Otelco Inc
Q4 2014 Earnings Call Transcript

Published: 3 Mar 2015

[Operator:]

Good day and welcome to the Otelco Fourth Quarter 2014 Earnings Conference Call. Today’s call 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.

[Kevin Enda:]

Thank you, Jamie, and welcome to this Otelco conference call to review the company’s results in the fourth quarter and year ended December 31, 2014. Conducting the call today will be Rob Souza, President of Otelco, who is also appointed to the additional position as CEO on December 31 upon the retirement of former CEO, Michael Weaver; and Curtis Garner, Chief Financial Officer is also on the call. 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 the 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 turn the call over to Rob Souza.

[Robert Souza:]

Thank you, Kevin, and good morning and welcome to our call. I look forward to speaking with you on our investor calls. Thank you. Let me first hit some key highlights for the quarter. We’re pleased with the network and operational reviews we initiated in the first quarter of this year resulted in an operational cost savings of approximately $1.5 million during 2014. These cost savings were in large part due to the changes to our network fabric, our interconnection facilities and a reduction in work force. Total revenue for the quarter was $18.2 million and our fourth quarter adjusted EBITDA of $6.6 million was consistent with the third quarter 2014 adjusted EBITDA performance, when you exclude separation expenses and other one-time adjustments and has established an excellent starting point as we move into 2015. For the year, revenue totaled $73.9 million, with adjusted EBITDA of $28.7 million for an EBITDA margin of 39%. We are encouraged by our efforts to grow our business access line equivalents which increased 1.9% during fourth quarter and 7.6% since the end of 2013. This business growth includes our Hosted PBX product, the Classifax offering introduced in the third quarter of 2014, demand for fiber transport and significant growth in our support of educational facilities in Alabama. Strengthening our balance sheet was a key priority for us as we continued to reduce our senior debt through both required and voluntary payments, ending 2014 with $112.1 million of debt or a reduction of $16.5 million during 2014. Capital expenditures in the fourth quarter were $1.5 million for a total of $6 million in 2014. Our cash balance as of December 31, 2014 was $5.1 million. We’re also very pleased with the performance of Reliable Networks, which completed its first year as part of Otelco by meeting all of its operating targets. As a result of growth opportunities in their cloud-based services, we are adding sales capability in the Boston market. Reliable’s products continue to be complementary to our Hosted PBX service. In terms of 2015, we plan to develop VoIP service delivered to customers of our wireless high-speed Internet service in Missouri, offer a managed home product in New England, and explore public, private, municipal fiber optic partnerships with municipalities in Maine. We will continue to make our network more efficient through additional consolidation of network elements, resulting in reduced maintenance cost and make additional improvements to our interconnection facilities to further reduce operational costs. In summary, with the operational improvements we made in 2014, we’ve stabilized our business after the balance sheet restructuring of 2013. We’ve remained focused on efficiently operating the business, grown our enterprise and business customer base by providing our customers more of the services they need and want and at the same time significantly reducing our debt each quarter. I will now ask Curtis to summarize the financial results and then we’ll take your questions.

[Curtis Garner:]

