Gigaclear: scaling up rural FTTP delivery Prepared by: Annelise Berendt Date: 17 October 2016 Version: 2.0 Point Topic Ltd 73 Farringdon Road London EC1M 3JQ, UK Tel. +44 (0) 20 3301 3305 Email [email protected] Gigaclear: scaling up rural FTTP delivery Table of Contents 1. Introduction 3 2. Background 3 3. The business model 5 Building a predictive model on a demand-led base 5 Developing choice in service provision 6 4. The service, support and marketing 7 Approach to marketing 9 Customer care and support 10 5. Deployments to date 10 Network installation 14 6. Looking to the future 17 Page 2 of 17 Gigaclear: scaling up rural FTTP delivery 1. Introduction Gigaclear has become the UK’s leading alternative network operator specialising in fibre-to-the- premises (FTTP) delivery in rural areas. It is expanding its footprint rapidly and is acquiring a relatively sizable customer base. Founded on a solid and well-oiled approach to demand registration and order taking, with a clear set of aims, focused business model and strong financial backing, the company is now having to adapt its processes to make the transition from local broadband player to national broadband provider in the rather large niche market that is rural Britain. The company designs, builds and operates FTTP broadband networks delivering symmetric speeds of 50Mbps to 10Gbps. It owns and operates 66 rural fibre networks and has over 35 under construction across Kent, Oxfordshire, Northamptonshire, Cambridgeshire, Leicestershire, Buckinghamshire, Hertfordshire, Rutland, Gloucestershire, Berkshire and Essex, and more recently Devon and Somerset. Having spent several years deploying commercially in areas Openreach and others were reluctant to enter, Gigaclear has now embarked on a number of Broadband Delivery UK (BDUK) funded contracts under the Superfast Extension Programme to build next-generation networks in Berkshire, Essex and Gloucestershire, in addition to its continued commercial expansion. Gigaclear is targeting a market of 1.5 million rural households and businesses across thousands of rural communities. It had around 5,800 customers in August 2016 having passed over 21,000 homes and businesses. It plans to have close to 40,000 premises passed by the end of 2016 and around 100,000 by the end of 2017. Point Topic recently visited Gigaclear’s headquarters in Abingdon near Oxford where we met Matthew Hare, the company’s founder and Chief Executive. Gigaclear has grown significantly since our last case study published in December 2013, from 15 employees and 35 contractors, to 150 staff. Following a tour of the site, Hare explained to us how the company is adapting to manage its growing coverage, size and customer base, as well as its ambitions and plans for the future. 2. Background Gigaclear was established in December 2010 to build ultrafast broadband connections to rural communities. In February 2011 the company applied to Ofcom for Code Powers under the Electronics Communications Code and the following month the regulator published its consultation. The Direction applying the electronic communications code to Gigaclear was issued on 10 May 2011, giving the company powers to carry out street works in relation to the roll out of fibre-based telecoms networks in the UK. Gigaclear took a majority stake in sub-loop unbundling pioneer Rutland Telecom in May 2011, which is now a wholly owned subsidiary of Gigaclear plc. At that time Rutland Telecom served over 500 residential and business customers in the county of Rutland. Gigaclear needed to demonstrate it was capable of building and running fibre networks and so, according to Hare, buying the capability in Page 3 of 17 Gigaclear: scaling up rural FTTP delivery Rutland Telecom was a quick way to achieve this. Since December 2014, all Rutland Telecom operations and support have been managed from the Gigaclear offices in Abingdon. Gigaclear began construction of its first network in Hambleton, Rutland, in association with Rutland Telecom in September 2011, opening for service a month later. This was followed by another fibre- to-the-home (FTTH) network in the Oxfordshire communities of Appleton and Eaton. The company’s position was boosted in November 2012 when Gigaclear announced it had concluded equity financing from a private group of investors enabling it to substantially accelerate the pace of FTTH rollout. The transaction was arranged by financial advisers Cameron Barney LLP based on a proven level of demand for high-speed broadband in rural and semi-rural areas. Further funding rounds have taken place as shown in Table 1 below. Two of these rounds in Spring 2014 transformed Gigaclear from a firm backed solely by a small number of private individuals into one backed by over 70 private and institutional shareholders. Then on 15 September 2014 Gigaclear announced its intention to float on AIM in London to raise additional funds principally from new institutional investors, existing shareholders and certain qualifying customers, to enable it to