Consolidated’s Udell: FairPoint acquisition will drive Ethernet scale, ease price compression pains

Binary Monitors
Robert Udell, CEO of Consolidated Communications, told investors during the telco’s fourth-quarter earnings call that it saw pricing issues from wireless backhaul customers.

Consolidated Communications is not immune to Ethernet pricing pressure, but the telco is confident that the pending acquisition of FairPoint will give it a broader footprint to sell more of its services.

Robert Udell, CEO of Consolidated Communications, told investors during the telco’s fourth-quarter earnings call that it saw pricing issues from wireless backhaul customers.

“In terms of price compression, we are seeing cost per meg as well as some interest by the wireless backhaul customers of ours in larger deals across our entire footprint,” Udell said during the earnings call, according to a Seeking Alpha transcript. “That's where scale will work to our favor with the FairPoint acquisition.”

Udell added that the pricing pressure comes as its wireless wholesale customers transition from TDM to Ethernet and fiber-based services. This is because Ethernet is often at a lower price and is spread across a longer-term contract than the TDM-based products that were the mainstay of traditional ILECs.

“In this case, it caused us to rewrite some TDM circuits, larger deals down as we expanded the term of those contracts and replaced them with Ethernet,” Udell said. “That's kind of the inflection point we experienced in the fourth quarter on a price compression basis.”

In the face of increased price compression, Consolidated still grew carrier and commercial revenues 2% in 2016.

Purchasing bumps

Similar to other fiber-focused service providers, Consolidated also saw some carrier and business customers delay purchases. The service provider saw some softer purchases during the third and fourth quarters of 2016. In particular, Consolidated saw a number of its business and wholesale customers delay purchases due to the outcome of the 2016 presidential election.

“It really varies market by market, but there was little bit slower decision making that we saw across all of our markets through the election time period of third and fourth quarter last year,” Udell said. “That was obvious in a lot of wireless proposals that went out for small cells, as well as on the commercial front.”

Udell said that “when you're making facilities-based decisions they're usually longer lead times, but I think there was some election paralysis that set in for a short time,” adding that “that's starting to free up.”

In particular, Consolidated is seeing some ramp-up in sales in the South and in Texas, although the oil market is not growing as fast as it had in previous years.

Metro Ethernet rising

Ethernet continues to be a hot seller for Consolidated Communications. The telco reported that during the fourth quarter, Metro Ethernet and data connections rose 7% in the quarter and 22% for the year.

Consolidated won a contract for a 34-site medical service network in Texas, providing a private Ethernet network solution with gigabit capacity, which will be used for telemedicine applications, for example.

Udell said that “this solution which is a good example of our consultative sales approach will be fully installed by midyear and brings with it a total contract value of $16 million.”

But the service provider is not resting on its laurels.

Throughout 2016, Consolidated expanded its fiber network by 434 route miles. This expansion supported the service provider’s carrier team's addition of a net 28 new towers and 270 additional on-net buildings, which also creates an opportunity for our commercial team.

In addition, Consolidated won some of its first small-cell contracts and saw an increase in requests for proposals.

Steve Childers, CFO of Consolidated, said that “82% of our revenue mix in the fourth quarter was from business in broadband services as we continue to grow strategic revenue to counter the expected legacy decline.”

Here’s a breakdown of Consolidated’s key fourth-quarter metrics:

Commercial and Carrier: Led by data and transport services sales, Commercial and Carrier revenues were $77.4 million. Data and transport services revenues were $49.3 million, up from $47.9 million in the same period a year ago. However, voice services were down for the quarter, declining to $24.3 million from $25.3 million in 2015.

Consolidated said that growth in commercial revenue was partially offset by declines in legacy voice, network access and subsidy step-downs from CAF II and Texas USF support. 

Consumer: Similar to the Commercial segment, Consolidated’s consumer unit felt the pain of legacy voice as fourth-quarter revenues slid to $63.9 million, down from $67.7 million.

Broadband service revenue, which includes VoIP, data and video, was $50.8 million during the quarter, down from $52.8 million in 2015. Finally, voice services were $13 million, down from $14.8 million.

Udell noted that despite the overall consumer revenue decline, the service provider is ramping up the availability of higher speed broadband services, including 1 Gbps.

“We now offer over 90% of our marketable homes a broadband connection of 20 Meg per second or higher, and 42% can receive our 100 Meg product,” Udell said. “The number of customers subscribing to our 1 gig speed offering has more than doubled in the last year and the demands for higher speeds will continue and our network, our service and support are key differentiators.”

Financials: Consolidated’s total fourth-quarter revenue was $175.9 million, compared to $188.2 million in the fourth quarter of 2015. Fourth-quarter 2016 revenue was impacted by lower equipment sales and service, which is the business the company divested in December. 

Income from operations was $17.4 million, compared to $19.7 million in the year-ago quarter. Income from operations was down due to lower revenue offset by lower operating expense including a decline of $3.5 million in depreciation and amortization.