FairPoint business customers' TDM to Ethernet migrations are 'lumpy,' Sunu says

FairPoint Communications may be seeing the more of its business customers migrate to Ethernet services, but the timing of these changes varies by quarter.

Paul Sunu, FairPoint

Sunu

Speaking to investors during the company's fourth quarter 2015 earnings call, Paul Sunu, CEO of FairPoint said that while it is building out its fiber network into more buildings to serve business customers, it will see business service revenue declines because Ethernet is priced lower than a legacy ATM or TDM-based circuits.

"It's really hard for us to be able to time this because it is lumpy; it's based upon customer decisions of when it is that they are ready to make that move," Sunu said during the earnings call, according to a Seeking Alpha transcript. "And in some quarters, we are going to see greater erosion in the converts and we're not going to see the offsetting makeup on the growth side, because whenever people convert from the traditional TDM to an Ethernet-type of a circuit, they are doing this at lower pricing."

Sunu added that as the revenue churn occurs during its TDM to Ethernet migrations, the telco will look for opportunities to upsell businesses additional services like data center or hosted VoIP and hosted PBX.

"One of the things that we need to do with our sales force is to be able to cover that revenue churn through additional sales to the existing customers or bring on new logos," Sunu said.  "I think we do that fairly well. It's just the fact that there are quarters where we see some of this lumpiness happening. And so overall, we believe that we will be able to cover that. It just was not something that we were able to cover this past quarter."

Being a traditional ILEC, FairPoint's challenges aren't uncommon. Other traditional ILECs who have an established base of legacy services like AT&T (NYSE: T) and Verizon (NYSE: VZ) cited similar issues in their fourth quarter 2015 earnings reports. 

AT&T reported that Business Solutions service revenues declined slightly year over year to $18.2 million, down slightly from $18.7 million as strategic business gains offset legacy declines, for example.

Regardless of the ongoing revenue replacement issues, FairPoint still reported that Ethernet services revenue during the quarter and throughout 2015.

Ethernet circuits grew 15 percent year-over-year to $24.8 million, but remained flat sequentially. FairPoint said growth in the company's Ethernet products is expected to continue based on demand from customers like regional banks, healthcare networks and wireless carriers.

The service provider ended the quarter with a total of 14,507 Ethernet circuits, up from 12,614 a year ago.

However, FairPoint's fourth quarter access revenue declined $2.2 million, a factor it said was primarily due to the continued loss and conversion of legacy transport circuits to fiber-based Ethernet services.

"As anticipated, Ethernet service, when not combined with advanced services, is becoming further commoditized, which is pressuring prices but we continue to be successful in re-terming enterprise customers to long-term contracts," said Ajay Sabherwal, EVP and CFO of FairPoint.

For more:
- see the Seeking Alpha earnings transcript

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