Otelco Inc
Q1 2015 Earnings Call Transcript

Published: 6 May 2015

[Operator:]

Good day everyone and welcome to the Otelco’s 1Q 2015 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 today’s host, Mr. Kevin Enda. Please go ahead sir.

[Kevin Enda:]

Thank you, Allen, and welcome to this Otelco conference call to review the company’s results in the first quarter year ended March 31, 2015. 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 on this conference call contains forward-looking that are subject to risks and uncertainties. Forward-looking statements give out current expectations relating to our financial condition results of operations, plans, objectives, future performance and business. These statements may include words such as anticipate, estimate, expect, project, plan, intend, believe and other words in terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. These forward-looking statements are based on assumptions that we have made might or have experienced in the industry in which we operate as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. Although we believe that these forward-looking statements are based on reasonable assumptions you should be aware that many factors could affect our actual financial conditions or results of operations will cause our actual results to differ materially from those in the forward-looking statements. 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 SEC. With that stated, I’ll turn the call over to Rob.

[Robert Souza:]

Thank you, Kevin, and good morning and welcome to our call. We’re very pleased with our start to 2015, so let me first hit some of the key highlights for the quarter. During the first quarter we produced our best adjusted EBITDA since we restructured our balance sheet in the second quarter of 2013. While the increase in our annual CoBank dividend was a significant part of the growth in adjusted EBITDA compared to the first quarter of last year, the network and operational improvements initiated during 2014 continue to have a positive impact on our earnings both sequentially and year-over-year. We will continue to focus on finding both infrastructure and operational improvements in 2015. Our business access line equivalence grew during the first quarter and now represents more than 53% of our total access line equivalence. Both our Hosted PBX product and Classifax offering grew this quarter as did our wholesale network offering. Hosted PBX now accounts for more than 34% of our CLEC voice lines. Reliable Networks continues to experience growth as it enters its second year as part of Otelco. The market growth and visibility of private hybrid cloud services and our focus on mission critical applications positions Otelco to expand our penetration of the needs of our customer base as well as new customers well beyond our New England rooms. In addition email [ph] needs to Reliable Networks is [Indiscernible] email platform to standardize and optimize our own internal communications platform. In terms of our balance sheet, we have continued to reduce our long term debt each quarter which also has reduced our interest expense. During the first quarter, our debt was reduced 2.4% to $109.5 million versus the required repayment of 1.25% of the original balance for the quarter. Our cash balance at quarter end was $7.7 million. In summary the operational improvements we made in 2014 helped stabilize our cash generation last year and in the first quarter of 2015 We continue to remain focused on efficiently operating the business on growing our enterprise and business customer base, upgrading and expanding our IT networks and paying close attention to our cost structure. 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 doing our call today. Rob has already touched on several of the key performance elements and I’ll just provide a brief overview of other first quarter highlights and then we can go to questions. Beginning with the top line, total revenues decreased 6.1% in the first quarter of 2015 to $17.6 million from $18.8 million a year ago. Internet, transport and cable satellite services were basically flat year-over-year. Our managed services in hybrid cloud posting revenue from the reliable network’s acquisition increased by 9.6% compared to first quarter of 2014 reflecting the growth that Rob mentioned in the market and from our customer base. Local services and network access revenues both declined. The decrease in residential RLEC access line equivalents and revenue decreases due to the FCC’s inter-carrier compensation reform order accounted for the majority of the decrease, more specifically local services revenue decreased 7.2% to $6.3 million from $6.8 million a year ago, the decline in residential RLEC access lines, the impact of the FCC’s order which reduces or eliminates intrastate and local cellular revenue and CLEC market pricing accounted for a decrease of $0.3 million. Unfortunately RLEC decrease is recovered through the Connect America Fund which is categorized as an intrastate access revenue and it actually shows up with network access. The decline in long distance directory and special services revenue accounted for a decrease of $0.2 million. Growth in Hosted PBX revenue was offset by a decline in one time fiber installation in the first quarter of 2014. Network access revenue decreased 11.5% to $5.5 million from $6.2 million. The Connect America Fund and access recovery fees that we have instituted increased by $0.1 million. This increase was more than offset by lower state and special access charges of $0.5 million and lower user based fees and switched access of $0.3 million. Operating expenses in the first quarter decreased 11.3% to $13.1 million from $14.8 million. Cost of services decreased 12.1% to $8.3 million from $9.4 million reflecting the improvements initiated during the second quarter of 2014. Network circuit and toll costs decreased $0.5 million, customer services sales expense decreased $0.3 million and central office equipment and co-location expense decreased $0.1 million. Service performance credits received in Maine increased $0.2 million in first quarter of 2015 when compared to first quarter 2014. Selling, general and administrative expenses were unchanged at $2.6 million during both periods. Operating taxes increased $0.1 million in first quarter of 2015, reflecting a one-time credit in the same period of 2014. Other general and administrative expenses decreased by $0.1 million. Depreciation and amortization for first quarter 2015 decreased 19.2% to $2.2 million from $2.8 million. Depreciation decreased by $0.1 million in Missouri and by $0.4 million in the CLEC. The amortization of other intangible assets in New England decreased by $0.1 million. As a result of all those factors I just mentioned in the year-over-year increase in the CoBank dividend which Rob mentioned, adjusted EBITDA increased by $0.5 million to $8 million compared to $7.5 million a year ago. During first quarter, the company made scheduled access cash flow and voluntary payments on debt of $2.7 million flooring [ph] our debt to $109.5 million. We continue to meet all the covenants for the loan reducing our leverage ratio at 3.75. Capital expenditures were $1.5 million in the first quarter of 2015 compared to $1.4 million a year ago. As Rob mentioned, cash increased from the end of the year at $5.5 million to the end of the quarter at $7.7 million. That covers the highlights, there’s more details in the press release and the 10-Q probably will be filed tomorrow. Allen, if you want to provide directions, we can shift to taking investors calls at this time.

