In an exclusive interview with TelecomFinance, the CFO of AIM-listed CityFibre says his firm could eventually become a viable alternative to BT’s Openreach.
Part of Europe’s booming wholesale fibre market, AIM-listed CityFibre could eventually become a viable alternative to Openreach in the UK.
The company has deployed dense metro networks across tier two cities, first to public sector integrators, businesses, or mobile operators as anchor tenants, with a view ultimately to target consumers.
Claire Landon: Could BT use CityFibre as an example of a strong competitor in its argument against rivals calling for a full separation of Openreach?
Terry Hart: There are industry concerns about dependency on incumbents, and also concerns by incumbents about carrying the sole financial burden. We sit between these two concerns, potentially representing a solution and bringing some balance to the debate. BT, for example, could point to the likes of CityFibre and say that infrastructure competition in the market is working, since others are making infrastructure investments, meaning there is no need for heavy handed regulatory intervention. Furthermore, we would say that this presence of competing infrastructure yields more choice and more investment, as well as longer term benefits for consumers and investors. For example, when Virgin Media invested in high-speed broadband, it forced BT to do the same. CityFibre’s investment in pure fibre networks will also spur BT and others to upgrade their networks, benefiting businesses and consumers.
CL: What is the story of CityFibre, and what are your revenues?
TH: The company was founded in 2011 via acquisitions of fibre assets across the UK, each with its own existing revenue stream, and we listed on AIM in 2014. We have roughly doubled our revenue each year through organic growth.
For FY 2014, we reported revenue of £3.8m, an increase of 105% on the previous year, and an adjusted EBITDA loss of £3.6m. We finished out the year with a cash balance of £33.2m. Having raised £16.5m in our January 2014 listing and a subsequent oversubscribed secondary placing of £30m in May 2014, we now have a market cap of £64.5m. We are the only listed company of our kind in the world.
CL: Your business model sounds similar to that of a towerco, is that the case?
TH: Yes, we are an infraco, not a telco, with a model similar to that of both towercos and data centre operators. We do not do any speculative builds without guaranteed revenue, typically of £3m-£4m for an initial contract. We establish a new metro presence by first providing fibre on a wholesale basis to business service providers and SI houses serving city councils, connecting schools and hospitals to gigabit speed fibre. Last year, we anchored a build in Kingston-upon-Hull with a mobile tenant, MBNL.
CL: But you serve consumers as well as businesses and local governments?
TH: Uniquely, we are capable of being both B2B and B2C, and have designed our networks for both. Because our highest cost is deployment, we build in future growth by adding sufficient ducts and capacity for eventual FTTH service. However, our core business remains as a wholesaler of passive fibre infrastructure – anything that might happen in the B2C space is future upside and beyond our immediate focus today.
We are currently running an FTTH trial in York with Sky and TalkTalk in a three-way JV, which is designed to prove that the economics of B2B/B2C work well enough to rival Openreach. Our partners have each contributed £5m, while we have contributed the use of our local network. The trial is progressing well and the technical architecture and construction economics are working, and this is a positive indication for future scalability. Our partners already have a combined market share of 40% of York’s residential broadband, a departure from a typical greenfield FTTH deployment. If the trial does well, we have the option to expand to further cities.
CL: CityFibre was last year linked to talks with Google Fiber about a potential UK project. Are you able to comment?
TH: We didn’t comment on that report. We know the Google Fiber team, but have no formal relationship with them. What they’ve done in Kansas City and elsewhere is very interesting, but philosophically that is quite different from our model, since it is a closed network with no wholesale. We feel it’s a more compelling proposition to team up with players who already have a strong broadband position, which influenced our approach to the FTTH deployment in York.
CL: What is your offering to mobile operators?
TH: We have a national framework agreement for dark fibre with two of the UK’s mobile operators, 3 and EE, as well as with their network JV, MBNL. We reckon that each of the cellcos currently have backhaul deals with BT worth tens of millions of pounds each year. Assuming that BT’s acquisition of EE goes through, we believe it will be important to create a competitive supply of mobile backhaul, as some mobile operators might want to reconsider their relationship with BT.
CL: What is your future growth strategy?
TH: Our strategic direction is to build out whole “Gigabit Cities”, of which Edinburgh is the largest. We see our full market as 100 addressable towns and cities, and our medium term aspiration is to have network within reach of 10% of the population. Some of our existing 61 cities are currently just point-to-point networks, so we will also look to transform some of these into denser networks. We are seeing increasing demand from city councils keen to promote economic growth and better connectivity.
CL: Will M&A figure as part of this, given management’s excellent track record on exits from companies including ESAT Telecom, Versatel and Easynet?
TH: We’re currently focusing on our day to day business. We offer institutional investors different options: M&A, as well as long-term revenue growth. If a four-player mobile market makes sense, the same could be true in fibre infrastructure, with BT, Virgin, CityFibre and maybe one other having national scale deployments. As long as we focus on growth opportunities, all options are open.
Saying that, there has been significant M&A in the sector, with buyers including Level 3 [which bought Time Warner Telecom, and in May indicated an appetite for deals outside the US] and Zayo [which after tens of acquisitions in the US last year bought into the UK and France]. In the UK, Interoute last year acquired Vtesse and this month agreed to buy Easynet. Last year, we acquired a large network in Coventry, so we are open to selective acquisitions if the assets and revenue model match our criteria.
CL: Which companies do you most admire?
TH: We’ve spent a lot of time studying pretty much all the fibre operators around the world, and each has some lesson, good or bad. We frequently point investors to Stokab, Stockholm’s metro fibre provider, as an example of what we might look like in a more mature phase, say ten years from now. Other European providers such as Eurofiber [in the Netherlands] and Metroweb [in Italy] are also impressive examples.
CL: What is the overlap, if any, between other fibre providers such as Zayo and euNetworks? Who are your other competititors?
TH: There is some overlap between us and the likes of Geo [the UK fibreco acquired by Zayo in 2014] and euNetworks, although their focus is the London metro market and, outside London, on long-distance. Virgin has extensive infrastructure, but it is a closed network rather than open access, like ours. Other niche FTTH providers include KCom in Hull, Hyperoptic, and Gigaclear, a vertical provider to villages that mainly serves residential customers. We have the opportunity to collaborate with these providers. In terms of our core business, wholesale network infrastructure serving all market verticals, our real competitor is BT Openreach.
CL: What upcoming trends do you foresee in fibre, and how will CityFibre take advantage of these?
TH: An important trend is exponential growth of IP traffic in the metro networks. Experts predict that in 2015, metro IP traffic will exceed long-distance IP traffic for the first time, meaning that the focus must be on the local access networks. Today, incumbent local access networks are reliant on the incumbents’ old copper and cable networks, so there is now a clear need to deploy pure fibre FTTP and FTTH networks. We are also witnessing a trend for passive infrastructure companies, to build, own and operate the duct and fibre networks in an open access wholesale model.
In both small cells and fibre to the tower, the UK lags behind Europe. We are able to add connections to things that aren’t conventional buildings, such as CCTV, public WiFi, traffic management and public safety networks, and can also connect to the Internet of Things. We believe that everything will be connected to fibre with an overlay of very high speed wireless services. This points to a need for modern, fit-for-purpose fibre networks, since tinkering with incumbent copper networks is unlikely to fulfil imminent demand.
