With few exceptions, small U.S. telcos decreased their investment in infrastructure between 2011 and 2012, according to the 2013 Telergee Alliance Benchmarking Study, a broad financial study of small U.S. telcos. Capital expenditures as a percentage of operating revenue were 19.5% for 2012, down 4% from 2011, according to the study conducted by the Telergee Alliance, a group of accounting firms that focus on the rural telecom industry.
“The median company last year spent $1.7 million” on network investment, said Chris Skidmore, senior research manager for Moss Adams, the Telergee Alliance accounting firm that coordinated the study, in an interview. “The median company this year spent $1.1 million.”
Another indicator of small telco investment is their interest expense, which indicates how extensively the companies have borrowed money. Small telcos’ interest expense declined 7% between 2011 and 2012, according to Telergee’s research.
That continues a trend the Telergee Alliance noted in the two previous years as well. After declining 4.6% between 2009 and 2010, small telcos’ interest expense declined 6.4% between 2010 and 2011, according to previous Telergee studies.
The 2013 Telergee Alliance Benchmarking Study was based on data for 2012 and had 236 respondents, representing a substantial percentage of the estimated 800 or so rural telcos nationwide. This year, like last year, the accounting firms shared research results with Telecompetitor.
Uncertainty inhibits investment
The Telergee Alliance findings are the latest of several studies that have found a reluctance to invest on the part of small telcos.
A study earlier this year from telecom advisory firm Balhoff & Williams noted that in 2012 the Rural Utilities Service, a key small telco lender, was unable to place its full loan portfolio for the first time in years. The RUS was able to place only 11.6% of the funding that was available for 2012, according to the study.
A separate study conducted this year by rural broadband association NTCA found that 69% of small telcos had canceled or delayed construction projects. Respondents to the NTCA survey said their cancellations and delays were caused by uncertainty about Universal Service and inter-carrier compensation reform.
The Federal Communications Commission is in the process of reforming those programs with the goal of increasing the availability of broadband nationwide by shifting some funding from smaller carriers to larger carriers, who have lagged behind the smaller carriers in deploying broadband. Small telcos have complained about the way the FCC has implemented its reforms, which impose caps on the amount of funding small carriers can collect in a way the small carriers say is unpredictable.
Skidmore agrees that the decline in small telco investment is largely the result of regulatory uncertainty. “In the past, rate-of-return carriers could invest in their networks with the confidence that through the various support mechanisms in place, they would both recoup their investment and earn a modest return,” said Skidmore. “This appears to be changing as the amount of support is reduced and the way it is shared has been impacted by the FCC reforms. Smaller telcos are impacted more as they tend to rely more heavily on this support.”
Skidmore also noted that FCC reforms encouraged companies to retire old non-productive infrastructure. “If companies had fully depreciated assets on their books that they didn’t get around to getting off their books, it was going to have a significant impact on how the companies would be capped,” Skidmore explained. “We saw a lot of companies significantly purge their accounting and books of those assets that were no longer useful.”
The exception to the rule
There were some small telcos that increased their capital investment levels in 2012, however. The median company with between 9,000 and 17,999 lines in the survey based on 2012 data invested $7.7 million that year. In comparison, the median company of that size in the survey based on 2011 data invested $4.6 million. And while the median company with 18,000 lines or more in 2012 invested $14.9 million, the median company of the same size in 2011 invested just $10.8 million.
“Larger companies are still doing things,” said Skidmore. He noted that larger companies are likely to be more diverse, which may give them the confidence to invest.
More findings from the 2013 Telergee Alliance Benchmarking Study – such as trends in operating margins and regulated and non-regulated business units, including video, wireless and CLEC operations – are discussed in an extensive post, also dated September 26, at Telecompetitor Plus.
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