Dollar SignThe typical small rural telco financials saw margins decrease about 3% between 2012 and 2013 as their revenue mix shifted toward non-regulated lines of business, according to the 2014 Telergee Alliance Benchmarking Study. Telergee is an alliance of accounting firms specializing in rural telecom.

The group’s annual benchmark study had 216 respondents this year – a substantial portion of the nation’s 800 or so small telcos. The study is based on a wide range of financial information reported by the telcos.  The 3% number, like most of the numbers in the report, was based on the median response.

The decrease in operating margins is not surprising as the Telergee report has seen margins drop all but one year out of the last five.

“As a whole, companies are less heavily reliant on wireline revenues and more on non-regulated revenues,” observed Chris Skidmore, senior manager for Moss Adams, the Telergee firm that coordinates the benchmark report. Non-regulated revenues include services such as video, home security and Internet, which tend to have narrower margins than telcos’ traditional voice business, which continues to erode as customers shift to wireless and VoIP alternatives.

Small telco revenues were virtually flat in 2013, with the median company seeing a scant .9% increase over 2012.

Investment Reluctance
Although policymakers have focused heavily on bringing broadband to rural America in recent years, small telcos’ capital investment, measured as a percentage of operating revenues, was virtually flat – coming in at 20.4% for the median company in 2013, compared with 19.5% for the median company in 2012.

Small telcos say they have been reluctant to invest because of uncertainty about their ability to recover that investment as today’s Universal Service Fund transitions to a Connect America Fund.

Further evidence of this reluctance can be seen in small telcos’ interest expense, which declined 7.1% between 2012 and 2013, after declining between 4.6% and 7% every year since 2009. As Skidmore explained, this suggests telcos are paying off old debt but not adding any new, as they would need to do when undertaking any substantial capital investments.

“It’s like the end of a mortgage – the last payment has very little interest and the first payment is all interest,” observed Skidmore.

Wireless Challenges
About 23% of rural telcos in this year’s Telergee study offer wireless services. But that business continues to be a challenging one for those companies.

For each of the last three years, the median company offering wireless service has lost at least 5.4% of its customers – a trend Skidmore attributes to strong competition from national carriers that are more likely to have the hottest mobile devices.

Like the large national carriers, small rural telcos likely are seeing more and more customers using mobile data – a factor that may have contributed to an increase in average revenue per user to $37.96 from $35.91 in last year’s survey.

As mobile data usage increases, however, wireless carriers tend to see expenses rise at a faster rate than revenues because data generates less revenue than voice when measured on a per-bit basis. This factor may have contributed to a rise in small telcos’ wireless expenses, measured as a percentage of revenues. That number now stands at 93.9%  – up from 89.5% in last year’s study.

CLEC Businesses See Gains
The number of small telcos that offer competitive local exchange carrier services was up in 2013 – about 30% of respondents compared with 26% the previous year.

Margins in that business were up 5.8%, perhaps indicating that small telcos are getting more efficient at operating those businesses.

Labor Expenses
One thing Skidmore said he expected to see this year that he did not see was an increase in employer-initiated reductions in headcount. With overall margins declining, one of the most obvious places to cut expenses is in headcount, as labor is the single largest expense category.

What happened instead was an increase in employee-initiated headcount reductions.

“The Baby Boomer generation is retiring and companies are not replacing them but re-purposing existing employees to cover those responsibilities,” observed Skidmore.