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.

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Pending Revenue under Contract
Discussing Revenue under Contract
Revenue Under Contract
Remaining Days in Term
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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…

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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…

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Tracking Revenue under Contact
Discussing Revenue under Contract
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Seth Godin did it again.   In his Learning from the MBA Program post, he showed great creativity.  Zayo Group perhaps will try something similar in the future.

Seth decided to launch an alternative MBA program.    He began with a post on his blog.  It would be unaccredited, residential, free and six months long.  He positioned it as a new way to learn about doing business.

More than 48,000 people visited the page that described the program and 350 people applied. He picked 27 finalists and they spent the day together.   Seth says “the conversations that day were stunning. Motivated people, all with something to teach, something to learn and something to prove”.

Seth had to select ~9 people out of the 27.   So he asked each person to interview as many other people as they could.  After three hours, everyone privately ranked their favorite choices… “who would you like to be in the program with you?”   Nine or ten people kept coming up over and over in the top picks — and his “Class of 2009″ was formed.

I had crowdsourced the selection, and the crowd agreed.

Seth further observed:  “It’s interesting to realize that the way I did the application process certainly changed the list of who applied. Same thing happens with jobs, I bet. Your applicants reflect your methods.”

In his post, Seth reports on the results of the program.   It sure sounds like it was a success.

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[Re-print from a long ago bearonbusiness post--but one I think is appropriate for the times...]

So you are sold?  You want to be like Warren Buffett–a contrarian investor.  The expression “easier said than done” is apropos.

First, simply being contrarian isn’t nearly enough.  You also have to be right.  The overwhelming percentage of contrarian ideas are not just wrong, they’re downright horrible.  Said differently, there is a reason why most people believe otherwise.  It is why the style of investing is named based on the word root contrary.

Second, even “right” contrarian views tend to sound wrong.  This isn’t a problem for Warren Buffett, but it probably is for you.  Why?

Do you feel compelled to run your contrarian ideas by others for validation?

Do you need to convince others to back you financially to pursue your contrarian ideas?

If the answer to either of these is a “yes”, the fact that your idea is viewed by most people as flawed poses a problem.  Most other people won’t validate it for you–hence you will lose confidence and become discouraged.  Most financial backers will dismiss you, hence raising money will be difficult.  Some might even poke fun at you behind your back.

Let’s review.  Your ideas have to be right, even if they sound wrong.  You have to raise money, even though most money sources think the idea is flawed.  You have to trust your convictions, even as others chip away at your confidence.

Do you still want to be a contrarian investor?

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Steve Wilson, the veteran account executive at Envysion, wrote a blog post titled The Right Tool for the Job.

We funded Envysion a few years’ ago.  The underlying investment thesis was that a Software as a Service approach to video surveillance would be superior for customers who wanted to view video from dozens or hundreds of locations.    A consistent question we faced was “will there be any features or capabilities that cannot be done through a traditional solution?”.  This turned out to be a hard question to answer.

Certainly a SaaS approach promised dramatic efficiencies to administrators and users.  Many of these are proving to be game-changers.  But most of the capabilities could be provided via a traditional solution (albeit in a far inferior way).   However, identifying capabilities that simply can’t be replicated was less obvious.

Enter My Clips.  Envysion’s MVaaS solution allows a user to point-and-click a interesting video clip to a personal folder in the computing/server cloud.  The URL for this clip can then be sent to other users.  Also, a “friends” list can be maintained to allow others–such as all the store managers in California–to view certain clips.

MyClips enables video to be viewed and shared in ways that traditional systems simply aren’t equipped to handle.  MyClips is becoming one of the most tangible answers to “what features does MVaaS enable that are unique?”.

Thanks Steve for the post.

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One of my most memorable Bruce Springsteen songs is one that few have heard.  It is from the fairly recent album “Devils and Dust” and the song it titled The Hitter.

The Hitter takes place with an aging boxer knocking on his mother’s locked door. He hasn’t seen his mother in years–not since he was sent out of town at a young age to escape the law. The Hitter isn’t returning home to ask for money or to move back in. As he explains, he is just tired and needs to rest in a comforting place.

