Otelco Inc
Q1 2016 Earnings Call Transcript

Published: 6 May 2016

[Operator:]

Good day and welcome to Otelco's First Quarter 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 Mr. Kevin Inda. Please go ahead, sir.

[Kevin Inda:]

Thank you, Jenny, and welcome to this Otelco conference call to review the company's results for the first quarter ended March 31, 2016. Conducting the call today will be Rob Souza, President and CEO; and Curtis Garner, Chief Financial Officer. Before we start, let me offer the cautionary note that statements on this conference 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, listeners are urged to consider statements labeled with the terms believes, belief, expects, intends, anticipate, plans, or similar terms to be uncertain are forward-looking. 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 SEC. With that stated, I'll now turn the call over to Rob Souza.

[Rob Souza:]

Thanks, Kevin. Good morning and welcome to our call. I want to begin today by providing some highlights regarding our first quarter results. As usual, Curtis will then review our financial results, and then we'll take your questions. We are pleased that our initiatives to improve our network and operation efficiencies continue to have a positive effect on our operating results. Despite a small decline in revenue this quarter when compared to the same period in 2015, first quarter operating income increased $0.2 million and consolidated EBITDA improved $0.1 million when you exclude the impact of the CoBank dividend. Our total revenues were $17.5 million or a 0.9% decrease from a year ago. The trend of residential customers replacing their landline phones with wireless devices continues. Yet the positive outcome occurring is that they choose to retain their data line and often increase its speed, thus our residential data lines were basically flat compared to the end of 2015. Video and security products, which are residentially focused, both grew during the first quarter. We are disappointed with our overall CLEC access line equivalents for the quarter, which decreased during the first quarter of 2016. Approximately half of the decrease was related to customers reducing their expenses as the economy continued to stagnate. Where lines were lost to competitors, a portion resulted from the sale of a local business to a national firm who then moved their services to a national vendor contract. Residential revenue remains under pressure for all telephone companies, for a number of factors. The landscape of the telecommunication industry is experiencing tremendous change. Thus we are working extremely hard to take advantage of opportunities in the current marketplace. Our focus is on continuous cost improvements across our markets and the identification of top line revenue enhancements, which include new or improved products as well as pricing and promotional actions. For example, in March, we were the first company to bring 10 gigabits per second of Internet connectivity to the full Northern Ring of Maine. It was brought to Northern Maine through Maine Fiber company's Three Ring Binder network. We have already signed two major companies as well as a new enterprise to grow their businesses using our fiber-fed high-speed services. Our investment to bring 10 gigabits per second of capacity to the entire Northern Ring will foster our efforts to provide the very latest in communications and cloud services to the 77 rural Maine communities in Aroostook, Penobscot, Piscataquis, Hancock and Washington counties. In Vermont, we're testing an over-the-top Roku-type local programming service to gauge customer acceptance. On March 30, 2016, the FCC issued their order regarding the Connect America Fund for rate-of-return carriers. The Alternative Connect America Cost Model, better known to the industry as A-CAM, will provide the regulated companies we manage a new option to replace the existing high-cost loop and interstate common-line support mechanisms. A-CAM will provide a 10-year fixed amount of support to companies that choose this option. Otelco's regulatory experts along with its industry consultants are evaluating these options to determine the best path forward. However, there are provisions within the new rules that have yet to be finalized. Our company-by-company analysis will not be complete or a decision made until we can assess the effects of the final revisions yet to be made by the FCC. Lastly, our new credit facilities implemented during the first quarter provide us with a five-year horizon to further adapt our business to the new industry norms and benefit from these changing trends. I'll now ask Curtis to summarize the financial results, and then, we'll take your questions.

[Curtis Garner:]

