q11.


Otelco Continues to Focus on CLEC Business During 2Q11

Cable Business Shines Among Access Line Declines

The first half of 2011 has been tough for Otelco (Nasdaq:OTT), with access line losses continuing to put downward pressure on revenues. The tornadoes that ripped through Alabama and Missouri in the spring cost the company $0.7 million to replace damaged assets, and an unspecified number of customers have not yet resumed service. The company’s share price fell from a January high of $20.30 per share to close on June 30, 2011 at $18.78. But access line losses are nothing new, and the company has been working to diversify revenue streams. Management has focused on expanding its CLEC business in New England, and for the full-year 2010 we noted the company’s CLEC properties posted revenue growth of 7%.  The company has completed six colocation facilities in New Hampshire, and the earnings release notes “we are in a position to see growth in our non-regulated business.” Yet so far, 2011 has been a struggle– in addition to RLEC access line declines of 1% from 1Q11, CLEC access lines decreased by 289 during 2Q11 (0.9%) compared to 1Q11, though YoY CLEC access lines are up 1.3%.  CLEC revenues fell to $11.2 million during 2Q11 from $12.1 million in 2Q10.

Cable revenue was a bright spot in 2Q11, reporting 1.1% growth over the prior quarter. According to the earnings release, growth in “IPTV subscribers and the shift to high-definition packages in Alabama was offset by the decline in revenue associated with the conversion of our Missouri cable customers to satellite services” during 1Q11. But management isn’t sitting idly by. In addition to cost cutting measures and offering advanced services such as IPTV, the company is working to expand its CLEC footprint. To this end, the company has agreed to acquire Vermont-based Shoreham Telephone Company, giving Otelco a CLEC footprint in Maine, New Hampshire and Vermont. This acquisition is expected to close early in 4Q11.

Going forward, Otelco’s “primary strategy consists of leveraging our strong incumbent market position, selling additional services to our rural customer base and providing better service and support levels than the incumbent carrier to our competitive customer base,” which sounds a lot like ‘doubling down’ on its current business model. It’s a bit unclear where future growth will come from, but, Otelco reported $16.4 million in cash and equivalents on its balance sheet as of June 30, 2011, and the Shoreham acquisition will broaden the company’s New England footprint.


Cincinnati Bell Data Centers Key to Future Growth

2Q11 Total Revenue Increases 9%

Cincinnati Bell’s (NYSE:CBB) bet on data centers began to provide a return during 2Q11, with an 83% increase in data center revenue and a 22% increase in IT services and hardware sales.  The gains drove a 9% increase in total revenue during the quarter, but falling access lines continue to drag on the company’s wireline business. The YoY decline in access lines was 6.9%, a slight improvement over the 7.1% YoY decline reported in 2Q10.  In the prior quarters, we’ve noted CLEC access lines were growing slowly, partially offsetting declines in ILEC access lines. However, during 2Q11 this was no longer the case, with ILEC access lines falling by 46,200 during the year ended June 30, 2011, and CLEC access lines declining by 2,200 over the same period.

But not everything is declining in the wireline segment– the company’s fiber-based Fioptics added 3,000 subscribers during 2Q11, to reach 34,000. Cincinnati Bell continues to expand its fiber network, and passed an additional 7,000 homes and businesses with Fioptics during the quarter, bringing the total number of homes passed to 90,000. By the end of 2011, the company expects Fioptics to pass approximately 150,000 homes.

The wireline segment isn’t the only segment suffering from customer losses, as a 7% decline in wireless postpaid subscribers led to a $4 million, or 5% decline in wireless segment revenue during 2Q11 compared to 2Q10. Prepaid subs increased 2.6% during 2Q11 over 2Q10, but were down sequentially 3.7% from the end of 1Q11 to end the second quarter at 156,000. Smartphones are a bright spot within the wireless segment, as postpaid smartphone subs represented 30% of total postpaid subs during 2Q11, up from 24% a year earlier. The increase in smartphone customers has led to an increase in data ARPU, offsetting a decline in voice ARPU. In June 2011, Cincinnati Bell launched a 4G network, which is expected to drive future smartphone adoption.

