Lumos Networks' CEO Discusses Q3 2013 Results - Earnings Call Transcript

Nov. 1.13 | About: Lumos Networks (LMOS)

Lumos Networks Corp. (NASDAQ:LMOS)

Q3 2013 Earnings Conference Call

October 31, 2013 8:30 am ET

Executives

Will Davis - Director, Investor Relations

Tim Biltz - Chief Executive Officer

Hal Covert - Chief Financial Officer

Analysts

Barry Sine - Drexel Hamilton

Donna Jaegers - DA Davidson

Jennifer Fritzsche - Wells Fargo

Operator

Good day and welcome to Lumos Networks Third Quarter of 2013 Earnings Conference Call and webcast. All participants will be in listen-only mode.

(Operator Instructions) Please note that this event is being recorded.

Now, I would like to turn the conference over to Mr. Will Davis, Director of IR. Please go ahead sir.

Will Davis

Thank you, Dennis. Good morning. Thank you. This is Will Davis, Director of Investor Relations for Lumos Networks Corporation. Welcome to Lumos Networks’ third quarter 2013 earnings conference call. The topics for today's call include remarks by Tim Biltz, our CEO; and our financial results update by Hal Covert, our CFO.

We ask the questions on this call be from current investors or analyst and that any media questions be directed to Jim Nester, Lumos Networks Director of Marketing Operations.

Before we continue, I would like to point out that certain of the statements made on this conference call are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those described. Please refer to the special note from the Company regarding forward-looking statements in our third quarter 2013 earnings press release issued earlier this morning.

In an effort to provide useful information to investors, our comments today include only non-GAAP financial measures. For details on these measures, including reconciliations to the most comparable GAAP measures, please refer to our third quarter 2013 earnings press release and to information posted on the company's Investor Relations website.

With that, I will now turn the call over to Tim.

Tim Biltz

Thanks Will. Good morning everyone and thank you for joining our call today.

During my discussion today, I will go into some detail of our transition to a fiber based broadband services provider that we have been going through for the last 18 months. And expand upon our broadband strategy to take full advantage of the opportunities that lie before us.

Before starting that discussion, I would like to point out that for quarter three 2013, we generated revenue of $51.6 million and EBITDA of $23 million, both of which were below our financial guidance for the quarter and while not satisfied with this performance and we believe we are on track to seal our financial guidance for the year of 2013 that we provided on our second quarter 2013 earnings call on August 1 of this year for both revenue and EBITDA. As you may recall, this guidance included a revenue of $208 million an EBITDA of $97 million.

A little later Hal will provide a detailed summary of our financial results for Q3 and our outlook for Q4 2013.

I would like to start my discussion by saying that I and the senior management team here at Lumos believe we have an exciting opportunity ahead of us as we continue to transition the company to achieve 80% of our total revenue from fiber based broadband strategic data revenue. We should accomplish this in the second half of our five year plan that starts in 2014.

As we exit 2013, we expect the strategic data revenue will represent 58% of our total revenue. This compares to 53% in 2012 and 45% in 2011. As we indicated on August 1, 2013, the second half of 2013 will have financial performance below our initial plan and decline in financial performance on a sequential basis compared to that of the first half of 2013.

In addition, we will have quarterly decline in total revenue generation on a year-over-year basis but better of the EBITDA performance as we managed through the transition from legacy voice to TDN product through high content Ethernet based product offering.

The primary reason for updating our financial projected performance in the second half of 2013 were delays in fully achieving our Richmond edge out market and distribution channel goal relative to our initial plan for 2013.

This slower than plan was at Richmond and correspond the slower revenue growth ramp into Richmond, we do the decision we made to expand the original fiber building Richmond by nearly 50% bringing our national network there to over 110 miles. We made this decision as a result of maximizing our future opportunities in the market and to increase our future network flexibility.

I’m pleased to note that the Richmond market is now fully operational and we are generating revenues and servicing customers in this market.

