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.

Six Degrees of Separation: Winners, Losers and Movers

CenturyLink Edges Out Windstream for First Place

In the first two years of our “Six Degrees of Separation” analysis, there was little movement at the top of the ranks. NTELOS (Nasdaq:NTLS) edged out Shenandoah Communications (Nasdaq:SHEN) in 2008 for the victory, while Shenandoah

returned the favor in 2009, flip-flopping ranks with NTELOS. This year we crown both a new winner and a new runner up. Envelope please. And the winner of the third annual “ILEC Six Degrees of Separation” is… CenturyLink (NYSE:CTL)!

Over the past three years, CenturyLink has steadily improved its performance in our Six Degrees tests, moving up in rank from 10th place in 2008, to 4th last year, to 1st in 2010. Aided by its acquisition of Embarq, CenturyLink finished on top of the growth and return to shareholders categories in this year’s analysis. Its sample best weighted average rank of 4.48 is slightly stronger than Shenandoah’s winning rank of 4.8 a year ago. Right on CenturyLink’s heels was runner-up Windstream (Nasdaq:WIN) with a weighted average rank of 5.23. Both LECs were awarded A’s for their overall performance.

The only downside to winning: when you’re at the top, there’s no place to go but down. Just ask the 2008 and 2009 Six Degrees champs. Last year’s winner, Shenandoah, dropped twelve spots overall, while NTELOS fell nine spots. We documented Shenandoah’s fall from grace throughout this year’s analysis as its efficiency, growth and profitability metrics all deteriorated in 2010 and its stock price (and long-term performance rank) paid the price. NTELOS’ declines were also widespread, as it went from A’s to C’s in growth, financial condition and efficiency.

The upside movers were less dramatic. Otelco (Nasdaq:OTT) was the biggest gainer, thanks to its first place finish in long-term performance.  It moved up from 9th place to 3rd overall, earning an A- for its efforts. Frontier (NYSE:FTR) also jumped up six spots from a year ago, driven by an improved growth performance after it acquired 4m access lines from Verizon (NYSE:VZ).

While there was a shakeup at the top, the F students remained the same. Fairpoint (Nasdaq:FRP) finished in the basement for a third consecutive year, its average rank improving slightly only because there was one less public LEC (Iowa Telecom) compared to 2009’s sample. New Ulm Telecom (OTC:NULM) also repeated its second-to-last place finish from last year after earning a D- and an F in the most heavily weighted categories (return to shareholders and long-term performance).

In total, the bell curve produced a final grade tally of two A’s, one A-, two B+’s, one B, two B-‘s, one C+, one C, three C-‘s, two D+’s, one D, zero D-‘s, and two F’s. 

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.

1Q11 Connections: Wireless Connections

Wireless Connections Rise as Verizon Tops AT&T

Smartphone offerings fueled connection growth for a number of wireless providers in 2010.  Overall wireless connections grew 10% YoY from 1Q10 to 1Q11, with the number of adds increasing each quarter.

Verizon (NYSE:VZ) overtook AT&T (NYSE:T) as the leading wireless provider in 1Q11, elevated by the February release of the Verizon iPhone.  Verizon added 11.2m customers YoY; nearly 10m of which were added in the first quarter.  Not far behind, AT&T added its 10.5m customers more steadily from 1Q10 to 1Q11, reflecting the same 12.1% annual growth rate as Verizon.

MetroPCS (NYSE:PCS) grew its connection base 9% in 1Q11 and nearly 22% YoY—the result of low-priced Android smartphone offerings and the introduction of its 4G service plans. MetroPCS added 0.73m customers in 1Q11—a quarterly record for the provider— and decreased its churn rate 60 basis points. 

T-Mobile aside, which lost nearly 100k customers in 1Q11 and 78k for the year, the companies that shed connections during 2010 and in 1Q11 were the smaller wireless providers—Alaska Communications (Nasdaq:ALSK), Cincinnati Bell (NYSE:CBB), and NTELOS (Nasdaq:NTLS). CenturyLink (NYSE:CTL) exited its wireless reseller program altogether in mid-2010, though it will soon start reselling Verizon Wireless services to its customers.   

 

1Q11 Connections: ILEC Penetration

Broadband and Video Penetration Levels Rise for Most

Broadband and video penetration of voice connections have steadily increased for six quarters now, and as more customers opt for bundled services this trend shows no sign of slowing down.  For the average ILEC, broadband penetration of voice connections reached nearly 42% in 1Q11, while video penetration was over 28%.

The average video penetration figure is, however, skewed by Shenandoah Telecommunication’s (Nasdaq:SHEN) 218% penetration.  After factoring out SHEN, video penetration was around 15% for 1Q11, up slightly from 4Q10. SHEN’s video subs have far exceeded voice subs the past three quarters, attributable to the poor penetration of its cable voice offering, and its acquisition of cable provider JetBroadband. Among homes passed in SHEN’s cable segment, 38% were SHEN video customers while only 5% were voice customers during 1Q11.

Verizon (NYSE:VZ) in 1Q11 achieved better penetration with its video services YoY thanks to a pair of factors.  VZ shed 8m voice connections after selling off a large chunk of its wireline assets, and it increased its FiOS television customer base 17% YoY. 

SHEN was also at the high end of broadband penetration in 1Q11 at 148.5% of voice connections, followed by SureWest (Nasdaq:SURW) at 56%, and Windstream (Nasdaq:WIN) at 49%.  At the low end, NTELOS (Nasdaq:NTLS) and Cincinnati Bell (NYSE:CBB) reported only 1.8% and 4.6% broadband penetration.

A closer look at the ILECs that lack a video offering suggests that bundling all three services can positively influence broadband penetration.  The four ILECs without video service reported broadband penetration levels at or below the mean and median levels of the survey.