Come to the door, Ma, and unlock the chain
I was just passin’ through and got caught in the rain
There’s nothin’ I want, nothin’ that you need say
Just let me lie down for a while and then I’ll be on my way

To help his mom understand, he reflects on the time he last saw his mom.

I was no more than a kid when you put me on the Southern Queen
With the police on my back I fled to New Orleans
I fought in the dockyards and with the money that I made
And the fight was my home and any blood was my trade

It turned out he was quite the boxer.  Not only did it pay the bills, but he enjoyed beating up on other men.

Baton Rouge, Ponchatoula, and La Fayette town
Well they paid me the moon, Ma, to knock the men down
I did what I did, when it come easily
Restraint and mercy were always strangers to me

Eventually, he made it to the championship fight.   It was a tough fight, but even with a broken jaw he pressed on.  And he prevailed…

I fought champion Jack Thompson in a field full of mud
Rain poured through the tent to the canvas and mixed with our blood
In the twelfth, I slipped my tongue over my broken jaw
And I stood over him, pounded his blooded body into the floor

Well the bell rang and rang, still I kept on
‘Til I felt my glove leather slip ‘tween his skin and bone

And then he enjoyed the spoils of being the champ. But even as he did, he knew he was a play-thing for the rich guys–but he was fine with what he received in return.

And the women and the money came fast, in the days I lost track
The women red, the money green, but the numbers were black
I fought for the men in their silk suits to lay down their bets
Well I took my good share, Ma, and I had no regret

When the rich guys were ready to move, our champ eyed the payoff and went along with the fix.

I took the fixed staid hombre with Big Diamond Don
From high in the rafters I watched myself fall
So he raised his arms, my stomach twisted, and the sky it went black
I stuffed my bag with their good money, and I never looked back

Worried his mom might see it different, the Hitter explained his choice to her:

Understand me, and Ma, every man plays a game
If you know anyone different, then speak out his name

As he talks through the door, he is not sure his mom even recognizes his voice–and if he gets her to open the door, he is not sure she’ll recognize his face either.  He has been through a tough life.   So he tells her to look into his eyes–and in those she will recognize to be the same as her own.

Well Ma, if my voice, now you don’t recognize
And just open the door and look into your dark eyes

He is proud and independent.   He doesn’t want his mom to misunderstand his intentions.  He doesn’t want her to have any regrets nor does he want her to see any of his frailties.  So he reminds her that he is not seeking anything, not even an “I love you”.    He just needs to return to the home he grew up in, lay down in the bed he slept in when he was young and innocent, and then he’d be ready to continue on.

I ask of you nothin’, not a kiss, not a smile
Just open the door and let me lie down for a while

The Hitter’s best days are behind him and he knows it.  But fighting is all he knows.  He is tough and lives with something he still needs to prove, though he is not sure to who.  Perhaps only to those who are like him–who think they are tougher and who too have a checkered past.

Now the grey rain is fallin’ and my ring fighting’s done
So in the work fields and alleys, I take them who’ll come
If you’re a better man than me then just step to the line
And show me your money and speak out your crime

Well tonight in the shipyard, a man draws a circle in the dirt
Like I always do, I move to the centre and I take off my shirt
I study him for the cuts, the scars, the pain man no time can erase
I move hard to the left and I strike to the face

If you are a Springsteen fan and haven’t heard this song, consider yourself lucky–as when you do, you are in for a treat.

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About two months ago, advertising was introduced on bearonbusiness. Actually, I cut a revenue-sharing deal with Rob Powell of Telecom Ramblings. Since inception, I think we divvied up about $31.59 between us.

Is my aim to make money? Many years ago, Bruce Springsteen (or more precisely a character in a Springsteen song) courted a gal who apparently had a sizable bank account. He explained her money wasn’t what he sought: “I ain’t after your money, ‘cause ‘I got plenty of that’ “. Nope: he just wanted to hang with her in the back of her Pink Cadillac.

My intent with ads pales in comparison to Bruce’s with the Pink Cadillac lady but, like Bruce, “I ain’t after your money, ‘cause ‘I got plenty of that’ “. My intent is to gain some first hand experience on how advertising works in the web 2.0 world.