[Operator:]

[Operator Instructions] And at this time sir, I am showing no questions or comments over the phone lines. [Operator Instructions] And we will take our first question from Tucker Golden with Solas Capital.

[Tucker Golden:]

Good morning, had a question about the CoBank dividend. Just could you provide some color on what you’re expectations are generally going forward? And then also just in terms of Q1, is there anything seasonal about your business. Is there anything wrong with my taking the dividend out completely and looking at that as sort of the underlying earnings power of the business at this current state?

[Robert Souza:]

Tucker, thanks for the call. I’ll try to address the last part of your question and then turn over the second or the first part of your question to Curtis to talk about the CoBank fees. From a seasonality of the business I wouldn’t say there’s much fluctuation there. But as you point out its probably appropriate to look at the CoBank dividend and backed that out and look at our overall performance year-over-year. Certainly, I think we’ve done a good job in reducing expenses as our revenue has declined and I think we’ve done a very good job of making sure we’re running an efficient operation. So, overall I’m very pleased with the results and certainly CoBank what we receive from them added to our results at this point in time. And Curtis would you comment on our relationship with CoBank and how that varies.

[Curtis Garner:]

Sure. Tucker, let me just – I’ll do two things. First the CoBank dividend or payment is made up of three pieces. The first piece is a cash dividend and since they are corporative bank. They determine their dividend rate and then they use formulas to determine based on your amount of loan, value, et cetera, how much money you get. And they send cash. They really – they declare a dividend and then they declare a percentage of that dividend that’s cash and the balance is in equity patronage dividend. So this year we got $270,000 round numbers in cash dividend and we got another $90,000 dollars in equity dividends which aren’t cash to go on our balance sheet. In addition to that CoBank can choose from time-to-time to repatriate some of the equity patronage dividends that they give out. This year they’ve recovered $809,000 of our dividend – of our patronage dividends. So the total cash in was $1.79 million round numbers. Now, what that does is it means that on our balance sheet we have patronage dividends that are sitting out there. CoBank can choose when to recover those or to repatriate them or not too at all. And quite frankly, the quality of the banks performance in the year can determine both how much cash and patronage dividends are awarded and how many patronage dividends are recovered. So, there is – it’s difficult to know in the year-to-year environment how much money we’re going to get and project for that. The good news is where our point [ph] set it’s all in the first quarter and so we just – that is -- and that we keep it pretty straightforward and separated so you can see what the operations also verses back. Now, in a going forward mode, there was no – for this year there was no cost associated on our balance sheet with those dividends, but next year and in 2008 there is cost associated with those dividends on our balance sheet and what that would mean is that if we get a similar dividend to next year not all of that will go into cash, that’s good. But not all of that will flow through to the bottom-line as EBITDA, because we’ll have offset the cash, big cost that’s on the balance sheet. That maybe more than you want. But that’s kind of a complete story on it.

