Yesterday’s post presented a table from Zayo Group’s monthly management deck.   It listed the larger Month to Month services, with comments provided by account executives on what is being done about them.

Back to Ian’s question:  “wouldn’t I want to see how much of that revenue is set to expire in the near future?”  Month to month, by definition, have already expired.  What about those that are soon to move into the month to month category?  Perhaps if we act while they are still under term, we could extend the term in a win/win solution with the customer.

Below is a table that captures large circuits with terms that are soon to expire.

Note that it’s format is the same as the Month to Month table.  We find that separating the soon-to-expire into their own table brings heightened attention to them.  The same questions are considered for these services:

• Should we let a sleeping dog lie?
• Should we offer a modest price discount, perhaps effective prior to the expiration of the existing term, in exchange for a new term?
• Should we suggest an upgrade to a higher speed service?   Again, this could take place prior to the end of the term.
• Should we announce a price raise effective upon term expiration unless customer is able to commit to re-terming the service?

This is a bit like negotiating with your baseball player while he is in the final year of his contract.  How can you leverage the competitive advantage that the circuit is still under term to create a win/win for you and your customer?

So Now What?

  Leave a response (2 so far)
  Subscribe via RSS
  Subscribe via by Email
Share

Related posts:

Month-to-Month
Remaining Days in Term
Revenue Under Contract
Discussing Revenue under Contract
Tracking Revenue under Contact

Over the past couple of weeks, I had several posts on the topic Revenue Under Contact.   Telecom is a recurring revenue business.  Most services are under 1-, 3-, or 5- year terms.  The gist of the posts was that the amount of revenue under contract is an important metric–one that should be measured and tracked.  I showed how Zayo uses Salesforce.com to capture the data.

How is the information used to improve the business?  As an example, take a peek at the following table:

This table gets published each month as part of our executive review deck.  Month-to-month means that the original term has expired and the service is no longer under a longer term contract.   At any point in time, the customer could decide they no longer need the service and send us a disconnect notice.

Ian Gilyeat posted a comment earlier in the series:  “If I’m managing revenue under contract wouldn’t I want to see how much of that revenue is set to expire in the near future?”  In a response to Ian’s comment, Jeremy foreshadowed “Something like an evaluation of ‘high risk’ circuits might be very appropriate. This evaluation could … tell you what large circuits would be coming out of term in the near future.”

The table above is one piece of the puzzle.  It highlights–systematically–those large services that are no longer under longer-term contracts.  It provides a subjective risk assessment and a comments column.  No simple rule-of-thumb guides what to do with a “month-to-month” service.  The great account executives are able to ascertain the best course of action through conversations with their customers.  Should we let a sleeping dog lie?  Should we offer a modest price discount in exchange for a new term?  Should we suggest an upgrade to a higher speed service?   Should we raise the price with an offer to reduce it if and when the customer is able to commit to a longer term service?

Depending on the circumstance, any of these might be the appropriate course of action.  I applaud those account executives and product managers who, working in collaboration, show command of the detail and a knack for choosing a good path.

So Now What?

  Leave a response (0 so far)
  Subscribe via RSS
  Subscribe via by Email
Share

Related posts:

Soon to Expire
Revenue Under Contract
Remaining Days in Term
Discussing Revenue under Contract
The Power of Accurate Data

A bearonbusiness reader by the name of Marcio posted a great comment to yesterday’s The Power of Accurate Data.  He wrote:

I think you nailed the major requirements for data accuracy…but I want to expand a bit on your last point: extreme ease of access to the data.

The ease of access is absolutely necessary, but it may not be sufficient.  What I really believes makes a difference is having as many eyes as possible on the detailed data.  Obviously, w/o ease of use this isn’t possible.

Marcio, I am glad you pointed this out for two reasons.  One, I agree with you.  Two, it is 6:48pm and I needed a post for tomorrow.

At Zayo, we have a whole lot of eyes on the data.   We do this because of how it is used both in the detailed work flow of the business and in the operational finance reporting of governance.   The same data flows seamlessly through these steps.  The data flows from one work process (e.g., sales), to a downstream process (e.g., billing).  The data also flows from those using it to get their work done to those who are sharing results with upper management and the board.