I’d like to point out that in spite of this market launched away, we’ve had sequential revenue growth in each quarter of 2013 within our strategic data product segment and expect a sequential growth rate to continue to increase. Our strategic data revenue grew sequentially 2.3% in the quarter one, 1% in quarter two, 1.4% in quarter three and we expected it to be between 2.5% and 3% in quarter four of 2013.

Given our typical sales cycle of approximately six months or more for complex networks and taking installation plan into consideration, the first opportunity that we will have to change the aforementioned financial performance profile in total revenue will start in early 2014.

To accomplish our revenue and EBITDA growth goals for 2014, the following ongoing key revenue based initiatives must be effectively addressed and achieved. First, we want to achieve our revenue generation goal through our edge out markets. Second, we must effectively manage the strategic data, technological product transition and related price compression that has been and is currently underway within our strategic data product segment. Third, we must achieve our revenue generation goals with our fiber to cell product group. And finally we need to build upon our initiative to enhance key distribution channel.

The four initiatives just described our key focus of our 2014 operating plan that we’re currently building using a top down goal setting and bottoms up execution approach. With that read-in, I will go into some detail for each of our key revenue drivers.

First, our edge out market initiatives. We have two edge out market opportunities that we began pursuing in 2013, Richmond, Virginia and Western Pennsylvania. As we complete the fiber builds currently underway in these markets, we will have significantly increased the size of our adjustable market for our data, enterprise data product group and expands our adjustable market for our fiber to the cell product group.

In 2014, we expect to generate meaningful revenues in both our edge out market. During our Q4 2013 earnings conference call, we would give you more details regarding and updates regarding our progress in these markets.

Next are the products and services within our strategic data product group. There is a technological product transition underway as our customers upgrade from TDM to Ethernet services. We are well-positioned to capitalize on this transition while working through the associated challenges primarily on the loss of our legacy revenues and price compression.

I would like to provide a brief overview of each of the three product groups within our strategic data product segment and I’ll start with our enterprise data product group.

Enterprise data revenue is a $40 million revenue stream represent approximately 35% of our total strategic data revenue and it has been growing at an annual rate of approximately 8%. With new enterprise data, our Metro E product represented approximately 50% of our revenue and its growing on an annual rate of approximately 20%.

The second largest product line from a revenue contribution standpoint is dedicated Internet access that represents approximately 25% of our enterprise data product group and is currently declining at an annual rate of approximately 5%. We believe primarily related to price compression of existing customers. We would, however, expect to see this product group begin to grow show year-over-year growth starting with second half of 2014 as we acquire new business within this product line in our edge out market.

Other product lines within our enterprise product group are either growing or declining but neither have a material impact on the overall revenue for our enterprise data product group.

Moving on to carrier data, our carrier data product group revenue is $62 million revenue stream, which represents approximately 50% of our total strategic data revenue and is currently growing at an annual rate of approximately 20%. Our carrier data product group consists of two products fiber to the cell and transport.

First, I will cover fiber to the cell. We are making good progress in our fiber to cell product group initiatives and expect to continue achieve annual revenue growth of approximately 100% over the next few years. As we exit 2011, we have 148 towers on our network at the end of 2012, 370 and we would expect to have more than 600 towers as we exit 2013. As of September 30 of 2013, we had 540 towers on network which represents 106% year-over-year increase or 279 new FTCC sites on air.

During our August 1, 2013 conference call, we increased our fiber-to-the-tower target to 1500 from 1000 over the next few years. Given the acceleration of our installation, our expanding footprint, the current deployment of 4G services in our market and the desire of our wireless carrier customs to upgrade to maybe in that back office servers across their network.

Upon achieving our five-year goal or fiber to the cell product group, we would have generated more than $60 million revenue stream representing more than half of our carrier data product group, which compares to 20% today.

Now transport, our transport product group is going through the most significant technology product transition within our strategic data product segment. Transport revenues represent approximately 80% of our total current carrier data revenue and its growing at an annual rate of approximately 5%. Wavelength our fastest growing product line within transport, it is growing at an annual rate of more than 100% and represents approximately 10% of our total transport revenue today. However, DS1s and DS3s products which represent approximately 40% of our total transport revenue are declining at an annual rate of approximately 20%.

