May 1999

Telecom Trouble Signs

BY MARK C. SPRAGG

The U.S. economy in general, and the telecom industry in particular, is booming. Since March, 1997, the telecom sector has appreciated almost 80 percent, according to Moody's Telecom Index. The recent price reductions sparked by new competition have led to significant increases in traffic and strong subscriber growth, especially in the mobile telephony sector. Financial markets have breathed a collective sigh of relief, and capital has been flowing into the industry at record levels to fund expansion and the construction of networks by new entrants.

Yet, as with any high-growth industry, a few companies may have been overly aggressive in their zest to capitalize on favorable industry conditions and to take advantage of readily available capital or acquisition opportunities. For these firms, financial difficulties may be just around the corner in an industry where rapid changes in technology, a shifting set of competitors, and declining prices have become the norm.

Some of the key telecom trouble signs to watch for include:

Poor Acquisition Integration
The rise in the number of mergers and acquisitions poses both an opportunity and a risk. Mergers require a high level of coordination across systems, operations, and marketing. Failure to integrate quickly may prevent a company from reaping the benefits that spurred the acquisition in the first place, or worse, such a failure may distract the company from executing its core business functions.

Management Turnover
The telecom industry demands very specific technical and market knowledge. Unfortunately, the rapid transformation of the industry also leads to high management turnover. This can prove costly to any firm, but small and medium-sized companies can be especially hard hit by the sudden departure of a key executive.

Inadequate Billing/Information Systems
Some telecom firms may have outdated or inadequate back-office systems. Beyond any Y2K issues, this can lead to billing problems, capacity constraints, and high general and accounting (G&A) costs. It may also put these firms at a competitive disadvantage in their ability to quickly launch new services, deliver bundled pricing, or leverage customer usage information for marketing and retention purposes

Weak Technology Transition Plan
The development of new technologies such as fiber-optics, IP, PCS, LMDS, and WDM is providing telecom companies and customers with more options than ever. Firms that lack a solid, well thought-out technology transition plan may soon find themselves at a severe competitive disadvantage.

Excessive Churn
Given the recent changes in the industry, churn rates have tended to increase overall. Yet the preservation of a firm's subscriber base - its most precious asset - must remain paramount. Hence, a high churn rate, especially when combined with high acquisition costs, is a real danger sign.

Slowdown in Subscriber or Revenue Growth
Subscriber growth and network traffic of all types are growing rapidly in response to declining prices. Any telecom company with slowing or flat revenue growth should stand out like a sore thumb.

Are these firms doomed to financial ruin? Certainly not, provided that any trouble signs are spotted early and that corrective action is implemented aggressively. The telecom industry is strong and forgiving for those that recognize their missteps and move quickly to action.

Mark C. Spragg, CPA/MBA, is a Director in the PricewaterhouseCoopers Telecommunications Financial Advisory Services Practice. Based in Los Angeles, Mark specializes in litigation, strategy, and corporate
restructuring consulting for the telecom industry. For more information, contact Mark at Mark.spragg@us.pwcglobal.com.