Hence, eyeballs are constantly on the data.  It is easy to drill down.  It is easy to summarize into macro-trend lines.  Data problems are uncovered quickly.  Fortunately, the Salesforce.com tool also enables on the spot corrections.

Hey, there is another Salesforce.com plug.   When will Salesforce start comp’ing Zayo for all this great P.R.?

So Marcio, I agree with you.  Lots of Eyes are crucial to accurate data.

With it, managers can tailor weekly and/or monthly reporting programs that “facilitate” (if not force) the account execs to look at the data regularly. We’ve found this to be necessary in our usage-based business (admittedly more complex than the MRR-based part of the business) where the high-level trends sometimes mask underlying issues. Thus getting more eyes on the data is way to “de-average” w/o having to create reams of detailed reports that no one can possibly digest as well as foster greater ownership for the acct execs.

Generally a win-win as you get both improved data accuracy and acct execs that become more empowered (by the ease of access to the data) to own and manage the business the company gets from their customers.

So Now What?

  Leave a response (0 so far)
  Subscribe via RSS
  Subscribe via by Email
Share

Related posts:

The Power of Accurate Data
T’s Call to Arms
Tight Handshake
Should I file complaint or send a thank you note?
A-Mays-ing Progress at Zayo

Yesterday’s Remaining Days in Term post was more important than might have been gleaned from a casual read.   Revenue Under Contract is important to telecom service companies.  However, accurate tracking is elusive.

In the post, I illustrated how straight-forward it is to gain visibility into the numbers.    With a couple of clicks in Salesforce.com, I can find Revenue Under Contract.   Just one more click and I get all the individual orders that compile this number.   And just one additional click takes me to any one of the individual orders–and allows me to see the detailed information such as the original contract date, the term, and the calculation of how many days are remaining in the term.

As my former colleague Jon Yount used to say far too often, “Yada.  Yada.  Yada.”  and with a skeptical voice, I can hear him asking “But how do you know the data is accurate?”

Well, I am sure it isn’t 100% accurate.   Hell, the data only was entered into the system over the past six months.  However, it important to recognize the following:  the data is ZB’s only database of record for this info.  It feeds the billing system.  Account Executives have complete access to it and use it for account planning.   It feeds our monthly financial decks.  And, as I illustrated, anyone–including me–can drill down and sanity check the numbers.

Data Integrity is driven by the combination of:

• Transparent data
• Single database of record
• Integrated database architecture (that is, same data persists through opportunity, activation, account management, and billing)
• Data Accuracy Accountability (for example, the account exec is identified on each record, and they have no excuse for letting inaccurate data persist in their customer account records)
• Consistent monthly reporting (so if data is messy, the trend lines will reveal inconsistency)
• And, most importantly, extreme ease of access to the data

Oh, and one more thing.    Management cares!    If not, would I be writing this blog post?

So Now What?

  Leave a response (2 so far)
  Subscribe via RSS
  Subscribe via by Email
Share

Related posts:

Arming your Account Executives
Remaining Days in Term
A-Mays-ing Progress at Zayo
Lots of Eyes
Discussing Revenue under Contract

In four posts last week, I discussed Revenue Under Contract.   Recurring revenue is extremely important to telecom services companies.   The durability of the recurring revenue is influenced by how much revenue is under contact.   Given its importance, it is highly desirable to know the total amount of revenue under contract.  Also desirable is to know the pace in which Revenue Under Contract is growing or shrinking.

In the posts, I showed a graph of the past five months of data for Zayo Bandwidth.  The commentary showed that the five-month trend line provides insights into the business.   Before I get into ways that the data is used–some of which were hinted about in blog comments–I want to address the following questions:

How do we capture this information?

How do we know it is accurate?

How big is the army of people who do the tabulation?

And was I serious when I said we track this daily?

Salesforce.com–I hope you are reading this, as you are about to get another big plug from me.