Cincinnati Bell’s revenue mix has been changing. While the company’s wireline segment accounted for just over 50% of total revenue during 2Q11, that’s down from 55% during 2Q10. To further highlight the shifting importance of Cincinnati Bell’s revenue streams, consider this: Data Center Colocation revenue accounted for 12.3% of total revenue during 2Q11, up from 7.3% during 2Q10, and IT Services and Hardware revenue—the second largest revenue stream during 2Q11—accounted for 20.6% of total revenue, up from 18.4% during the year earlier period. Wireless share of revenue fell to 19% of total revenue from 21.7% over the year earlier period.

Cincinnati Bell expects future growth to come from the same products, services and segments that performed well during 2Q11.  Fioptics is expected to buoy the wireline segment, 4G phones and service will drive smartphone adoption and higher data ARPU in wireless, and an expansion of data center capacity will increase Data Center Colocation revenue.  Capital expenditures will be focused on maintaining the wireline network, expanding the fiber optic network and upgrading the DSL network in addition to data center expansion. Incremental data center space is being built in Austin, Dallas, Houston and Cincinnati, and the first phase of a London facility will be on-line in 3Q11. 


NTELOS 2Q11 Earnings: Fiber Buy Yet to Deliver Pro Forma Growth

New Wireline Business to be Named Lumos Networks

Over the past two years, NTELOS (Nasdaq:NTLS) has actively invested to strengthen its wireline business, with fiber buys of Allegheny Communications Connect and more recently, FiberNet. After completing its FiberNet acquisition in 4Q10, NTELOS management commented that the deal would position the company for accelerated wireline growth in the future. The early results are in, and it appears that the anticipated growth has yet to arrive.

Although the FiberNet purchase drove revenue up from $132m to $155m YoY, pro forma competitive wireline revenue was down slightly in 2Q11. NTELOS however remains confident that its wireline business will grow as it penetrates the FiberNet market with its legacy data products and backhaul services.

“We continue to see a pick-up in orders for our enterprise data products and wireless carrier backhaul as we offer these services in FiberNet markets newly integrated into our network,” said NTELOS ceo James Hyde. “With these sales successes, we are well positioned for significant data revenue growth in the competitive segment later this year and in 2012.”

Down the road however, Hyde will no longer oversee NTELOS wireline operations. Later this year NTELOS will complete the spin-off its wireline business into a separate corporation, Lumos Networks. Current NTELOS cfo Michael Moneymaker will serve as Lumos President and ceo, while Hyde will remain ceo of NTELOS Wireless.  

Despite a decline in overall subs for its wireless segment in 2Q11, NTELOS made strides in transitioning retail customers over to smartphones in 2Q11, adding over 33k connected devices. In the quarter, NTELOS’ wireless costs grew faster—11% YoY—than wireless revenues—5% YoY—thanks to the relative higher cost of smartphones. The subsidized handset sales drove equipment costs up 36% YoY, contributing to declines in overall operating and gross margins for NTELOS (down 16% and 3% YoY). Although the sales trimmed margins in the short term, NTELOS is counting on the data revenues from the devices to drive up ARPU in future periods. The gains can already be seen in 2Q11 as total data ARPU rose from $11.53 to $15.46 YoY—a 35% jump.

With regards to wireline, NTELOS remains focused on delivering high speed data to enterprise and residential customers. In 2Q11 it expanded the footprint of its Metro Ethernet and IP services into 23 new market areas, while its stimulus-funded, FTTH build in Virginia will deliver video and data services to an additional 4,000 homes upon completion. NTELOS has also made strides in growing its backhaul business, connecting 18 additional cell sites with fiber to the cell in 2Q11. These efforts however have not yet led to actual wireline revenue growth.

Looking ahead, while the spin-off will include the same players from its current management team, it does add a layer of complexity to NTELOS’ ongoing FiberNet integration. Add the in-process FTTH build out into the mix and wireline head Michael Moneymaker has a lot on his plate for the rest of 2011 and beyond.