[Tucker Golden:]

Got it. That’s very helpful. Thank you. Okay. So if I’m trying to look at the underlying business say last four quarters start June, EBITDA might have been 7.4 – 7.2 in September. December, I’m not sure what to do. I think you wanted to add back $400,000 in severance and 300,000 of other one-time expenses if you could remind me with this would be great, but if add that back at 7.3, if we just add back the 7 it’s 7 even. And then this quarter its looks like 6.9 without the dividend. So, is it adequate way to look at sort of the trajectory, I know you fighting the decline in top line and doing what you can on the cost side to offset. Does that painting a good picture in your mind of what the current trajectory is of EBITDA?

[Robert Souza:]

I think it’s a reasonable way to project it. I believe, end of year, December numbers were reflected by some one-time severance payments that were made. It certainly had an impact. We also – the other thing that we’re doing is obviously continuing to try to grow top line revenue not only in the CLEC, but with the action the acquisition of reliable networks. And I believe that certainly holds promise as we move forward. But I think your – overall your characterization is correct.

[Tucker Golden:]

Okay. Is the internal goal, would you say the internal goal for EBITDA too flat or even grow it at some point in the foreseeable future or not?

[Robert Souza:]

Absolutely, the goal – our goal here is to maintain EBITDA levels at where they are, at or near where they are.

[Tucker Golden:]

And then final question how you’re thinking about intangible assets that recorded. I think now, if we look to it today, I think your debt probably short term, maturities on April of next year, how are you thinking now that we get down to the later stages of what the markets look like in terms of the refinancing opportunities, can you give us any update there please?

[Robert Souza:]

I don’t think I can go into the specific details per say Tucker, but we’re definitely well aware of the upcoming maturity of the credit facility and we’re in dialogue with our existing lenders as well as exploring other financing sources to refinance the facility. As I said, we’re well aware of that event and I think we’re doing the correct things as we move forward.

[Tucker Golden:]

Okay. Thanks good luck.

[Robert Souza:]

Thank you, sir.

[Operator:]

And we will take our next question from Phillip Gum [ph]. Please proceed sir.

[Unidentified Analyst:]

Yes. I think my question was on the same line as the last on the debt. But it would seem to me anytime I talk to a shareholder about the prospects of the company. There is two things, obviously the EBITDA and declining revenue, but it’s also the uncertainty of the refi or what would be needed and now it’s under a year. And I think it really -- it casts a poll [ph] I’m not having done by as far as the stock. And people I know there’s not many people that look at stock right now, because there’s so little of it. But if you look at the pricing or the stock over the last 18 to 24 months, you’ve paid $30 million down in debt and yet the stock has gone down instead of you would think its going up because the enterprise – unless the enterprise value went down by 30 or more. So, when I think – when I took to people about that they say, well, what happen if they can’t refi the debt and they have to do a restructure and that’s I would think that looking at the company that’s not the case, but I guess everybody but it was bid a couple of years ago but I was not thinking that was the case either. But the question is why isn’t that being moved along quicker so to get it behind you.

[Robert Souza:]

Phillip [ph], I appreciate the question and as I mentioned, we’re certainly aware of that maturity date. We continue to have dialogue with our existing vendors. I believe we’re doing that things that we need to do as company on a going forward basis.

[Curtis Garner:]

But it does look like by doing that you’re letting the common stock just float at $4 or between the $4 and $5 with only 3 million shares out. Its like cut a drift to the people who use to own it at 20 or more.

[Unidentified Analyst:]

Understand you comments, sir.

[Curtis Garner:]

Okay.

[Operator:]

[Operator Instructions] We would take our next question from Chris Brown with Aristides Capital.

