Consolidated Communications Holdings, Inc.
Q4 2013 Earnings Call Transcript

Published: 27 Feb 2014

[Operator:]

Good day, ladies and gentlemen, and welcome to your Consolidated Communications Holdings Incorporated Fourth Quarter 2013 Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded. I would like to introduce your host for today’s conference, Matt Smith, Vice President, Investor Relations and Treasury. You may begin.

[Matt Smith:]

Thank you, Nicole, and good morning everyone. We appreciate you joining us today for our fourth quarter 2013 earnings call. At the conclusion of the prepared remarks, we will open the call up for questions. Joining me on the call today are Bob Currey, Chairman and Chief Executive Officer; Steve Childers, Chief Financial Officer; and Bob Udell, President and Chief Operating Officer. Please review the Safe Harbor provisions in our press release and in our SEC filings for information about forward-looking statements and related risk factors. This call may contain forward-looking statements within the meaning of the Federal Securities Laws. Such forward-looking statements reflect among other things, management’s current expectations, plans and strategies, and anticipated financial results. All of which are subject to known and unknown risks, uncertainties and factors that may cause the actual results to differ materially from those expressed or implied by these forward-looking statements. In addition, today’s discussion will include certain non-GAAP financial measures. Our earnings release for this quarter’s results which has been posted to the Investor Relations section of our website contains reconciliations of these measures to their nearest GAAP equivalent. I will now turn the call over to Bob Currey, who will provide an overview of our financial and operating results. Steve Childers will then provide a more detailed review of the financials. Bob?

[Bob Currey:]

Thanks, Matt. Good morning, everyone and thank you for joining us today. I’ll highlights some highlights for both the fourth quarter and the full year and then turn it over to Steve for more detailed review of our financials. Our fourth quarter capped off another very successful for Consolidated. Throughout the year we have continued our focus on meeting our strategic objectives, all of which helped us delivered strong cash flows, supporting our dividend and investments for growth. Revenue for the quarter was $148 million and adjusted EBITDA was $70 million. For the year, revenue was $601.6 million which included a 5.2% increase in data, video and internet revenues. Adjusted EBITDA was a strong $286.5 million, representing a 5.7% increase over 2012. We generated $96.3 million in cash available for dividends in 2013 and return $62.1 million in dividends our shareholders, representing a comfortable payout ratio of 64.5%. The investments we made during the year continued to be driven primarily by success based opportunities. We invested $26.8 million in the quarter and $107.4 million for the year. These capital expenditures included items such as growth and expansion in our commercial services, wireless backhaul and delivering fiber directly to new Greenfield developers. During the quarter, we installed fiber to an additional 96 tower sites bringing the total add to 210 for the year. In addition, we installed fiber directly to 1,913 additional marketable homes in the quarter and 6,966 for the year. We have expanded our growth initiative by adding more sales reps and sales engineers to drive further growth in the higher margin commercial area. Specifically, by the end of year we had 22 more commercial sales employees than we had at the end of 2013. This reflexes our ability to invest in growth while maintaining a well-balanced cash flow supporting the dividend. We also had a strong year with respect to our five Verizon Wireless partnerships. Both the quarter and the year represented record distribution from these partnerships. We received $10.5 million in the quarter and $34.8 million for the year which reflect increases over the same prior year periods of 11.7% and 19.6% respectively. And with the LTE build largely complete as well as the associated capital expense requirements; we are confident in the continued growth of this cash distributions. Operationally, we had a strong quarter as demonstrated by our metrics. We’ve increased our broadband subscribers by 3,454 with 27,123 from data and 731 from video. For the year, broadband subscribers grew by 12,082 or 3.4%. Metro Ethernet continuous to be a leading growth area for us with 47.3% increase in the number of circuits during 2013. We also had our best quarter in two years with respect to our non ILEC voice line driven by commercial VOIP growth. We also delivered another solid quarter in full year of access line performance. Our strong operating results reflect our competitive products and best in class service quality. Overall, I was very pleased with both the financial and operating performance of the business for the quarter and the year. Another important step we took in the quarter was a successful refinancing of our bank debt. The new rate has a spread of 3.25% and floor of 1% and reduces our interest cost by approximately $5 million per year. We also extended the maturities on our term debt out to December, 2020 and our revolver to December, 2018. And in addition, our revolver capacity was increased from $50 million to $75 million. We were very pleased with the support from our existing investors and the significant interest we’ve received from new investors. So before I turn the call over to Steve, let me provide an update on our SureWest integration efforts. Overall, process continues to go very well. Our final project billing integration is on track with our original plans. The new user interface was completed earlier this month and the rest of the project will complete in the third quarter of this year. With respect to synergies, we mentioned last quarter that we had achieved our original $25 million in annual cost savings, a full nine months ahead of schedule. In the fourth quarter, we achieved an additional $760,000 in synergies and we will benefit from in 2014. So with that I’ll now turn the call over to Steve for detailed financial review.