Going forward we believe that the growth rate of our wavelength products will continue to be in the double-digit range and it will position us to achieve our annual growth rate – target growth rate in this product group.

Finally, our IP services product group, our IP services product group revenue is $19 million representing 15% of our total strategic data revenue. This product group which is mostly on net consists of a number of product lines such as video, GSL and voice, we believe that this product group will have a marginal growth rate and decline of a percent of our total strategic data revenue each year of our five year plan.

We note that our IP product group has the lowest EBITDA margin as a percent of revenue within our strategic data product segment.

To summarize my product discussion, I would like to stress that we believe we can continue to achieve annual revenue growth of 10% to 15% plus strategic data product segment. This expectation taken into account the impact of the technological product transition and the related price compression that I just discussed.

The next revenue driver is our distribution channel. In our enterprise data customer segment we are focused on account management, vertical segmentation, expertise and sales force productivity. Both of these activities are a continuation of enhancements of a program that we implemented in mid-2012.

In our carrier data customer segment, we have recently expanded the size of our internal sales team and are leveraging key relationships with national and regional carriers to support our growth initiatives.

To summarize, as we wrap up 2013 and look into 2014, we are highly focused on how we will continue to exploit Lumos Networks key attributes. These key attributes include our strategic data product offering, network footprint and strong universal customer demand for fiber based bandwidth services. And expanding fiber to the cell footprint and rapidly growing revenue stream, edge out markets that will significantly increase the size of our adjustable market, the healthy network carrier and enterprise customers and finally a strong portfolio of Ethernet-based products that we are selling and selling and servicing everyday.

These products will have and will continue to position Lumos to expand its EBITDA margin for our strategic data product segment going forward.

In closing, let me say that we will continue to keep a sharp focus on capital investment efficiency as we make success based investments to grow our strategic data revenue and ensure that we have product segment revenues and expenses in a highly efficient manner.

While in the last 18 months, not each of our key financial metrics have moved in linear straight lines or a quarterly basis, it’s clear to see that transformation strategy is working as we’ve effectively maximize the EBITDA from our legacy products and shifted investments to grow our strategic data products, while improving our overall revenue mix and increasing our EBITDA margin on a year-over-year basis.

We look forward to providing with you more details about our 2014 financial performance goal and specifically our strategic data growth expectations during our fourth quarter of 2013 earnings conference call in the first quarter of next year. We want to thank all of our customers, our employees and our shareholders for their continued support.

Now, I’ll turn the call over to Hal.

Hal Covert

Thank you, Tim. I would like to cover two topics working today. First, our unaudited financial results for Q3 2013 and then financial guidance for Q4 2013.

Revenue for Q3 of 2013 was $51.6 million compared to $52.3 million for Q2 2013 and $52 million for Q3 2012. Q3 2013 strategic data revenue was $30.4 million versus $30 million in Q2 2013 and $27.4 million in the same quarter last year. This represents a sequential increase of 1.4% and a year-over-year increase of 11.1%. The sequential and year-over-year increases were the result of overall combined net growth in our strategic data product groups, enterprise data, carrier data and IP services. A little later, we will provide more details about sequential growth.

Strategic data revenue represented 58.9% of our total revenue in Q3 2013 versus 57.3% in Q2 2013 and 52.6% in Q3 2012. Q3 2013, legacy voice revenue was $14.1 million versus $14.3 million in Q2 2013 and $16.1 million in the same quarter last year. This represents a sequential decline of 1.9% and a year-over-year decline of 12.5%. These declines are in line with our expectations and are due to the continuing universal commoditization of legacy voice revenue, the increasing use of wireless devices and our shift in focus to higher margin strategic data products.

