Otelco Inc
Q2 2015 Earnings Call Transcript

Published: 5 Aug 2015

[Operator:]

Good day and welcome to the Otelco Second Quarter 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 Mr. Kevin Enda. Please go ahead, sir.

[Kevin Enda:]

Thank you, Tanisha, and welcome to this Otelco conference call to review the company’s results for the second quarter ended June 30, 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 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 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 describes such risks and uncertainties, listeners 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 SEC. With that stated, I’ll now turn the call over to Rob Souza.

[Rob Souza:]

Thank you, Kevin and good morning and welcome to our call. Let me begin by providing some highlights for the quarter. Curtis will then review our financial results and then of course, we'll take your questions. During the second quarter, we produced revenue of $17.9 million and adjusted of EBITDA of $7.1 million compared to $18.4 million and $7.4 million a year ago. Over the period, we’ve offset more than half of the year-over-year decrease in revenue with cost and expense things. When you compare second quarter 2015 adjusted EBITDA with first quarter 2015 adjusted EBITDA, excluding the benefit of our annual CoBank dividend, adjusted EBITDA showed a sequential increase of $0.2 million as a result of our continued focus on cost containment and elimination. The network and operational improvements initiated during 2014 continue to have a positive impact on our earnings, both sequentially and year-over-year. Consolidation of network infrastructure and reductions in the underlying cost of goods are key parts of these improvements and we continue to focus on finding these and other improvements in 2015. Our business access line equivalents grew just under 1% during second quarter and now represent more than 54% of our total access line equivalents. Hosted PBX and Classifax product offerings grew this quarter, as did our wholesale network product. Hosted PBX now accounts for nearly 35% of our CLEC retail voice lines. Reliable Networks continues to expand its service platform, adding capacity and capabilities located in our Portland data center. During second quarter, we expanded and adjusted the operational structure of the team to allow its senior leaders to focus on sales opportunities. In addition, we’re in the process of moving our corporate email operations onto [ph] their platform and will utilize their cloud–based shared Sequel server platform to host our financial system by the end of third quarter. This will result in additional cost efficiencies for the company. Reliable networks continues to expand its service platform adding capacity and capabilities located in Portland Centre. During second-quarter, expanded access to the operational structure of the team to allow the senior leaders to focus on sales opportunities. In addition, we are in the process of moving our corporate email operations to the platform and will utilize the year cloud-based server platform to post our financial system by the end of third quarter. This will result in additional cost efficiencies for the company. In terms of our balance sheet, we’ve reduced our long-term debt each quarter, which has also reduced our interest expense. During second quarter, our debt was reduced 4% to $105.1 million versus the required repayment of 1.25% of the original balance per quarter. For the first six months of this year, our debt has been reduced by $7 million or 6.3% and our cash balance at quarter end was $6.9 million. I’ll now ask Curtis to jump in and 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. Rob touched on several of the key performance metrics and I’ll provide a brief overview of other second quarter highlights and then we can open it up for questions. Beginning on top line, total revenues decreased 3.2% in the second quarter to $17.9 million from $18.5 million a year ago. Local services and network access, 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 5.5% to $6.3 million from $6.7 million a year ago. Growth in Hosted PBX revenue of $0.1 million was more than offset by 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, which accounted for a decrease of $0.3 million. A portion of the RLEC decrease is recovered through the Connect America Fund, which is categorized as network access revenue. The decline in long distance, directory and special revenue accounted for a decrease of $0.2 million. Network access revenue decreased 5.6% to $5.6 million from $5.9 million a year ago. The Connect America Fund and access recovery fees increased by $0.2 million. This increase was more than offset by lower state and special access charges of $0.4 million and lower user based fees and switched access of $0.1 million. Internet revenue increased 3.4% to $3.7 million compared to $3.6 million a year ago. Transport services revenue was $1.3 million in both quarters of this year and last year, but reflected a 1% increase in revenue. Cable, IP and satellite television revenue decreased 3.9% to just under $0.7 million from just over $0.7 million in last year. Increases in pay-per-view revenue were more than offset by cable subscriber attrition. Cloud hosting and managed services revenue was unchanged at $0.2 million. Now, I will focus on operating expenses, in the second quarter decreased 6.6% to $13.1 million from $14 million in the same quarter last year. Cost of services decreased 2.2% to $8.4 million from $8.6 million a year ago. Network circuit, toll and Internet costs decreased $0.1 million and customer service and plant operations expense decreased $0.1 million as a result of the operational reductions implemented over the past year. Selling, general and administrative expenses decreased 7.1% to $2.5 million from $2.6 million. Legal and other G&A expenses decreased $0.1 million and earn-out stock compensation decreased by $0.1 million. Depreciation and amortization decreased by 19.3% to $2.3 million from $2.8 million same quarter last year. Depreciation decreased by $0.1 million in Missouri and by $0.4 million in the CLEC. Depreciation increased by $0.1 million in Alabama and the New England RLECs and Reliable Networks. The amortization of other intangible assets decreased by $0.1 million. As a result of the factors that Rob and I just mentioned, adjusted EBITDA decreased $0.3 million to $7.1 million when compared to $7.4 million a year ago. But as Rob noted, adjusted EBITDA increased $0.2 million sequentially from first quarter of this year when you exclude the annual benefit - annual CoBank dividend that occurs in the first quarter. During the second quarter, the company made scheduled excess cash flow payments on our debt of $4.4 million, lowering our debt to $105.1 million. We continue to meet all covenants for the loan reducing our leverage ratio to 3.63. Capital expenditures were $1.5 million in the second quarter, which was the same as last year, and as Rob noted, cash be at $6.9 million at the end of the quarter. That covers the highlight from the quarter with additional detail in the press release, our SEC, form 10-Q should be filed on Friday. Tanisha, if you can provide directions, we can shift to take any investor questions at this time.

