Otelco Inc
Q4 2015 Earnings Call Transcript

Published: 10 Mar 2016

[Operator:]

Good day, and welcome to the Otelco Fourth 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, Roxanne, and welcome to this Otelco conference call to review the company's results for the fourth quarter and year ended December 31, 2015. 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, 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.

[Robert J. Souza:]

Thanks, Kevin, and good morning and welcome to our call. I want to begin today by providing a quick summary of the new credit facilities that we executed and funded earlier this year. Then I’ll provide some highlights regarding our fourth quarter results. Curtis will review our financial results and then we’ll take your questions. Over the past three years, Otelco has been extremely focused on improving its balance sheet, reducing our current credit facility borrowings by 62 million to stand at approximately 100 million at the end of 2015. As our industry landscape has changed, the company has adjusted its financial strategy to redirect cash to reduce our leverage toward current industry expectations. We are very pleased with completing the refinance, especially with the current uncertain market conditions and we appreciate the effective efforts of Piper Jaffray who marketed the transaction for us. Now let me provide a quick summary of the new credit facilities totaling 105.3 million in the aggregate. Under the terms of the new senior loan agreement, Cerberus Business Finance has extended a new five-year first lien loan facility to Otelco in the aggregate principle amount of 85 million and also provided a new $5 million revolving credit facility, which remained undrawn at closing. The first lien term loan bears interest at a rate equal to at the company’s option either a reference rate plus an applicable margin equal to 5.5% or a LIBOR rate plus an applicable margin equal to 7.75% with a 1% LIBOR floor. Quarterly principle payments of 1 million would be required as well as 75% of an annual excess cash flow payment. In addition, NewSpring Mezzanine Capital has provided a new 5.5-year senior subordinated term loan facility in the amount of 15.3 million. The senior subordinated term loan bears cash interest at 12% paid monthly and paid in kind interest at 2%, which would be added to the balance sheet on a quarterly basis. There are prepayment premiums associated with the first four years of the first lien and three years of the second with no call or refinance option. The total borrowings together with cash on hand were used to refinance the company’s existing bank-syndicated credit facility, which would have matured on April 30, 2016, as well as paid all transaction costs. The detailed agreements were attached to our 8-K announcement of the transaction. Coincident with the transaction, the Class B shares held by the lenders were exchanged for an equal number of Class A shares. Let me now move on to the fourth quarter results. During the fourth quarter, we produced revenue of 17.7 million and adjusted EBITDA of 7.3 million compared to 18.2 million and 6.7 million a year ago. The decline in revenue is primarily attributable to the loss of residential RLEC customers and the impact of the FCC's inter-carrier compensation reform order, both of which are not new trends. Internet revenue increased while our other revenue categories remained basically flat. The network and operation improvements Otelco initiated in the last two years continue to produce reductions in our operating costs this quarter and for the full year of 2015. The fourth quarter of 2015 adjusted EBITDA improved over the same period last year and over third quarter 2015 demonstrating the long-term viability of the actions. The company remains focused on generating cost improvements across our markets and on top line revenues through comprehensive and consistent product development, product pricing and sales and marketing efforts. Our business access line equivalents were basically flat during fourth quarter 2015 when you exclude wholesale lines lost due to one customer that was acquired by a cable provider. Our Hosted PBX product and the Classifax offering continue to grow as the market maintains its migration to IP-based products. I’ll now ask Curtis to summarize the financial results and then we’ll take your questions. Curtis?

[Curtis L. Garner:]