Overall, legacy voice revenue represented 27.2% of our total revenue in Q3 2013, 27.4% in Q2 2013 and 30.9% in Q3 2012. Q3 2013 access revenue was $7.2 million versus $8 million Q2 2013 and $8.6 million in the same quarter last year. Q2 2013 included a one-time positive adjustment of $23 million. This represents a sequential decline of 10.6% and a year-over-year decline of 16%. Not including the $0.3 million positive adjustment in Q2 2013, the sequential decline would have been 7.1%. The declining trend pattern for access revenue was actually ongoing impact of the FCC Access Reform Order. Overall, access revenue represents 13.9% of our total revenue in Q3 2013, 15.3% in Q2 2013 and 16.5% in Q3 2012.

Adjusted EBITDA for Q3 2103 was $23 million, compared to $24.6 million for Q2 2013 and $22.3 million for Q3 2012. The $1.6 million sequential decline in EBITDA was due to lower revenue which accounted to approximately $0.6 million of EBITDA and higher non-GAAP operating expenses that accounted for $1 million. The year-over-year increase was due to lower cost of revenue which is a result of the restructuring program implemented in Q4 2012.

Non-GAAP operating expenses for Q3 2013 were higher than front end due to a spike in several routine operating expense items that are expected to return to normal levels in Q4 2013. Therefore, we anticipate that Q4 2014 non-GAAP operating expenses will be lower than a level incurred for Q3 2013.

Turning to capital expenditures, capital expenditures for Q3 2013 were $19 million, compared to $11.7 million in Q2 2013 and $14.9 million in Q3 2012. Capital expenditures in Q3 2013 were in line with our annual time for 2013. Approximately 75% of our capital expenditures in Q3 2013 were success-based projects. Adjusted EBITDA, less capital expenditures for Q3 2013 was $4 million, compared to $12.9 million for Q2 2013 and $7.3 million in Q3 2012.

Cash on hand as of September 30, 2013 was $58.1 million compared to $62.8 million on June 30 2013 primarily due to higher capital expenditures. Our net credit line balance after subtracting cash on hand was zero as of September 30, 2013, [indiscernible] on June 30, 2013 and $4.7 million as of September 30, 2012. We have a credit line of $50 million, which as I just indicated is on track and fully available.

Next, we would like to address financial guidance. As we discussed today and during our Q3 2013 earnings conference call in August 1, 2014, while our strategic data revenue has grown sequentially throughout 2013 and on a year-over-year basis, the rate of growth has been at the lower end of our planned range for our enterprise data and our transport product group. Our transport product group is included in carrier data wireless fiber to the cell product group.

Our fiber to the cell product group has been running ahead of plan thereby feeling good growth overall for our carrier data.

For our enterprise data and transport product groups, as our customers bought our newest product lines like Metro E and Transport wavelength They can currently had changed the design of our networks to improve efficiency, which has resulted in the removal some of our older products such as DS1s and DS3s. This network grooming activity combined with a lower than planned revenue growth ramp in our edge out markets has slowed down to find sequential growth rate of our strategic data segment.

Our IP services product group has also been marginally behind plan. The end result is that we expect strategic data revenue to grow in 11% to 12% range in 2014 compared to 16% in 2012. We continue to expect that we will achieve adjusted EBITDA decline 45% to 46% of revenue in 2013 for our strategic data segment compared to 46.6% in 2012.

From a total revenue standpoint of 2013, even with the aforementioned situation, we believe that growth in our strategic data segment will offset the revenue declines in our legacy voice and access segments.

From an expense standpoint for 2013, we expect that cost of revenue will be approximately $5 million below the $46.8 million incurred in 2012. Non-GAAP operating expenses are expected to be approximately $2 million lower in 2013 when compared to 2012 non-GAAP operating expenses of $71.1 million. The restructuring that was completed in Q4 2012 positioned the company to fund growth in our strategic data segment and make a meaningful contribution to EBITDA in 2013.

With that background, we would like to provide specific financial guidance.

