Operations-based financial analysis of FTTH system proposals

Operations-based financial analysis of FTTH system proposals

• 1.
  Financial Analysis ofFTTH System Proposals:
 An Operations-Based Approach Fiber to the Home Council 5 October 2005 Stephen A. Blum, President,TellusVenture Associates Net Present Value in Year 10 ($000) Bid B Bid C Bid D Bid E Bid F US$357 (US$1,309) US$458 US$238 (US$1,477)
• 2.
  FTTH bids focuson construction costs • Proposals sometimes discuss operating costs or outsourcing strategies – Common with IP video solutions • Actual bid price usually doesn’t include those costs – Evaluations focus on “apples to apples” construction costs – You need to compare apple pie shops, not just the apples • Capital costs of a solution are only half the picture – Outsourcing options, license fees, maintenance contracts are some of the operating costs that differ from solution to solution Vendors understand their business, but they are in a different business than you are...
• 3.
  Revenue & costassumptions • Objective is to make relative comparisons – To the extent possible, assumptions should be applicable to all proposals and scenarios – Assumptions can be refined and made specific once a winner has been chosen, in order to create a fundable business plan • Specific assumptions and back-up info in paper – All figures are in constant dollars, except programming costs – Revenue is assumed to be the same for all proposals – Speculative revenue is excluded – Construction to be completed within Year 1 Overly complex assumptions create confusing scenarios and mask problems. Simple, step by step reasoning produces a clear basis for decisions...
• 4.
  Six hypothetical proposalsconsidered Type Comments Bid A PON RF video Bid B Active IP IP video Bid C AON RF video Bid D PON RF video Bid E AON Hybrid, with IP video solution Bid F AON Hybrid, lower cost video solution Based on actual bids, but actual numbers have been changed and elements swapped around
• 5.
  Hypothetical proposals meetsystem needs Service Mbps Required High-speed Internet 1 to 10 Telephone service Less than 1 Digital TV 0 to 10 Standard video on demand 5 to 20 High-def video on demand 19 to 38 to ? Interactive gaming ?
• 6.
  Vendor-dependent capital costsnormalized • Core central office facilities • Central office TV head end facilities • Telephony facilities • Set top box installed • ONTs installed • System management • Fiber plant • Outside actives • Project management Includes items that might be left out of bids, such as VOD servers, IP routers, ATM switches, etc.
• 7.
  Bid A isthe lowest of the 4 “actual” bids Vendor-Dependent Capital Costs ($000) US$6,000 US$6,750 US$7,500 US$8,250 US$9,000 Bid A Bid B Bid C Bid D Bid E Bid F
• 8.
  Vendor-dependent operating costsvary widely • Central office costs – Video head end, CO/OSP network control software – Outsourced core, video head end maintenance – CO spares • Customer premise & OSP costs – Additional CPE maintenance & spares – Fiber plant, outside actives spares & supplies – Outsourced fiber plant & outside actives maintenance • System management costs – Conditional access management – Advanced video services management – EPG When vendors can’t or won’t cooperate, use industry figures, independent research, best estimates
• 9.
  Bid D hasan edge in operational costs Vendor-Dependent Operating Costs ($000) US$0 US$100 US$200 US$300 US$400 Bid A Bid B Bid C Bid D Bid E Bid F
• 10.
  Higher capex canlead to lower opex, but not always Vendor-Dependent Costs ($000) US$0 US$100 US$200 US$300 US$400 US$6,000 US$6,750 US$7,500 US$8,250 US$9,000 Bid A Bid B Bid C Bid D Bid E Bid F
• 11.
  Important: Determine licensingfees • Paid to manufacturers, integral to system – Usually bundled with support and maintenance – No other source for it – Could be used by vendors to offset low-ball hardware bids • Third-party software and technology – Insist on a complete break out – Identify activity-based costs and other hidden escalators – Develop direct relationships with providers If bidders are adding cost, make sure they are also adding value that is specific to the cost...
• 12.
  Independent costs needto be factored in • Any additional capex required? • What are the wholesale costs of services? • What will you need to run the business? – Billing, CRM, tech support, NOC – IT support, maintenance, advertising, marketing, legal, admin, etc. – Personnel and training: if a bidder says you can run the system with just the people you already have, verify it. • Confirm that costs are truly independent – Watch out for vendor mandates, such as specific video sources – Move costs into vendor dependent categories as necessary
• 13.
  Build the businessmodel • Model cash flow – Calculate ramp rates, revenue, other activity units – Subtract wholesale service costs – Subtract operating costs • Model capital requirements – Vendor-dependent & independent costs – Fixed and variable – Operating capital • Calculate key financial metrics – Cash flow, break even, net present value, internal rate of return
• 14.
  Will it supportitself & pay back the investment? Positive Cash Flow & Break Even Bid B Bid C Bid D Bid E Bid F Years 1 to 10 Assumes $50 per month mandatory assessment
• 15.
  Once cost ofmoney is factored in, speed counts Net Present Value in Year 10 ($000) Bid B Bid C Bid D Bid E Bid F US$357 (US$1,309) US$458 US$238 (US$1,477) Assumes $50 per month mandatory assessment
• 16.
  What’s the systemoperator’s bottom line? • Entrepreneurial ventures look at near term return – 30% return on investment within 5 years typical • Municipalities have longer planning horizon – 20 year pay back might be sufficient – Bonding requirements, lease options might be key considerations • Private communities look at assessments – Simplifies planning: 100% take rate immediately – Can be subject to a vote, older property owners tend to focus more on personal cash flow than on benefits of technology Results from operations-based analysis will differ, based on system operator needs...
• 17.
  Private community assumptionslead to out-of- pocket bottom line considerations
• 18.
  Investment driven decisions
 requirefaster and bigger returns Assumes $100 per month mandatory assessment
• 19.
  Results support nextsteps, decisions • Second round of negotiations can be better informed – Analysis of hybrid scenarios can suggest changes to proposals – Bidders can adapt proposals to better meet system operator’s needs and reach • Investors, lenders focus on standard financial metrics – Quick progression to a fundable business plan • Stakeholders can evaluate personal impact – How much will it cost me? – What will I get for my money? Operations-based analysis creates the conditions for success, for system operators and vendors alike.
• 20.
  Questions? For more information... SteveBlum Tellus Venture Associates 1-831-582-0700 [email protected] www.tellusventure.com