As I was writing this post, I opened up my Salesforce.com account.  I clicked on Reports and scrolled down to the section called “Revenue Expiration (Erickson/Cheedle)“.   Erickson as in Matt Erickson, head of Zayo Bandwidth Product; Cheedle as in Brad Cheedle, head of Zayo Bandwidth Sales. (Erickson/Cheedle) as in if the data isn’t accurate, I know which direction to growl.

Within this Revenue Expiration (Erickson/Cheedle) section of Reports are seven reports, including:

• Remaining Contract Value Embedded Base
• Contract Value Gross Install Pipeline
• Remaining Contract Value Gross Disco Pipeline
• Remaining Contract Value Revenue Commitments

I clicked on Remaining Contract Value Embedded Base.  When I clicked on it, three numbers popped up.  The first is the number of “records” (specifically 8,673), which is the number of service instances for which  ZB issues invoices each month.   The second is the amount of MRR that is associated with these 8,673 service orders–for illustration purposes, let’s say this amount is $11,000,000 / month (hypothetical number).    The third number is the total amount of Remaining Contract Value, which (hypothetically) might be $250,000,000.

$250,000,000 thus is the amount of Remaining Contract Value associated with the Embedded Base, at this precise moment.  If a disconnect is processed later today, the number will go down.  If a new install is made–or a contract term extended–the number will go up.

The next thing I did was click on the Salesforce.com button called “Show Details”.  In seconds, all 8,673 records are listed–showing me the contract value for each one.  The fourth one is a DS3 from NYC to PA with a price of $900/month and a Remaining Contract Value of $9,468.

Its circuit ID is 034029.  I clicked on this number and it took me to the details of this particular service order.  It turns out this order has a one year term and was signed on May 1, 2009.  “Remaining Days in Term” is also shown–and in this case there are 320 days of remaining life.

Voila:  $900 MRR/month * 320 remaining days / 30.41 average days in a month = $9,468. I repeat:  Voila!

…more to follow…

So Now What?

  Leave a response (0 so far)
  Subscribe via RSS
  Subscribe via by Email
Share

Related posts:

Revenue Under Contract
The Power of Accurate Data
Month-to-Month
Tracking Revenue under Contact
Discussing Revenue under Contract

The past three posts focused on revenue under contract–an extremely important but rarely tracked metric in telecom services companies.  Yesterday, I posted the following graph:

The first bar is labeled 1.15.09 (January 15, 2009).  This is the first date we tracked Revenue under Contract.   For monthly reporting, we record the data mid-month.  The graph gives us a quick view on whether the total is growing, staying the same, or shrinking.

Each bar consists of three segments.  Green is the actual services that are provided as of the date of that particular bar.  A $10,000 per month OC48 with a 3-year remaining life would contribute $360,000 toward this bar.

Blue is the Net Pipeline.  These are orders that have been received from customers but not yet processed.  It is the net of  Install Pipeline (new service) and Disconnect Pipeline (services that are being terminated).  If a $5,000 OC12 new service order with a five year term is in the pipeline, it will contribute $300,000 to this bar.  A $20,000/month service with no remaining life (that is, the term has expired) that is being disconnected will reduce the bar by $20,000–causing the net to be $280,000.

Lastly, the orange is Take-or-Pay Commitments, which represent obligations by customers to purchase service in the future.   These have not yet turned into specific actionable orders–so they are not part of the Install Pipeline.  Nonetheless, including these in the tracking is extremely important.

So what does the graph tell us?

• Over this four month period, the bars are getting bigger.  This is good.  The pace in which it is growing is encouraging.

• Over four months, the green bar became 13% bigger–implying a 52% annual growth rate (which is clearly a non-sustainable growth rate).

• Interestingly, the blue segment did not change much.  The reason for this is that we improved our service activation interval during this time, causing revenue to sit in the pipeline for a shorter period of time.  (Good job ZB!)

• The orange segment grew materially over this time.  We signed up a few material Fiber to the Tower projects in this period.

For Zayo Bandwidth, the news so far is good.   This chart serves as a very early indicator of the longer term growth rate of the business.  If revenue under contract is shrinking, the growth rate several quarters from now is likely to slow.  If it is increasing, it is likely foreshadowing an acceleration of growth.  It is only one such indicator–but it is among the most important.