[Steve Childers:]

Thanks, Bob and good morning to everyone. I’ll review our fourth quarter financial results and then provide our 2014 full year guidance. As Bob mentioned we did produce solid results in the quarter inclusive of the net $2.2 million non-recurrent reduction to both revenue and adjusted EBITDA due to an adjustment in universal service fund with the California market due to a late filing. While SureWest had filed the traditional ICLS certification with NECA for 2013, a new ETC certification with the FCC which was required as part of the 2011, Intercarrier Comp USF Reform order was not filed on a timely basis. Once notified in the late filing we have worked aggressively to cure it. However, the FCC took the unprecedented action not to provide any of the funding for the time period in question versus granting waiver or issuing late filing fee. We had appealed the decision and we remained optimistic the FCC will reverse the decision in 2014. Now let’s get into the specifics of the quarter. Revenues were $148 million compared to $153.8 million for the fourth quarter of 2012. Increased in our data and video services and continued growth in our commercial sales were offset by declined in subsidies and network access services. The total operating expenses exclusive of depreciation and amortization were [$90.8 million] representing a $3.1 million improved compared to the second period of last year. The operating expense reductions primarily driven by the continued success in achieving synergy cost savings from the SureWest acquisition as well as lower transaction related costs. Net interest expense was $19.8 million compared to $20.5 million for the fourth quarter last year. The improvement was primarily attributable to $100 million of swaps that matured in September 30, 2013, that were replaced by much lower rates. Other income net was $10.8 million compared to $9.4 million for the same period last year. The increase was driven by growth of Verizon Wireless partnerships. Adjusted net income and earnings per share as presented in earnings release were $9.2 million and $0.23 respectively. In comparison, adjusted net income and earnings per share for the fourth quarter last year were $8 million and $0.20 respectively. Adjusted EBITDA for the quarter was $70 million versus $73.2 million for the same period last year, including $2.2 million on favorable subsidy threw up adjusted EBITDA would have been $72.2 million. Capital expenditures for the quarter were $26.8 million with over 60% of the expense being driven by success based projects. From liquidity standpoint, we ended the quarter with $62 million revolving capacity and $5.6 million in cash on hand. For the quarter, our total net leverage ratio as calculated in our earnings release was 4.25 times to one. All leverage and coverage ratios were within compliance levels of debt agreement. Cash available to pay dividend was $24.1, resulting in strong dividend payout ratio at 64.4%. Now let me provide our guidance for 2014. First, capital expenditures are expected to be in the range of $97 million to $103 million compared to $107.5 million in 2013. Second, cash interest expense is expected to be in the range of $75 million to $78 million compared to $81.9 million last year. And finally, cash income taxes are expected to be in the range of $10 million to $15 million compared to $1 million in 2013. With respect to our dividend, our Board of Directors has declared the next quarterly dividend of approximately $0.39 per common share payable on May 1, 2014 to shareholders of Record on April 15, 2014. With that I’ll now turn back over to Bob for closing remarks.

[Bob Currey:]

So, in summary we had another strong year, full of many accomplishments. I am thankful for all the hard work of employees in making 2013 a success. Going forward, we will continue our focus on providing the best and product services in our market, delivering cash flow that supports our dividend and funds our growth prospects and completing a successful integration of SureWest. So with that, Nicole, let’s open it up for questions.

[Operator:]

(Operator Instructions). Our first question comes from the line Frank Louthan of Raymond James. Your line is now open.

