ILEC Revenue Trends and Future Outlook - PowerPoint Presentation

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ILEC Revenue Trends and Future Outlook

Charting Your Company’s Path to 2025

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Revenue Trends Since the Transformation Order

$2B Cap

$2B Target

Overlap

Expense Caps

Local Rate Floor

RoR

Phasedown to 9.25%

Glide Path

A-CAM II

A-CAM I

Expense Limitations

Short Term BCF Refunds

Reverse Auctions

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Takeaways – Federal Support

Strategic Takeaways from the Order

There is

more money

designed to ensure sufficient, predictable support for rate-of-return incumbent eligible telecommunications carriers

Order reverses preceding trend of support erosion, creating

a more robust and predictable foundation aimed at a more substantive

level of broadband.

Creates a precious window of opportunity where revenues are stable and robust to plan our pivot away from reliance on support revenues.

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December 2018 Report & Order

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Predictability is a Relative Term

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Short-Term Revenue trends are quite positive

Mid-Term Revenue trends are considerably more hazy:

5 Years – Competitive overlap re-evaluated for legacy carriers.

Year 11 of ACAM?

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Revenue Trends – Mid Term…Reliant on Adaptation

There is an inexorable link between margin potential and product relevance/value

Growth in our margin is directly tied to:

The intrinsic value in the products we offer to the marketplace

Our ability to breed awareness of what we have to offer and to actively sell our solutions

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Relevance to the Customer

Not that long ago, the summit of customer relevance was the Triple Play bundle

Increasingly, our three-legged stool of relevance is being undermined by shifting customer preferences

This exaggerates the incline relative to the transformation we are all attempting to engineer

We must also address the prospect of broadband commoditization

We must carefully evaluate where we can inject ourselves to enrich our value proposition to both business and residential communities

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Revenue Trends in the Mid-Term – It Depends…

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Mobile Usage Trends

Mobile Only Broadband Users

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Revenue Trend Outlook – It’s About Value

Verizon 5G Home Service300 Mbps to 1 Gbps$70 per month

Star Link

LEO constellations

4,425 satellites – Initial 60 launched on May 23

rd

, target 1,800 within next 2 years (authorized for 12,000).

Initial 800 deployment will provide coverage to United States

Target 1 Gig at low latency ~30 ms

Estimated ARPU $62.50

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How Important is the Plan?

Kodak / Fuji Film – A case study:In 2000, just before the digital transition, sales related to film accounted for 72% of Kodak revenue and 66% of its operating income against 60% and 66% for Fujifilm.

– Pretty analogous to margin % driven by USF Support Revenues.

In 2001 Revenues associated with Film sales peaked, in 2010, the film market dropped to less than 10% of that level.

If we move to a reverse auction format in the next 10 year period, will our margins from this source be similarly impacted?

In 2004, Fuji came up with a six-year plan called VISION 75 in reference to the 75th anniversary of the group. The stated goal “saving Fujifilm from disaster and ensuring its viability as a leading company with sales of 2 or 3 trillion yen a year.”

Took inventory of its capabilities, products and patents, diversified using acquisitions to complement pivot that exploited existing capabilities, eliminated capacity and downsized businesses that were trending down.

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How Important is the Plan?

Kodak’s strategy less urgent and holistic, rooted in past position - imaging.Lead to them being anchored to a framework defined by technological disruption – imaging.Inability to differentiate their position based on value – moving into digital camera space which became increasingly commoditized – digital cameras.

Kodak – Filed for bankruptcy in 2012 – (34 million in operating income year before and a loss of 349 million loss in digital camera sales).

Contrasting – Fuji Film consistently posts annual profits between $1.5 and $1.8 Billion.

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Projecting Steady State…

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Present

2025

2029

In light of the uncertainty in the mid-term:

Competitive threats posed by evolving technology

Evolving technology changing the way customers perceive value

Impact of possible recovery changes…..

Our revenue trends and outlook will be directly predicated on our ability to:

Define strategically and competitively where we need to be not next year or year after, but where we need to be, financially and competitively, when these alternative technologies are in full commercial bloom, and when financial risk will be presenting itself.

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Metrics / Dashboards constructed without an underlying set of strategic goals are like a map without a defined destination

Evaluation of tactical alternatives / options without a thoughtfully constructed longer-term vision can create a disjointed set of actions that may not reconcile well or gel to form a cogent thoughtful path

A strategy and thoughtful set of tactics may be undermined by a lack of execution not anchored in a precise understanding of the relative performance of metrics that underpin your objectives

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Data / Metrics Lifecycle

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Defining Foundational Vision

Example:

2025 Strategic Vision

Replace 35% of regulated support revenue over the next 6 years, and 75% over the next 10

Be the #1 provider of technology solutions and IT-based services in every market we operate in

Deliver a world class, objectively verifiable customer experience

Once the vision is established – Your approach to analytics can begin to be constructed in a way that is relevant to your strategic focus, and to the tactics you construct to realize your company’s vision

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Time

Identifying the Options, Then Defining the Path

Capabilities

Opportunities

What are the service and market opportunities that are most promising?

Margin

Size / Scale

What capabilities are required to capture opportunities present?

Capital

Staffing level and acumen

Systems

What is my window of time?

Income diversification goal

Perceived window of opportunity.

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Defining Your Product Persona

In the face of the erosion of relevancy of traditional products, companies will be faced with a foundational question…

what is my desired product/ strategic persona?

Do your capabilities define your opportunities, or do market opportunities define the capabilities you must assemble?

