Otelco Inc
Q3 2013 Earnings Call Transcript

Published: 12 Nov 2013

[Operator:]

Good day, ladies and gentlemen, and welcome to the Otelco conference call. Today’s call is being recorded. At this time for opening remarks and introductions, I’d like to turn the call over to Mr. Kevin Enda. Please go ahead sir.

[Kevin Enda:]

Thank you, Serra, and welcome to this Otelco conference call to review the company’s results for the third quarter ended September 30, 2013. Conducting the call today will be Michael Weaver, 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 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 describes such risks and uncertainties, listeners are urged to consider statements labelled 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 will turn the call over to Mike Weaver.

[Michael Weaver:]

Thanks Kevin. Good morning, everyone, and thanks for joining our call. I am just going to provide some great financial and operational highlights for the quarter, and then I will turn the call over to Curtis for a summary of our financial information. After which we will be glad to take your questions. For the third quarter our business generated total revenues of $19 million, operating income of $4.3 million and adjusted EBITDA of $7.3 million. We also returned to much more typical capital spending level this quarter after a year of controlled investment during our balance sheet restructuring as we’ve spent $1.6 million on capital equipment which we believe will help us grow the business. Consistent with industry trends, our customers are demanding (inaudible) and more bandwidth to satisfy the data and entertainment needs and we have identified specific areas of our markets for additional investments to enhance our existing data offerings. This expansion in improvement of our data services will continue into 2014 and beyond actually as we believe the demand for more data services will continue to increase. Business access line equivalence grew in third quarter in both our RLEC and CLEC markets. Our business metrics were enhanced by the installation of fiber facilities to educational systems in our RLEC markets and the continued success of our hosted PPH product in the CLEC markets. The quality of our Hosted PBX product is gaining attention as other carriers are exploring arrangements with Otelco to potentially black label our product to their customers. We have identified multiple opportunities to provide this service on a wholesale basis and believe this is an effective way to expand our enterprise marketing footprint. The first installation of one of those wholesale customers was completed last week. Just a little metrics during 2013 we’ve installed an average of 170 new optic-based Hosted PBX switch per month through the end of October. In terms of our balance sheet, we made our first quarter principal payment of $1.7 million on the senior credit facility. We completed the payment of our remaining restructuring expenses and we ended the quarter with $10.4 million in cash, which was down only $800,000 from second quarter. We also made an additional principal payment of $300,000 at the end of October based on the requirements of the senior credit facility as we continue to remain focused on reducing our leverage. In summary, we remain focused on efficiently operating and growing our business. Curtis if you would please summarize the financial results, after which we will be glad to take investor questions.

[Curtis Garner:]

Thank you, Mike. And thanks everybody on the call for joining us today. I will provide an abbreviated overview of our financial highlights and then we will open it up for questions as Mike suggested. Let me first summarize our third quarter results. Total revenues were $19 million, which was a decrease of 22.3% compared to year ago. The expiration to the Time Warner Cable contract at the end of 2012 was the primary reason for the decrease in 2013 accounting for almost three quarters of the total revenue declines. Balance of the decline is the result of the traditional loss of RLEC residential voice access lines and the revenue related to them and the net impact of the FCCs’ Intercarrier Compensation order. Details by revenues categories are contained in the press release. The global service and network services declined 35.6% and 18.5% respectively. Operating expenses also decreased this time by 18.2% to $4.7 million from $17.9 million. Cost of services and products decreased 14% to $8.9 million from $10.4 million. As noted in the press release, Time Warner Cable accounted for approximately 40% of the decrease. Selling, general and administrative expenses decreased 11.7% to $2.9 million from $3.3 million. Reorganization expenses were approximately $0.9 million during third quarter, with no comparable expenses in 2012 in the SG&A category, which is really [the low case]. This brings the total for 2013 at the reorganization expenses $7.5, excluding the cancellation of debt income. Depreciation and amortization decreased $38.4% to $2.8 million from $4.6 million, almost all of which is related to the completion of amortizing the value of the Time Warner Cable contract. As Mike mentioned, adjusted EBITDA was $7.3 million compared to $11.4 million a year ago and $8.4 million in second quarter. Mike also covered our senior debt repayments and the capital investments for the quarter. This covers the highlights for the quarter. Our quarterly results were detailed in the press release. The SEC Form 10-Q filing which was scheduled for later today will provide additional details for our 2013 year-to-date results. It’s probably more productive, me and Mike to shift to answering some questions. So Serra, if you provide directions, we can take questions at this time. Serra, are you there?

[Operator:]

(Operator Instructions). We’ll go first to Charles Garrison, Private Investor.

