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…
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This is great analysis and focuses on basics that everyone should know about their company. But what about the revenue stream that is not under contract? Those customers that are month-to-month and have not signed longer term agreements? Shouldn’t that also be included in the stack?
Also, and you may already be seeing this, but the term of the revenue under contract is a critical view on whether or not upcoming volatility is just around the corner. If revenue under contract is 3 months versus 36 months that’s quiet a difference. 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?
I dont want to give away any future posts but to respond to Ian, you are exactly right. Something like an evaluation of “high risk” circuits might be very appropriate. This evaluation could not only tell you what your average remaining term is it could also tell you what large circuits would be coming out of term in the near future.
This would allow the business to forecase this potential downturn as well as put together a plan to keep the business before it has the opportunity to go away.
Great series.
Ian, you points are excellent ones. As Jeremy insinuates, the data you would want to see is made very visible within ZB. I’ll include this in posts, hopefully next week.
The month to month are included in the stack. Those get credit for only one month of revenue. A $10,000/month circuit on MTM would contribute only $10,000, whereas a $10,000/month with 3 remaining years would contribute $360,000.
Thanks Ian and Jeremy for the comments…more to follow next week