Increased Pressures on ROIC Require a More Skilled CEO

Investments in residential and commercial FTTX service provider companies have exploded over the past 10 years.  With skyrocketing bandwidth needs, twisted pair copper infrastructure cannot deliver suitable bandwidth by leveraging DSL technologies. Similarly, HFC (Hybrid-Fiber-Coax) technologies, despite their widespread use by cable companies, have severe limitations in delivering greater bandwidth because it utilizes a shared architecture, has upstream limitations and is more susceptible to noise and interference.

Once in a Lifetime Opportunity

Those fiber services companies which deploy fiber in a given geography have a first-mover advantage that may last a lifetime, capture significant market share and create unattractive economics for any competitor to enter the same region.  For this reason, massive investments have been made in new FTTX builds in North America by incumbent cable and telecom companies, PE funds and infrastructure funds.  Speed of deployment and efficiency of deployment (think ROIC) are paramount for these new FTTX challengers.  

Increased challenges and Pressure on Business Cases

The fiber services sector is the most operationally intensive and capital intensive of all the digital infrastructure sectors.  FTTX requires a lot of CAPEX but the timing of the CAPEX is also a significant issue.  A service provider can spend 15%-20% of CAPEX in a market before getting one passing.  Normalized cost per passing is not achieved until about 75% of CAPEX is expended and this is not always well understood.  Additional challenges have become more acute in recent years:

• Higher cost of capital tied to interest rates
• Higher labor costs
• Lower dependability and efficiency of OSP construction firms
• Congested local permitting offices
• Hyper competition from other fiber overbuilders
• Customers expect frictionless buying experience
• Delays and red tape on state and federal subsidies
• Increase cost of video content

What should investors be looking for when searching for a fiber services CEO?

There are significant differences in fiber services business models between B2B, B2C, rural, urban, dark fiber, MDU/HOA, etc. But in general, some key requirements are as follows:

Typical requirements in any CEO position specification

• Demonstrated success developing a company’s strategy and adapting the strategy as market conditions evolve.
• Track record of installing 100’s of thousands of FTTX homes and/or businesses passed under budget and on time with operational depth of understanding.
• Revenue traction – demonstrated track record of revenue growth, while also lowering costs and reducing churn.
• P&L leadership- ownership of all revenue and cost levers and cash management. Ability to show maniacal focus on EBIDTA and related metrics which impact EBIDTA.
• Financial acumen – disciplined rigor around project finance, capital allocation, unit economics and ROI per project. A CEO who knows how to make money has a constant focus on unit economics.
• Team leadership – leadership of a collaborative, high-performing, dispersed geographic team with multiple functions (i.e. engineering, operations, customer care, sales, marketing)
• Acquisition Playbook (if B2C or B2B business model) – experience with programs needed to quickly acquire customers by driving the go-to-market strategy for each vertical pursued by the company. A CEO often needs to design and manage a multi-channel distribution strategy which may include inside sales, D2D, alternate channels, paid search, Web/ECommerce, etc.  Community engagement is an important consideration in B2C business models.
• Experience & success in a smaller company, entrepreneurial culture or high level of autonomy as a regional market leader with P&L accountability.
• Executive communication skills to interact with multiple constituencies

Additional CEO Requirements Which May Not Be as Obvious

• Manage the Risk Profile of your Business Model.  Residential FTTX (rural, urban, B2C, B2B, HOA, MDU) and Commercial FTTX and Dark Fiber all have different business models and different risk profiles. A great CEO will manage the specifics of his/her business.
• Focus on Operations & Delivery.  A focus on build costs is not enough. A great CEO will be aware of every step in the build, operate, sell and service processes.
• Great judge of talent.  All four key processes; build, operate, sell and service, need solid leaders.  A CEO cannot expect great results from mediocre talent.
• “No Surprises” Communications and Board Management Capabilities.  Be open and honest and be willing to share good news and bad news quickly. A great CEO needs exceptional board management skills; read the room, engage with confidence, show humility when needed.
• Regulatory Acumen (more relevant for B2C business models).  Given the potential state and federal stimulus, a CEO needs to create a state-by-state plan to help influence the Office of Broadband in each state.
• Platform Approach to Back Office Operations.  There needs to be a” build versus buy” analysis on every component of the virtual back office.  What functions will be built and run internally? A back office needs to be designed as a platform so when the company is sold, it can be easily integrated with the new buyer.
• High Energy – There is so much going on, any CEO needs passion and energy to win.

What Can an Existing Fiber Services CEO Do Today to Keep His/Her Business on Track?

• Adaptability. A CEO needs to have experience with the fiber build process to anticipate problems and issues.  Additionally, if a new competitor enters a market, the CEO needs to reassess realistic market share expectations, and adjust build plans and capital allocation.  Development of penetration curves by market is essential.  The achievement of 10 penetration in the first 60 days of a launch is critical for success.
• Focus on ROIC and MOI.  Don’t overinvest in saturated markets. Don’t overinvest in markets where stiff competition will not permit targeted market share goals.  Be agile. If market conditions change, adjust to new unit economics.
• Be a part of the local community.  Have your fiber brand be part of school and athletic events and get to know local school and government officials on a first name basis.
• Combat negative social media.  Make contact immediately with anyone on social media who is trashing your brand. Correct the problem and stop negative news from spreading.
• Be Responsive but not reactive to your Board of Directors.  Input from a single passionate board member could be valuable, but a mature CEO knows how to respond by saying “let’s tee up that issue at the next board meeting” before making reactive decisions that have not been discussed with the entire board.

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