[Unidentified Analyst:]

Good morning, gentlemen. I was curious what is the trigger for the excess cash flow payments to the senior lenders?

[Michael Weaver:]

Charles, this is Mike. Curtis, would you please address that question?

[Curtis Garner:]

There is $4 million of credit agreement basically using assets and liabilities plus the change, the change in cash flow versus plus, I am sorry let’s start over. It’s the difference in the cash that we spend versus the cash that we use plus the change in the balance sheet working capital items. Any excess cash flow positive amount we would have to send 75% of that amount to the lenders and we keep 25%. So as an example in third quarter we were at about $450,000, $460,000 of excess cash flow using that formula and we've sent $335,000 of that to the lenders on October 31.

[Unidentified Analyst:]

Well, I would indicate that’s probably positive then if we continue to see you’re making excess cash flow payments at the same, if things are going well, Curtis?

[Curtis Garner:]

Clearly the direction of the lenders in our agreement is that everything would be focused on reducing senior leverage. So the payments are all on a positive basis and in sync with what was expected when we negotiated the agreement.

[Unidentified Analyst:]

Thank you.

[Operator:]

(Operator Instructions). Next we’ll hear from Chris Brown.

[Unidentified Analyst:]

Hey, good morning gentlemen. I just had one question for you, on the release under the line additional internet customers there was a quarter-over-quarter drop from I guess 1,590 to 455 on the line, are they dial-up I was just wondering if you could provide some color on that?

[Michael Weaver:]

Chris, that’s…I am sorry, go ahead Curtis.

[Curtis Garner:]

I would just say that that when we acquire -Missouri Telephone in 2004 and Country Road Properties in 2008, we also acquired a fairly large stake-wide dial-up business in Maine and Missouri. That business at the time of acquisition was probably close to 15,000 or more customers. Overtime as they’ve had access to high-speeds into some sort of a DSL or some other type of capability, they generally, we lose those customers because we are not there, outside of our normal service area. Now in Missouri, we've setup a wireless high-speed data access. And we've actually got [liquid] where we are adding customers in that area, while we are decreasing customers in the dial-up internet mode. So it’s mainly, that's the long answer, the short answer is, customers outside of our normal serving territories that we had as dial-up internet customers that we’re losing.

[Unidentified Analyst:]

Okay, fantastic. Can you put, do you have, I know it’s probably hard to say, can you kind of estimate or say what the opportunity might be in that Hosted PBX product or is it kind of too early to say?

[Michael Weaver:]

It’s a good question, Chris. This is Mike. That product, we've had that product for about 2.5 years now and as a matter of fact, we will exceed $1 million in revenue from that one product this year. So the product’s been, it’s been a real winner for us. And what I mentioned in the script and my earlier comments that we’re dealing this a little bit different. The product has gained enough of teaching tool, now we’re having other providers of services that are coming to us and saying would you consider making your product available to us on a wholesale basis and of course the answer is yes. So I think that the cool thing about that product is that we’re seeing where it does of course as long as the internet service is reliable it doesn’t matter what state it’s in it doesn’t have to be in our territory. So it really opens up a market for us that we haven’t had access to, so we are excited about it. And what we are trying to do is identify great other providers of services whether it’s other ROX or other IXCs or those kinds of folks that would have relationships established with our customers and I don’t have a great provider of Hosted PBX. So that’s where we’ve reached out clearly in the process of really, we want to develop those relationships and I think it’s an effective way to expand the market. And we’re doing it with established businesses. I don’t, I can’t tell you, I don’t have a projection of how much money that might bring in because it’s really early in the process. But what we will do is continue to update you on quarterly calls as to our success with that offering. Does that give you any help at all?

[Unidentified Analyst:]

That’s helpful. Can you give any color on any other initiatives in terms of trying to bring in new sources of revenue?

[Michael Weaver:]

I can tell you some of the thoughts that we have. I mean certainly as I mentioned earlier, we absolutely know that there is demand in our RLEC territories for more broadband. It’s just something we see it everywhere whether you are watching your TV on or downloading books or whatever you are doing it’s more and more speed. So we believe that there is significant demand, particularly in the RLEC territories. And we have identified those markets where based on the number of homes per mile and the facilities that we have now we think we can make smart investments with our capital. And that is right you should see the space go up. You can necessarily see additional customers added, but the dollar per customer from the broadband, we should see an increase in that and the other thing I have to say it just makes that customers stickier. Other areas that we do the Hosted PBX, when you go in and install that you are really getting in the customers network and providing a lot of services that get you in the areas where we have been before. It would be great to have some top of managed services platform that perhaps it could bit more than just providing the upgrade telephone service. And that’s an idea that we kick in around, some type of managed services will be a nice addition to Otelco.