[Frank Louthan:]

Great, thank you. Couple of things. One, the subsidies in the quarter was down. Is there anything one time a true up or anything like that sort of $11 million kind of new baseline? And then just one thing to clarify, I don’t think there is really any change but and I apologize if you mentioned this earlier in the call but just to make sure I was clear, post Verizon acquiring all of Vodafone, there really isn’t any impact to your partnerships. There shouldn’t be any impact to your business or do you expect any changes? And then can you give us an update on the – you have been passing the couple of thousand homes every quarter with fiber. Is that sort of system wide? Is that concentrated in a couple of particular market, where are you seeing those opportunities and should we expect that going forward?

[Steve Childers:]

Hey, Frank, good morning. This is Steve. I’ll take the first two parts of your question and Bob Udell takes the third. With respect to the subsidy, we did – we talked about in the call that basically we took a $2.2 million write-down due to ICLS funding in California for the first six months of 2013, that we previously recognized, so yes so the run rate should be the same once you normalize for that $2.2 million adjustment that we made in the fourth quarter. And we are optimistic that’s going to get reversed in fourth quarter – sometime in 2014, but it based on where we with the FCC at the end of 2014. We felt it was appropriate – 2013 results were appropriate to take a revenue write-down at that point in time. With respect to the wireless, we expect absolutely no change in the performance of our wireless partnership, all the cash distributions as result of the Vodafone/Verizon deal.

[Bob Udell:]

Frank, regarding the fiber to the home passing, we have done very well penetrating the home, we built fiber too and had the exclusivity but some of the opportunities still for bringing new services and products to some of the market in the SureWest area, still give us upside. We had 7,000 pass in 2013, I expect to see somewhat less than that in 2014 because our penetration levels are still in the mid-teen and we think 30%, more than 30% especially in fiber to home markets are realistic expectations for us to have. So we are looking at balance growth across our portfolio, and really focusing capital investments in success based opportunities we find in carrier and commercial as higher priority than new Greenfield fiber developments for residential.

[Frank Louthan:]

Okay, great, thank you. And thanks for repeating yourself. I appreciate that. And just one quick follow up. So looking going forward– I see the guidance of the cash taxes becoming full cash taxpayer, now just to clarify, my understanding has been you have been taking advantage of the tax situation to make additional investment and so forth, you got some room triggering your CapEx to kind of throttle that to keep the free cash flow and payout ratio relatively stable. As we see that cash tax begin to climb, should we see some of the – or do you have room to have an offset there on the CapEx? How should we think about that kind of going forward?

[Steve Childers:]

Well, Frank, this is Steve. With respect to the cash taxing, number one, we are increasing from $1 million to the guidance for 2014 is in the range of $10 million to $15 million and couple things, just to set the expectation for cash taxes. Basically we had at the end of the year we had roughly $43 million in NOLs, we expect to exhaust those by the end of 2014, we don’t anticipate bonus depreciation been available in 2014, so net-to-net those are reflected in our estimate for 2015. So even though cash taxes are going up in 2014 to your point, we are slightly falling back on CapEx while still making the appropriate growth investment, and we also due to the very successful refinancing we had in the fourth quarter. You also see a reduction in cash interest as well for next year. So net-net on the things we provide guidance on we are actually down – or actually have a more positive cash flow number than 2013 actual result, so we do have – we do think we have a lot of room and flexibility within CapEx guidance that was given for this year again focuses on success base CapEx, more focused on commercial and carrier opportunities.

[Frank Louthan:]

Okay, great, thank you.

[Operator:]

Thank you. Our next question comes from the line of Mike McCormack from Jefferies. Your line is now open.

[Mike McCormack:]

Hey, guys, thanks. Bob may be just quick comments regarding cable competition in the commercial space, what are you seeing at there from a pricing perspective? And then may be also the product offering versus what you guys have and then hearing a lot from other video providers regarding and high speed data providers rather regarding Wi-Fi in home distribution. I think it is a clearly a result of multiple devices in the home streaming video services. So just trying to get a sense to what are you guys seeing as far as in home Wi-Fi distribution? Thanks.

