Entries in AT&T:T (23)


2Q11 Connections: ILEC Quarterly and Annual Growth Rates

Wireline Voice Losses Outpace Fiber Growth

The steady decline in wireline connections continued for ILECs in 2Q11, as overall connections fell around 1% for the publicly traded LECs QoQ.  Second quarter adds of broadband and video connections could not make up for the 1.8m loss of wireline voice connections.  

ILECs across the board experienced QoQ wireline losses in 2Q11 with the exception of slight gains reported by CenturyLink (NYSE:CTL) and SureWest (Nasdaq:SURW). CenturyLink’s overall gain was fueled 1.4% QoQ growth in video connections, while SureWest added broadband and video subs.

The smallest LEC in our sample, Warwick Valley Telephone Company (Nasdaq:WWVY), experienced the sample's largest percentage loss of wireline connections in 2Q11 (1.9% QoQ), driven by a 3.2% drop in voice connections.  Meanwhile, the largest LEC by connections, AT&T (NYSE:T), also lost approximately 3% of its voice connections in the quarter and accounted for 86% of the net wireline losses.

Growth in fiber optic video fueled the largest wireline gains in 2Q11.  Cincinnati Bell (NYSE:CBB) reported 10% connections growth in its “fioptics” video services, while NTELOS’ FTTH video customer base grew 5.2% in the quarter.

The annual wireline growth trends in 2Q11 were merely an extension of the quarterly results.  On a weighted average basis wireline voice connections fell 10.7% on the year, while broadband and video connections have grown 10.9% and 15.4% YoY.

The main area of wireline growth for both small and large ILECs has been in fiber based services. NTELOS (Nasdaq:NTLS) increased its wireline connections 75% YoY, using M&A to expand its fiber services, and now is in the middle of a FTTH build in Virginia. Verizon and AT&T have experienced wireline losses overall, but are increasingly reliant on their FiOS and U-verse FTTX services for growth. Elsewhere, Cincinnati Bell has invested $48.1m in its fiber optic network thus far in 2011, and SureWest plans to extend its FTTH services to 15.5k homes by the end of the year.


2Q11 Connections: FiOS versus U-Verse

U-Verse Growth Outpaces FiOS in 2Q11

AT&T (NYSE:T) and Verizon (NYSE:VZ) continued to increase their fiber-based subscriber base in 2Q11, combining to add a net 391k U-Verse and FiOS subs. The net customer gains for both were down slightly from 1Q11, but remained steady compared to quarterly adds over the past two years. The increased penetration of their FTTX services continues improve overall top line growth and ARPU at AT&T and Verizon.

AT&T added 202k U-verse subs in 2Q11, slightly more than what FiOS gained. In its 2Q11 conference call AT&T referenced that U-Verse revenue is growing 57% YoY. It has achieved 25% penetration of U-Verse in service areas in which it has marketed service for three years, and will complete its fiber expansion by the end of 2011. The ARPU from U-Verse subs rose to $170 in 2Q11, up 8% YoY, driven by the fact that 75% of U-Verse video customers opt for either three or four services. U-Verse broadband gains (439k subs) more than doubled television adds (202k subs) in the quarter. 

Verizon’s FiOS customer base grew 4.4% in 2Q11 to 4.5m subs. FiOS customers provided a monthly ARPU of over $146, about 15% less than U-verse’s ARPU, but still well above Verizon’s average consumer ARPU of $92.44. In terms of consumer revenue, FiOS accounted for 57% of Verizon’s consumer revenue in 2Q11, up from 48% in 2Q10.

FiOS’ video penetration of homes passed in 2Q11 was greater than U-Verse’s at 30%, partially attributable to the fact FiOS has had a presence in many of its markets for a longer period of time. With AT&T completing its fiber expansion later in 2011, the key to future FTTX growth for both companies will focus on improving penetration. Currently Verizon has the edge, but with more time in its markets AT&T looks to narrow that gap.