Our financial guidance for Q4 2013 is as follows, revenue $51 million to $52 million, adjusted EBITDA $24 million to $25 million, capital expenditures $20 million to $24 million, cash-on-hand balance $48 million to $50 million. Taking into consideration our Q1 through Q3 2013 actual financial results and our financial guidance for Q4 2013, the full year of 2013 is projected to have a following financial results profile.

Revenue approximately $208 million versus $206.9 million in 2012, this revenue is in line with our updated financial guidance provided on August 1, 2013. Adjusted EBITDA approximately $97 million versus $88.9 million in 2012, these adjusted EBITDA levels along with our updated financial guidance provided on August 1, 2013.

Capital expenditures $65million to $70 million versus $59.9 million in 2012. This capital expenditure levels consistent with our initial financial guidance provided on February 28, 2013.

Cash-on-hand $48 million to $50 million which includes cash usage of $75 million for 2013. In 2012 we generated $29 million in cash and had zero cash on hand as of December 31, 2012 in line of credit balance of $3.5 million. The difference in cash usage in 2013 versus cash generation 2012 is a result of higher capital expenditures and cash taxes in 2013. I’d like to reiterate Tim’s comments about the detail of work underway of built our bottom up 2014 operating plans and the excitement about the opportunities that the management believes at Lumos Networks has in 2014 continued to improve our fiber based strategic data revenues of our total revenue.

Please review our Q3 2014 earnings guidance press release that was issued earlier today and our Q3, 2013 10-Q for more details regarding our financial results. Operator, we’ll now take the first question.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. (Operator Instructions) Our first question is from Barry Sine from Drexel Hamilton. Please go ahead.

Barry Sine - Drexel Hamilton

Hi, good morning gentlemen. A couple of questions for you. One, I noticed on the network chart in your presentation data center connectivity, I think the number is 14 connected at about 81 total, that seems a little low but obviously that implies a big opportunity for growth. Could you talk about your expectations there and what that may need for revenue growth opportunities?

Tim Biltz

Barry, this is Tim. We do think, it’s important to put information and we will continue to report on it. We have some high level estimates to access each of those data centers. We put ourselves to a pretty high standard of having things success based capital. So we’re working with – work with some customers to build some wavelength but we did see there is a real opportunity.

Our expansion into Richmond part of that expansion was expanding our long haul fiber from Richmond backup to Ashburn as well. So that new route will give us a little bit more access to those data center. So we’ll keep you informed. We wanted to highlight it. We expect to -- as several data centers over the next several years. And it’s a high focus for the company.

Barry Sine - Drexel Hamilton

And then shifting to growth expectations obviously that’s driven by sales force size and productivity. Could you give, get a little more granular in terms of the current size your quota bearing sales force, what is that look like compared to a year ago and then what do you’re seeing in terms of the sales productivity and especially maybe you can comment on some of the newer markets at Richmond and the Western Pennsylvania?

Tim Biltz

We actually have -- it’s kind of productive area into it. We actually have fewer sales people than we did a year ago, despite a few. We think the folks that we had -- as we sell larger solution, more custom solutions to customers. We felt that we needed to change about a third or half of our sales force. Those folks are producing. From a metric standpoint, we, what I would say is, we expect about balance 70% of what the quarter -- in aggregate would be. So, we don't budget for perfection. And I would say also that our top risks are -- the rest have been with us, the longest we’ll have the most experienced in the industry.

Though we’re seeing good traction in our enterprise state business, we’d like what we see, we’ve also added our sales engineering team to support our aid. So, long story -- a long answer, we have 25 reps, in the enterprise space, we just added. And I think I made a comment about our carrier team; we added three new dedicated carriers for our wholesale business. These folks were actually located in Northern Virginia, we are located in Denver and Kansas City and in Pittsburg. So once that Virginia help there vary but --

Barry Sine - Drexel Hamilton

[indiscernible]

Tim Biltz

Yes. High qualities, yes.

Barry Sine - Drexel Hamilton

I’m assuming that with the changes you’ve made that sales force productivity, therefore it is higher than what it would been a year ago?

