2024 telecommunications benchmarking study insights | Baker Tilly
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Profits still strong: 2024 telecommunications benchmarking study
Aug. 26, 2024 · Authored by Chris Skidmore, Justin Wardle
The 2024 Telecommunications Benchmarking Study shows that the overall profitability of rural communications carriers improved from the previous year. The communities served by rural carriers continue to demonstrate a high demand for reliable, high-speed broadband and other communications services. The existing Universal Support funding mechanisms, grant programs and other funding sources remain focused on bridging the digital divide to make these modern communications services available to more and more Americans.
Although profitability continued to improve overall, the results differ for carriers on model-based support as compared to those on legacy rate-of-return support. With three to five years remaining on the original Alternative Connect America Cost Model (ACAM)-I and ACAM-II model-based support, companies on these model-based support mechanisms are showing lower operating margins and other profitability metrics as compared to similar companies that remained on legacy, rate-of-return support mechanisms. Challenges in growing revenues for ACAM-I and ACAM-II companies combined with the inflationary impacts experienced in nearly every product and service in the past few years are leading to this profit fade.
Even amidst these challenges, however, local internet service providers, including rural telecommunications carriers, still excelled at providing vital services to their customers.
This year’s benchmarking study provides important data and takeaways influenced by this economic landscape that can empower your business to assess where it ranks against other telecommunications companies in key industry areas. Explore an overview of survey findings below.
2024 benchmark methods
The study compiled 2023 data from over 100 companies.
Participants came from nearly all 50 states and included a nearly even mix of cooperatives and privately held businesses. Additionally, approximately two-thirds of participating companies were under legacy rate-of-return, with approximately one-third under model-based support — ACAM I, ACAM II, or Alaska Plan.
Participating companies
The following table provides a summary of the range of size of the study participants.
The study defines a customer connection as a physical connection that provides service to a residential or business customer.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.
Often, one customer connection provides multiple services such as voice, internet, and video; however, for the purposes of the study, such instances counted as one connection regardless of the number of services a single customer connection might carry.
This review of the benchmarking data focuses on:
Profit fade companies on model-based support as compared to those on legacy rate-of-return support
Staffing efficiency
Broadband internet
Overall profitability
Profit fade
Profitability of companies on model-based support — ACAM-I or ACAM-II — is diverging in comparison to companies that remain on legacy rate-of-return. This profit fade appears to be a result of two factors:
Significant growth in costs that has occurred over the past three to four years
Challenges that companies on model-based support face in growing revenues when a significant portion of their annual revenues remain fixed at the 2019 levels
Since the first ACAM election took effect in 2017, companies that elected ACAM-I or ACAM-II, have shown revenue growth rates that are 1% to 2.5% less than companies on legacy rate-of-return.
The graph below shows the median operating revenue year-over-year growth from 2017 through 2023, which illustrates the differing growth rates.
This difference is more pronounced, especially in recent years, by the growth rate in traditional wireline revenues — voice, wholesale broadband, access and universal service support — as opposed to broadband internet revenues and other communications services.
Total operating expenses increased 4.4% from 2022 to 2023, the third consecutive year of expense growth of over 4%.
The graph below shows that median operating expense year-over-year growth for the past seven years has steadily increased annually.
Getting more granular, staffing costs have long been the single largest cash expense to rural telecommunications carriers, and are certainly impacted by inflationary factors.
Direct labor costs — gross salaries and wages, employee benefits, payroll taxes, bonuses — historically represented approximately 35% of total expenses and 28% of total revenues. Regardless of the denominator used to same-size a company’s total labor costs, a notable spike in 2022 of between 3% and 7% occurred, whereas these same figures remained relatively consistent over the previous four years. These increases appear to have continued in 2023.
Perhaps most notable is that the median company reports that gross labor costs nearly exceeded 50% of its total operating revenue less Universal Service Funding (USF) — controllable revenues.
On a more individual level, the increase in personnel costs is more pronounced. Specifically, the average compensation cost per employee increased nearly 5.8% from 2022 to 2023, which followed a 6.2% increase from 2021 to 2023 as compared to only a 3% increase from 2020 to 2021.
The following table details the per employee costs for the past five years.
Given these increases in costs, it’s important to ensure the efficient use of staffing resources.
Staffing efficiency
The efficient use of staffing resources is an important management focus. The benchmarking study traditionally used revenue per employee to compare employee efficiency across study participants; however, USF support revenues, and other revenues that aren’t necessarily employee-driven can influence that outcome. As such, this year’s survey introduced a new metric that compares the number of employees to customers — essentially answering the question: How many employees does it take to serve 1,000 customers?
