Otelco Inc
Q2 2018 Earnings Call Transcript

Published: 14 Aug 2018

[Operator:]

Good day, and welcome to the Otelco Second Quarter 2018 Earnings Conference Call. Today’s conference is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Ms. Drew Anderson. Please go ahead ma’am.

[Drew Anderson:]

Thank you, Stephanie and good morning. Welcome to the Otelco conference call to review the Company’s results for the second quarter ended June 30, 2018. Conducting the call today will be Rob Souza, President and Chief Executive Officer, and Curtis Garner, Chief Financial Officer. Before we start, let me offer the cautionary note that statements made during this call that are not statements of historical or current fact constitute forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other unknown factors that could cause the actual results of the Company to be materially different from the historical results or from any future results expressed or implied by such forward looking statements. In addition to statements which explicitly describe such risks and uncertainties, readers are urged to consider statements labeled with the terms believes, belief, expects, intends, anticipates, plans, or similar terms to be uncertain and forward-looking. The forward-looking statements contained herein are also subject generally to other risks and uncertainties that are described from time to time in the company’s filings with the Securities and Exchange Commission. With that stated, I will now turn the call over to Rob Souza. Please go ahead sir.

[Rob Souza:]

Thank you, Drew. Good morning and welcome to our second quarter 2018 investor call. I’ll discuss the second quarter’s operational performance and other key issues impacting our business. Curtis will then review our financial results and then we’ll take your questions. For the second quarter, we introduced a new format for our quarterly earnings release and filed our Form 10-Q coincident with our release. We felt that investors would benefit from this change in the format and availability of operational information. Our results for the second quarter continue to reflect the trends in our industry and our Company. As traditional access revenues and residential RLEC customers continue to decline, while costs of service deliveries is seeing the impact of inflation and a tightening job market. Total revenue was $16.9 million, down 3% over last year. However, we were pleased that our operational income was up 2.4% to $5.2 million. Our results included additional ACAM revenue approved by FCC for investment in Missouri and positive FCC budget adjustments in Vermont. Net income was also up over the second quarter last year, increasing to $2.9 million compared with $1.5 million last year. This increase includes $1.1 million decrease in interest expense associated with the new CoBank facility and the benefits of the tax act. Cash increased to $4.2 million. During the second quarter, we've reduced the outstanding principle on our credit facility by $4.1 million, including $3 million voluntary payment. For the third quarter in a row, the Company's leverage ratio was below 3 turns when you reflect the cash on the balance sheet with the quarter's ratio ending at 2.87. An additional $1 million payment was made at the end of July. As discussed over the past year, Otelco began receiving the FCC's ACAM payments in the five states where the program is applicable for the Company. The program funding is being used to enhance and build out our broadband network to provide increased broadband speeds and accessibility to customers over the next 10 years. In addition, we accepted the FCC's enhanced ACAM offer in Missouri, which will provide an additional $1.5 million in funding over the tenure licensed program, which began in 2017. The FCC has also adjusted the budget control payments for 2017 and '18, which positive affected our Vermont property. Both changes are reflected in second quarter results with the cash payments expected to be received before the end of the year. In addition, Otelco was accepted by the FCC as a bidder in the CASQ auction. This process, which began on July 24th, has not yet concluded. So there is no information available regarding awards from this process. Otelco invested $2.1 million in enhancing its network during the second quarter 2018, increasing its fiber network to approximately 200 miles of both last mile and middle mile fiber. In other operational news for the second quarter, four communities in Massachusetts are moving forward to build and operate a fixed wireless network using their combined $2 million grant allocated by the State of Massachusetts. These bring high-speed Internet to underserved communities, mostly in the western part of the state. Otelco is working to partner with these communities to enhance their voice and data services and make them more competitive in the digital future. This partnership mimics the work we did in levered Massachusetts and demonstrates how municipal partnerships can work to improve broadband access to more communities. The new network, once all contracts are completed, could be operational in one of the towns as early as October, while the other municipality should follow in early 2019. Consolidating and streamlining the business operations remains a strategic focus of our business. As announced early last year, we selected a partner to consolidate all of our billing and operational systems on one platform. After an extensive period of planning, development and training, we converted all of our operational and billing systems on to that single platform at the end of July. For the month of June, all carrier customers were built from the new system. And commencing in August, all the end user activity from new service ordering to provisioning to billing and collecting, is now handled from a new system. The first end user bills from the system were generated over the past weekend. Our employees have worked very hard to get to this conversion point and are pleased to be utilizing the new technology. We look forward to the operational benefits that we’ll provide our customers, as well as the favorable financial impact we should see from a more efficient system. In addition, to keeping up with every customers’ need, location, serving equipment and usage for long distance minutes to gigabit Ethernet circuits, the system will also enhance our ability to market new products, to meet targeted customer requirements. And as we noted earlier this year, with the move to a company-wide operational system, we are now branding all of our services as Otelco throughout our entire service footprint. We are pleased with our progress through the first half of 2018 as our employees have worked hard to execute on a number of initiatives for both our customers and shareholders. Moving forward, we will continue our focus on enhancing the customer experience, improving data speeds, adding new customers and reducing our leverage to provide additional financial flexibility for the future. Our primary strategy consists of leveraging our strong incumbent market position, improving our ability to sell additional data service to our royal customer base and providing better service and support levels with a broader suite of services. In addition to our focused debt reduction, we believe an improvement in our revenue performance, a continued emphasis on cost management and the move to enhanced billing and operational support platform will benefit our employees and customers and deliver additional value to our shareholders. Curtis will now summarize the second quarter financial results.

