Updated 2/26/10, 7:53 a.m.
By DAVID BORAKS
The MI-Connection cable and internet system has built a competitive, state-of-the-art network that can be profitable if its owners – the towns of Mooresville and Davidson – take a hard look at expenses and pricing, a Texas consultant told the MI-Connection board Thursday.
Buford Media Group LLC, of Tyler, Texas, compared MI-Connection’s operations to other small companies it owns or has owned, and its standards for expenses and profitability. The report, delivered mainly in a conference call with Buford CEO Ben Hooks, came at Thursday’s board meeting at MI-Connection headquarters.
Mr. Hooks’s comments at times were sobering, noting that small cable and telecommunications systems face big challenges.
But he also praised the towns for the quality of the re-built system, which he referred to as the “plant.” “Obviously you’ve built a very nice plant. And we didn’t see anything in the plant that would suggest that you’ve got a weakness in your service. I thought it’s a first-class company on the infrastructure,” Mr. Hooks said.
But he pointed to expenses and revenues and suggested the company has a lot of “upside” potential on profits. “We believe you have more revenue opportunities. You’re still a fairly new company, so to speak, as far as your rebuild and selling your services, but we think there is some upside there,” he said.
Among the study’s highlights:
- MI-Connection’s projected operating profit for this fiscal year (excluding the cost of debt, taxes and other non-operating expenses) is about 5.9 percent. By comparison, Buford’s systems operate in the 26 to 33 percent range.
- Buford believes MI-Connection could save $2.8 million through cost-cutting, particularly in facilities, marketing, and personnel and other administrative expenses. The review took into account plans by MI-Connection to save $50,000 a month by bringing contract installers in-house. MI-Connection board members raised questions about some of the items, including the marketing line. But even in a revised analysis, potential savings could be $1.6 million.
- MI-Connection’s revenue per customer could be higher. In January, according to BVU, it was $82.17 after subtracting the cost of promotional discounts. Buford says its benchmark is $94 to $98 per customer.
- The quality of MI-Connection’s network in some ways exceeds Buford’s benchmarks. Mr. Hooks said MI-Connection has about 180 customers per “node” – the equipment that delivers signals in neighborhoods. By contrast, Buford shoots for 200 to 300 homes per node.
Buford Media Group is an independent owner, operator and consultant to small cable and telecommunications companies. The cable system board paid Buford $5,000 for the preliminary financial and operational review – a cost shared by the system’s owners, Davidson and Mooresville, and by Bristol Virginia Utilities (BVU), which operates the system for the towns. The board later could consider hiring Buford for a more extensive review.
Mr. Hooks, MI-Connection board members, and BVU executives discussed the numbers during Mr. Hooks’ report and agreed that better figures would require a more detailed, on-site analysis. In addition, the preliminary study used only basic information provided by MI-Connection. Nonetheless, it could help guide the board and staff as they consider how to improve profitability.
MI-Connection board officials raised questions about one point: Buford’s figures for marketing did not recognize that MI-Connection accounts for promotional discounts as a marketing expense, which inflates the marketing figure. Mr. Hooks acknowledged the point. One board members noted later that adjusting for that reduces the potential savings under Buford’s analysis to about $1.6 million.
“This still represents a big opportunity,” board member and Davidson resident John Venzon said later. “We are looking very closely at the recommendations and will formulate a plan of action. I thought his analysis was very insightful.”
Buford’s study comes as MI-Connection tries to figure out how to turn losses into profits. The system lost $6.4 million in the 2008-9 fiscal year. The task is an urgent one. MI-Connection last month asked Davidson and Mooresville to make up a $576,000 shortfall this fiscal year. And the funding gap is expected to widen next year, mainly because of increasing payments on the $92.5 million in debt the towns took on to buy and upgrade the system.
The towns so far are making up the shortfalls through cuts in their own budgets, or by dipping into reserves. Bigger shortfalls could mean deeper town budget cuts or even tax increases – something the towns had said when they bought the system in 2007 wouldn’t happen
Mr. Hooks told the MI-Connection board small independent operators face “a big challenge,” and tight expense controls are a necessity. Large cable and telephone companies have “the advantage of … having a lot of resources they can choose from, because they can spread it over a large subscriber base, and it has a lot less impact on their operating performance.”
Small companies don’t have that flexibility. “You can’t always do what you’d like to do. We find that we have a lot more people who wear multiple hats,” Mr. Hooks said. And every expense must be scrutinized for its impact on both service on the one hand, and the bottom line, on the other.
“We couldn’t stay in business unless we get our expenses at a level that we could get a return on our investment or certainly pay back the banks or the debt that we’re obligated to,” he said. “our experience is that we operate at a lower level of expenses, and we have to.”
Also Thursday, the MI-Connection board held a closed session to discuss potential litigation. And it heard a financial and operational report from general manager Alan Hall.
Mr. Hall unveiled a new promotional campaign the system will introduce soon, which offers cash rewards to customers for helping to recruit new customers. “”We have decided to hire 15,000 salespeople,” Mr. Hall joked, referring to the approximate number of existing customers.
“We get a lot of positive feedback from our customers and we need to take advantage of that,” he said.
A flier to be distributed beginning as early as next week promises customers cash rewards of up to $75 for each new subscriber they recruit, and a matching reward up to $75 for the new customers as well. (That’s $25 each for the three services MI-Connection offers – video, internet and telephone.)
Mr. Hall also trumpeted growth in MI-Connection’s commercial business. He said the company installed data or phone services at 11 businesses in January, adding about $26,000 in ongoing annual revenue. That included MI-Connection’s first business to receive a direct fiber-optic line, and Mr. Hall said two more fiber-to-the-business installations are in the works. Mr. Hall did not name the companies.
Meanwhile, the company saw a bright spot in the market for contracts with new neighborhoods and apartment complexes, where it has lost some business in recent months. Next week, it turns up service at Walden Ridge, a 65-home subdivision in Mooresville that previously had no cable service. He noted that MI-Connection will be the only provider there able to offer customers a single-bill package of video, telephone and internet.
Overall, MI-Connection is continuing to see a mix of customer losses, but gains in the number of products per customer. Mr. Hall said the company has 91 fewer customer relationships than it started the year with. But it has 272 more “revenue generating units,” or individual products sold. That means that existing customers are signing up for additional services, such as telephone and internet.
CLARIFICATION: This article has been updated to note that board members questioned Buford on the potential savings. See the second bullet point above. Also, we have corrected the description of the $26,000 in new commercial revenue.