Consolidated’s Udell: There are no surprises with the FairPoint integration process

merger and acquisition
Consolidated CEO Bob Udell told investors during the company's second-quarter earnings call that the FairPoint integration process has begun, with the initial focus on improving customer interactions and increasing broadband speeds.

Consolidated Communications recently closed its acquisition of FairPoint Communications, and the service provider says that it has not found any initial issues as it started to integrate the company into its fold.

Perhaps not surprisingly, two of the big points of the service side of the FairPoint integration will be to stitch together the fiber networks to address consumer and business market needs.

Bob Udell, CEO of Consolidated Communications, told investors during its second-quarter earnings call that the integration process has begun, with the initial focus on improving customer interactions and increasing broadband speeds.

Udell Consolidated
Bob Udell

“We're excited with the early traction of our integration efforts and there are no surprises,” Udell said during the earnings call, according to an earnings transcript. “We've outlined and prioritized projects and begun integration projects with a focus on reducing customer pain points and expanding broadband speeds. Near-term projects are in motion and include connecting our networks and the migration of our financial platform.”

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Udell added that Consolidated will use the same integration playbook the company has used for other large acquisitions like SureWest and Enventis.

“Consolidated has a successful track record of integrating companies having completed three acquisitions in the last five years,” Udell said. “We're confident in our ability to integrate FairPoint effectively and with no negative customer impact.”

Consolidated has set a goal to reach $55 million in synergies two years after completing the acquisition, and it will be able to utilize $300 million in FairPoint's federal net operating losses. Udell said that “we are off to a fast start having achieved $15 million in annualized cost savings at close.”

Analysts agree that while Consolidated will be able to achieve its integration goals, it will take a few quarters to see the ultimate outcome.

“While we continue to view the FairPoint deal positively and believe the company will execute well on its integration, it will also take time to fully play out (i.e., revenue synergies) and beyond estimates getting adjusted for the FairPoint deal this quarter, we view meaningful upward estimate revisions as less likely over the next few quarters,” Cowen and Company said in a research note. “As such, we remain comfortable on the sidelines particularly given the continued negative across RLEC industry which we don’t expect to improve in the near-term.”

Enhancing consumer broadband speeds

Consumer broadband is one of the key areas that Consolidated hopes to improve upon in the existing FairPoint service areas by leveraging the existing fiber network the telco built mainly for business and wholesale customers.

FairPoint built out a 22,000-fiber-route-mile network that connected all of its 24-state territory, which Consolidated plans to now use as the foundation for introducing new broadband speeds.

We're working quickly on bandwidth upgrades and have the capital allocated within our guidance to quickly connect the fiber network which FairPoint has deployed so well for the carrier and the wholesale customer channel but not leveraged for the residential market,” Udell said.

Today, 60% of FairPoint’s customers can get 15 Mbps speeds, but Udell says Consolidated will be able to rapidly ramp up the number of customers to get even higher speeds. In its legacy markets, Consolidated has continued to increase broadband speeds. The company can deliver 100 Mbps to 42% of its customers, while over 96% can get 20 Mbps.

“While the speed uptake looks incremental when you look back through history, we've seen our customers move up market quickly from the 3 meg and 6 meg product into the fastest growing product set of the 20 meg and the 100 meg,” Udell said. “The same logic will apply in the FairPoint property.”

Within its own broadband properties prior to the FairPoint deal, Udell said that “increasing speeds is a key priority for us.”

“We achieved a 15% increase in subscribers to our 20 meg or greater services year-over-year, and we're well positioned to offer the higher speeds customers demand as we focus investments on network upgrades through the Connect America Fund 2 Program and through our own speed prioritization plan,” Udell said.

While Consolidated itself only added a little over 3,200 broadband subscribers in its existing territories, the service provider gains a total of over 304,193 broadband subscribers from the FairPoint acquisition.

Capitalizing on metro Ethernet, backhaul

In the business services market segment, Consolidated continued to see strong results from Metro Ethernet sales. The service provider reported that Metro Ethernet units grew 34% year over year.

As part of evolving its Metro Ethernet portfolio, Consolidated recently achieved MEF 2.0 certification, ensuring its Ethernet platform is interoperable with other carriers.

Similar to AT&T, Consolidated is seeing that business data services are becoming a larger portion of its revenue mix.

“Our business in broadband strategic revenue accounts for 82% of our total revenue,” Udell said. “This shift has occurred over a five-year period with a concentrated focus just as commercial and carrier revenue grew to be the largest component of our overall revenue composition.”

Udell added that “72% of our total revenue will be from business in broadband representing an opportunity to grow the strategic revenue as we have proven our ability to do so in the past,” which “in turn offsets legacy declines.”

By acquiring FairPoint, Consolidated becomes the ninth largest U.S. fiber provider, positioning its business and wholesale services unit to pursue more business and wholesale service opportunities.

A key point of the acquisition is the assets it gained. Consolidated got 22,000 fiber route miles from FairPoint, creating significant scale with a network now extending 36,000 fiber route miles across 24 states and making Consolidated Communications a top 10 fiber-based provider in the United States.

Besides scaling the overall fiber route mile count, Consolidated also grows its on-net fiber building count to 8,800 and fiber-connected towers total to 2,600.

As of the end of the first quarter, FairPoint had 3,000 on-net fiber buildings and has connected its fiber to over 1,300 towers via contracts with wireless carriers since it entered the market in 2011. Having a greater density of fiber will position Consolidated to increase business and wholesale revenues over time.

Consolidated also saw gains in its wholesale segment, in which more of its wireless customers are asking the company to provide more small-cell and dark-fiber products. By purchasing FairPoint, the service provider now has about 2,600 wireless towers under contract but still faces pricing pressures.

“We are working on a number of FRP's and see solid opportunities with regional and national service providers,” Udell said. “As we have been reporting for the last few quarters, we continue to experience bandwidth price compression resulting in contract revenue write-downs; however, the positive side of these price changes often brings opportunities to compete for midterm renewals, which allow us to extend contract terms and to secure more sites in the process.”

Here’s a breakdown of Consolidated’s key metrics:

Commercial and carrier: Led by data and transport services sales such as Ethernet and dark fiber, Consolidated reported second-quarter commercial and carrier revenues of $78.6 million, up year over year from $76.5 million.

Consumer: The company said consumer revenue after adjusting for the sale of the Iowa ILEC was down $3.1 million largely due to declining voice services and the expected churn in its low-margin digital TV services as it focuses on its over-the-top strategy in broadband as well. It reported that broadband revenues, which include VoIP, data and video services, were $50.8 million, down year over year from $53.1 million. Voice services declined again to $12.6 million from $14 million due to customer defections to wireless and other IP-based voice service options.

Financials: Total revenue in the second quarter was $170 million, compared to adjusted revenue of $176.4 million in the second quarter of 2016 after excluding $10.5 million of revenue from the equipment sales and service business which the company divested in 2016. Consolidated noted that commercial and carrier revenue growth of 2.7% partially offset the expected declines in consumer voice, subsidies and access.