Fibre to the Home: Take-up & Churn – Interview with Colin Hutchinson

In this episode, Mark Menzies, Director at Eight Advisory and Chris Stening, Senior Advisor at Eight Advisory, sit down with Colin Hutchinson, Chief Financial Officer of Fibrus, who shares how the company is achieving strong take-up in both commercial and subsidised builds, the importance of being first to market, strategies for reducing churn, and approaches to increasing ARPU.

[Chris Stening]

Hi everybody, I’m Chris Stening, Senior Advisor with Eight Advisory and I’m really pleased to be here today with Colin Hutchinson who’s the chief financial officer of Fibrus and Mark Menzies who’s one of our Directors to continue our C-suite series on our Take-up Tracker. We’re going to cover this morning overall take-up, we’re going to talk about aged cohorts and we’re going to talk about overbuild and we’re going to finish off on churn. Before we get stuck in there Colin first of all, welcome.

[Colin Hutchinson]

Thank you.

[Chris Stening]

Tell us a bit about Fibrus.

[Colin Hutchinson]

Thanks, thanks Chris. Fibrus is an Altnet that is based in Northern Ireland and in Cumbria. We’ve been rolling out network, the end of June we completed our build in Northern Ireland and we’re still building in Cumbria. It’s a combination of our own sort of commercial build in smaller towns and subsidised build. We’re right in the sort of the really rural areas supported by government subsidy from DFE and from BDUK where we’ve been rolling out Northern Ireland and in rural Cumbria. So, it’s been an exciting time for the last four years. The customer base obviously growing rapidly as we complete build and as we penetrate the areas.

[Chris Stening]

Colin, it was really interesting that you’ve got that mix of commercial subsidised build and hopefully that the differences will sort of come out in the conversation, but I wanted to start really on overall take-up. What we showed in our report is that BT are, Openreach are sort of 36 now 37% and the Altnets around 20 but what we’ve shown is you’re obviously much higher than that. What are you seeing with penetration. Is it continuing to grow, is the line continuing to straighten out. What are you seeing?

[Colin Hutchinson]

It is interesting cause we’ve got the commercial build and the subsidised build, and we’ve also got the two geographies in Northern Ireland we’ve been building, and we’ve been active for longer than we have been in Cumbria, and you can see the differences between the two. Our overall penetration is closing in on 30% now which is well in line slightly above our business plan and it’d be significantly higher in the subsidised areas where there’s less Openreach overbuild, less competition and much lower copper speeds even. We’re seeing penetration in the subsidised areas in high 30s and then high 20s in the commercial areas. It’s also interesting to look at the difference between Northern Ireland and Cumbria in the commercial areas. In Northern Ireland we’ve got almost complete Openreach overbuild. They were very quick to roll out. Northern Ireland’s got the highest broadband coverage of any part of the UK. In Cumbria it’s slower and there’s not as much Openreach so we’re seeing faster take-up in the commercial areas in Cumbria.

[Mark Menzies]

Just in terms of your cohort performance by age. In the report we showed a chart that across all the Altnet average take-up is correlated with the time in the market for the cohort and that growth is generally linear and shows no signs of tailing off. I wanted to get your take on that Colin. Is that consistent with your view that just the longer you’re in the market, the more the take-up rises or are you seeing any tailing off in those areas of rural subsidised build, or the two footprints in Cambria and Northern Ireland?

[Colin Hutchinson]

When we’re seeing penetration grow steadily month on month, when particularly in the subsidised areas, when you go live there’s an immediate Big Bang where there’s that pent-up demand. People have been waiting for service, and you see a really rapid rise and then you see a sort of a gradual month on month penetration keeps growing. Some of our older cohorts in the subsidised areas would be closing in on 60% for high 50s, 60%. And in some of the commercial towns as well, we’d be above 50% as well just depending on time to market, getting there first and the level of Openreach activity in the towns. We keep growing month and month. We’re closing in on 30% now overall.

[Chris Stening]

That Openreach overbuild is something that we get asked a lot by investors about. We see a sort of 6% variation between Openreach overbuild and non-Openreach overbuild.  But what we’re seeing is the biggest factor is who gets there first. Is that something that you’re seeing?

[Colin Hutchinson]

Yes, I completely agree with that. I think getting there first is massively important. Not just getting fibre built in the area first but getting to the customer first. Something we’re very keen on is making sure you’re the first fibre that goes into the customer’s home, the first time they’ve experienced fibre. Because what we’re seeing with our churn rates as well is once you’re in there and you’re providing a good service at a good price then there’s really no reason for the customers to leave. Nobody wants to go through the hassle of having another hole drilled in their wall, another installation.

