The 1996 Telecommunications Act and the technology boom that followed wrought an explosion of upstart telecommunications companies. While many have disappeared or been acquired in the recent phone bust, Golden Valley– based Eschelon Telecom, Inc., is still on the line—and growing.
The 10-year-old company’s bread and butter is providing telecom services to midsize companies, defined by CEO Rick Smith as those employing 100 or fewer. That segment makes up about 16 percent of the $292 billion U.S. telecom industry. Eschelon now has 55,000 such customers, and had revenues of $228 million in its 2005 fiscal year.
Not exactly Verizon numbers, perhaps, but still remarkable in the small-player telecom world. Eschelon is a competitive local exchange carrier. “CLECs” offer local telecommunications service in competition with more established regional Bell operating companies (RBOCs, better known as “Baby Bells”). Eschelon leases Qwest’s local phone and digital connections, which are linked to Eschelon’s own network-switching platforms for voice and data systems.
If getting ahead while leasing a competitor’s equipment sounds like an uphill battle, it is, according to Smith. Even though the Telecom Act is now a decade old, the four remaining Baby Bells still carry much of the lobbying clout they had between the 1984 breakup of the old AT&T and the passage of the Telecom Act.
“The landscape has always been tilted in their favor,” says Smith, who’s been on Eschelon’s payroll since 1998. “That’s changing, but the process is only halfway done. As long as a pro-competition environment continues, you’ll see lots of choice and higher-quality service.”
Still, Eschelon is the only CLEC to have gone public since 2001; its initial public offering was made last August. That move did cause some growing pains—the company showed a net loss in 2005, due partly to the costs of the transition. But Eschelon anticipates steady EBITDA (earnings before interest, taxes, depreciation, and amortization) profitability this year. In the first half of 2006, its stock price (Nasdaq: ESCH) has risen from a low of $11.50 in February to $15.59 as of June 26. (Its 52-week high before that date was $17.18.)
Since its inception, Eschelon has acquired 10 other CLECs. Most recently, it paid $20 million in January for Oregon Telecom (the deal closed in April), a transaction that added 6,000 customers and brought Eschelon’s total number of business lines to 415,000. Eschelon now employs 1,000, including about 550 in the Twin Cities.
“I’d like to grow about $76 million in acquisitions over the next few years,” Smith says. “We’re looking hard, but we’re very selective.”
Part of that selectiveness is a deliberate strategy to establish a presence in high-growth metro areas—and to achieve greater market share through organic growth and acquisitions in these geographic areas.
Currently, Eschelon serves 19 markets in eight states, including the Twin Cities, Portland, Seattle, Denver, Phoenix, and Salt Lake City. Smith says the company is first in market share among CLECs in all but Salt Lake, where it’s number two.
“The markets we’re in today all have 3 to 4 percent [population] growth, about double the national average,” Smith says. “As the number of people there continues to grow, that obviously presents more opportunities.”
Like most other telecoms, Eschelon is eager to find a niche in the voice over Internet protocol (VOIP) market. About 25 percent of systems Eschelon sells are VOIP enabled, but the company is watching to see how the quality and security concerns that have dogged VOIP work out.
“We’ll have a modest rollout next year,” Smith says. “VOIP gets a lot of hype, but when you look at total cost of ownership, it can be more expensive. And really, as long as the service always works and is at a reasonable price, our customers don’t care if we use two cans and a string.”