2Q11 Connections: Ten Largest Providers

Smartphones and Tablets Accelerate Wireless Growth 

Compared to 1Q11, there was not a lot of movement among the top communications provider rankings, as AT&T (NYSE:T) extended its lead in wireline, Verizon (NYSE:VZ) topped wireless and Comcast (Nasdaq:CMCSA) took first place in video once again in 2Q11. While the rankings haven’t shifted much, there are some interesting trends at play within the top ten lists.

If you compare the top ten sub totals in all three categories, the wireless count continues to dwarf the video and wireline connections by increasing margins in each quarter. The upward trend in wireless is directly linked to the popularity of smartphones, and other wireless connected devices such as tablets, and netbooks. Verizon and AT&T combined to activate around 6m iPhones in 2Q11, which included nearly 1.5m new subscribers. The two wireless giants alone accounted for 205m wireless subs in 2Q11, and industry-wide there are now more wireless connections in the U.S. then there are people according to a recent CTIA report.

Elsewhere, in video, the subscriber base for the leading cablecos continued to erode in 2Q11, while satellite providers and telcos enjoyed slight gains. The top video provider, Comcast, shed a net of 238 video subs while cablecos Time Warner Cable (NYSE:TWC) and Charter (Nasdaq:CHTR) combined to lose 225k video customers in 2Q11. Placing #2 in video, DirecTV (Nasdaq:DTV) put some distance between itself and fellow DBS provider DISH Network (Nasdaq:DISH) with 500k adds, only 26k of which however came in the United States. In the middle of the video top ten, AT&T and Verizon continued to improve penetration of their FTTx options, U-verse and FiOS, leading to moderate customer gains.

The top mover in any category was CenturyLink (NYSE:CTL) in wireline, as it closed its Qwest acquisition in 2Q11, netting it Qwest’s 8.6m connections. With over 15m total wireline connections, CenturyLink jumped to third place in the wireline top ten behind AT&T (41.2m connections) and Verizon (25m connections).


Six Degrees of Separation: ILEC Returns and Stock Prices Factored In 

CenturyLink and Otelco Top Final Two Tests

Up to this point we have analyzed and graded the public ILECs in four categories: Profitability, Growth, Financial Condition and Efficiency. Our final two tests are perhaps what shareholders and potential investors pay attention to most: Return to Shareholders and Long-Term Performance. We believe that a company’s historical stock performance is the best indication of a company’s overall performance, as the eyes of millions of investors recognize sound/weak management, company risks and growth prospects. Accordingly, Return to Shareholders and Long-Term Performance are weighted more heavily (20% and 30% of composite rank) in determining  the winner of our “Six Degrees of Separation” analysis. Let’s take a look at how the public LECs measured up in 2010.

CenturyLink (NYSE:CTL) earned top marks in Return to Shareholders, finishing on top in its second category this year (in addition to Growth). Its $8.70 in free cash flow per share was 70% higher than the next closest ILEC, and its 2011 acquisition, Qwest, also topped a pair of tests—cash return on capital investment and return to investors. Qwest’s 92% return to investors in 2010 was aided by the 15% premium CenturyLink agreed to pay over Qwest’s stock price on the day its merger was struck. Elsewhere, second place AT&T (NYSE:T) generated the most in terms of (diluted) earnings per share of the public LECs in 2010.     

There were no surprises at the bottom of the ranks.  Burdened by its bankruptcy, Fairpoint’s (Nasdaq:FRP) return to shareholders was graded worst of all ILECs for the second year in a row. Its bottom of the barrel free cash flow and diluted earnings per share were both negative, while only Warwick Valley Telephone (Nasdaq:WWVY) generated less cash return on capital investments. With its third F in five categories, Fairpoint essentially sealed up last place overall with its poor performance in Return to Shareholders.

The only significant movement in the category was courtesy of Cincinnati Bell (NYSE:CBB) which fell six spots to fourteenth overall, earning a D in the process. A lagging stock price lowered its return to investors to -19% in 2010, a year after it generated the second best return to investors  (79%) of all the public LECs.

We now move on to the final and most heavily weighted category in our Six Degrees analysis: Long-Term Performance.  This final category consists of just a single test—the growth of a $10,000 investment over a three year period.  This measure of total return includes stock price appreciation and dividends paid. 