Thank you, Rob. We appreciate everyone taking their time to join our call today. We touched on the highlights of the new credit facilities on our March call. But just to reiterate, since the transaction was actually closed in first quarter, on which we're reporting today, we borrowed $100.3 million from two sources to repay $100.1 million from the bank syndicate which was due to expire on April 30 of 2016. The vast majority of the loan fees and costs were paid from balance sheet cash. Both new facilities last until 2021. Now let me do a brief overview of other first quarter highlights as contained in our press release, and then, we will open it up for questions. We expect to file our 10-Q this afternoon, so additional information will be available in that. Beginning with the top line, total revenues decreased just less than 1% in the first quarter to $17.5 million from $17.6 million a year ago. The decrease is related primarily to the trends in the residential voice access line market and revenue decreases due to the FCC's intercarrier compensation reform order. The decrease was somewhat offset by increases in Internet managed services and security revenue. As noted in the press release, this decline in total revenue was materially less than the decline in the first quarter of last year, when you compared it to the first quarter of 2014. Now let's look at some of the details. Local services revenue decreased 4.5% to $6 million from $6.3 million as the decline in RLEC residential voice access lines and the impact of the FCC's order, which reduces or eliminates intrastate and local cellular revenue, accounted for a decrease of $0.3 million. A portion of the RLEC decrease is recovered through the Connect America Fund, Part I, which is categorized as interstate access revenue. The decline in long distance and special line revenue accounted for a decrease of $0.2 million. CLEC, including the hosted PBX and fiber revenue, increased $5.2 million. Network access revenue decreased 1.6% to $5.4 million from $5.5 million a year ago. The decrease was the result of declines in end-user base fees of $0.1 million and special access charges of $0.2 million. The declines were partially offset by a $0.1 million increase in the Connect America Fund and a $0.1 million increase in inter and intrastate switched access revenue. Turning to unregulated services, Internet revenue increased 5.9% to $3.8 million compared to $3.6 million a year ago. Net subscribers were stable and speeds and equipment rental revenues increased. Transport services revenue decreased by 3.1% to remain at just under $1.3 million from a year ago, on lower wide area network revenue. Video and security revenue increased 3.2% to basically hold at $0.7 million. Increases in security and IPTV revenue as well as selected price increases were partially offset by digital cable subscriber attrition and lower pay-per-view revenue. Cloud hosting and managed services revenue increased 11.6% from higher professional services revenue. Shifting to expenses, operating expenses in the first quarter decreased 3% to $12.7 million from $13.1 million. Cost of services decreased 1.5% to $8.1 million from $8.3 million, as access and total expense decreased by $0.1 million, hosted PBX expense decreased by $0.1 million, and all other costs decreased by $0.1 million, reflecting the New England operations optimization that Rob mentioned. PAP billing credits received in Maine decreased by $0.2 million, which is effectively increasing our costs as a result of the FairPoint Communications' services level showing further improvement. SG&A decreased 2.1% to just under $2.6 million from just over $2.6 million as a result of small decreases in external relations, human resources, and non-cash earn out stock expenses. These improvements were partially offset by a small increase in loan fees, legal and non-cash stock compensation expense. Depreciation and amortization decreased 9.4% to $2 million from $2.2 million, as New England CLEC and RLEC depreciation decreased by $0.1 million and the amortization of other intangible assets decreased by $0.1 million. As a result of the factors that I mentioned, net income decreased $0.4 million to $1.8 million and consolidated EBITDA decreased $0.4 million to $7.6 million compared to $8 million in the first quarter of 2015. And as Rob mentioned, when you exclude the impact of the $0.5 million decrease in CoBank dividend, consolidated EBITDA actually improved by $0.1 million. A further note on the CoBank dividend might be appropriate. With the change in lenders, CoBank is no longer a lender to Otelco. Therefore, the company will no longer receive annual cash and patronage dividends from CoBank. Over the next 10 years, CoBank is expected to repatriate the current patronage dividends that remain on the company's balance sheet. As a reminder, a change in the generally accepted accounting principles now nets loan costs against the outstanding balance of the term loan facilities for balance sheet presentation. To see the absolute outstanding balance on our loans each quarter it will be necessary for investors to look at the footnotes to the financial statements. Capital expenditures were $0.7 million for the first quarter, compared to $1.5 million a year ago. That rate of investment in our network and facilities is a bit lower than normal for first quarter, but not a signal that we're going to lower capital investment for the year. Cash at the end of the first quarter was $6.9 million, essentially the same as at the end of 2015. Given the level of loan costs paid in first quarter, some might consider that a positive accomplishment. As a reminder, our new senior loan facility receives its interest and principal payments on the first of the month, while the bank syndicate received their payments at the end of the month. I think that covers it, Rob. Additional details are in the press release and the forthcoming 10-Q. Jenny, if you'll provide directions we can shift to taking investor questions at this time.

[Operator:]

Thank you. [Operator Instructions] And we will go to Chris Brown of Aristides Capital.

[Chris Brown:]

Yes, good morning, gentlemen. Good quarter. A question, Rob, can you please go over the regulatory development you were talking about at the beginning of the call? I'm sorry that was a little bit quick for me.

[Rob Souza:]

Sure. I think it's been in the news for quite some time, Chris and thanks for the question. Hopefully it will clarify it for other folks as well. The FCC has been dealing with the change in what is known as Universal Service Fund in the past. It was primarily a voice fund or a fund that was used to ensure that everyone had connectivity to the voice network. That is shifting to ensure that everyone is connected to high-speed broadband service. As a result of that, they came up with some alternative cost models. They worked with the price cap companies probably over a year ago to finalize that decision. And it's taken them about another year, year-and-a-half to finally come out with the final rules regarding the rate-of-return carriers, which is what we are and the rules that would apply to us. In that, the A-CAM is an alternative to the current legacy support mechanisms that exist today. And what we're doing, Chris, is going through the analysis to compare how the existing legacy support compares with the new A-CAM models. Unfortunately the FCC, even though they released the rule, has a number of things that they still need to finalize before we can do our final assessment. And that's basically where we are at this point. I think a decision for us will come somewhere towards the end of August, because once they finalize their work we're going to be given 90 days to do our analysis and make a decision as to whether we want to move to the A-CAM support model or continue with legacy support.

[Chris Brown:]

Okay. In general, should we look at this as a positive, a negative, or a neutral at this point?

[Rob Souza:]

I think overall at the moment it's neutral. I think A-CAM brings some probably regulatory stability for companies. But again, I think we have to do the analysis to finger out which side of the model that we end up on before we can make a determination. But overall, I believe it's neutral at this point in time.

[Chris Brown:]

Okay, great. That's all I had. I look forward to meeting you guys at the annual meeting.

[Rob Souza:]

Great. Look forward to seeing you, Chris.

[Operator:]

[Operator Instructions] At the moment, we do not have any other analysts queued up for questions.

[Rob Souza:]

Thanks, Jenny. Then I guess we can end the call. I certainly want to thank everyone for joining us this morning. As I indicated in my opening remarks, we are focused on transforming our business to adapt to the significant change occurring in telecommunications and we remain extremely dedicated to shareholder value. We always welcome your questions. We plan to keep you informed regarding developments in our business. And, as Chris Brown mentioned, our annual shareholder meeting comes up in another week in May in New York City. We hope to see you there. Thanks so much.

[Operator:]

Again, that does conclude the call. We would like to thank everyone for their participation today.