Otelco Inc
Q3 2015 Earnings Call Transcript

Published: 7 Nov 2015

[Operator:]

Good day and welcome to the Otelco Inc. Otelco's Third 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 Inda. Please go ahead, sir.

[Kevin Inda:]

Thank you, Tanisha, and welcome to this Otelco conference call to review the Company's results for the third quarter ended September 30, 2015. Conducting the call today will be Rob Souza, President and CEO of Otelco, 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 statement involve known and unknown risks, uncertainties, and other unknown factors that could cause the actual results of the Company to be materially different from 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, anticipates, plans, or similar terms to be uncertain or 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 will turn the call over to Rob Souza.

[Rob Souza:]

Thanks, Kevin, and good morning and welcome to our call. I will begin by providing some highlights for the quarter. Curtis, of course, will then review our financial results and then we will take any questions that you may have. During the third quarter we produced revenue of $17.9 million and adjusted EBITDA of $7.2 million, compared to $18.4 million and $7.3 million a year ago. We are pleased that we have been able to successfully offset much of the lost revenue from residential customers and inter carrier compensation with network costs and operational expense savings. Revenue from internet, transport services, cable and satellite, and managed services is growing or unchanged from last year as we continue to focus our attention on these unregulated services that we offer. Our business access line equivalents grew just under 1% during the third quarter and are up 1.6% this year, and now represent nearly 55% of our total access line equivalents. Our hosted PBX and Classifax product offerings continue to grow this quarter. Hosted PBX now accounts for nearly 36% of our CLEC retail voice line. And the third quarter addition of our new director of marketing and product development, who will be responsible for all marketing and product activities, coupled with the New England based operations realignment will provide benefits to the entire company. In terms of our balance sheet, we have continued our focus on the reduction of our long term debt, which also reduces our interest expense. We expect by the end of the year we will have reduced our senior debt by more than $60 million from the level prior to our restructuring. At quarter's end the debt was at $102 million and with our cash balance of $5.9 million net debt was $95.1 million. I will now ask Curtis to summarize the financial results for you.

[Curtis Garner:]

Thank you, Rob. We appreciate everyone taking their time to join our call today. Rob touched on several of the key performance elements and I will provide a brief overview of other third quarter highlights as contained in the press release. And then we will open it up for questions. 10-Q should be filed tomorrow with some additional detail. Beginning with top line, while the decrease in residential RLEC access line equivalents and revenue decreases due to the FCC's Intercarrier Compensation reform order caused total revenues to decrease by 3.1% in the third quarter to $17.9 million from $18.4 million in the year ago, our unregulated services, as Rob mentioned, were flat or increased for the quarter. Looking at a few of the details, local services revenue decreased 6.5% to $6.3 million from $6.7 million. The growth of our hosted PBX revenue was more than offset by the decline in RLEC residential voice access lines, the impact of the FCC's order that I mentioned which also eliminates or reduces intrastate and local cellular revenue, and small decreases in directory revenue and long distance revenue. Network access revenue decreased 4.4% to $5.6 million from $5.8 million. Switched access, including projected cost study adjustments, increased by $0.2 million. This increase was more than offset by lower state and special access charges of $0.3 million and lower Connect America Fund, up 0.1 million. Turning now to the unregulated services, internet revenue increased 1.8% to just over $3.7 million from just under $3.7 million a year ago. Transport services revenue increased 2.6% to just under $1.4 million from just over $1.3 million a year ago. Cable IP and satellite television revenue decreased by $6,000 to basically hold at just under $0.7 million, the same as a year ago. Increases in pay-per-view revenue were more than offset by cable subscriber attrition. Cloud hosting and managed services revenue increased 13.1%, so that still rounds to $0.2 million. Turning to expenses, operating expenses in the third quarter decreased 6.2% to $12.9 million from $13.8 million. Cost of services decreased 5.3% to $8.3 million from $8.6 million a year ago. Network circuit access and toll costs decreased by $0.4 million, and customer service and plan operations expense decreased by $0.1 million as a result of the operational reductions we have implemented over the past year. Selling, general, and administrative expenses decreased 3.7% to $2.5 million from $2.6 million. The decrease reflected a reduction in the earn-out stock compensation of $0.1 million. Just to note, that does not impact EBITDA. And legal and employee expense costs were down by $0.1 million. These were partially offset by higher operating taxes and uncollectible expense, which reflected some one time benefits experienced in 2014 that aren't replicated this year. Depreciation and amortization decreased 12.2% to $2.2 million from $2.5 million. Depreciation decreased by $0.1 million in Missouri and $0.1 million in the CLEC and the amortization of other intangible assets decreased by $0.1 million. As a result of all these factors, adjusted EBITDA decreased by less than $0.1 million to $7.2 million in both periods. During third quarter the Company made scheduled and excess cash flow payments on a debt of $3.2 million, as Rob noted, bringing it down to $102 million. We continue to meet all our covenants for the loan, reducing our leverage ratio to 3.54. Capital expenditures have continued to run at about $0.5 million a month, or $1.6 million for the third quarter of this year and the third quarter of last year. Cash increased from $5.1 million at the end of the year to $5.9 million this quarter. That covers the highlights for the quarter with some additional detail in the press release and in the 10-Q when that's filed. Tanisha, if you will provide directions, we can shift to taking investor questions at this time.

