Regional network operators still remain largely below the radar in many areas, but they are getting more and more attention from investors. Part of that is because of their potential for the FTTH build outs that the financial community is finding increasingly interesting. One such operator is Horizon, which has been putting substantial effort behind FTTH buildouts adjacent to its regional footprint in and around Ohio. With us today is the company’s CEO, Jim Capuano, who joined the company last summer, to talk about just what the company is up to and why.
TR: What is your background, and what attracted you to Horizon?
JC: I came up through the operations ranks, but my background started off in the military — then I got into telecom in the “good old days” working for MCI telecom as a field engineer. From there, I worked my way through different management jobs. I've been involved in a lot of M&A along the way. I think I’ve been in a company that has been bought or sold more than 10 times, but I always found a career opportunity in the transaction.
I came to Horizon in July 2020. I had been doing a little bit of advising work with the Board at the time and was asked if I would take over as CEO. It was a stroke of good luck. Typically, you don't get to walk in and take over a really good company that's just hitting its stride. Often you have to fix a lot of issues before you can get there. It was a great opportunity, and these are exciting times for Horizon.
TR: What does Horizon’s business and infrastructure look like today?
JC: We have an enterprise fiber business in Ohio and Indiana, as well as small areas bordering West Virginia and Pennsylvania, but predominantly today we're Ohio-based and focused. Our acquisition of Infinity in Indiana this year gives us connectivity through Indianapolis up to 350 E. Cermak in Chicago, which is obviously critical from a Tier-1 IP perspective.
We also have an ILEC. Horizon was founded over 125 years ago in Chillicothe, Ohio, as a competitor to the Bell network. This is a great business, and we are experiencing a resurgence in the market.
The other piece that we're working on right now is fiber to the home (FTTH) outside of the ILEC, and we just completed our first greenfield fiber build in Circleville, Ohio. We're pretty excited about that, and we have nine more of them in a hopper right now from a planning perspective. We’re currently finalizing additional markets throughout the state.
TR: What led to Horizon’s interest in FTTH in markets like Circleville?
JC: If anybody had said a couple years ago that we're going to be this excited about doing residential fiber networks, I would've said they were crazy. The investor community, obviously, is looking at it differently now. But also, because of the pandemic, people have realized just what quality bandwidth actually means, and that has changed that market as well.
TR: Have the economics of FTTH also shifted over the last year or two?
JC: The economics have absolutely shifted. The cost for materials and equipment, such as 1G optics, has come down — but fiber availability is a real concern. Labor costs, however, really haven't changed a whole lot. In fact, the cost to construct is marginally more expensive now than it used to be, but make-ready is significantly higher than even five years ago. I believe that most of the federal program money that is being awarded is simply paying to update the utility pole lines.
Maybe a plug for the ILEC businesses. For the longest time, people would look at ILECs and not really appreciate the value that they had. The majority were solid, profitable businesses, and, as we all know, the cash that those companies turned out has actually funded a lot of the CLEC fiber networks that we see around the country. Now there is a better appreciation for what residential services can do. The investor community is looking at longer-term investments, so the returns don't have to be quite as steep on day one. Plus, there's also a lot of federal money that is coming in from RDOF (Rural Digital Opportunity Fund) and perhaps the infrastructure bill that will offset the expense and lead to a lot of fiber builds.
TR: Did Horizon tap into the RDOF program itself?
JC: No, we did not participate in RDOF in our region. We obviously looked at it, but, quite honestly, the numbers just really didn't make sense for us to participate. The RDOF funds would have effectively offset approximately 90% of the make-ready costs, but we would still be on the hook to do the per-mile construction after that. I think it resulted in a bit of a land grab by some folks, but the question is whether or not they're actually going to follow through. There's a good chance that many of these bids don't become real. We have worked in the past with some of the different business/economic development folks, like Broadband Ohio, and we like to be seen by the state as a problem solver. We did a large BTOP build back in the day that was actually brought to us by the state. I do think in the future that there will be an opportunity to gain market share through other means or at least defer some of our expenses in more rural areas.
TR: Where are the broadband gaps in Ohio? What types of markets do you see such opportunities in today?
JC: Just looking at our longhaul and middle-mile fiber network, we have identified over 160 communities contiguous to our network that we believe are buildable. In many of them, we would be the third provider alongside the MSOs and the incumbents. But even in those markets, we believe that there is room for a third player. If you can bring in a high-quality product, you can win enough of the market share there to be a serious competitor — and in many instances, we can do it with our own funding.
TR: So what is the next step for your FTTH business?
JC: We are working with the municipalities themselves before we launch or announce, but we have nine projects that we're working on right now, as well as our ILEC territory where we are also performing a full fiber buildout. When you take that ILEC experience of doing residential service and support and then you bring in the enterprise fiber side with the knowhow of constructing fiber networks in new markets, I believe it gives us a little bit of a leg up. So, I think we're in a good position to scale things up so we can do multiple markets at the same time.
TR: Is there a necessary scale you need to reach for this effort to be a success?
JC: No, I don’t believe so. Because we already have the ILEC services in place, from a scaling perspective at this point we can just add them on and bring in additional resources as we add markets. There's definitely some point at which you can maximize margins by synergistically managing the business, but we are really more focused on construction costs: the cost to pass and the cost to connect. Those are really the metrics that we look at, as opposed to what the support costs.
TR: You mentioned earlier that you have been through many M&As over the years. How do you view M&A as a means to scale your business in today’s market?
JC: There are always opportunities out there to change the scale of your business. We've obviously been active and have made some nice complementary acquisitions, but most of them look more like asset purchases as opposed to large M&A deals. Opportunities to ‘jump start’ a market or add new products and services via an acquisition rather than spinning them up from zero — we are constantly looking for those opportunities. But it is pretty competitive out there right now, and we are big believers in our ability to grow the business organically. It can be difficult to rationalize some of the multiples that we're seeing when compared to taking that same capital and putting it toward growth in an organic fashion.
TR: What does the temperature of the current infrastructure M&A marketplace feel like right now? Are things cooling down?
JC: I don't think so. I think there's still a lot out there, it’s just cyclical in terms of what is hot. You're seeing a lot of activity with fiber to the home right now. The multiples that are being paid for fiber to the home businesses are pretty astonishing. There's so much money out there right now excited about investing in infrastructure businesses. It seems like many of the investment firms are having to weigh the value of selling a stake in a company and then what they may have to spend to buy into the next investment. That said, as long as there is money coming into the sector, there is still going to be a lot of acquisition activity.
TR: What challenges do you see ahead for the sector, if any?
JC: Probably the biggest problem we're seeing, and I know we're not alone in this, is hiring. It is so hard to find people. We have something like 20+ open headcount right now, which for a company of our size is a significant amount of labor that's not in the building. These positions are not the warehousing and assembly positions that we are hearing about on the news. These are engineering and other technical folks that we need. Obviously, as an industry, retaining the people we already employ is becoming super important. We have got to find a new spigot to get resources or find another way to market to and train people.
TR: Is infrastructure just not sexy anymore?
JC: I think that's true. It does seem to be old hat. This is especially true regarding recruiting. The traditional telecom roles, especially the outside jobs, are all held by folks who have been in the business for 30 years. There's not a lot of young people joining the ranks. I think that's going to take some work, but we have to bring people into the industry and train them up.
TR: Thank you for talking with Telecom Ramblings!
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