Tim Biltz

For the rest that we had a year ago, I think that’s actually stable. But we have a ramp of the people we brought in to deal there -- face the customers.

Barry Sine - Drexel Hamilton

Okay. And then it will…

Hal Covert

Richmond is a very important edge out for us. We certainly set out a release today we have four reps in that market. And but we shifted resources to our edge out markets where we think unique options -- we’ve signed not only the anchored tenants but we announced previously but are making good traction with the enterprise customers in that market.

Barry Sine - Drexel Hamilton

And then looking forward -- we think about 2014, could you discuss what you’re look like in terms of expiring contracts potential churn, how much of the base it is and not locked up and then how is the sales funnel building, do you have contracts booked what’s in the pipeline in terms of RFPs?

Tim Biltz

You know Barry, we don't released any of those metrics today and really, when we measure a mall internally, we manage them but we don't. We haven’t -- any of that information.

Hal Covert

And I’ll just add that certainly for the fiber to the cell contracts, we set those are long term contracts, they all range from five to the higher 10 years, typically five to seven. The enterprise contracts, I think we talked in the past. So, typically in the full year or four range and time for contracts are a little bit less than that. But on transport, the history is once you lock-in, it’s a pretty solid situation even if you end up going month-to-month after the original contract expires. So that, I don't think there has been a dramatic change in the profile of our customer contracts.

Barry Sine - Drexel Hamilton

Okay. And then lastly, you discussed a bit of a spike in third quarter operating expense, could you discuss what happened there? What ramped in third quarter?

Tom Biltz

Yes, I mean, we actually thought as we were going through the quarter. We were in fairly good shape on expenses and then like towards the end of the quarter, unfortunately, we have four to five items that I would characterize it as typical expenses just five. And I will give you two examples. One of them is, whole rental where we had a catch up that was more than six months long and we think we’ve adjusted our course now so that we’re covering that going forward.

We feel a good shape there. I will give you another example we have a Flood in Delco where we had some equipment and mass location. And if you take the combination of those two levels almost half of the overall miss that we had, then there were a number of smaller items. What we’ve done there, obviously, we’ve taken a hard look at all of our specials heading into Q4. And where we had discretionary opportunity to really push down on the expenses that did not hurt our network enhancement programs into our sales productivity. We just tightened up on heading into Q4. That’s why we believe that we can get back on track with our overall guidance profile for the full year.

There was a couple of -- half dozen things were spiked on us. Again, we think they were one time spikes that will come down to a more normal level heading into Q4. And then that combined with pushing down on discretionary expenses purchase and we believe a good position to -- again in our guidance for the full year.

Operator

And our next question comes from Donna Jaegers from DA Davidson. Please go ahead ma’am.

Donna Jaegers - DA Davidson

Hey guys, thanks for taking the questions. On the excess charge that you guys took in the third quarter because of the second phase of FCC changes, can you quantify that exactly how much that was?

Hal Covert

If you take the decline we had coming of Q2 after stocking, the positive adjustment, it was pretty much in line, what we had expected that was in the $300,000 to $400,000 range again outside the adjustments. And there was a couple of things, we had some more infra state origination fees that are not covered by the FCC order. We had a little lower volume and then we did lose some reciprocal compensation on the competitive side as that started to go away as we headed into July so the combination of those things where the cost would drop.

Donna Jaegers - DA Davidson

Okay.

Unidentified Company Speaker

We expect continue to drop approximately 10% at year-end total for both competitive and the regulated access revenue stream. So, borrowing in more one time adjustments, so we should be back on the original 4, 5, we talked about.

Donna Jaegers - DA Davidson

Okay. And then on the new fiber ring that you guys just built in Richmond, the 110 mile fiber ring, do you guys buy the fiber and then like that or did you actually get somebody’s right away and build out your own fiber?

Tim Biltz

About half and half.

Donna Jaegers - DA Davidson

Okay. On the data center connectivity interest, are you guys doing both TW Telecom and level three now are working with Amazon web services to do more sort of – then was on demand kind of connectivity obviously, AWS has a large data center in the Ashburn area, where you headed towards working with them to connect into the data center maybe working with their ATIs to help your customers connected more easily?