accelerate the rollout of more ultrafast fibre broadband communities. Floatation was due to take place on 24 October 2014 but was cancelled and rescheduled for 31 October. However, Gigaclear decided to put the floatation on hold due to difficult financial market conditions. According to Hare, “All the work has been done and is kept up to date including having a non-executive board. So we could float tomorrow if we wanted to”. Floatation is not a current objective, however. “We are unlikely to go back to the capital markets until we are EBITDA positive,” adds Hare. Two further funding rounds have taken place since then, one in February 2015 and the second in May 2015. Then on 14 January 2016 Gigaclear announced it had secured a EUR25 million committed debt facility from the European Investment Bank (EIB). The loan is being used to support Gigaclear’s rural expansion plans during 2016 as it builds to at least 25,000 additional properties. This involves a major investment by the company, one third of which is being financed through the EIB facility. The loan is the maximum available to companies under the ‘InnovFin – EU Finance for Innovators’ MidCap Growth Finance scheme and was the largest amount the EIB had awarded to any UK business under the initiative. As of August 2016 Gigaclear had raised £72.5 million in equity, had £20 million yet to draw from the EBI, and £10 million in funding for BDUK projects. Gigaclear says it is fully funded until the end of Q1 2017 and is planning to do another round of funding, the amount to be raised dependent on requirements at the time. The majority of deployments have been financed entirely by Gigaclear shareholders with no grants involved. The Hambleton network was different, funded by a loan from the community to Gigaclear secured against the assets of the infrastructure. The more recent BDUK-funded contracts are therefore new territory for Gigaclear but the company says it always expected to see a mixture of funding approaches being used. Page 4 of 17 Gigaclear: scaling up rural FTTP delivery Table 1: Gigaclear funding history Date Details November 2012 Private group of investors April 2014 Raised over £2.75 million through an Enterprise Investment Scheme (EIS), which resulted in more than double its original minimum target May 2014 Gigaclear agreed to an additional investment of £5 million from the CF Woodford Equity Income Fund 2 July 2014 Confirmed successful completion of a new round of equity financing totalling £7.75 million to enable Gigaclear to commence rollout of several additional new networks, with the target of serving 10,000 homes and businesses by the end of 2014 13 February 2015 Round of equity financing in which £6.5 million in funds were raised from both existing and new institutional and private shareholders. The CF Woodford Equity Income Fund added to its initial investment and Forward Private Equity became the company’s second institutional shareholder. Following this new round of funding, Gigaclear had over 100 private and institutional shareholders 11 May 2015 Secured £30 million in new equity providing resources for the next 24 months. Prudential committed to invest up to £20 million, managed by Infracapital, the infrastructure investment arm of Prudential. Meanwhile existing shareholder Woodford Investment Management committed a further £10 million of investment 14 January 2016 Secured a EUR25 million committed debt facility from the European Investment Bank 3. The business model Gigaclear is both an infrastructure operator and service provider, and says it is able to install FTTP networks to provide broadband internet access to homes and businesses in rural communities delivering a return on investment after 5.5 years. This is up slightly from five years due to the density of properties in coverage areas having decreased slightly. Costs are running at around £1,000 per property. In BDUK areas the cost to Gigaclear is around £1,200 per property. Building a predictive model on a demand-led base Central to Gigaclear’s business model has been its demand-led approach. It developed a strategy of raising interest in individual communities with residents and businesses making expressions of interest followed by orders for service via the Gigaclear website. By pre-marketing and pre-selling broadband orders, the company has been able to reach a penetration level which makes deployment viable, before actually committing to any build. In October 2016, however, Gigaclear move away from pre-selling broadband provision. Using uptake data already gathered, the operator as developed forecasting tools to predict where it should build. Marketing and selling therefore now begins when building begins, with these functions running in parallel throughout the process. Testing this approach during September 2016 the company says that take-up has proved at least as good in predicted areas as it has in pre-sold areas, and that the Page 5 of 17 Gigaclear: scaling up rural FTTP delivery method is resulting in cost savings.