Otelco Inc
Q1 2017 Earnings Call Transcript

Published: 3 May 2017

[Operator:]

Good day, everyone and welcome to the Otelco’s First Quarter 2017 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.

[Drew Anderson:]

Thank you, Dina and welcome to the Otelco conference call to review the company’s results for the first quarter ended March 31, 2017. 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 facts constitute forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other unknown factors that could have an impact on the company’s strategic review process or 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. There can be no assurance regarding the outcome of any decisions that the company may make regarding strategic alternatives in connection with the strategic review process. 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.

[Rob Souza:]

Thank you Drew. Good morning and welcome to our first quarter investor call. I'll begin today by providing some highlights regarding our results for the first quarter. Curtis will then review our financial results. And then Curtis and I will take your questions. Looking at the first quarter of 2017, our financial and operating results reflect the ongoing industry conditions affecting all telecommunication providers. Most notably during the first quarter, Otelco began receiving the FCC's A-CAM payments in the five states where the program is applicable to the company. The program funding is being used to enhance and built out our broadband network to provide increased broadband speed and accessibility to customers. The programs provides a stable 10 year funding mechanism to continue the expansion of broadband in rural communities. Under A-CAM we will continue to expand the availability of higher broadband speeds and expect to invest throughout our network. The A-CAM election includes specific deployment obligation including the number of locations to be capable of specific broadband speeds within certain eligible census blocks in our service area. Our first milestone review period for the FCC program is the end of 2020. Since January 1 2017, 10 of our RLECs received support payment through A-CAM and one of our RLECs receive support payments through the modified legacy rate of return support mechanisms for USS high cost loop and ICLF. The new model based support plus higher cap funding provided an increase of over 0.4 million in revenue for the first quarter of 2017. Compared with the revenue it replaced in 2016 leading through an increase in operating income of 0.3 million. Net income for the first quarter of 2017 declined by 0.1 million and consolidated EBITDA declined by 0.4 million for the same period in 2016. The decline in residential voice service the increase in interest cost associated with the company's credit agreement and the reduction in annual co-bank dividends were partially offset by the increase in A-CAM and GAAP revenue. As I mentioned in our March call, we expect funding under the new A-CAM model base support to increase in 2017 by an estimated 1.5 million compared to 2016 support received under legacy rate of return regulations. Without the new A-CAM model based support in 2017 our RLECs would have seen a normal year-over-year funding decrease under the old program and the FCCs newly adopted budget control mechanism. With the introduction of the A-CAM funding in 2017 the increase in revenue can be support additional capital investment in our networks above the levels of the last several years to enhance broadband speed and coverage. We've amended our credit agreements to allow for this increase spending. As announced on our last call, we were awarded to contract in Leverett, Massachusetts to provide Internet and voice to this community. On April 1 we began to serving over 1000 voice and data lines in accordance with this multiyear contract. In other new developments in March we implemented a long-term fiber IRU transport contract with a national carrier and find an additional dark fiber contract with another carrier that will begin service in June. In addition the company has find fiber leases to serve to sell powers with service to begin in the second quarter. We continue to see favorable trends with our newer offering like video and security and mange services. Our focus on continues cost improvements and efficiencies across our markets remain the critical element of our strategy. Our operating expense decreased by 3% over the same period a year ago. We've continued the detailed pre conversion work to replace our billing and operation systems with a common platform across our entire operations. We remain on schedule to complete the system conversion by early 2018. Streamlining of our organizational structure has already begin, which will allow the groups utilizing the new systems to work together in detailed planning, design and implementation of the revised service processes. We expect the completion of this conversion will provide more granular customer data and enhance customer service and efficiencies throughout the company. For the first quarter our business and enterprise access line equivalents decreased by 735 or 1.4% compared to the end of 2016. So loss of data lines for one of our New England CLEC customers and a decrease in multi-use voice lines in Alabama accounted for the decline. Residential access line equivalents declined by 522 or 1.1% compared to December 31, 2016 reflecting industry wide trends. Within the residential access line equivalents, residential data lines declined by 60 during the first quarter of 2017, or 0.3% as most customers who disconnect their voice lines chose to retain their data services. As of March 31, 2017 we operate 98,516 total access line equivalents. Finally as previously disclosed in the fall of 2016, we announced the engagement of The Bank Street Group LLC to explore company's strategic alternatives. Our top priority in this process is to identify opportunities for Otelco that maximize shareholder value. At this point, we are evaluating a broad range of options including potential acquisitions, mergers or sales among others. However, it is important to note that there can be no assurance that our review of strategic alternatives will result in any transaction. Our management team and our Board continue to be actively involved in the process. However, we will not make any further comment during this call or address any questions at this time. We will continue to restrict public comments to those required by applicable laws. Curtis will now summarize for you the first quarter's financial results.