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OTT Monetization – One Angle

In addition, this client is charging $100 per hour to come out and assist customers establish the service.

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IT Professional Services – One Company’s Experience

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Leveraging CBOL

With the ascension of mobile and decline in perceived value of fixed voice, the market share of voice has slowly and consistently declinedMany ILECS index broadband market share to access lines, which tends to significantly understate available market

Re-examining existing broadband rate structures and aggressively marketing CBOL is likely the most meaningful short-term revenue/margin opportunity

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There’s Gold in Them There Hills

New Annualized

MARGIN

Created

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Attacking Both Axes

Core objective – Drive upward progress in both ARPU and Market Share

Most clients have between two-thirds and three-fourths of their subscribers on the lowest package

Many tend to note that “other places may be different, but our folks are cost conscious and they’ll always opt for the bottom tier”

Rebuttal

Marketing must be a never-ending focus

Consumers will respond if they see value – we must make them see value

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Creating Value, Driving Awareness

We must sharpen our saw relative to presentation of value. Creating a compelling message to drive further broadband adoption within our territories is a perfect primer in honing our ability to message value beyond our borders.

Acceptance of Mobile

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Employing an Analytical Decision Making Process

Finite

Finite

Finite

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Assessing / Assembling Your Weaponry

Time

Capabilities

Opportunities

Rapidly Changing Technology and Evolving Consumer Preferences = The Need to Quickly Evolve.

This reality in turn requires capabilities we, as an industry, have been light on.

Creating and Efficiently Evolving Product

and Service Capabilities, and proactively enhancing the customer experience.

Breeding Awareness

of such products and creating a sales / growth driven culture.

These are skillsets that must be embraced as key organizational needs, with a priority placed on their acquisition and integration.

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Assessing / Assembling Your Weaponry

Time

Capabilities

Opportunities

Based on Financial North Star…..

Do you have sufficient capital capabilities to underwrite the desired / identified level of diversification?

Do you have a forecasting model in place that forecasts required capital indexed to your desired mid-term financial end-point?

Is there a perceived upper level of leverage imposed by your board that is less than what the business would otherwise support?

Are you positioned well to socialize financial needs with capital sources?

Is capital capacity an issue?

How are companies addressing capitalization?

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Importance of Forecasting Models

Create a model that can provide a vision of financial performance of the company through 2025

Critical to understanding progress.

Will I reach my destination on within my allotted time?

Are there obstacles I need to navigate around.?

Creates an analytical framework for assessing different options.

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Assessing / Assembling Your Weaponry

Time

Capabilities

Opportunities

Based on Financial North Star…..

Does your desired operational position require you to procure and operate platforms, or secure access to products to package and deliver to customers?

Does limited scale impact your ability to secure

and integrate

diverse products into an integrated whole?

What kind of dashboards/operating data are you pulling today from what sources to help operate your system

What insight do they provide?

How have they helped optimize your financial and operational performance?

What is the protocol for sharing and reviewing the information?

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Assessing / Assembling Your Weaponry

Time

Capabilities

Opportunities

Based on Financial North Star…..

Have you boiled your strategic plan, and associated elements into a chronologically based timetable – and set of Capital / Operating budgets and associated capitalization plan – a true 2025 Plan?

Does this sequenced plan fully integrate desired end-states for:

Level of Desired Income Diversification by Year

Product Position and Market Expansion Targets

Technology Platform Milestones

Staffing

Bylaws

Capital Structure

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Assessing / Assembling Your Weaponry

Time

Capabilities

Opportunities

Based on Financial North Star…..

Assessing your cadence

– Do You have the diagnostic tools necessary to quickly understand the elements driving your business

Customer Support – Net Promotor Score, churn.

Tech’s number of installs per day, fully loaded labor rate, allocation of truck rolls across business lines.

Financial ARPU by product, EBITDA by product net growth to target.

Average Investment Per Acquired Subscriber

Are you examining NPV and IRR when comparing strategic / tactical alternatives?

Continually examine your relevant KPI’s and recast Forecast based on observed values to assess compliance with Budget.

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Present

2025

2029

Opportunities, Capabilities, Time, Can We…

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What If We Don’t Have The Horses?

Significant income statement diversification is a big deal and requires:

Addressable markets

Sufficient scope of products

Right staff complexion

Capital

Often, the two most vexing issues are:

Markets

Capital

Potential Option…

Partner / Collaborate

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Slide31

Electric Coops – A Rising Force

834 distribution and 63 G&T electric cooperatives

Coops serve more than 19 million homes and businesses, spanning 42 million people across 2,500 of the 3,141 counties in the U.S.

Coops own and maintain 2.6 million miles, or 42%, of the nation’s electric distribution lines, covering 56% of the nation

Electric coops could open markets and provide capital sources that are beyond your inherent reach

Proactivity is essential. JSI has worked with many RLECs to assess business cases and frame the specifics of the relationships

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Conclusions

Business is Darwinian. To remain successful we must continually adapt.Our window of time to adapt is the next 5-7 years.

Alternative Technologies are on the way

FCC modifications to existing support structures are more likely than not.

Don’t be Kodak! Create a 2025 Strategic Plan and set of accompanying tactical elements.

Start at 2025 – Where do you want to be competitively and financially and reverse engineer that vision.

Incorporate diagnostic tools / data to insure that you’re on course.

Forecasting model, and utilization of financial templates for NPV and IRR

KPI’s.

Commit to this reality – Can’t go through the motions – its about your survival and prosperity.

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Questions?

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