[Curtis Garner:]

Thank you, Rob. We appreciate everyone joining us today. As Rob mentioned earlier in the call, we changed our presentation process this quarter. The press release is more focused on operational performance with the detailed financial performance contained in the Form 10-Q, which we filed in parallel with the earnings release to give interested investors both sets of information before we have a investor call. I’ll provide a brief overview of our second quarter financial highlights as contained in the Form 10-Q unless otherwise noted, every comparison against the same period last year generally second quarter versus second quarter. Total revenues for the second quarter 2018 were $16.9 million, down 3% from last year’s second quarter. The decrease is primarily due to the decrease in traditional access revenue affected by the FCC’s inter-carrier compensation reform order and in residential RLEC voice access line equivalents, particularly offset -- partially offset by an increase in ACAM revenue primarily in Missouri. If you look at the components revenue, local service revenue was $5.4 million, a decrease from 5.8% over the prior year period. The decline in RLEC residential voice access lines and the impact of the SEC's order, which reduced or eliminated intra-state and local cellular revenue accounted for decrease of just over $0.2 million [Technical Difficulty] RLEC decrease is recovered through the cap, which reflected in interstate access revenue. Combination of long distance and directory services accounted for decrease of $0.1 million and host PDX equipment sales and fiber installation revenue accounted for decrease of $0.1 million. Network access revenue decreased 0.7% over the last year, but remained at $5.6 million. Internet revenue decreased 3.7% to $3.8 million, primarily due to a small decline in customer and equipment rental charges. Transport services revenue increased to 3.7% over the second quarter last year, reflecting an increase in wide area network services. Video and security revenue was $0.7 million or 4.2% decline, reflecting small increases in IPTV revenue offset by small decreases in basic cable and pay-per-view revenue. And lastly, management services revenue decreased 4.2% over the same quarter last year. Now, move on to operating expenses for the second quarter. Total operating expenses were down 5.1% over the prior year. The details are as follows; cost of services decreased 7%; three expense areas, customer service and sales, digital and circuit all rental and network operations, were each down $0.1 million while access and Internet expense decreased $0.2 million. SG&A down 1.6% to $2.4 million from $2.5 million last year generally is attributable to $0.2 million and trading expense, which was associated with new building and operating support systems, which there was no comparable expense in 2017. And that was more than offset by a decrease of $0.1 million in cloud hosting and uncollectable expense of $0.2 million and senior management incentive compensation expense, reflecting the use of stock as part of the incentive compensation plan for 2018. Depreciation and amortization was unchanged from a year ago at $1.8 million. As Ron noted, operating income was $5.2 million, up 2.4% for the second quarter compared to last year. Interest expense for the second quarter was $1.5 million, a decrease of 43.6%. Lower interest rates and smaller outstanding principle amount accounted for just under $0.9 million with a decrease and the lower loan cost amortization accounted for $0.2 million. Income tax expense -- tax cuts and jobs act implemented at the end of 2017 increased bonus depreciation from 50% to 100%, and reduced the maximum favorable income tax rate from 35% to 21%. As a result, we expect to reduce our cash federal corporate tax liability for this year by approximately $2.1 million under the new tax rates. For the second quarter, the provision of income taxes decreased 15.6% over a year ago. Factoring in all of these changes, as Rob mentioned, net income increased $2.4 million to $2.9 million for the second quarter, primarily due to lower effective tax rate and the interest reductions associated with the new CoBank private facility. Consolidated EBITDA was $7.1 million compared to $7 million in second quarter of last year. Looking at the balance sheet, we ended the second quarter with $4.2 million in cash compared to $3.6 million at the end of the 2017. We made a voluntary $3 million prepayment at the end of May and our scheduled principle payment of $1.1 million at the end of June, reducing the outstanding balance on our credit facility to $80.7 million at the end of the quarter. Our ratio of debt net of cash to consolidated EBITDA was 2.87 at June 30th. We made an additional $1 million voluntary prepayment at the end of July, which is not reflected in the current financial segment. Capital expenditures were $2.1 million for second quarter 2018 compared to $2.5 million last year, including the implementation of our new billing and operational support system, we expect to invest approximately $8 million this year in the operations. To meet all of our ACAM obligations as well as investment in our network, we expect our capital expenditures to increase to $9 million in 2019 and 2020 period. That covers the highlights for the quarter. Additional detail is in the press release and the Form 10-Q. Stephanie if you provide the directions we can shift to taking investor questions at this time.

