New Neos boss targets return to profit in UK's 'brutal' B2B market

Such is Lee Myall's enthusiasm for DevOps, a cultural practice aimed at streamlining IT development, that one of his first moves when he joined Neos Networks as CEO last September was a trip to the UK's south coast for a curry with the in-house DevOps team based there. "I love that world," he told Light Reading. "This is where you can differentiate as a relatively small player in a market of some behemoths."

Unlike many of the UK's other fiber builders, Neos has rigorously avoided a plunge into the uber-competitive residential market, where dozens of new entrants are attacking broadband incumbent BT. Its focus has instead been on selling a range of fiber, optical and Ethernet products to various business customers, including the residential-sector altnets. Last August, for instance, it landed a new backhaul deal with brsk, an operator serving homes across parts of Lancashire, Yorkshire and the West Midlands.

Under Colin Sempill, Myall's predecessor, Neos had spent heavily to install its own equipment in BT exchanges (so-called unbundling) and roll out fiber. When Sempill met with masked-up reporters in late 2021, amid lingering COVID concerns, he reckoned Neos was spending about seven times as much as some rivals – an average of £100,000 (US$125,000) per exchange – to furnish those properties with top-of-the-range equipment. Some 550 exchanges had been successfully unbundled at the time.

But Myall's appointment, first announced a year ago, seems to herald a change in tack. For a start, the unbundling and fiber rollout are now "100%" finished, said Myall. "This is now about sweating every asset we've got and making sure we've got really core laser focus." The priority now is to grow sales.

Tough climate

Published figures show Neos has faced some business challenges in recent years. A joint venture since 2019 between energy giant SSE Group and private-equity firm Infracapital, it managed sales growth of 18% in the 2022 fiscal year (ending in March 2022), to £156.8 million ($195.7 million), but also saw its net loss widen 82%, to £57.8 million ($72.2 million). While the subsequent year brought a flattening of revenues – up just 1.5%, to £159.2 million ($198.7 million) – its loss narrowed to £36.8 million ($45.9 million).

SSE, the parent disclosing those figures, has yet to publish its annual report for the recently ended fiscal year. But it has already flagged a £14.7 million ($18.4 million) adjusted operating loss at Neos for the six months to September 2023, compared with a £6.5 million ($8.1 million) loss the year before. Gregor Alexander, who quit his job as SSE's chief financial officer in March, noted in late 2023 that "losses from SSE Enterprise and Neos Networks continued in the period as they build out their respective asset bases."

(Source: SSE Group)

Answering follow-up questions by email, Myall blames the slowdown that happened before he joined Neos largely on the wider economic malaise. "The post-COVID climate was tough for all operators," he said. "Now our UK-wide asset is wider reaching, our focus is on making connectivity work for critical national infrastructure providers, the wholesale market and some selected local and central government."

What he calls a "reset" means pushing the core product offers based on those fiber, optical and Ethernet assets. But Myall is evidently under some pressure to end that sequence of losses and "return to profitability," as he puts it. That will demand pricing discipline in what has become an extremely competitive marketplace. "Brutal" is the word Myall uses to describe the Ethernet sector.

"It would probably be fair to say we could grow even more if we chose to trash the margin, but then we'd be compromising the differentiation and value that gives us the Ethernet business we have," he said. "For us, though, where we're really starting to see the needle move more quickly and being more beneficial for us is in the optical area and in the fiber area."

Optical, especially, is benefiting partly from a flood of data traffic into the UK generated by data-center clusters in mainland Europe, he observes. And artificial intelligence (AI) seems to be having an impact in this area as data moves from what Myall calls "major hubs" into other parts of the network. "There are multiple facilities with vast processing power stuffed full of Nvidia and others, but the data gravity is changing," he said. "We are seeing these patterns starting to emerge."

The question is whether Neos has the footprint to address those and other big opportunities. Sempill had aimed to go beyond the 550 BT exchanges and unbundle another 200 by December 2023, but the number has not risen. While the original spending plans were evidently scrapped, the operator's message is that 550 gives it all the footprint it currently needs.

"Upon review we found that this provides us access to 80% of the UK business market and concluded that further investment to unbundle more exchanges would be unnecessary," Myall said in his written remarks. BT, he points out, is also taking thousands of exchanges out of service as it migrates from copper to fiber connectivity. "Couple this with BT's decision to retire its exchange estate, we believe we now have the right asset to support our growth," added Myall.

Easy to consume

When it comes to both cost savings and service differentiation, opportunities may be available in the DevOps area that so visibly excites Myall. "This is something I was involved in a few years ago at Interoute," he said. Active in the cloud services market, Interoute was eventually bought for $2.3 billion in 2018 by GTT Communications of the US. Before then, Myall spent 14 years at the company in various senior management roles.

That experience may prove valuable as Myall targets a closer integration of the technical and operational teams within Neos. "Of course, there are distinct operational and technical activities, but you can culturally bring them closer together to unlock the asset to much better effect," he said. "And that comes back to that obsession of making it much easier for customers to do business with us."

Accordingly, while the days of big spending on the network side seem to be over (for now, at least), Neos is busy at work on further developing an orchestration layer to aid that customer engagement. "We are trying to make this network as easy to consume as possible through orchestration and automation and AI within that realm," said Myall.

Telecom has not enjoyed the best reputation for customer service, but it's critical for Neos given Myall's desire to avoid any "race to the bottom" on prices. An important litmus test of any deal involves providing affirmative answers to two questions, he said. "Is this good for Neos? Is this good for the customer?" If he can bring his owners satisfied clients willing to pay handsome rates, he is unlikely to face many quibbles.