The graphic below overlays the median number of employees with the number of employees per 1,000 customers throughout the past seven years. As this number dropped from eight employees per 1,000 customers in 2016 to 6.7 in 2023, the data appears to support that companies realized some efficiencies in serving customers over the past several years.
Broadband internet
The availability and reliability of high-speed broadband internet continues to be essential to life in the United States, particularly to people and businesses in rural areas. Retail broadband internet grew to 30% of total operating revenues, up from 15% just five years ago.
Video conferencing continues to be commonplace, and education, work, entertainment, and more continue to rely on robust internet services. Broadband connectivity continues to remove or mitigate barriers to remote working arrangements, remote education, and other opportunities for individuals and businesses to overcome geographic restrictions that previously existed and limited flexibility.
Broadband growth and fiber optics
Circumstances in the rural telecommunications space continue to foster significant customer growth, speed-tier upgrades, and investment in fiber optic network facilities.
The graph below shows that the pandemic-driven broadband customer growth of 2020 and 2021 hasn’t perpetuated into 2022 or 2023, but it doesn’t appear that this growth was given back. The median study participant experienced 3.8% growth in broadband customers from 2022 to 2023, which is consistent with the 2021 to 2022 growth rate (3.9%). After experiencing the highest two-year customer growth percentage in the more than 10 years since the transition away from dial-up internet to DSL, it appears growth rates returned to pre-pandemic levels.
Existing customers upgraded services to higher speed broadband packages in 2020 and 2021. This is partially evidenced by the increase in broadband customer average revenue per user (ARPU) from $58.06 in 2019 to $62.59 in 2020 — a 7.9% increase — as well as the following year increase to $66.72 in 2021 — a 6.8% increase. The results for ARPU growth in 2022 of 3.6% showed some signs of stabilization in average pricing but was followed up by 7.1% growth in ARPU in 2023.
A more detailed look into the customer densities across various broadband speed-tier packages shows a movement to broadband products that provide a download speed between 100Mps and 500Mps. It’s also noteworthy that products that provide download speeds less than 25Mps constitute less than 1% of a median company’s customer base, down significantly from 8% in the prior year.
Continued deployment of fiber optic network facilities made this growth possible — see more on network expansion below. The median company reported that 85% of its residential customers had fiber connections to the premises.
This expansion of fiber to the premises not only allows for increased download speeds, but also increased upload speeds — essential for quality video conferencing performance, gaming, and other activities.
Specific to the number of speed-tier service combinations offered by companies to customers, the median company reported offering five combinations, with over 75% of all companies reporting three to 11 offerings.
The most common service package customers subscribed to in 2023 was a symmetrical 100Mbps service, totaling 20% of all broadband customer subscriptions.
Voice data vs. Broadband only
Another continuing significant trend in the rural telecommunications industry shows movement away from selling broadband internet packaged with a phone line, or voice data, to selling broadband as a stand-alone service, or broadband-only.
In total, broadband-only customers in the benchmark study totaled approximately 58.2% of all broadband customers. This indicated a double digit rise from the prior year.
Comparing legacy rate-of-return carriers to elected model-based support — ACAM I, ACAM II, or Alaska Plan — further illustrates the trend. This is a logical result due to the added support that legacy rate-of-return carriers receive for broadband-only customers, whereas model-based support carriers receive no additional support while losing the local revenue. There is, therefore, less incentive for model-based support carriers to offer broadband-only services.
The median legacy rate-of-return carrier reported 59.8% of its broadband customers as broadband-only compared to 42.5% reported by carriers under model-based support.
Profitability
Even after inflation challenges, the industry again experienced strong profitability results in 2023; albeit slightly down in earnings before interest taxes depreciation and amortization (EBITDA).
Over 5.3% growth in total operating margins, fueled by a 7.9% growth in broadband internet revenues, bolstered profitability while maintaining 2022 levels of federal USF. Specific to USF, interest continues to be high in evaluating a company’s profitability excluding federal and state universal service support — EBITDA-less USF or controllable margins.
Companies want to prepare for a future with less or no USF given the persistence of caps on federal USF, such as:
Budget control mechanisms
Per line caps on support
Expense limitations
Changes to the programs
Other constraints
The graph below shows the median company’s profitability figures along with controllable margins for the past five years.
As noted above, the median company continued to report a positive controllable margin after having reported a positive figure for the first time in 2021.
The following table provides more details including bottom and top quartiles.
This continued improvement in controllable margins is a function of the focus companies have placed on growing their services beyond the legacy wireline services.