[Curtis Garner:]

Thank you, Rob and we appreciate everybody joining us today. I will provide a brief overview of our first quarter financial highlights as contained in the press release unless I note otherwise, every comparison is against the same period last year generally first quarter over first quarter. Also, we expect to file our first quarter Form 10-Q tomorrow, which will have additional information about results for the first quarter of 2017. Total revenues for the first quarter -- total revenues were 17.4 million just slightly below 17.5 million a year ago. The drop in residential RLEC, voice access line equivalents was mostly offset by the incremental revenue associated with A-CAM and higher internet, video and security and managed services when compare those with the same quarter last year. Looking at the components of the revenue, local services revenue was $5.6 million, a decrease of 6.7% over the prior year period. The decline in RLEC residential voice access lines and related revenue accounted for a decrease of 0.2 million, a portion of the RLEC decrease is recovered through the Connect America Fund, which is categorized as interstate access revenue. The decline in long distance and special line revenues accounted for a decrease of 0.2 million. Network access revenue increased 5.9% to 5.7 million. The Connect America Fund and the initial A-CAM revenue transition payments increased by 2.3 million, they were partially offset by 1.9 million decrease in interim and cross data access including universal service funding. End-user base fees decreased by 0.1 million. Internet revenue was 3.9 million, or 2.3% increase attributable to the increased data speeds that we're providing to our customers. Transport services revenue decreased 11.8% to $1.1 million, reflecting the loss of two large customers and market prices. Video and security revenue increased 4.2% to 0.8 million reflecting increases in IPTV revenue and modest cable pricing increases to cover changes for our content cost during the year. Managed services revenue increased 2.1% to slightly over $0.2 million in the first quarter, reflecting increases in cloud hosting revenue. Now let move on to operating expenses for the first quarter, Rob noted as result of our continued focus on expense management, our total operating expenses for the first quarter of 2017 decreased 3% to $12.4 million. Cost of services decreased 3.9% to 7.8 million. Network circuit and resale facility expense was down 0.2 million for the quarter. Hosted PBX equipment expense, total internet and access expenses and customer service sales, cloud hosting and professional services expense were each down 0.1 million. These decreases were partially offset by an increase of $0.1 million in all other cost. SG&A was $2.7 million, which is a 5% increase over last year. The increase was attributable to a transition from a stock based senior management bonus plan, which is been in place for the past three years and is expensed over 39 month, to a cash based bonus plan for 2017, which much be expensed over 12 months. Depreciation and amortization decreased 9.7% to $1.8 million from $2 million last year, cable and CLEC depreciation and the amortization of other intangible assets in New England decreased by $0.1 million and the amortization of the telephone plan adjustment decreased by 0.4. Operating income was $0.5 million, a 5.8% increase over last year, primarily related to the increase in revenue associated with the A-CAM transition during first quarter of 2017. A 5.2% year-over-year increase in interest expense reflects the higher interest rates on the company's current loan facilities partially offset by lower loan cost amortization as you recall, we excluded new senior and subordinated credit facilities in the first quarter of last year. During the nearly yearlong process we shared the Otelco story with the broad array of potential lenders and selected the best options to market presented. We ended up with 5 and 5.5 half year terms for the two agreements which is consistent with the length of the credit facilities since we've been in public and investment before. Other income for the first quarter decreased 67.2% to 0.2 million primarily related to the annual call back dividend. In the first quarter of the 2016 the senior credit facility held by co-bank and five other banks was slowly repaid, therefore we were only entitled to a partial year dividends form co-back for the 2016 year, which we received in first quarter of this year. Co-bank pays its shared held by the company are expected to repatriated over a nine year[indiscernible] on a net basis with 2017 being the first quarter we paid it. Factoring in all of these changes, net income was $1.0 million for the first quarter $1.1 million a year ago or a $1.0 million decline primarily due to the decrease in the co bank dividend partially offset by the increase in A-CAM revenue. Consolidated EBITDA was $7.2 million a sequential improvement over the 6.7 million in the fourth quarter of 2016 but down 0.4 million from first quarter a year ago. The change is primarily due to again with CoBank dividend decrease. Looking at the balance sheet quickly, we ended the first quarter with 10.7 million in cash and cash equivalents or 0.2 million increase since the end of 2016. In terms of our senior loan facility, we made a scheduled principal payments of a $1 million and another $3.1 million in access cash flow payments during first quarter. At March 31, 2017, the outstanding senior loan balance was 77.9 million, $5 million revolver remains un-drop. Capital expenditures were 1.2 million for the first quarter of 2017 compared with 0.7 million for the same period in 2016 with the bill that requirements for A-CAM and the ongoing work to convert our billing operation system to single platform. We anticipate our investment in the business for 2017 and 2018 will be higher than historically has been the case. We have remained to that credit facility to allow for the potential increase in capital expenditures 8.5 million in 2017 and 7.5 million in 2018. Copy for that amendment will be including in the 10-Q. I think that covers the highlights for the quarter Rob with additional details in the press release and the forth coming 10-Q. Dina, if you want to provide directions, we can shift from taking -- taking investor questions at this time.

