NuVox Sticks to Tried and True Plan

One CLEC proves the way to beat the data doldrums is to stick with fundamentals—avoid competitive markets, build only the facilities you need, and target an under served audience—then execute the plan.

by Gerry Blackwell [September 10, 2002]

Competitive local exchange carriers (CLECs) have taken a beating in the ongoing telecom/dot-com meltdown. We've seen bankruptcies galore, capital sources dry up and best-laid plans generally come to nothing. It's a sad tale.

But if you're a pure-play ISP and you think you can breathe a sigh of relief now that voice-data CLECs have disappeared as a serious competitive threat, think again. Not only did some survive, coming through fire has apparently made them stronger.

Take St. Louis-based NuVox Inc., the recent recipient of a surprising $78.5 million in equity funding from venture capital firms. (Who says telecom companies can't raise capital?)

NuVox is the two-year-old product of a merger between TriVergent Communications of Greenville, S.C. and St. Louis-based Gabriel Communications. It's also the product of a fair amount of strategic repositioning.

The company now operates in 30 Tier-2 and Tier-3 markets across the southeast and Midwest, serving cities like Atlanta, Charlotte, N.C., Jacksonville Fla., Akron OH, Kansas City, Mo. and Wichita, Kan.

It focuses exclusively on small- and medium-sized businesses, offering bundled voice-data services—local, long distance and Internet—using leased backbone and Telco-supplied last mile access and its own central offices and switches.

NuVox also recently acquired customers and assets of pure-play ISP OneNet Communications of Cincinnati and now offers broadband and dial-up-based ISP services in parts of Ohio and South Carolina.

Sweet spots
NuVox is becoming a substantial player in its service area. It recently reported second quarter 2002 revenues of $33.8 million, a 77 percent increase over the second quarter of 2001 and a 12 percent increase over the first quarter of 2002.

It has about 15,000 customers for its core bundled broadband service—80 percent of them take all services—and another 30,000 ISP customers from the former OneNet operation. And it's adding new customers at a rate of about 900 a month.

That may sound like a pretty good clip, but the company isn't satisfied. "Our investors want to know why we're not growing faster than Allegiance," NuVox chairman and Chief Executive Officer David Solomon notes wryly.

Dallas-based Allegiance Telecom Inc. is in some respects a model for NuVox. Both adopted similar serving strategies—facilities based, "smart-build" CLECs—and small- to medium-enterprise (SME) target markets. Allegiance operates in bigger markets, which NuVox is deliberately avoiding for that reason.

While NuVox refers to itself as a facilities-based carrier, it does not own any fiber, nor any last-mile links. It does, however, maintain its own central offices and switching centers and owns its own Class 5 switches.

It buys backbone fiber from the local "high-quality, low-price" provider—sometimes the incumbent, including Qwest or Time-Warner Telecom. NuVox also buys last-mile links—typically T-1 circuits (1.55 Mbps), from incumbents operating in its service area.

The sweet spot it looks for is enterprises or offices with between 5 and 75 employees. These companies typically take voice services from the incumbent and long distance from the incumbent or a Sprint or MCI. They get broadband or dial-up Internet services from a variety of suppliers—including pure-play ISPs.

Marketable proffer
NuVox's value proposition is simple enough. It will run a single T-1 line into the customer's premises—many already have a T-1 for data alone—terminating it in an integrated access device, usually a product from key supplier Vina Technologies Inc. of Newark, Calif.

The integrated access device splits off 256 or 512 Kbps of bandwidth for Internet access (and/or inter-office data connectivity) and uses the rest for voice circuits. Even companies that have had a full T-1 for data can get along with this kind of bandwidth configuration, Solomon says.

"Most can't tell the difference between 512 or 256 Kbps and a megabit," he says. "But they can tell between that and 56 or 128 Kbps which they may be getting from ISDN or dial-up."

NuVox typically comes in at 20 percent below incumbent prices, Solomon says. Customers spend on average between $700 and $800 a month.

It also offers the convenience of one bill, one vendor to deal with and a supplier that is focused exclusively on the needs of SMEs. That combination along with a current focus on maintaining a high level of customer service has kept the churn rate well below 1.5 percent per month.

Given the growth rate—and the low churn rate—it's clear NuVox is hitting a nerve in the market. Solomon points to two key strategic factors that account for its success.

"We chose wisely as far as our serving strategy is concerned," he says. "Basically, starting in early 2000 we have focused on using a serving strategy that is tried and true."

Essential strategies
Key to that strategy was not owning fiber. Solomon's old company Brooks Fiber Properties, which morphed into Gabriel, had been in that business before selling off its assets to "a little company that used to be called WorldCom."

"It's a commodity business," he says of managing and reselling fiber capacity. "We saw that back in 1998. That's why we exited that space and sold to WorldCom."

The serving strategy also, incidentally, includes steering clear of fixed wireless. "We have actually in a couple of instances benefited from those types of providers exiting the marketplace," Solomon notes.

Wireless, he points out, "just adds another new technology to the network. Oftentimes it's not quite as reliable as wireline. And then I think some customers are not willing to try new technologies—they've been burned in the past on DSL or Voice over Internet Protocol [VoIP]."

The second major strategic factor was choosing to focus exclusively on SMEs. It was a segment of the market that NuVox rightly perceived to be under-served—and with the demise of so many other CLECs, SMEs typically remain under-served.

TriVergent did have residential operations at one point, but had mostly transitioned to an all-business model before the merger. NuVox sold off the last of its residential customers as recently as April.

"The residential side," Solomon explains, "was being served using a resale strategy and margins in that line of business were becoming increasingly narrow." An old story.

Prudent plans
Fiscal and business-plan conservatism is clearly another key factor in this company's success. For example, NuVox has no plans at this point to expand its footprint, although it may consider opportunities to acquire companies on the perimeters of its Midwest and southeast market areas; "a kind of edge-out strategy," as Solomon puts it. But NuVox has no ambitions to go nationwide.

"We think the strategy right now should be more conservative. We want to go deeper rather than broader," he says. "We believe now is not the time to go out and pursue that kind of growth and development."

NuVox has had some success, to be sure, but it's not out of the woods. It's not profitable yet.

Solomon projects it will be "EBITDA-positive" by the fourth quarter of this year—meaning it will have positive earnings before interest, taxes, depreciation and amortization are accounted for. And it will be "free cash flow-positive"—basically profitable—by the fourth quarter of 2003.

The recent influx of capital, which will be used to eliminate debt and finance general operations, is all the company needs to reach profitability, Solomon says.

NuVox, despite its successes, is no juggernaut. It doesn't appear poised to steamroller the competition.

Still, if you're a pure-play ISP focusing on the SME market, you need to be aware of this kind of company operating in your service area, even if you can't or don't want to emulate it. NuVox has a very attractive value proposition and a solid customer and financial base.

—End