Updated Sept. 1, 2009, 7:13 a.m.

By DAVID BORAKS
DavidsonNews.net

The MI-Connection cable system lost $6.4 million in the fiscal year that ended June 30, according to unaudited financial results presented this week. That’s less than a June projection that put the potential loss at $7.65 million.

While overall customer growth remains sluggish, system officials said Monday they’re optimistic because of summertime growth in sales of new services, including telephone and high-speed internet. After a $22.5 million network upgrade completed in April, the system now can offer a “triple play” of those two services plus cable TV. As a result, it’s now often selling more products to each customer.

“The deeper we are into the home, we’re driving more revenue per subscriber,” said Sandra Munsey, marketing director with Bristol Virginia Utilities, the management company that runs the system for its owners, the towns of Davidson and Mooresville.

The 2009 loss and hints of growth are among the details town and system officials are offering this week in meetings with concerned citizens and news media. In those meetings, they also acknowledged that the towns may have to invest millions of dollars more in the coming years as the system continues to grow.

The meetings are part of what appears to be a series of moves to turn things around at MI-Connection. On Monday, the company announced plans to hire a new general manager who would lead a stepped-up marketing effort after nearly two years of construction. The two towns are also reorganizing the MI-Connection board of directors, including by seeking a new chairman.

BUSINESS GROWTH

System and town officials have provided few hard numbers in this week’s meetings. They have not shared a balance sheet or an accounting of revenues and expenses. Stacey Bright, the system’s chief financial officer, said she and her colleagues are running MI-Connection as a business, and are wary of releasing too much information to competitors.

The system did break even in 2008-9 on an operating basis, that is, before accounting for the cost of debt and other non-operating expenses. (That’s known in business as EBIDA, earnings before interest, depreciation and amortization.) In other words, for day-to-day operations, cash inflows equaled cash outflows, Ms. Bright said.

Officials are talking about some sales numbers. In addition to expanding its reach among residential customers, MI-Connection salespeople are trying to make inroads into the business and institutional market, where it really hasn’t competed until now because it lacked a competitive high-speed internet product, officials said. So far, the system has won contracts from the towns of Davidson and Mooresville and a collection of small companies, as well as large corporate customers including giant home-improvement retailer Lowe’s Cos. Inc., which has its headquarters in Mount Mourne.

“Going into 2010, where we want to be aggressive is in the commercial and enterprise markets,” Ms. Bright said. “For once, we do have a product out there that we stand apart on. What we have to do is improve our credibility.”

Ron Rizzuto, a professor of finance at the University of Denver who has studied municipal ownership of cable companies, and who is familiar MI-Connection, said commercial services are “a growth area for all the cable telecom operators.”

“Cable has been historically a residential marketplace, but now with commercial phone and internet, they have a way to really take market share from the incumbent phone companies. That’s a good area to focus on,” Professor Rizzuto said.

MORE SERVICES PER CUSTOMER

Overall, the system had 15,171 customers as of June 30. That’s still down about 800 from when the towns bought the system in December 2007. Officials blame the situation on several factors: the weak economy, a decision to cut off customers delinquent on their bills, and competition from other TV services, including satellite.

MI-Connection also lost several hundred customers when the property management company at a Cornelius apartment complex signed a contract with a big nationwide competitor for telecommunications services at all its properties.

But the company says it is gaining among its existing customer base by selling each customer additional services, which expands revenues and widens profit margins. MI-Connection has been aggressively marketing its “triple play” of TV, phone and internet, and that’s a growth area as well, Professor Rizzuto noted.

“It’s a good opportunity, again, if you’ve got three products, compared to (satellite services) who’ve only got one,” said Prof. Rizzuto.  “So there seems to be a trend for double-play and triple-play out there.”

To measure progress in this area, MI-Connection officials said they’re paying more attention these days to what are called “revenue generating units,” or RGUs, instead of customer totals. An RGU represents one service – cable or telephone or internet. One customer may have more than one service, so the company is looking at total RGUs as a measure of growth.

In recent months, as existing customers add new services, MI-Connection has added hundreds of RGUs: 101 in May, 412 in June, and 245 in July. With the big growth in June, the company had 28,108 RGUs as of June 30. Officials declined to provide year-to-date or year-over-year comparisons, saying the information could give an edge to competitors.

Officials also said the growth in new services is the result of aggressive marketing to existing customers through direct mail, telephone calling, bill inserts and other contacts.

AUDIT AND HURDLES AHEAD

The figures released Monday are still preliminary; an audit won’t begin until Sept. 14.

Meanwhile, hurdles remain. System officials say they likely will need more money in the future to continue growing.

“Based on what we know today, and based on the obligations of MI-Connection and our indebtedness, and based on a model that we think we can achieve … it is a potential that the towns might need to invest more in the future,” Ms. Bright said. “It might be 19 (million dollars), it could be 7 (million) it could be 10 million.”

If growth picks up, the number would be lower, she said. (CORRECTED 9/3/09: This sentence originally said the number would be higher, but Ms. Bright said Thursday that “if growth picks up in the early years, that would be less the towns would have to invest in future years.”)

The system expects to cover a shortfall this year (2009-10) with reserves, but it’s unclear what will happen in the upcoming 2010-11 fiscal year. That’s when the towns will have to begin making principal payments on their initial $80 million bond issue, which paid for the system and initial work on the upgrade.

That year, the towns may need to provide additional capital, Ms. Bright said. “That capital might be only the capital needed to extend infrastructure to an enterprise customer or hook up more residential customers,” Ms. Bright said.

TAXPAYER CONCERNS

Some critics of the system worry future capital infusions could come out of taxpayers’ pockets. But officials from both Davidson and Mooresville said Monday they don’t envision paying for growth or making up shortfalls with property taxes.

“It’s not in our plan,” said Maia Setzer, Mooresville’s director of administration and finance.

Added Davidson Town Manager Leamon Brice: “I don’t see it in our plan. That really is speculation. … Now that we have the best system available, we anticipate being able to make (our) numbers. We now have a very good system that we need to market and people need to support.”

Davidson Mayor John Woods also said a cable-related tax increase is unlikely, and he said citizens can help make sure that doesn’t happen.

“It has never been our intent to support this system with taxpayer funds,” Mayor Woods said. “The 2010 budget has been approved and there is no need for taxpayer assistance. The future depends on our citizens and businesses embracing the system, taking advantage of its offerings. I hope we can celebrate a locally-owned effort that contributes to this community. To those negative voices in the world, I say the future is in your hands. Use the system and it will be successful.”

Town Board member Laurie Venzon, who was not on the Town Board when it voted to buy MI-Connection in 2007, said the towns have a long-term view. She compared it to a college basketball team of top-rated freshmen recruits.

“If they don’t win the NCAA Championship their first year, it doesn’t mean the coach should get rid of them all and get a new team,” she said. “MI-Connection is now faster, better and cheaper than the competition. They have great offerings with expanded high-definition cable service, the fastest internet speeds and expanded phone services.  Whether bundled or sold individually, they can save our residents money. So now, like a basketball team, they need to execute by capturing more market share, growing revenue and delighting customers – that will be the winning formula.”