FairPoint's Ethernet, IP services growth offset voice declines, hints at M&A possibilities

FairPoint is seeing its investment in Ethernet services continue to become a key revenue driver to offset ongoing voice service and legacy data services declines, a trend that continued into the third quarter.

Ethernet services contributed $24.8 million in revenue -- 11.2 percent of total revenue -- up from $20.7 million or 9.1 percent of total revenue a year as Ethernet circuits grew 21 percent year-over-year. It ended the quarter with a total of 14,100 Ethernet circuits.

Total revenue for the quarter was $221.6 million, down from $228.1 million in the same period a year earlier.

The service provider said that growth in its Ethernet products will continue into the fourth-quarter and into 2016 due to demand from its array of retail business customers like regional banks and health care as well as wholesale wireless operator carriers.

"Ethernet circuits grew 21% year-over-year as we see continued strength and ongoing conversion from older transport technologies," said Ajay Saberwal, EVP and CFO for FairPoint during the earnings call, according to a Seeking Alpha transcript.

To capitalize on the emerging small cell backhaul trend, FairPoint launched a new construction business. The service provider's Construction Solutions for wholesale customers can accommodate a host of wireline and wireless projects, including small cell construction and custom cellular locations, structured cabling and inside wiring, construction project management and custom-built network solutions.

Besides Ethernet services, FairPoint saw gains with its new hosted voice products where it is upgrading existing customers and winning new ones. The service provider recently rolled out the service for a new business customer with 40 locations and an existing customer with 35 locations, for example.

"We're developing and deploying advanced services that position us to provide meaningful solutions for our customers," said Paul Sunu, CEO of FairPoint. "We experience continued success with advanced services in the third quarter, but the growth in our hosted offering to further establishment of our data centers and the offering of a broader array of managed services. Our recent success with hosted voice is an example, where our sales teams are using this product to penetrate new logos while providing solutions for our existing customers."

The service provider is also enhancing its reputation as a provider of 911 systems, winning contracts with both the state of Maine and Vermont.

"In July, we completed the installation of our Maine's next generation 911 system, on time and on budget," Sunu said. "This is the second next gen 911 system installation we've completed, since we completed Maine's back in July of last year."

Overall data and Internet services revenue rose $1.6 million due to seasonal reconnects, rate increases and speed upgrades partially offset by broadband subscriber losses.

However, the service provider saw losses in voice services and access revenue. Voice services revenue declined by $200,000, while access revenue decreased $1.4 million. FairPoint attributed the voice and access revenue losses to continued loss and conversion of legacy transport circuits to next generation fiber-based services and the annual NECA cost study true-up in the third quarter of 2015.

Sunu also hinted again that it is considering its merger and acquisition options. Although he would not provide any specific details, he said that FairPoint is considering purchasing another service provider or being bought by another company.  

"I believe we're in a consolidating industry where scale matters," Sunu said. "With scale comes greater cash flow and with that, opportunities to expand and extend products and services. We believe our outstanding operating platform can be used to scale up or can be easily integrated into those seeking scale. As you might expect, there are limits to what I can discuss publicly on this topic, but I can assure you we've been active over the past several months exploring the spectrum of alternatives available to us and we've been careful, methodical, and disciplined in our approach."

For more:
- see the earnings release
- and the earnings transcript (sub. req.)

Special report: Tracking wireline telecom earnings in Q3 2015

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