Thank you, Rob, and thanks to everyone on the call for joining us today. Rob touched on several of the key fourth quarter performance elements and I’ll provide a brief overview of others and of 2014 financial highlights and then we can open it up for your questions. If we begin at the top line, total revenues decreased 6% to $18.2 million from $19.3 million. The decrease in residential RLEC access line equivalents and revenue decreases due to the FCC’s inter-carrier compensation reform order account for the majority of the decline, which was partially offset by new cloud hosting and managed services revenue of $0.2 million for the fourth quarter of 2014 relating to Reliable Networks acquisition and from Hosted PBX revenue growth. Breaking the revenue pieces down, local revenue service decreased 5.2% to $6.5 million from $6.9 million. Hosted PBX and fiber installation revenue increased by $0.1 million. 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 CLEC market pricing early in 2014 accounted for a decrease of $0.4 million. As a reminder, a portion of the RLEC decrease is recovered through the Connect America Fund which is categorized as an intrastate access revenue, while none of the CLEC impact is recovered. In addition, the decline in long distance revenue accounted for a decrease of $0.1 million. Network access revenue decreased 13.6% in the fourth quarter to $5.9 million from $6.8 million. The Connect America Fund increased by $0.1 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 charges of $0.6 million. Internet revenue increased 0.7%, but basically rounds to $3.6 million in both periods with a small increase in fiber rental revenue. Transport services revenue decreased 5.1% in the quarter to $1.3 million from $1.4 million as a result of customer churn and pricing actions that occurred at the beginning of 2014. Cable, IP and satellite television revenue decreased 7.5% to just under $0.7 million, as growth in security and satellite revenue was more than offset by cable subscriber attrition. Cloud hosting and managed services revenue, associated with the Reliable Networks acquisition, increased revenue $0.2 million with no comparable revenue in the earlier period. As Rob noted, this performance met our expectations established at the beginning of the year for Reliable Networks. Moving on to expenses, operating expenses in the fourth quarter decreased 4.3% to $14.4 million from $15 million. Looking at the individual pieces, cost of services decreased 6.8% to $8.8 million from $9.4 million. Expenses related to professional services and cloud computing increased $0.1 million. Network circuit and toll costs decreased by $0.5 million and customer service expense reductions implemented earlier in 2014 decreased by $0.2 million when you compare to the same period in 2013. Selling, general and administrative expenses increased 15.5% to $3.1 million from $2.7 million. Cloud hosting expense associated with our acquisition of Reliable Networks, including an accrual for non-cash stock compensation, increased costs $0.2 million. Executive expenses include $0.2 million as non-cash stock incentive compensation expense which is added back when you do the calculation of Adjusted EBITDA and $0.4 million associated with a separation and consulting agreement for which there are no comparable expenses in the same period in 2013. Uncollectible expenses increased $0.1 million, reflecting a one-time positive settlement that happened in the fourth quarter of 2013. These expenses were partially offset by lower property taxes of $0.1 million and lower executive cash compensation of $0.3 million. Depreciation and amortization for fourth quarter 2014 decreased 14.2% to $2.5 million from $2.9 million. The amortization of other intangible assets in New England and CLEC depreciation decreased $0.4 million from fourth quarter of 2013. As a result of one-time factors that I mentioned, adjusted EBITDA decreased $0.7 million to $6.6 million compared to $7.3 million a year ago. During the fourth quarter, the company made scheduled excess cash flow and voluntary payments on our debt of $2.3 million, lowering our debt to $112.1 million. As Rob mentioned, that brings the total debt reduction in 2014 to $16.5 million. We continue to meet all of the loan covenants and we’ve reduced our leverage ratio by 720 basis points during the year, when you exclude the impact of the separation agreement. Rob covered our investment in property, plant and equipment. Cash decreased from $9.9 million to $5.1 million when you compare it to the end of last year, 2013, primarily due to the additional voluntary loan principal payments above our scheduled quarterly and excess cash flow payments. That covers the highlights for the year, with additional details in the press release. Our SEC Form 10-K should be filed on March 16 and will provide additional detail about the full year 2014 results. Jamie, if you want to provide directions, we can shift to taking some investor questions at this time.

[Operator:]

[Operator Instructions] We’ll take our first question from [Gene Riley] [ph], a private investor.

[Unidentified Analyst:]

I’ve just got a question about the prepaid expenses, it went up by $1.6 million this quarter. So what’s in that category and what caused the increase this quarter?

[Robert Souza:]

Curtis, would you take that question, please?

[Curtis Garner:]

At the beginning of each year, we have a significant number of prepaid expenses for maintenance for the year for billing systems and for switches. That increases the prepaid, plus since the separation payment was not actually made until January that would have been – that’s not really in the prepaid, but that’s the primary sources, the increase in annual maintenance contracts that are prepaid and then we amortize them over the year into the expenses.

[Unidentified Analyst:]

Last year, you didn’t have that big jump between quarter three and quarter four, so that’s why I’m asking, so why is this year different?

[Curtis Garner:]

You’re correct. The other piece of it is prepaid income taxes and last year we were not really a tax payer, so there was not much in the way of taxes paid, our total taxes for the 2013 year were about $200,000, whereas there’d be well in excess of $1 million this year.