[Operator:]

[Operator Instructions] And we can go ahead and take our first question from Tucker Golden with Solas. Please go ahead. Your line is open.

[Tucker Golden:]

Sorry, I missed the first two minutes of the call, so maybe you have addressed this, but I don't think you have. I would like to know and I understand that specific disclosure might be difficult. But I would like to know your general confidence level and your ability to refinance before the maturity of your existing facility without any equity dilution, be it new shares, warrants, et cetera.

[Rob Souza:]

Tucker, I really can't address that. We certainly continue to realize that the credit facility matures in April and we certainly intend to refinance the credit facility prior to maturity. We are working it and at this point I think that's about all I can say.

[Curtis Garner:]

I think it's better if we don't try to preannounce or guide or anything like that. We're better off if we just once we've got it all done then we will let the whole world know about it at the same time.

[Tucker Golden:]

Should I take that answer to mean that some sort of dilution is within the realm of possibility at this point?

[Rob Souza:]

I don't think you can take that either yes or no from there.

[Tucker Golden:]

It's hard for me because I can't imagine you would be haggling over a small incremental change in cost of debt or certain flexibilities, while the equity kind of hangs in the balance. I guess that's just a statement. But I just can't imagine you're being penny wise and pound foolish, which leads me to believe that you must not be able to refinance on normal traditional terms because you've been at it for a couple of quarters as we can see from those capitalized expenses on the cash flow statement with respect to the debt refinancing efforts. And we haven't seen anything come to happen and I just can't imagine you are holding out for something small at this point. That's I will just put that out there. That's my baseline assumption I think that's probably consistent with the other shareholders.

[Curtis Garner:]

You can certainly make that assumption and you can certainly have that position. I'm not sure that anything we've said or done would necessarily support either that or it being correct or incorrect.

[Tucker Golden:]

Okay. I mean it's not what you've done it's what you haven't done. Thanks.

[Operator:]

And will go forward and take our next question from Sam Yake, who is a private investor.

[Unidentified Analyst:]

Good morning. I have more of a question along the lines of the previous person, and I just have an observation. To me, it is abundantly clear and I think I said this on the prior call that what needs to be done is Otelco has to be sold. From every angle I look at this, it's the only reasonable conclusion. If you look at your assets, they can be maximized better by a larger company. If you look at the stock, the stockholders the company is so small and the costs of being public are so high and your stock is going to trade at a constant chronic discount to intrinsic value, even if you refinanced the credit facility successfully, which as the previous caller said is a big if. I look at the environment we are in it's the perfect time to sell a company like Otelco. It just doesn't make any sense for me, when I think about it, to do anything else. And I have to say one of the things that troubles me is I don't have that much stock, but I have more stock than almost every member of management and the Board of Directors, which I hope you are considering the best thing for the shareholders. And the fact that you don't own that much stock does concern me a little bit, because the company needs to be sold. I have to just put it out frankly. It's very, very clear. I know you can't really maybe comment on that but that's my observation.

[Curtis Garner:]

Mr. Yake, we certainly appreciate your opinion and we are attentive to your concerns.

