Embarq is the fourth-largest local communications company, with 6.9 million access lines offering service in 18 states. It's the biggest carrier in fast-growing Nevada, including Las Vegas, and it also serves the suburbs of Orlando, as well as six of the top 20 metropolitan statistical areas. Its customer mix includes 42% consumers, 27% wholesale, 23% businesses, and 8% logistics.
Areas of improvement
During the call, management highlighted two positive trends. First, landline telecom is a dying business, under constant attack from broadband and wireless alternatives. However, it remains a cash cow, and Embarq CFO Gene Betts noted that the company lost fewer access lines in the fourth quarter of 2006 versus the prior-year period. Embarq hopes to stem the bleeding and continue to milk this business for all it's worth.
Furthermore, cable penetration increased from 40% to 60% of properties in Embarq's service areas. Betts noted that when Embarq expands to a new market, it's been having unusually high initial success, thanks to heavy promotion -- and because many people are so fed up with traditional telecoms and cable companies that they'll switch to anything new.
Embarq also has some exposure to faster-growing areas, including wireless. Embarq can sell more wholesale services in this sector, and it's also launched its own wireless service, which had 48,000 customers at year's end. The company also grew its high-speed Internet customer count 47% for the year, to more than 1 million subscribers.
I like what I hear
Telecom companies are often notorious for poor capital allocation decisions. For that reason, it was extremely pleasing to hear Betts pay lip service to focusing on metrics like economic value added, cost of capital, and investments with a high probability of near-term cash flows, rather than relying on "terminal values" to justify capital investments. Betts also eschewed mergers and acquisitions solely for their own sake. Somewhat flippantly, he said that it's "well-known that over half of the mergers don't work out well, at least over shorter periods of time." That should be music to a value investor's ears.
Although management's mostly using basic metrics, it's refreshing to hear a CFO focus on sound fundamental principles. If Embarq can milk its cash cows and reinvest wisely, shareholders can expect further rewards ahead.
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Fool contributor Emil Lee is an analyst and a disciple of value investing. He doesn't own shares in any of the companies mentioned above. Emil appreciates your comments, concerns, and complaints. The Motley Fool has a disclosure policy.