Independent earnings season: half see revenue growth, half do not

Broadband and business.

That’s been the mantra for publicly-held Independent carriers since their traditional residential voice business began crumbling a decade or so ago—and this mantra takes on added importance during earnings season.
Over the last week, at least half a dozen of the publicly-held Independents, also known as Tier 2 carriers, announced their third quarter earnings—and several of them made substantial progress toward the broadband and business nirvana.

The frontrunners

SureWest, HickoryTech and Cincinnati Bell all showed revenue increases compared to third quarter 2010 (3%, 4% and 5%, respectively)—and in all three cases, broadband and business services were largely responsible for the revenue growth.

SureWest saw 9% year-on-year revenue growth in residential broadband and 13% growth in business broadband, while HickoryTech saw residential broadband growth of 5% and business revenue growth of 10%. (Business income was actually down 7%, but the company said that was largely the result of a one-time tax adjustment and a one-time network construction project.)

HickoryTech has put a strong emphasis on selling equipment to business customers and noted an impressive 43% growth rate in equipment and support revenues.

Cincinnati Bell didn’t break out its residential broadband revenue growth, but the company said that growth essentially offset declines in the company’s traditional wireline business. The company took the opportunity to note some of the high points for its Fioptics triple play platform on its earnings call today, noting for example that it is seeing penetration rates above 30% in Fioptics areas, where average revenue per user (ARPU) increased to $122 from $114 in the same period of 2010, while churn was just 2.8%.

But Cincinnati Bell’s biggest success story was on the data center side, where its business grew 18% over the previous year. And although much of that growth resulted from the company’s acquisition of data center operator CyrusOne, the CyrusOne business itself grew 23% over the previous year.
Apparently Cincinnati Bell has been filling data space as quickly as it can build or acquire more square footage. “We are seeing demand in excess of what we’re building,” said Gary Wojtaszek, president and CEO of CyrusOne, on the Cincinnati Bell earnings call.

The strugglers

Independent telcos that didn’t have such a positive story to tell included Frontier, Fairpoint and Otelco. All three companies saw declines in their third quarter revenues—and tellingly, none of them talked about their broadband or business revenue growth, other than Frontier (which indicated that business revenues were down about 1% from the previous quarter).

All three companies outlined a strategy for how they expected to improve performance, however, and those plans were largely grounded in the broadband and business arenas.

Frontier noted that the drop in business revenues related to a one-time settlement of contract disputes that had been pending for a long time. “We wanted to put all of that behind us,” said CEO Maggie Wilderotter on today’s earnings call.

On the broadband side, Frontier take rates in the areas where it acquired lines from Verizon are just 13%, compared to the 19% rate that the company sees in its legacy territories—and Wilderotter noted that the company is driving to close that gap and to increase ARPU in the former Verizon territories.

Like Frontier, Otelco also is in the process of integrating acquired properties into its operations, having completed its acquisition of Vermont-based Shoreham Telephone Company in October. Otelco sees those operations anchoring the expansion of its CLEC business in New England, which has now been completed. But because that expansion took longer than expected, Otelco said in its earnings announcement that third quarter results “softened a bit.”

On Otelco’s earnings call today, Otelco CEO Michael Weaver also highlighted the company’s hosted PBX offering, which saw a 34% increase—presumably a year-on-year increase. “It works well with any broadband provider,” noted Weaver. Accordingly the offer gives Otelco the opportunity to serve people outside its own service area.

FairPoint, meanwhile, seems to be basing its future performance on high-speed Internet growth, where the company said its subscriber growth was 8.2% year-over-year, compared to a 5.4% increase in the second quarter of 2011 and a 1.7% decline in the third quarter of 2010. The company also noted that its plan to reduce its work force would result in substantial operating expense savings—and it noted fiber-to-the-tower as a key expansion area.

Frontier partnerships, potential Otelco acquisitions and more

Other interesting information from Independent telco earnings calls over the past week:

· Frontier has signed an agreement with AT&T Mobility to offer wireless in its service bundles—a move that will enable Frontier to offer the “hottest devices,” Wilderotter said.

· Frontier also is conducting home security trials with ADT and Protection One that add home security to the carrier’s service bundles.

· Weaver said the Universal Service reforms announced by the FCC last week could be a “catalyst” for Otelco to make further acquisitions of rural carriers—apparently because the order removes uncertainty about how those reforms would impact the rural carrier industry.