Verizon (NYSE:VZ) and Motley Fool Stock Advisor pick SBCCommunications (NYSE:SBC) have made plenty of headlines with plans to roll out fiber to the premises (FTTP) in order to offer customers digital cable, high-speed Internet, and other broadband services. Such FTTP projects are the legacy telecom carriers' best (only?) hope for competing with Comcast (NASDAQ:CMCSA) and other cable providers.
But FTTP is not the exclusive domain of the big legacy carriers. SureWest (NASDAQ:SURW), a small telecom provider based in Roseville, California (outside Sacramento), has been working on rolling out FTTP for a few years now, and the effort is beginning to bear fruit. In its third-quarter earnings report released Monday morning, the company said it increased the number of subscribers on its FTTP network by 30% and increased the number of homes for which FTTP services are available by 36%.
In its third quarter, SureWest experienced healthy revenue increases for its wireless, Internet, and broadband offerings, but these increases were partially offset by single-digit percentage declines in local phone service and network access revenues, resulting in a net revenue increase of 5.4%. For operating income, the company swung to a $4.8 million profit from a $1.5 million loss last year. The income improvement was due to reduced costs from restructuring efforts and the increased revenues. For similar reasons, net income swung to a $2 million profit from a $1.6 million loss last year, and diluted earnings per share were $0.13 vs. last year's loss of $0.11 per share.
Going forward, growth in operating income and earnings should be slightly larger than revenue growth because SureWest can leverage its existing operations. But most likely, the percentage earnings increases won't be repeated.
SureWest is also in the process of rolling out HDTV to its telecom service area on its new FTTP network. Its HDTV service will be the first in the country to use Internet protocol; it will be offered in addition to its existing digital TV service. The HDTV rollout and the continued expansion of its fiber network doesn't come cheaply, which can be seen in the company's capital spending for the last few years. In fact, for the last five years, SureWest has reported negative free cash flow.
To fund its expansion and continue paying a dividend -- the yield is 3.5% -- SureWest has consumed most of the cash it had on its balance sheet a few years ago and has taken on additional long-term debt. At this point, SureWest is anything but a sure thing, because the cash flow dynamics haven't yet turned positive. However, the trend has begun to improve this year, and the company is worth following because what it's doing is fairly similar to the broadband efforts of a number of larger telecoms.
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Nathan Parmelee has no financial stake in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.