How do we capture this information?  How do we know it is accurate?  How big is the army of people who do the tabulation?  And was I serious when I said we track this daily?  You know what words are next…

Stay tuned…

So Now What?

  Leave a response (3 so far)
  Subscribe via RSS
  Subscribe via by Email
Share

Related posts:

Revenue Under Contract
Pending Revenue under Contract
Tracking Revenue under Contact
Remaining Days in Term
Month-to-Month

The past two posts focused on recurring revenue–the life blood of telecom services companies.  A $10,000 per month OC48 with a 3-year remaining life has a contract value of $360,000.   If you add up all the services under contact, what would the aggregate contract value total?    How much did this total amount of contracted revenue grow over the past month /quarter?

Yesterday’s post went a step further.  Install Pipeline is orders for new service that have been received but not yet installed; Disconnect Pipeline is disconnect orders that have been received but not yet completed.  Net Pipeline = Install Pipeline minus Disconnect Pipeline.  How will Revenue under Contract be impacted once the Net Pipeline is processed?

Take-or-Pay Commitments are obligations by customers to purchase service in the future.   Though less prevalent today than in the boom times, take-or-pays–such as Fiber-to-the-Tower–can be meaningful.  What is the Revenue under Contract associated with Take-or-Pay Commitments?

Zayo Group acquired 11 telecom properties over the past two years–and completed due diligence on several more.   With perhaps one or two exceptions, Revenue under Contract was not tabulated.  Nor was it tracked in my prior telecom lives–ICG Communications, Level 3 Communications, Worldcom, and MFS Communications.

At Zayo Bandwidth, it is tracked.   Accurately.  Comprehensively.  And, for those who care to know it at any precise moment, in real time.  As part of our monthly financial deck, we share the information with our board as well as with Zayo Bandwidth employees.  And today we will share it with Bearonbusiness readers:

Okay, I realize that the numbers were removed on the left axis.   I want readers to understand what is tracked –but the absolute value of Zayo Bandwidth’s numbers are not relavent.    Tomorrow, I will comment more about the graph and how we use it to better understand our business.

So Now What?

  Leave a response (2 so far)
  Subscribe via RSS
  Subscribe via by Email
Share

Related posts:

Pending Revenue under Contract
Discussing Revenue under Contract
Revenue Under Contract
Remaining Days in Term
Zayo Bandwidth’s Pipeline Bust

Recurring revenue is extremely important to telecom services companies.   The durability of the recurring revenue is influenced by how much revenue is under contact.   Given its importance, it is natural to assume that telecom companies feverishly track revenue under contract.   Specifically:

What is the total amount of revenue you have under contract?

Did the total amount of contracted revenue grow over the past month /quarter?  Or did it shrink? By how much?

The tracking could be taken a couple steps further.  Install Pipeline is orders for new service that have been received but not yet installed.  Disconnect Pipeline is disconnect orders that have been received from customers but not yet completed.  Net Pipeline = Install Pipeline minus Disconnect Pipeline.  An additional question could be:

How will Revenue under Contract be impacted once the Net Pipeline is processed?

“Take-or-Pay Commitments are obligations by customers to purchase service in the future.   In Telecom Boom times, take-or-pays were plentiful.  Today they are less frequent.  But in many cases–such as Fiber-to-the-Tower–they are material and meaningful.  This brings up yet another important question:

What is the Revenue under Contract associated with Take-or-Pay Commitments?

As a Take-or-Pay Commitment is converted to revenue, the commitment goes down but the Revenue under Contract increases.  Wouldn’t it be helpful to see this careful tracked–with accurate and real time data?

…to be continued…

So Now What?

  Leave a response (0 so far)
  Subscribe via RSS
  Subscribe via by Email
Share

Related posts:

Tracking Revenue under Contact
Discussing Revenue under Contract
Revenue Under Contract
Remaining Days in Term
Zayo Bandwidth’s Pipeline Bust

Many bearonbusiness readers work for or are investors in a telecom services company.  Recurring revenue is the life blood.  Contract durations might be one year, three years or five years.  As contracts expire, revenue reverts to month-to-month status.   If it is renewed, price might drop but the reward is a new 3- or 5-year contract.