Tim Biltz

I would not say that we’re as far down the road that is accompanied. We are still connecting too many of our data centers. We had conversations but we’re not there yet.

Donna Jaegers - DA Davidson

Okay. And then on SG&A the jump in non-cash compensation because of the vesting of the options that’s most of the jump in SG&A, is that correct and that should come down in Q4?

Hal Covert

That’s right Donna.

Donna Jaegers - DA Davidson

Okay.

Hal Covert

Yes, we have a spike because of that, should drop back down to a more normal level.

Donna Jaegers - DA Davidson

Okay. And then given the purchase of DukeNet by Time Warner Cable, south of you, I was just curious, I mean obviously Joe used to work for DukeNet, how close are you guys, do you have any sort of working -- how is you working relationship with DukeNet? Do you have any customers or connectivity in common that you’re working on?

Tim Biltz

We had a great relationship. Obviously, Joe as you said worked there for years. We had a lot of joint business. We connected our -- with this transport between other and across each others networks. And I wouldn’t say it was a daily activity. But certainly monthly it’s a positive relationship. So it’s kind of asset that would get into the group.

Donna Jaegers - DA Davidson

Okay. Great guys. I’ll get back in the queue if I have another. Thanks.

Tim Biltz

Welcome.

Operator

(Operator Instructions) Our next question is from Jennifer Fritzsche from Wells Fargo. Please go ahead.

Jennifer Fritzsche - Wells Fargo

Thank you for taking the question. I’m sorry if I missed that but I just wanted to explore the revenue acceleration in Q4, the confidence you have there to the driver. And then my second question would be on fiber to the tower, can you talk a little bit, we’ve heard from AT&T and Verizon that’s really move toward densification of their network, I don't know it is sold over to you or markets yet, but anything you have seen there in terms of increased activity on those two?

Tim Biltz

On the revenue, all I can do this, look at my revenue projection officers and they tell me what’s in the site then what we expect. We do expect it to be delayed. We shouldn’t have them led in the third quarter. Richmond did not launch in for the very last day of the quarter. So we need all of that revenues pushing into that quarter.

From what we know as we said here today, I would be very disappointed if we weren’t at the upper end of that range. And we’ve said that we accelerating strategic data sequentially is our number one focus. So there are as you know, we plan to bring several more [indiscernible] here in the fourth quarter. And until that actually turns on, the carrier accepts it, you know you never know. But so far we never had a carrier last accepted side as soon as finished it.

So we’re expecting what business, unprecedented delay them accepting those assets. I feel really comfortable about it. As it relates to fiber to the cell, two things I would say as one, yes, we’re seeing more activity from both to those carrier in the sense of looking at how they going to deploy small cell, a lot more discussion. We have, I would say which carrier, we got coming on that.

But we have seen examples, some small cell deployments that are calling for almost [indiscernible] service to these facilities, which we are happy to deliver. The reason we are more bullish even then we were in August of our FTC opportunity is, that where we expanded the adjacent markets and new markets and even within our own [indiscernible] there are a number of – a large number of fiber to the cell that are being delivered over Ethernet over summer and that just not going to be able to keep up with the demand and the strain and the packet requirements over time I think – as I said our customers who want to see mainly Ethernet and so between the combination of small cell, venture cell, we think this is a robust marketplace for the next couple of years.

Hal Covert

Jennifer, just couple of quick points, Tim has already covered, our overall revenue for Q4 is going to be relatively flat with Q3 [indiscernible]. However, Tim has indicated that the strategic data we think that positions in north of 2.5% growth and it is fueled by stuff that orders that are in the pipeline right now are ready to go. So the only we have to do is just get the customer sign off so that’s what we are depending on.

Jennifer Fritzsche - Wells Fargo

Okay. Thank you very much for that color.

Hal Covert

Thank you.

Operator

Our next question is from Donna Jaegers from DA Davidson. Please go ahead ma’am.