[Operator:]

Thank you. [Operator Instruction] We will go to Ira Sacker with Sacker and Company.

[Ira Sacker:]

You comment on the -- you mentioned in there you are going to the single billing platform, the dark-fiber, the other contract, could you just kind of elaborate on that? And how the company plans on sustaining this EBITDA that you have been able to accomplish in last three years?

[Rob Souza:]

Sure, Ira. The decision to go to a new billing and operational support system was something that had been in the works for quite some time. We have been considering our options in the past, our various regions were managed with disparate systems. Our effort this year is to review all of those processes and all of the data. We have selected a company to do that work for us and that company is also the company that will be providing us the new system. It is -- the name of the company is NISC and we believe that consolidated system or consolidating our operations to a single system will have multiple benefits to us, certainly efficiencies and how we deal with customers and also internal efficiencies that will reflect and continue. We believe to improve the overall performance of the company. As far as the dark-fiber, all of our company have a fair amount of embedded fiber optic cable in their networks. It is so happens that in the New England area we have a particular fiber run that has been attractive to carriers in the past based on its location and one of those carriers required some additional dark fiber and we were able to sign a 20 year IRU with that provider to provide them access to additional strands of fiber. In addition to that as mentioned I think in my comments, we continue to feel the cause from cellular carriers looking to reach towers that are within our like franchises and we continue to provide fiber capabilities to those customers. So certainly I think the combination of those two things, certainly a favorable and we believe the appropriate steps for the company to take on a going forward basis.

[Ira Sacker:]

Okay and you mentioned the fact that during the period you lost two large customers, is Otelco dependent on a few large customers or is it bulk of your revenue from a diversified base.

[Rob Souza:]

The bulk of our revenue is certainly comes from the diversified base, in this case it happen to be a fairly large bank that was acquired by another organization. They had no issues with our service per se but the larger organization wanted to centralize command and control for all telecom purchases and that’s why we lost this particular customers. But the majority of our revenue is scattered across medium to smaller businesses and residential customers with a few large customer scattered in there as well.

[Ira Sacker:]

Very good, thank you.

[Rob Souza:]

Thank you, Ira.

[Operator:]

[Operator Instructions] And gentleman it appears we have no further questions at this time.

[Rob Souza:]

All right well once again we certainly appreciate the folks who've joined the call. We continue to remain focused on managing Otelco in tandem with the significant changes that are occurring within our industry and we continue to look for additional growth opportunities in the current marketplace. As always, we are dedicated to delivering greater value to our shareholders. We certainly welcome your questions at any time and we plan on keeping you informed regarding the developments in our business. Again thanks for joining our call.

[Operator:]

Thank you. And that thus conclude today’s conference. Thank you for your participation. You may now disconnect.