[Operator:]

[Operator Instructions] We’ll go ahead and take our first question from Sam Yake [ph], he is a private investor. Please go ahead, your line is open.

[Unidentified Analyst:]

Congratulations on the strong quarter. My question is when I look at your financial statements this morning, it seems like for the first six months of the year, you paid - you had $2.5 million in income tax expense, but you only paid a $11,000 in cash taxes. If I am building the financial model, how should I think about income tax cash taxes for the rest of 2015 and thereafter?

[Rob Souza:]

Probably, you’d be best served, Curtis, why don’t you take that question and explain what’s going on there?

[Curtis Garner:]

At the end of 2014, as you know the administration changed the tax law to allow bonus depreciation to be considered. We had started paying taxes in December based on the assumption that would be no bonus depreciation in ‘14 or ‘15. So, with the bonus depreciation in ‘14, we basically had overpaid ‘14 taxes and had overpaid our prepayment of first quarter of ‘15 taxes. So, first and second quarter saw no cash tax payments. Because of that change, because we had basically a credit with the government, the cash taxes will return to a more consistent rate beginning in third quarter and for the rest of the year.

[Unidentified Analyst:]

Okay, so, that’s going to go. And so, just use the statutory rate for the periods going forward?

[Curtis Garner:]

It’s difficult to actually do the cash taxes from the income statement simply because we’ve taken bonus depreciation for a number of years. So, our tax depreciation is actually lower than our book depreciation at this point in time plus there is a little bit difference in how the tax history, the expenses associated with management bonuses and more bonuses in stock than they do in tax. So, it’s a little difficult to project them and we don’t give - they don’t announce and advance what their cash taxes would be. But I think the rate would be consistent and will just be just be impacted by a couple of items that what might be hard to see in the income statement.

[Unidentified Analyst:]

Okay, that answers it. Thanks so much. I mean, you guys are really doing quite a good job and I wish you all the best of luck.

[Rob Souza:]

Thanks so much.

[Operator:]

[Operator Instructions] Will go ahead and take our next question from Tucker Golden with Solas Capital. Please go ahead. Your line is open.

[Tucker Golden:]

Hi, Rob and Curtis, couple of questions. In terms of comparison, you talked about sequentially, you talked about when I asked last quarter about seasonality. Is there any seasonality in your revenues? It seems like historically the June quarter has been a little bigger. Just trying to understand if the business is really stable here at $7 million of EBITDA a quarter or if I should look at the year-over-year decline from your K [ph] and feel like maybe that’s a more indicative picture of the trend?

[Rob Souza:]

Thanks, Tucker. Good question. If there is any type of seasonality, it’s primarily within our regulated FCC, RLEC and fees. And I would say it’s rather minor. We do have subscribers in some of our locations who tend to head south in the winter and either removed service or go to overdo straight and those changes happen year-over-year but it really is I would say relatively minor in the scheme of things. So, I don’t think there is much seasonality that you see there. Of course, the other impact that always happens at this point in time is access rate adjustments that will happen beginning July 1, but other than that, no real seasonality that I could point to that would indicate huge fluctuations in the overall topline.

[Tucker Golden:]

Okay. Sounds good. So, do you think that $7 million a quarter is something you can do going forward?

[Rob Souza:]

I don’t know that I have ever in my brief tenure here predicted what we would do on a quarter-over-quarter basis, but certainly feel good about the moves that we continue to make as a Company whether it’s in the operational efficiencies or what we are trying to do to drive more topline revenue and I think I’ll leave it at that.

[Tucker Golden:]

Okay, I mean, you’ve talked about Reliable Networks as, I know one of your growth drivers, I noticed that actually looking at the adjusted EBITDA reconciliation, the add back for stock based comp for the earn out is negative, does that mean you’re having a reverse, are they trending below the earn out projections at this point? What cause that adjustment to your negative?