So here is my question:

What is the total amount of revenue you have under contract?

Is it $50M?   $100M?   Knowing the answer would seem to be important to management and investors.

Let me ask a few related questions:

Did the total amount of contracted revenue grow over the past month /quarter?  Or did it shrink?  By how much?

Ideally, the revenue under contract is growing each month.  New multi-year contracts offset the aging of the base.  Re-terming month-to-month bolsters the number as well.

Does your company track “Revenue Under Contract”?   If so, how precise is the measurement?  How frequently is it measured?  Are there discussions about what is being done to accelerate the growth of contracted revenue?  Or if it is shrinking, is there discussion about what could and should be done to turn this around?

to be continued…

So Now What?

  Leave a response (3 so far)
  Subscribe via RSS
  Subscribe via by Email
Share

Related posts:

Pending Revenue under Contract
Tracking Revenue under Contact
Discussing Revenue under Contract
Remaining Days in Term
Month-to-Month

Today, we will wrap up the series on Measuring Value Creation all together.   The formula is:

Value Creation = Intrinsic Value less Paid-In Capital-Net less Opportunity Cost

Focus on the time period ~”three quarters from now”.  Two principles underpin this:

First, performance in near term drives financial results “three quarters from now”.  Sales that are made in 2Q09 lead to installs next quarter which leads to financial statement revenue in 4Q09.  Likewise, cost reduction projects that are identified and approved in 2Q09 improve the cost structure in 4Q09.   Examples of these are network expense optimization and SG&A savings initiatives.  If service has been great in the recent past, customers will be more likely to not disconnect their service and to order more.  If service is poor, churn will increase and it will be harder to win new sales.   If the marketing/product group, with support of other groups, has a well tuned in quoting and pricing process, sales success will be higher, and results a few quarters hence will be boosted.

Second, Financial results can be forecasted with a high degree of accuracy for the next few quarters.    Per #1, most of the events that will drive 4Q09 performance have happened already.   A fine-tuned forecasting process produces an accurate bottoms-up projection of Income Statement, Cash Flow Statement, and Balance Sheet for the next handful of quarters.

Use the projected Balance Sheet to tabulate Paid-In Capital-Net at the end of “three quarters from now”.  If your business unit is returning cash, it is reducing its Paid-In Capital-Net and thereby helping the Value Creation equation.  If it is consuming additional cash, it is increasing the Paid-In Capital-Net.  Note that even one-time changes that help or harm cash are accounted for in the Value Creation equation.   Using Paid-In Capital-Net maintains emphasis on the flow of capital between the business unit and its parent.

Calculate Opportunity Cost by Multiplying the Paid-In Capital-Net by Cost of Capital.   Recall this is a cumulative calculation, where the calculation is made every quarter to “three quarters from now”, and these numbers are summed together to reflect the Opportunity Cost.  As part of this calculation, the management team assesses what Cost of Capital would leave investors neither thrilled nor disappointed in the business unit’s performance.

Derive an appropriate EBITDA Multiple for the Business Unit: Understand the relationship between EBITDA and Cash Flow.  Consider what longer-term growth rate is appropriate to assume for the business unit.  Peg what income tax and capital will be at the long term growth rate.  Show what EBITDA Multiple is implied by these assumptions and the business unit’s Cost of Capital.  Use EBITDA multiples of similar public companies to provide color to the analysis, but not as a substitute for showing a bottoms up derivation.

Estimate Intrinsic Value by multiplying EBITDA “three quarters from now” by the EBITDA Multiple.

There you have it.   Hopefully many BearOnBusiness readers are helped by this long-winded but very important series of Measuring Value Creation.

So Now What?

  Leave a response (2 so far)
  Subscribe via RSS
  Subscribe via by Email
Share

Related posts:

How to Calculate Value Creation
Intrinsic Value’s role in Measuring Value Creation
11.6X EBITDA
Recapping.
Estimating your EBITDA Multiple