So, if you’re there and you’re there first, you’re doing everything you said you’re going to do, you’re providing good service, good customer care at a good price then that’s hugely important. It’s getting built in the area first but it’s also getting to the customer first and being their first experience of fibre which is something we’re really pushing. And we’ve been successful in doing that in Northern Ireland to date where we’ve got a high penetration and in Cumbria as well, we’re trying to get into those towns first before Openreach get there and get to the customers.

[Chris Stening]

Maybe this is a factor that plays into that but we’re seeing that those Altnets that got taken a vertically integrated strategy to own the retail ISP it sort of makes sense that you can then deploy your marketing effort and your sales teams and all your social media as soon as the build is done.

[Colin Hutchinson]

Yeah.

[Chris Stening]

If you’re just playing in wholesale, it’s just taking much longer for that to happen, and you don’t get that first-mover advantage.

[Colin Hutchinson]

Yeah, absolutely. I think part of the reason we have there our own ISP is just so we can get out there as soon as the towns live even advance of it going live. We’ve got our build teams out we’re warming up the area saying fibre is coming sending them the marketing material and then as soon as the time is ready for service we’ve got our field sales teams in knocking doors and talking to customers and that’s hugely important.  To be in control of your take-up is crucial. The wholesale model is difficult particularly unless you’re at massive scale.

[Mark Menzies]

I think you alluded to as Altnets move from this build to really that monetisation journey and filling the networks with customers churn is something that becomes more front of mind than it was earlier.

In our report we showed the Altnet cohort churn is materially lower than the large incumbents and ISPS and you alluded to that earlier by saying on the price and the service is the reason for that. Specifically, for Fibrus, I was keen to get your view on what you think the drivers of your churn are and where you see that going. We saw a tick up in the overall Altnet average. What are the real drivers of your churn and what are you guys doing to address them.

[Colin Hutchinson]

Yeah Mark, churn is something we’re really super focused on as we move into driving profitability, and we just ticked up we’re EBITDA positive now at the end of March that’s on increased revenue. To drive revenue, you need to keep pushing the ARPU up and you need to keep control of churn. Because those are the two big drivers for the customer lifetime value.

On churn I look at it split between sort of the controllable and the non-controllable churn. A big chunk of our churn is things that are largely outside of our control, house moves being a big one, people moving outside the footprint, bad debt, people who can’t pay their bills and you have to switch them off. On the controllable side it’s very low. Our overall churn rates are around 5-6%. The control element of that is less than half of that. We’re very focused on making sure that our pricing is competitive when customers come to the end of their contracts. We obviously discount quite heavily on acquisition and then retention trying to move people up either onto a higher price plan or offering more speed. We’ve got a big team in our customer care centre in Belfast that’s talking to customers when they’re coming to the end of the contract and moving them on to the best packages.

It’s about the customer experience the whole way through that first two-year contract and if they’ve had good service, the speeds are good and whenever they come to renew the price is better than they can get in the market then there’s really no reason for customers to leave you. And we’ve invested a lot in our customer care. We’ve got awards for our customer service centre in Belfast they really are fantastic and our trust pilot rating is now up to 4.3.

It’s really just making sure the customer experience is as good as possible the whole way through that contract period and then whenever it comes to that moment of truth at the end of that retention conversation that you’re still offering them a better price than anything else in the market so there’s really no reason to leave. So, yeah churn is a massive focus, and I think 1% on churn has a huge impact on what your average customer lifetime value is going to be, so it’s massive.

[Chris Stening]

So, Colin you mentioned obviously the two drivers being around churn and ARPU. Are you seeing ARPU growth because that’s another important determinant as to you know a customer lifetime value, a customer spending more money or how are you doing that?

[Colin Hutchinson]

I guess it’s the age of Fibrus now. We’ve got a lot of customers this year in particular who are coming to the end of that first two-year contract. Like most Altnets we discount quite heavily on acquisition to get customers to move across to a brand that maybe isn’t as well known as an EE or Virgin. And then when it comes to the end of their contract, I think as long as they’ve had customers had a good experience they’ve had good service, speeds are good, whenever it comes to that end of that first contract you’re able to move them up a little bit on price or maybe move them up on speed or a combination of both. So, we’re seeing our ARPU tick up every month now.

Our acquisition pricing hasn’t shifted that much over the last year but it’s the price on retention once customers come to renew an extra £5 if they’ve had good service customers are happy to pay every month ARPU is growing. So, we’d see ARPU continuing to grow as the base ages and that sort of borne out in some of the analysis we do in the older towns we can see the ARPU increasing.

Colin, thank you very much for your time, that was really interesting. We look forward to seeing Fibrus continue to go from strength to strength. Thanks very much.

[Colin Hutchinson]

Thanks Chris, thanks Mark.

[Mark Menzies]

Thanks Colin.