[Rob Souza:]

I think there were comments that I made that indicated that we needed to kind of look at Reliable Networks and make some minor changes within the organization to make sure we’re focusing on the topline revenue piece of the business. We’re basically, what about 18 months in, we certainly, I believe done a good job of integrating the company into the Otelco family but as with any company that comes on board, we had to make a few changes there, but feel confident overall with their ability to deliver the performance that we expect from them.

[Tucker Golden:]

Okay, but [indiscernible] correctly, that they are below their earnout, below where they were last quarter with respect to their earnout hurdles?

[Rob Souza:]

I would say that’s in our factored characterization.

[Tucker Golden:]

Okay let’s see, I guess with eight months to go at this point, I think last quarter you said when you had progress made, you would give us, shareholders some indication of which way you’re heading or just some summary overview, I mean as we get closer and closer and there is still no update, we get more and more concerned. What can you tell us today about what you’re going to do with this refinancing or other options?

[Rob Souza:]

I hate to disappoint you Tucker but I really can’t provide you a whole lot of specific details other than what I’ve done in the past. We certainly, I mean the Board and senior management is certainly focused on the issue of our debt structure and we’re spending significant time considering that and working that issue at this point in time.

[Tucker Golden:]

Okay. All right, because of that do you consider yourself restricted from buying stock, I mean it would be nice to see management share a little more in kind of risk reward proposition of being shareholder, see that they’re thinking a little more like honors?

[Rob Souza:]

Again, I can’t speak for anyone other than myself, certainly I have certain restrictions and normal restrictions that are placed upon me from the standpoint of open windows to trade but I really have to differ it to the other directors to answer that type of question for you.

[Tucker Golden:]

How much are you spending on moving your email, moving your financial reporting systems and is that added back to adjusted EBITDA or is that not added back?

[Rob Souza:]

Well, the transition hasn’t completed but anytime there is any type of intercompany revenue or intercompany expense, that’s always accounting for when we report results and before I maybe step on someone’s else toes, Curtis maybe you could describe a little bit of how that would happen, when those expenses and revenues appear.

[Curtis Garner:]

The expenses would be relatively minimal, where we already have [indiscernible] software system, we’re just upgrading it to the newer version of it and then moving it over to SEQUEL servers on through allow the platform, so it will be expensed, it will be expensed in third quarter, there will be a little bit of Capex but it will be minimal.

[Tucker Golden:]

Okay. And how would that impact earn out calculations for that acquisition?

[Curtis Garner:]

It won’t, it will not be excluded from earnings.

[Tucker Golden:]

Okay, but it won’t be included toward their earn-out results?

[Curtis Garner:]

No, that’s not - they really don’t benefit from the CapEx and as Rob pointed out, they are restructuring the sales side of the equation because to focus on higher sales growth, so I don’t think you will see any impact in the balance of the year.

[Tucker Golden:]

Okay. We look forward hopefully to a near-term resolution of this maturity issue. It’s certainly got us wondering what’s going on. Thank you.

[Rob Souza:]

Thank you, Tucker.

[Operator:]

[Operator Instructions] We will go ahead and take our next question from Peter Carmack, he is a private investor. Please go ahead. Your line is open.

[Peter Carmack:]

Good morning, guys. Thanks for taking the call. Previous question addressed some of my issues as it relates to the refinanced process, but I did want to circle back and I guess ask more of a kind of a theoretical question as it relates to leverage ratios. And you may have talked about this in previous calls, but at what level generally are you guys comfortable switching objectives from paying down debt to potentially looking at other uses of cash, acquisitions and kind of stock repurchases?

[Rob Souza:]

I think that’s a difficult question to answer obviously coming out of the restructure. We had certain obligations out of that for uses of capital. It will be one of the things that we focus on as we look for a new debt instrument or an extension of a debt instrument depending on what we are able to acquire. And based on that that would certainly give us maybe some more latitude, more flexibility going forward, but until those particular details work out, really have no specific answer to give you as to when we would turn that corner as I think you put it into maybe focus more money in the CapEx sector.

[Peter Carmack:]

CapEx meaning what exactly?

[Rob Souza:]

Whether you are investing more than we do on an annualized basis today. I think we invest a great deal of money in our capital equipment whether it’s outside plant, switching infrastructure IT networks, whatever it happens to be. And I understood your question as to when would you begin to maybe change your direction there, is there a point in time where you would change and that’s where my point of reference is coming from.

[Peter Carmack:]

Very well. Thank you.

[Rob Souza:]

Thank you.

[Operator:]

[Operator Instructions] And it does appear we have no further questions at this time, I will now hand it back over to our speakers for any additional or closing remarks.

[Rob Souza:]

Well, I just want to thank everyone for being here. We appreciate you joining us this morning. As you’ve noted, our continued focus is reducing our debt, bringing our debt down while managing the business what we think very effectively for the shareholder. We are always welcome to your questions and we definitely plan on keeping you informed regarding developments with the business at that point. I think that’s it.

[Operator:]

And that does conclude today’s program, I’d like to thank you for your participation. Have a wonderful day and you may disconnect at any time.