[Operator:]

[Operator Instructions] And we’ll take our first question from [Wally Walker], who’s a Private Investor.

[Unidentified Analyst:]

Good morning Rob, Curtis, great quarter, really like the aggressive debt reduction you guys are doing.

[Rob Souza:]

Thank you, Wally. We believe we heard the message from the majority of our investors that they appreciate what we’re doing there.

[Unidentified Analyst:]

Yes, we do. And although Otelco has done a wonderful job on cost control, recently you have been hesitant to call on end of the slower revenue declines. I am just wondering with certainty of ACAM now the potential of additional CAF-II revenue and work that Otelco has been doing with rural towns, the latest example that resulted in $2 million grant from the State of Massachusetts. Do you think we’re closer to revenue stabilization?

[Rob Souza:]

Wally, I always provide my comments in little bit of quotation marks. We certainly continue to see some decline in local revenues through what Curtis mentioned the natural shift in decline in access revenue and also line loss. But we certainly believe that all of the things that you mentioned are positive signs and signals in addition to the fact that we continue to build fiber as a result of the ACAM funding. And we believe that funding and the construction of that fiber that last mile fiber to customers certainly continues to improve our ability to stabilize top line revenue.

[Unidentified Analyst:]

And the bidding in the FCC’s CAF-II auction has now entered its fourth week. From your advantage point do you think that it’s nearing its conclusion?

[Rob Souza:]

Well, the one thing that I can’t share, Wally, is that the national CAF-II budget cleared -- I believe it cleared last Thursday or Friday and then the FCC gave all of the bidders Monday off I believe to rethink where they were. The budget clearing means that obviously we’re in the final stages of the bidding and now we might be down to some competitive bidding in individual markets as the FCC might have multiple participants in various census blocks. So I do believe we’re getting close to the end. I am just not sure, how long it will take for the rest of the markets to get to the bid point where the FCC can award individual winners. And as of this point, nothing has been made official regarding how Otelco stands in that process.

[Unidentified Analyst:]

All right, appreciate your input. Have a great day guys.

[Rob Souza:]

Thank you, Wally, you too.

[Operator:]

And it seems there are no further questions in the queue [Operator Instructions]. And we do have a one question from Ira Socket from Socket & Company.

[Ira Socket:]

Good morning. Has there been any more payments since June 30th on the debt other than what's scheduled? Or is there any additional planned other than what's scheduled?

[Rob Souza:]

Curtis, why don’t you respond? I think you mentioned that in your comments and you can reply to Ira, please.

[Curtis Garner:]

Our scheduled payments are at the end of the quarter there’s $1.1 million. So we have $1.1 million scheduled in September. We made $1 million payment, a prepayment -- extra prepayment at the end of July. And we'll decide between now and the end of the September whether we make any additional prepayments based on the availability of cash at our operations.

[Ira Socket:]

So on that $1 million lower than what was shown on the 10-Q?

[Curtis Garner:]

Correct.

[Ira Socket:]

Thank you.

[Operator:]

And there are no further questions [Operator Instructions]. And there are no further questions in the queue. I'd like to turn the call back over to Mr. Rob Souza.

[Rob Souza:]

Thank you, Stephanie. We certainly appreciate your participation this morning as we discuss our second quarter results. We definitely remain focused on managing Otelco in tandem with the changes and continue to occur in the industry. And we continue to look for additional growth opportunities in that current marketplace. As always, we are dedicated to delivering greater value to our shareholders. And once again, we appreciate your participation and your questions. And we look forward to sharing additional information with you in the future. Thanks so much.