Finishing in first place, Otelco (Nasdaq:OTT) generated the highest total return for shareholders over the past three years, turning $10k into just under $19k. The return was 30% higher than the next best long-term performer, Warwick Valley. The market rewarded Otelco’s overall management and financial performance, driving its price up 34% in 2010. Investors also looked positively on Warwick Valley’s results in 2010, bidding its stock price up 15%.

On the downside, a pair of smaller LECs were beaten up by Wall Street over the past three years. A $10k investment in New Ulm Telecom (OTC:NULM) in January 2008 had lost half of its market value through 2010. Meanwhile, Shenandoah Telecommunications (Nasdaq:SHEN)--awarded an A for its long-term performance a year ago--dropped ten spots in this year’s test. The market shaved 10% off its stock price in 2010, reflective of its declining performance that we have observed in this year’s Six Degrees tests.

It has been a tale of two stories for Shenandoah the past two years.  In 2009, we crowned it the overall winner of “Six Degrees of Separation” as it tested well across the board in efficiency, financial condition, growth, and profitability measures. The market took notice of its strong performance, and kept its stock price high. On the other hand, in 2010, Shenandoah’s growth slowed, its operations became less profitable and less efficient, and investors found it less attractive.

With Shenandoah’s struggles, it’s safe to say that we will be crowning a new winner in the “ILEC Six Degrees of Separation” this year. The ballots have all been cast and just need to be counted.  Tune in tomorrow to get the results.


Six Degrees of Separation: ILECs Measured for Efficiency

Job Cuts Lead to Efficiency Gains for ILECs

Historically, the goliaths have dominated the "Six Degrees of Separation" Efficiency category, logically due to their economies scale. The third annual results provided little change, with AT&T (NYSE:T) cruising to a three-peat in the category. YoY the efficiency measures for the industry were stable, with one exception: revenue per employee was up. And with revenues relatively flat for ILECs in 2010, it’s clear that job cuts drove the gains.

AT&T topped the working capital to revenue test en route to its A+, as its test average was 4.5 in the four efficiency measures. Fellow giant Verizon (NYSE:VZ) followed close behind in third place, earning an A along side second place finisher Cincinnati Bell (NYSE:CBB).

Hickory Tech (Nasdaq:HTCO) was in the minority of ILECs that added jobs, but growth at its business segment, Enventis, drove its revenue per employee up 13% YoY. Hickory tested best in both asset turnover ratio and revenue per employee growth. Its two wins made it the top overall gainer in efficiency, moving up eight spots from last year to sixth place. Elsewhere, Shenandoah Telecommunications (Nasdaq:SHEN) rated as the most efficient ILEC in the gross PP&E per connection test, but its high working capital to revenue ratio (16.1x) dropped its overall grade to a B-.

At the bottom of the efficiency ranks this year we had a repeat loser from 2009. That dubious distinction went to Fairpoint (Nasdaq:FRP), also earning its second F this year (Profitability the other). While Fairpoint did not rank last in any one test, it placed in the bottom third of all four. Each efficiency test had a unique last place finisher: Warwick Valley Telephone (Nasdaq:WWVY) in working capital to revenue, New Ulm Telecom (OTC:NULM) in asset turnover ratio, CenturyLink (NYSE:CTL) in revenue per employee and Alaska Communications (Nasdaq:ALSK) in gross PP&E per connection.

The main storyline coming out of the efficiency category is bad news for telecom workers: companies became more efficient in 2010, but at the expense of American workers. After declining in 2009, revenue per employee increased around 3% YoY. Industry-wide a net 35k jobs were shed by the public LECs, driving the efficiency gains while revenues were flat. Ten of the eighteen ILECs in our sample cut employees, and the big boys—AT&T and Verizon—alone trimmed 44k from their payrolls.

This trend shows no signs of slowing in the future, especially given the projected job losses should the AT&T/T-Mobile merger go through. Despite AT&T’s promise to bring 5,000 quality jobs to America post merger, the truth is that more people will lose their jobs to ensure that synergy values are achieved and that efficiency improves. This is good news for AT&T’s Six Degrees efficiency rank down the line, not great news for AT&T/T-Mobile employees.