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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Bear – This is an issue I have wrestled with over my telco career (20 years) and believe the answer as to the correct ratio of contracted/non-contracted revenue is complex. I am not commenting on the obvious benefit of growing contracted revenue through new sales (which was the main theme of your post), but thought adding insight to the issue would stimulate further thought.
At the heart of the issue is the trade-off between gm erosion vs. the predictability of revenue. As you point out, re-terming revenue typically requires a revenue write-down which translates directly to gm reduction. I have done a number of studies on disconnects over the years which showed that customers do not make a disconnect decision based on in-term/out-of-term status; they make a disconnect decision based on bandwidth need. If they need it, they keep it. If not, they disco. Thus, you can assume that no customer will re-term unless they have good certainty it will be required over the length of the contract. Therefore, any carrier offering a discount to re-term a circuit is really just writing down margin that they would have otherwise retained had they left it mtm.
That being said, I would agree their is value in having financial certainty (especially as it relates to valuations on a telco business). But, the question is the cost of that financial certainty.
Food for thought as your readers wrestle with this complex issue.
The issue with letting the client run his service MTM (out of term) is this: at some point a competitor is going to come in and take that circuit away from you. So you can take a write-down now by re-terming and guaranteeing a revenue stream for another term; or you can MTM (“let sleeping dogs sleep” as it were) until a competitor awakens that dog and throws it the “lower cost” bone. ‘Tis the wise telecom sales professional who teaches, “Grasshopper, all revenue should be under contract.”
Teddy G and Simple Tennessee Country Boy: Thanks for commenting. Though your opinions are contradictory to one another, I can’t fuss too much with either of you. Teddy G, I get your point. When to seek a re-term versus when to let a MTM situation persist is not a black and white issue. STCB: I agree that simply ignoring MTM is not sufficient. I favor being aware of each situation and then having a thoughtful strategy for which ones to “let lie” versus which ones to seek a “re-term” or capacity upgrade.