[Bob Udell:]

Yes, Mike thanks for the question. Let me start first with the question around the commercial competition, cable providers. We have been competing against the major cable companies for years. There is no doubt we see a bit of trend with them getting a little more aggressive and better at delivering personal businesses, but while we don’t take any competitor lightly, we have got an excellent product set and have more new things rolling out in our business or commercial customer group offerings and we had in years with the stronger data center product in all of our market and very robust voice-over-internet platform. So while I think there has been some setback, everyone seen across the nation from the cable guys we feel very well positioned because of our consultative sales approach. Our beef up in focus on retention to continue compete effectively with that both on–certainly on quality, speed and price. And the advantage we have is – have been early in the IPTV deployment game almost 10 years ago. We have been upgrading capacity across our network for years, and so we are very good at capacity management, very good with tools for commercial entities to be able to measure and monitor our bandwidth use. With regards to the commercial consumer and the residential Wi-Fi usage in home, we deployed a few years back a tool that allows us to help our residential subscribers manage the number of IP devices they have in their home, and so we can actually turn off an IP device if it is a problem or having too much bandwidth because it is left in mode that isn’t productive for the family use or for our network. And in addition with over the top adoption that’s happening with the digestion of content by end users, we have been refining our capacity managing tools as I mentioned on a consumer side and commercial side, also on the consumer side. And so I think we are well prepared with the strong core network. We are well prepared because of the way our network is constructed on by user or by residence address basis to help our customers manage a number of devices they have online at any point in their home. And to provide a high quality experience by ensuring that we cash and store the content as close to the customer as possible.

[Mike McCormack:]

That’s great, thanks a lot.

[Operator:]

(Operator Instructions). Our next question comes from the line of Donna Jaegers. Your line is now open.

[Donna Jaegers:]

Can you remind us a little on your cable overlap? Who do you overlap most with? I am sure you guys have those sorts of percentages that you can remind us on? And then on commercial growth, you added to sales and sales engineering, any new product upgrades that you guys already have a pretty robust internet line?

[Bob Udell:]

Yes, Donna, let me take the commercial part first. I would say it is more of product evolution than a major new deployment. We’ve been recently upgrading our VOIP voice platform with some very new signifying messaging tools that were getting a very good response from an HD voices is a big component. We joke about internally that HD is kind of the trend line now for everything, HDTV, HD voice and HD ratio and it is because we become so accustomed to poor volume voice transmission I think on wireless phone that people wanted to get back to over the quality voice experience, and it is serving us very well with our customers. The data center product, we are writing tier three higher level data center product to our portfolio, that’s been natural evolution, that’s people’s requirement about computing, get more sophisticated so I think our sales folks have never been more excited about their portfolio services like I can honestly say the Metro Ethernet platform has become the table stakes with as transport path to customers, then we layer the other things and retention goal is working well for us. On the consumer front, cable competition that we talked about in the past is still the same. In Pennsylvania, it is Comcast and Armstrong, with Texas, Suddenlink and Comcast, MediaCom and NewWave in Illinois, a mix in California and Kansas of the national players you would expect Comcast, AT&T in a little bit up frontier but and then of course you got Google in Kansas city which we were asked about more often than it is probably deserve attention. So that’s really the players that we see and while they continue to run in the various promotions, we haven’t see any irrational behavior different than what we have seen in the past. They are all pretty, fairly well behaved and fairly predictable.

[Donna Jaegers:]

Great, just a quick follow up on the tier three data center that you guys added to the portfolio. Are you leasing space from somebody? Did you stand that up on your own or are you reselling somebody else’s service?

[Bob Udell:]

It’s a mix. Where we have this facility and the space and economically justified we are adding capacity, and we’ve added over 8,000 square foot of new data center space across California, Texas and Kansas City. And in Pennsylvania we have some space still available. We are contracting with underlying provider, we are very confident in Texas for tier three space. So it is a mix. It is a build versus buy decision just like network decisions you make.

[Donna Jaegers:]

Okay, thanks, guys.

[Operator:]

Thank you and I am showing no further questions at the time. I’d hand the call back over to Bob Currey for any closing remarks.

[Bob Currey:]

Thank you, Nicole. And thank all of you for joining us today, and for your continued interest and support of Consolidated. We hope you will join us again next quarter. And have a great day.

[Operator:]

Ladies and gentlemen, I thank you all for participating in today’s conference. This does conclude today’s program. You may all disconnect. Have a great day everyone.