[Chris Brown:]

Yes. Good morning, gentlemen. I guess I just had a little bit of follow-up on Tucker’s question. It’s good to hear that the goal is to maintain EBITDA at or near where it is. I guess we think what do you think the chances are of existing 2015 with a run rate EBITDA quarterly of say $6.7 million or $6.8 million per quarter or higher?

[Curtis Garner:]

I think we have to be little carefully because there’s a general rule we don’t do any prognostication projection or provide any guidance and so Rob just I think you have to keep them the back of your mind.

[Robert Souza:]

I certainly appreciate the question Chris, but to Curtis’s comment, I don’t we’re prepared to project EBITDA run rate. I think we are committed to doing what we need to manage with the company in a way where EBITDA continues to stabilize. And I think the actions that we’ve taken last year have gone to provide that point and we will continue to take the actions require to do that on a going forward basis.

[Chris Brown:]

I guess I’m little bit puzzled in that trajectory of revenue and EBITDA has really not kept up with the bankruptcy exist plan scenario. And as a shareholder that’s never really been explained is to what the delta has been, that would be helpful? I guess I don’t personally see a lot of visibility you guys are in a business where it seems like there is various federal and state reimbursement cuts that just happened on a almost continual basis and you guys have already taken a lot of costs out and then you’ve got basically a very small acquisition that’s growing maybe 10% year-over-year that’s basically putting back a few drops of revenue versus glasses that are spilling out for other. It sounds like reason, but regardless is there anything that you can say that would shareholders more confidence that we’re going to be able to either stem the revenue declines or take a lot more out of the business or because if I look at Tucker’s trajectory of EBITDA and I think about $6.7 million EBITDA or worse on a quarterly run rate for 2015 that basically puts us about four times leverage and has been committed previously that leverage ratio really isn’t coming down at all and I think that really speak why there hasn’t been any value added in the stock.

[Robert Souza:]

I think to your point on leverage ratio I think Curtis has explained it based on paying down debt and continuing to hold our EBITDA numbers fairly flat. We have actually reduced the leverage ratio. You’re right, are there headwinds in the industry. They’re certainly are I think every industry faces, that every telecom industry faces that at this point in time. But I think we’re doing what we need to do to maintain the existing customer base in the ILEC footprint and we’re still going to face competition. There’s no way to change that. And we continue to look to folks like Reliable Networks and our CLEC business to continue to grow revenue in that less regulated arena to offset those loss in the regulated businesses and we’ll continue to work that strategy very hard.

[Chris Brown:]

Got you. Thanks.

[Robert Souza:]

Thank you.

[Operator:]

[Operator Instructions] We will take our next question from Edward Painter with UBS.

[Edward Painter:]

Hi, guys, can you hear me?

[Robert Souza:]

Certainly can, yes.

[Edward Painter:]

Hi. So I guess this is the request to be a little bit more forthcoming with respect to what the lenders are saying with respect to refinancing the debt. And along the lines of it the stock has obviously done nothing for shareholders and appears to be kind of just drifting down to negligible value. Is there light at the end of the tunnel with respect to paying a dividend or doing anything to enhance shareholder value?

[Robert Souza:]

Edward, thanks, appreciate you comments. Certainly, we’re well aware of the events that are affecting our business. We’re going to be meeting with the Board as you folks know here in another week and we will continue to be dialoguing along all of the issues that have been raised on this call. And likely there will more information forthcoming when there is more information to share.

[Edward Painter:]

All right. Thank you.

[Robert Souza:]

Thank you, sir.

[Operator:]

And that this time, gentlemen, I’m showing no questions or comments over the phone lines. [Operator Instructions] And once again gentlemen, I’m showing no questions or comments over the phone lines…..

[Robert Souza:]

Allen, if there are no more questions at this time, I think we can wrap the call. Give another second here to see if anyone has additional calls or questions.

[Operator:]

[Operator Instructions]

[Robert Souza:]

Allen, it doesn’t appear that anyone else is going to ask questions. So I guess we can wrap up the call. I certainly appreciate all of you joining us this morning. Our focus over the last several years has been bringing our debt down to industry acceptable levels and managing the business effectively for the shareholder. We certainly welcome your questions and we will keep you informed regarding the developments to our business. Once again thanks for joining us.

[Operator:]

And that does conclude today’s conference. Ladies and gentlemen, we like to thank you for your participation. You may now disconnect.