Small Telco Revenue Transition Continues

By Gary Kim November 08, 2012

It is not a particular surprise, but smaller fixed network service providers in the U.S. market are not having an especially easy time making the transition from legacy revenue to new sources.

Windstream, for example, saw net income decline of 31.2 percent year over year, though revenue rose 51.7 percent the year-earlier quarter. Those sorts of results virtually always mean that profit margins were squeezed.

On a pro forma basis, CenturyLink’s operating revenue declined 1.3 percent, driven in larger part by the decline in legacy revenue and not fully offset by growth from new revenue sources. 

Image via Shutterstock

As of the third quarter, business customers drive more than 60 percent of CenturyLink’s total operating revenue, partly a reflection of the acquired Qwest Communications assets. That is a significant change for a firm that historically has been a supplier of rural communications services, largely to consumer customers.

Third quarter 2012 CenturyLink revenue declined 0.9 percent from second quarter 2012 as growth in strategic revenue was offset by lower legacy revenue due to access line losses and lower minutes of use.

What CenturyLink refers to as strategic revenue growth was driven by strength in high-speed Internet and high-bandwidth business data services.

Revenue for the third quarter of 2012 was $1,252.5 million as compared to $1,258.8 million in the second quarter of 2012 and $1,290.9 million in the third quarter of 2011. The decrease in revenue for the third quarter of 2012 as compared to the third quarter of 2011 is attributable to decreases in the number of residential and business customers and switched access revenue.

Frontier Communications saw total revenue decline about three percent, year over year, the best quarterly result for the company since July 2010.

An analysis by Fitch Ratings will confirm what you might expect: smaller U.S. service providers are encountering problems generating organic revenue growth.

In large part, that is because sales of legacy products are slowing. That, in large part, also accounts for the recent merger and acquisition activity within the U.S. cable TV business, Fitch Ratings says.

"Operators are faced with maturing product and service portfolios and unrelenting competitive pressures," Fitch Ratings notes. “As always is the case, when organic growth becomes difficult, public companies will look out of region for acquisition targets, essentially substituting acquired customers and revenue for growth in the existing territories.”

Fitch Ratings says such "grow by acquisition" strategies will be more important in the future. It's hard to disagree with that forecast.

Edited by Brooke Neuman

Contributing Editor

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