[Unidentified Analyst:]

And I will also say, especially when you start talking about equity dilution, I don't think I hope that's not a possibility. But when you have you have the perfect solution for all constituencies, which is to sell the company, to talk about anything else, is to me it just doesn't make any sense. I have to be frank about it. I know you can't comment on it, it's sensitive, but I just wanted to get that out there because I think it is very, very clear what needs to be done. So thank you.

[Curtis Garner:]

Just so we're clear, the Company has not mentioned anything about equity dilution.

[Unidentified Analyst:]

I understand. But even if I assume that you can do a perfect refinancing at a great interest rate with relaxed covenants and everything, I would still say it's abundantly clear the company needs to be sold. So even with no dilution I think Otelco is like an orphan stock. It's just too small. And even if you get a successful refinancing, the stock is going to trade at a chronic discount. Then I look at it operationally, like I said, you have underinvested in CapEx for a number of years. I understand you are handcuffed. You can't really do anything about that, but you can do one thing, you can sell out to a bigger company who can maximize the value of the assets much better. I don't want to go on about that, but to me it's abundantly clear what needs to be done.

[Rob Souza:]

Thank you.

[Operator:]

[Operator Instructions] And we can go ahead and take our next question from Chris Brown with Aristides. Please go ahead. Your line is open.

[Chris Brown:]

I was actually just wondering if you could give us any kind of color in terms of any important events coming up from a regulatory perspective over the next 12 months that are going to affect pricing. I guess that's first question.

[Rob Souza:]

When you refer to regulatory events, are you referring to anything with the FCC or can you be more specific?

[Chris Brown:]

Correct, correct.

[Rob Souza:]

Sure, we certainly recognize the FCC continues to look at rate of return carriers, which we happen to be one, from a standpoint of the Connect America Fund. They are continuing to do their analysis and we're not sure exactly where the FCC will land. We are certainly attentive and watching their activity closely, but at this point in time I don't believe we have enough information to know exactly what they're going to be doing with companies such as ours.

[Chris Brown:]

Okay. Can you talk about the business that you acquired in the cloud hosting and services space, how that's coming along and what the developments are there?

[Rob Souza:]

Sure. You're referring to Reliable Networks?

[Chris Brown:]

Correct.

[Rob Souza:]

We continue to look for good things from Reliable Networks. I believe, as we discussed on our last call, we made some changes to allow them to be more active from a standpoint of generating additional business. We believe that we are poised to make great strides in that area. We have a strong team. I think the addition that I mentioned on the beginning of the call of adding some marketing and product development oversight as well will certainly go a long way to being successful.

[Chris Brown:]

Okay. Then can you speak to how things are going in terms of your core markets, any exciting developments in terms of other security product or more schools to sell it to or any significant changes or developments there?

[Rob Souza:]

I think that what we continue to be excited about is our hosted PBX and really the full IP line of services that we offer. Generally speaking, they are very well received and we believe the market continues to look more and more in that direction to purchase those types of services. So from that perspective, schools and libraries, we continue to be very active with them, ensuring that we are providing them adequate service and additional bandwidth. There's certainly additional opportunities in the wireless sector providing connectivity to towers. And we again, as I say, that hosted IP product coupled with IP fax and the cloud hosting business really is the area of focus and will continue to be.

[Chris Brown:]

My last question is kind of speculative, but can you kind of give do you have any opinion, if you had to guess, when the last plain old telephone service line in your area or in one of your areas is turned off, is that close enough yet where we can say, hey, we think 10 years out or 15 years out there's going to be a date or what do you think the future holds there?

[Rob Souza:]

I don't think that I'm in a position to predict that. I've got to believe wire line services are going to still be a valuable resource for many individuals, especially as you think of folks as they age out and have families, they are less inclined to continue to rely strictly on a wireless product. Business line services are still going to be connected to a physical wire. The way the service is delivered may not be the same way. It may be in an IP format, as I've indicated, but certainly you are going to continue to be connected. So I think the poles, wires, and cable resources that we own as an operation will still be valuable for a long time to come.

[Operator:]

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

[Rob Souza:]

Thank you. We certainly appreciate you joining us this morning. Our focus over the last several years has been to bring down our debt to an industry acceptable level and managing the business effectively for the shareholders. We always welcome your questions and certainly listen to your opinions, and we plan on keeping you informed regarding the developments in our business. Thanks so much for joining the call.

[Operator:]

That does conclude today's program. We would like to thank you for your participation. Have a wonderful day and you may disconnect at any time.