So far, the answer is: “not all that well”.

Seth Godin of the fabulous Seth’s Blog wrote a recent post: When the writer becomes the publisher. I quote:

In a world in which just about everyone is a writer and just about every writer wouldn’t mind benefiting from their work, there’s a huge need for people who can help us publish profitably. Or, failing that, figuring out a way to get your own words published profitably. Some people will happily remain amateurs, but history shows us that the real explosion in content happens after people figure out how to make money.

Mark this down as another job for the new economy: someone who can collate, amplify and leverage the work of writers and turn it into cash. I don’t believe that there’s one solution, not this time. But I’m confident that around the edges and deep into niches, there’s money being made.

You betcha, Seth. Blogging is producing an incredible amount of interesting, insightful, and downright humorous content. And I am not just talking about bearonbusiness. Publishing is easy. And evidently lots of people have a lot to say. However, the opportunity for “someone who can collate, amplify and leverage the work of writers and turn it into cash” is bigger than a Pink Cadillac.

Newspapers are struggling. Perhaps they should change their business model entirely. Stop focusing on the production of unique content. Instead, focus on how to “collate, amplify and leverage the work of writers and turning it into cash”. What do you think Seth?

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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.

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How to Calculate Value Creation
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We are nearing the end of the series on Measuring Value Creation. Before I provide the wrap up, I need to return to the topic of prior posts: Choosing an EBITDA Multiplier. Let’s recap what we learned about EBITDA Multiples:

1. The true value of a business–called Intrinsic Value–is determined by summing up those future cash flows -appropriately discounted – that the business is really going to generate. Multiplying EBITDA by a number is nothing more than a back-of-the-envelope approximation of discounted cash flows.

2. In many businesses including telecom, EBITDA is preferred over Cash Flow because capital expenditures are a significant component of Cash Flow. A capital intensive business that is growing rapidly will have low or perhaps negative Cash Flows, despite that the business is presumably in a rapid value-creation mode (else, why is it investing capital?). Conversely, slow or negative growth usually is accompanied by low capital expenditures and, hopefully, higher Cash Flow. Therefore, a multiple of near term Cash Flow is an extremely unreliable back-of-the-envelope approximation of Intrinsic Value.

3. Insight can be gained from similar companies that are publicly traded. However, there is danger in relying solely on market comps. First, market comps can change suddenly and substantially. Some of this might be due to legitimate new insights into Intrinsic Value. However, much of it also is due to the inherent difficulty in calculating Intrinsic Value, as small changes in assumed growth rates and Cost of Capital cause wild changes in EBITDA Multiples.  Making market comps even less reliable is that emotions e.g., fear and exuberance introduce noise into the market’s ability to efficiently estimate Intrinsic Value.   Moreover, no two firms are identical.  All and all, there is danger in blindly pegging your business’ multiple to that of a somewhat-similar public company.

4. EBITDA Multiples are highly sensitive to assumptions about growth rates, cost of capital, and the long term durability of cash flows.

I advocate that a business unit should take it upon themselves to derive and justify an EBITDA Multiple that is appropriate for its business. Understand the relationship between EBITDA and Cash Flow. Assess what Cost of Capital would leave investors neither thrilled nor disappointed. 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. Use the methodology described in Estimating your EBITDA Multiple to translate these assumptions into an EBITDA Multiple. Explain the results and underlying thinking to your constituents—and use their feedback to refine the derivation.

For many, this might seem theoretical; perhaps even distracting to the higher priority task of selling or provide good service. In my opinion, the learning that occurs when business unit leaders reflect on their EBITDA Multiple is of monumental importance. It provides a framework to dialogue about (a) how EBITDA translates into Cash Flow over the long term; (b) the durability of revenue and EBITDA and (c) what return would leave investors neither thrilled or disappointed. Each of these is essential to discovering opportunities to increase (or avoid destroying) value. For these very reasons, I have begun to probe my management teams to opine on what EBITDA Multiplier is appropriate for their business.

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Estimating your EBITDA Multiple
Multiples…
Why not Multiple of Free Cash Flow?
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