[Operator:]

We’ll take our next question from [Sam Yake] [ph] who is a private investor.

[Unidentified Analyst:]

I was just wondering is there anything like when you came out of bankruptcy or for whatever reason, is there anything that would prevent a sale of Otelco at this time?

[Robert Souza:]

I don’t believe that there is anything in our future that would suggest that what happened in 2013 is something that would be replicated, but of course, that’s what I believe at this point in time. I believe that we continue to perform according to plan and look forward to continuing to operate the business in a sound financial manner.

[Unidentified Analyst:]

I guess my point is, I look around at the other people in your business, it seems to be consolidating, it seems to be a great time to sell a company like Otelco because the multiples seem high, the interest rates are low, the financing window is open and the other thing that I would mention is it seems – I own stock in other companies in the industry and I watch them closely, it seems to me with all due respect that you have the lowest CapEx in the industry and it seems to me like it’s a little bit pushing the envelope and I think you might be leaving some growth opportunities on the table or whatever. And so when I look at all the factors, it seems to me like it’s a perfect time to sell Otelco for a whole bunch of reasons and it would be the best for all constituencies, for the shareholders, for the customers, for the employees, and I’m just wondering, I’m sure you’re aware of that, but what your comments would be on that, it just seems to me like it’s the right thing to do from every angle.

[Robert Souza:]

I appreciate your comments, Sam, and I know that the Board continues to explore all options and look at every opportunity that is available to us at this point in time. But beyond that, I can’t make any comment at this time.

[Unidentified Analyst:]

But I guess I would have one other thing, I mean on the CapEx, do you feel that – and I’m sure you’re getting pressure on the debt, with the major debt you have in going through bankruptcy, do you feel that you’re leaving any opportunities on the table by under-investing in CapEx in anyway?

[Robert Souza:]

No, not at this time, I think we’ve made reasonable capital expenditures, not only this past year, but in the past. I think we continue to invest in our IP technology, including Hosted PBX. We’ve got the cloud hosting platform, where we continue to invest money. As a matter of fact, this year we invested $300,000 in our cloud hosting capability to give us some additional diversity and capacity. So I believe that we’re making the correct capital expenditures and I don’t believe we’re leaving anything on the table.

[Operator:]

[Operator Instructions] We’ll take our next question from [Wally Walker] [ph] a private investor.

[Unidentified Analyst:]

Although Otelco historically hasn’t given forward-looking guidance, it did in its disclosure statement associated with its reorganization back in early 2013. I would like to ask how does Otelco feel now about its 2015 projections offered in the disclosure statement of an estimated EBITDA of $30.1 million for 2015 as well as the year end 2015 debt balance of $103.3 million?

[Robert Souza:]

I don’t believe I’m prepared to comment on our EBITDA projection for 2015. I do feel good about where the company is positioned, especially with the changes and modifications that we made in first quarter of 2014 and then saw those completed through the rest of the year. I think that positions us well for the future. I believe we’re continuing to hold our expenses in check, I believe we continue to have good opportunities, revenue opportunities in our CLEC business with Hosted PBX and the cloud hosting services. So I feel good about the company and where we’re headed. But at this point, can’t really comment on projected EBITDA for 2015.

[Unidentified Analyst:]

One other question, do you have an estimate of the numerical odds that Otelco obtains in amended and/or extended credit agreement sometime this year, because time – it’s April 2016 when time runs out.

[Robert Souza:]

We are clearly aware that April 2016 is when the time runs out, the Board continues to, I think, explore all opportunities and is well aware of that. If I were willing to set odds, I’d probably be not here where I’m sitting right now, but in Las Vegas. So at this point, I don’t think I’m prepared to make a prediction on whether the facility will be extended, amended at this point in time. But certainly appreciate the question.

[Operator:]

And there are no further questions in queue at this time.

[Robert Souza:]

If there are no other questions, at this time, Jamie, no one else at this time?

[Operator:]

There are no further questions.

[Robert Souza:]

Okay. Then, we certainly appreciate you joining us this morning. We always welcome your questions and we plan on keeping you informed regarding our business and look forward to doing this in the next quarter. Thank you so much.

[Operator:]

Ladies and gentlemen, that does conclude today’s conference. Thank you for your participation.