Donna Jaegers - DA Davidson

Hi, guys. Lack of questions on my part. On competitive tone, can you talk about what you are seeing in Richmond, I think Verizon is the lead incumbent there, correct?

Tim Biltz

Yes. We looking in our network, certainly there is a lot of competition there. We have less than – we don’t have a half percent of the market, it’s a big market. So our team is building custom solution. We like our network because the additional 50, 60 miles that we build, we build in specifically designed to where the new office parks are where the new suburb facilities are. And we have always been really selling in that market about 3, 4 months and we signed the Virginia Commonwealth University I think in our seminar today.

And we brought a team of seasoned reps in that had competed in that market. So look, it going to be more competitive market but we have less share to lose. And when we shared a gain in that market at this point.

Hal Covert

Yes. We did issue three press releases today, we will encourage everybody to take a look at it. One was on the customer, it simply talks about. And then we talk a little bit about our expansion into Western Pennsylvania and some more details about Richmond expansion.

Donna Jaegers - DA Davidson

On specifically on Richmond is, Verizon rolling up files in that area and have they approached business customers with that?

Tim Biltz

I don’t know Donna that’s what we will say. But, we are –most as you could see, ACA is our anchor tenant big medical facility connecting 10 major facilities.

Donna Jaegers - DA Davidson

Not exactly 5 or plus.

Tim Biltz

That was in our market.

Donna Jaegers - DA Davidson

On DSO in your own encumbered regions, you have stopped reporting numbers on that last quarter, can you give us a little color there because obviously NTELOS is teaming with Dish to try to put together more of a combo wireless data package.

Tim Biltz

Well, I would say a couple of things. Our [indiscernible] business is about 15% year-over-year, it’s up from the back. My sort of business. I love the project that telephone dish are working on. We supply most of that bandwidth coming out of those towers, not all but most. Our DSO business is a declining business as we get move upstream and wake in that market try to -- if we put into our IP services group which we think will be flat but soon the other combination of the product primarily voice and messages and treat that its head above water or but not a growth engine for the company.

But we are seriously moving away from that end of the market. And so that I think the Dish, NTELOS joint venture is going to be good for us long-term because we are supplying bandwidth big aggression stuff from the wireless network.

Hal Covert

Then I just reiterate what Tim probably said in his prepared remarks about services, EBITDA margin, product statement. So, we’re trying to -- that turn let’s go upstream even within that both products.

Donna Jaegers - DA Davidson

Okay. And then guys mentioned in your press release that you’re moving ahead with system streamlining in your operations and those, you come on board, I guess in 2014, can you give us any more timing when that comes on board and what sort of cost saving that could add to?

Hal Covert

Yes, so I think there are two or three key points. The first one is that, we’re actually using our business monitorization project as an opportunity to reengineer all of our business looking all of our business process. So we expect that we are going to impact – we already are doing some more positive benefits. There is two big phases that come up in 2014 primarily related to the financials and some of the operations or activities. And then, two other big phases come up in the first part of 2013.

The project was a key part of helping to expand our overall strategic data margins. With all that, it would be once more difficult for us to get those data of course in the margin side we are after. So, we’ve talked that we believe we can go from the mid-40s where we at today to get up closer to 50%. That’s a key part of getting to that point.

Tim Biltz

Yes. And the other things, some of these, our investments to as we migrate from a circuit world or TDM world into a network packet company. The quality of our systems it, you have heard other companies speak. I’m a big believer that a unified system that allows you to manage your service delivery, customer interface, customer portal its critical and this system will make a sufficient not only from a cost perspective but from a customer service and for a customer satisfaction perspective.

Donna Jaegers - DA Davidson

Great. Thanks guys.

Tim Biltz

Thanks Donna.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Will Davis

As a reminder, a replay of this call and an archive of the audio webcast would be available. Please refer to our Investor Relations website for details. Thank you again for joining us this morning. This concludes our call.

Operator

Thank you for attending today’s presentation. You may now disconnect your lines.

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