Enventis Sale Illustrates Rural Telco Dilemma

Another acquisition by regional telco Consolidated Communications, which now is acquiring Enventis Corporation, formerly HickoryTech, illustrates the pattern of “growth by acquisition” for Consolidated Communications and other regional telcos that formerly primarily earned their revenues from telecom services, mostly voice, sold to rural consumers.

In recent years, leading regional telcos that formerly could have rightly been called “rural telcos” have grown not just by acquiring assets, but by changing the nature of their businesses, becoming largely suppliers of services sold to business customers.

In most cases, such transformations have been accomplished through acquisitions, especially of service provider operations that historically have focused on business customers.

Almost by definition, that strategy cannot work for all rural telcos. An acquisition strategy requires access to capital, plus geographical proximity, management expertise and reasonable existing scale.

Windstream and Frontier Communications, for example,  are among larger regional service providers whose strategies are based on growth from business customers.

After the acquisition, the larger company (Consolidated  plus Enventis) will have $785 million in revenue and $332 million in adjusted EBITDA for the 12 months ending March 31, 2014.

Enventis currently serves approximately 39,000 access lines, has 21,000 high-speed internet customers, 12,000 digital TV customers and 90 fiber-to-the tower sites.

As has been the case for Windstream Communications and Frontier Communications, business revenues have proven to be crucial for Enventis, and increasingly also are the story for Consolidated Communications.

Enventis created a regional fiber network spanning 4,200 route miles that enables facilities-based business customer operations in Minnesota, Iowa, North Dakota, South Dakota and Wisconsin.

Enventis says it earns 80 percent of revenues from its business and broadband services segments.  That is the good news.

The bad news is that Enventis is losing voice lines and revenue, as well as associated equipment revenue, about as fast as it is gaining business revenues, Internet access and video services revenue.

That, as much as anything, illustrates the fundamental problem many fixed network service providers are facing.

Enventis arguably had been doing a good job creating new revenues to replace lost legacy revenues.

Even so, Enventis is running to stay in place.  

In 2013, access line revenue dropped 12 percent, access revenue declined seven percent, broadband revenue was up five percent and other revenue dipped seven percent. Total telecom segment revenue declined four percent.

Offsetting those losses, the fiber segment grew revenue 11 percent in 2013, while equipment revenues declined one percent (revenue was down 22 percent in the first quarter of 2014).

Enventis reported first quarter of 2014 net income of $2.1 million, an increase of 27 percent year over year.

Earnings before interest, taxes, depreciation and amortization totaled $12.1 million in the first quarter, an increase of 11 percent.

Revenue totaled $44.2 million and was down nine percent from first quarter 2013, primarily due to lower equipment sales, which were down 35 percent year over year.

Services revenue, which accounts for 77 percent of the company’s revenue, increased two percent year over year.

Revenues from “Fiber and Data” was $17.7 million, up six percent year over year. Operating income was $2.9 million, up 80 percent year over year, with net income amounting to $1.7 million, an increase of 81 percent year over year.

In the “Equipment Segment,”  Enventis revenue totaled $12.2 million, a 29 percent decrease year over year. Support services related to equipment sales was $2.2 million, a 19 percent increase from first quarter 2013.

Operating income totaled $486,000, a 41 percent decrease year over year. Net income totaled $287,000, a 41 percent decrease compared to the first quarter 2013.

In the “Telecom Segment,”  Enventis earned $14.4 million, down two percent year over year. Broadband service revenue grew five percent, offsetting part of the voice revenue decline.

Net revenue was $1.9 million.

The longer term issue might have been whether growth could be sustained.

Enventis predicted total 2014 revenue (gross, net, cash flow) would be about the same as 2013 results.

In 2013, Enventis revenue was $189.2 million, up three percent. Operating income in 2013 was $17.6 million, down nine percent.

Net income in 2013 was $7.7 million, down $566,000 from 2012.

Prior to the acquisition, Enventis had forecasted 2014 revenue between $189 million and $199 million, with the main trend being growth of business and broadband revenue and declines in voice revenue. In other words, revenue growth was most likely going to amount to $5 million, on an annual basis.

Net income was expected to be in a range of $6.4 million to $8.4 million, possibly less than earned in 2013.

EBITDA in 2014 was expected to be in a range of $47 million to $49.5 million. In 2013, EBITDA was $47 million.

The big story, however, is that new revenues would not offset all the legacy services losses.

Enventis expected flat to slightly-higher 2014 gross revenue, flat net income and EBITDA. So despite the robust new revenue growth, Enventis was on track to see revenues, profits and cash flow stall.

And that, as much as anything, illustrates the problems even successful rural telcos face. Despite healthy “new services” revenue growth, service providers might be losing traditional revenues as fast, or faster, than they can grow new revenues.
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