Thank you, Rob. We appreciate everybody taking their time to join our call today. Rob already touched on several of the key performance elements and I’ll provide a brief overview of our fourth quarter highlights as contained in the press release. And then we can open it up and take your questions. Beginning on the top line, while the decrease in residential RLEC access line equivalent and revenue decreases due to the FCC's inter-carrier compensation reform order caused total revenues to decrease 2.5% in the fourth quarter to 17.7 million from 18.2 million a year ago, our unregulated services were flat or increased for the quarter. Looking at some of the details, local services revenue decreased 4.7% to 6.2 million from 6.5 million. The growth in our Hosted PBX revenue was more than offset by the decline in RLEC residential voice access lines, the impact of the FCC's order which reduces or eliminates intrastate and local cellular revenue, and some smaller decreases in directory revenue and long-distance revenue. Network access revenue decreased 6.1% to 5.5 million from 5.9 million a year ago. A small increase in the Connect America Fund was offset by declines in end user based fees. Special access charges decreased by 0.2 million and switched access decreased by 0.2 million. There was also a one-time fiber installation revenue in 2014 that had no similar revenue in the fourth quarter of 2015. Turning now to the unregulated services, Internet revenue increased 5.4% to 3.8 million compared to 3.6 million a year ago. Transport services revenue increased 1.3% to just under 1.4 million from just over 1.3 million a year ago. Video and security revenue decreased 13,000 to basically hold at just under 0.7 million, the same as the year ago. Increases in pay-per-view and security revenue were more than offset by cable subscriber attrition. Cloud hosting and managed services revenue increased 3.1% while still rounding 2.2 million. In all the revenue categories, except transmission services, the quarterly percentage change for fourth quarter of 2015 was better than the annual percentage change in 2015 indicating positive traction with all our markets. Operating expenses in the fourth quarter decreased 11.9% to 12.6 million from 14.4 million in the same quarter of 2014. Cost of services decreased 6.8% to 8.2 million from 8.8 million a year ago. Network circuit and loop costs decreased 0.3 million and access expense decreased 0.2 million reflecting the operational improvement that Rob referenced. Customer service and other operational expenses decreased 0.2 million while Internet bandwidth cost increased 0.1. Selling, general and administrative expenses decreased 25.5% to 2.3 million from 3.1 million a year ago. The decrease was primarily the result of executive expenses decreasing by $0.5 million, of which 400,000 was associated with a separation and consulting agreement in 2014, which had no comparable expense in 2015. Depreciation and amortization decreased 13% to 2.2 million from 2.5 million. Depreciation decreased 0.1 million in Missouri and 0.1 million in the CLEC and the amortization of other intangibles also decreased by 0.1. As a result of the factors I just mentioned, net income increased 0.9 million from fourth quarter of 2015 over fourth quarter of 2014. Adjusted EBITDA increased 0.8 million to be 7.4 million in fourth quarter of '15 compared to 6.6 million in fourth quarter of '14. During the fourth quarter, the company made scheduled and excess cash flow payments on our debt of $2 million lowering our debt to 100.1 million at the end of 2015. As Rob noted, we entered into and funded new five-year senior and five and a half year subordinated loan facilities in 2016 and paid off the bank debt. Capital expenditures were 2 million for the fourth quarter compared to 1.5 million in the fourth quarter of 2014, as we continue to enhance our network bringing CapEx to 6.6 million for the year. CapEx has run between 9% and 10% for most years since the company’s IPO in 2004. Cash increased from 5.1 million at the end of 2014 to 6.9 million at the end of 2015. I think that covers the highlights for the quarter, Rob, with some additional details also in the press release, our SEC Form 10-K should be filed on Friday and provide additional details for the full year of 2015 results. Roxanne, if you want to provide the directions, we can shift to taking investor questions at this time.

[Operator:]

Certainly. [Operator Instructions]. We’ll take our first question from David Waters from Alluvial Capital. Please go ahead.

[David Waters:]

Hi, guys. Thanks for reporting today. Just a quick question about the CoBank patronage shares that remain on your balance sheet. Now that CoBank is no longer a lender, do you think they’ll be redeeming those shares and will those proceeds be used to amortize senior debt?

[Robert J. Souza:]

Curtis, why don’t you take that one please?

[Curtis L. Garner:]

Yes. CoBank, as we understand it, would have 10 years to redeem the patronage shares as their current bylaws I think show. So over the next 10 years, we should receive I think it’s about $3 million, $3.5 million in cash from that. That cash would be considered as part of the excess cash flow calculation and therefore a portion of that will be used to reduce the senior debt.

[David Waters:]

Okay, thanks. Good to know. Also, I know that you don’t have a ton of flexibility as far as excess cash flows go with the 75% sweep. But do you see your priority more as reducing senior debt in order to refinance that more quickly or reducing total debt as you reduce total interest expense?

[Curtis L. Garner:]

I think it’s really total debt to reduce overall interest expense and continue the push to improve overall leverage ratio, which then should provide us additional options.

[David Waters:]

I see, okay. Thanks, guys.

[Robert J. Souza:]

It will be difficult though. The subordinated debt doesn’t get paid down until the senior debt’s paid, so we can’t pick and choose where we apply those cash.

[David Waters:]

I see. Thanks.

[Operator:]

[Operator Instructions]. It appears we have no further questions at this time. I’ll turn the call over to our presenters for any additional or closing remarks.

[Robert J. Souza:]

We certainly want to thank you for participating in the call. It’s always our pleasure to provide information to you. We thank you for your participation and we look forward to talking to you again next quarter. Thanks so much.

[Operator:]

This does conclude our conference for today. We do appreciate your participation. You may disconnect at any time, and have a wonderful day. Speakers, please hold the line for post conference.