[Unidentified Analyst:]

Okay, great. Well congratulations on other quarter of paying down the debt. And thank you very much.

[Michael Weaver:]

Sure.

[Operator:]

And from Solace Capital we hear from [Tucker Goldman].

[Unidentified Analyst:]

Thanks and good morning, Mike and Curtis. I just wanted to really take a capture about how you feel thing are going now? I don’t to split here, the numbers are not big, but I would see the drop off from the second quarter to third quarter in EBITDA and kind of sort of mark how you are going versus the projections release in the [RLEC] not necessarily that you are still holding to that items, but you need to be kind of close continue to succeed which you are doing so far in paying down this debt. Do you still feel like this quarter is on track or is there anything in terms of something that’s lumpy or any sort of seasonality that indicates that maybe we will continue to see that sort of trajectory and how comfortable are you with the covenants looking forward, your leverage covenant here, your coverage covenant? Thanks.

[Michael Weaver:]

That was a very comprehensive question and I'll try my best to answer it and I'll try to make sure added in. As first comment things on (inaudible) Bottom line answer is I was we're okay with the third quarter, we have liked it to be a bit higher, of course we would. But here is my perspective on that, we had no Time Warner revenue in third quarter, probably the agreement is expired at the end of the second quarter and the last payment we received from them was there. So, that was reasonably accurate, in all of our projections as far as the revenue and EBITDA that Time Warner brought to our P&L. So, I was pleased when the numbers came out where they did. So, I think that's a fairly consistent quarter for us, if you, it was a clean quarter, meaning it wasn't there was no significant lumpy items and that's we are perceptive of because that's always an issue particularly in our industry where you can have swings from one quarter to the other. So I would characterize it as a more first quarter without Time Warner, would have walked ahead another couple of hundred thousand dollars to EBITDA, but I'm not upset about it, I thought it was close enough to where we need it to be and I think that it's something that we can do, we should be able to do consistently assuming the regulatory environment stays where it is and we continue to have success with our CLEC.

[Unidentified Analyst:]

Okay. Thanks. No that’s really helpful. When you look for so maybe you’re running around $29 million a year and littler higher on EBITDA this point and you’re still fighting that circular headwinds but sounds like that there are some opportunity. If there is more bad luck down the road, what can you look to make sure that you’re still safe or above whatever threshold you need to be above, can you look to CapEx, can you look for working capital can you look further the cost structure are there any opportunities there to give shareholders some confidence that we're not completely threading a needle?

[Michael Weaver:]

No, that’s again the right question. Essentially what you’re asking is what keeps you up at night. [Well, I cannot do] about it. So the numbers, we've always known that the first 12 months are a bankruptcy which is 2014 would be the year when the covenants were a bit tighter. I think all of our information reflects there. The things that I have draw comfort from is we haven’t finished the quarter with I think $3 million to $4 million in cash, that’s not bad, particularly if you consider that we have paid the balance of our restructuring expenses. We made our first principal payment and then we also made a relatively small $300,000 excess cash flow payment at the bank. So number one, we have some cash that we can use if the need arises. Number two we have in our budget for 2013 and this is a fairly typical number for us of $7 million in CapEx that’s the right number I mean that’s what we are to spend to be able to continue to keep our plan healthy and expand and have some cash left over for opportunities. We will not spend all of that $7 million in 2013. My opinion is, it would be somewhere around $6.5 million to $6.8 million so there is a little bit of cushion that we have going forward there. We do have working capital that we could use for that. So that's what I’ll draw comfort from. We have some flexibility with the cash and then the CapEx number could we get bound less than $7 million if the need arose we had to, we could. I prefer not because I want to keep the plan in great shape. We work really hard both for the restructuring in particularly as part of the restructuring to take as much cost out the business as we can. So I think we are pretty efficient on the cost structure. We continue to look at that, but I don’t -- I think we’re efficient, let me just leave it that on the cost structure.

[Unidentified Analyst:]

Okay. I appreciate the answer and appreciate the job you are doing here. It’s a difficult, but not impossible and I think there is nice opportunity, so good luck. Thank you.

[Michael Weaver:]

Thank you.

[Operator:]

(Operator Instructions). Gentlemen no further questions at this time.

[Michael Weaver:]

Okay. Serra, just in closing I appreciate the questions, I appreciate your dialing in. And we plan on keeping you informed and we look forward to talking to you in one more quarter. Thank you.

[Operator:]

Ladies and gentlemen that does conclude today’s conference. Thank you for joining.