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Edited Transcript of OTEL earnings conference call or presentation 10-Mar-20 3:30pm GMT

Q4 2019 Otelco Inc Earnings Call

ONEONTA Mar 30, 2020 (Thomson StreetEvents) -- Edited Transcript of Otelco Inc earnings conference call or presentation Tuesday, March 10, 2020 at 3:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Curtis L. Garner

Otelco Inc. - Secretary & CFO

* Richard Allen Clark

Otelco Inc. - CEO, President & Director

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Conference Call Participants

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* Ira Sochet

Sochet & Company, Inc. - President

* Dru L. Anderson

Corporate Communications, Inc. - SVP and Principal

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Presentation

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Operator [1]

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Good day, and welcome to Otelco's Fourth Quarter 2019 Earnings Conference Call.

Today's conference is being recorded.

At this time, for opening remarks and instructions, I would like to turn the call over to Ms. Dru Anderson. Please go ahead, ma'am.

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Dru L. Anderson, Corporate Communications, Inc. - SVP and Principal [2]

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Thank you, and welcome to the Otelco conference call to review the company's results for the fourth quarter ended December 31, 2019.

Conducting the call today will be Richard Clark, Chief Executive Officer; and Curtis Garner, Chief Financial Officer.

Before we start, let me offer the cautionary note that statements made during this 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, readers 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 Securities and Exchange Commission.

With that stated, I will now turn the call over to Richard Clark, who was appointed Chief Executive Officer of Otelco on January 1 of this year. Please go ahead.

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Richard Allen Clark, Otelco Inc. - CEO, President & Director [3]

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Thank you, Dru. Good morning. It is good to host everyone on our fourth quarter 2019 investor call.

I appreciate the opportunity to update you today on Otelco's results and activities. After I review fourth quarter's performance and other key issues affecting our business, Curtis will then review highlights of our financial results. And after that, we will take everyone's questions.

Our results for the fourth quarter continued to reflect the trends impacting our industry. Access revenues declined along both residential and business voice customers. But there are some positive signs for the future. In the fourth quarter, the company invested $4.8 million in our network infrastructure, the largest single quarter's investment in the history of the company, bringing the total for the year to $12.4 million, making it the largest annual investment in our history. Approximately $3 million was spent on constructing fiber in our territories and $2.6 million meeting our ACAM speed performance obligations. And if you glanced at our 10-K filed last night, the customer metrics information showed an improvement in the customer churn in the last half of 2019. While churn still has a ways to go to be flat or to show growth, customers are clearly responding to the increased speed we have been able to provide through our additional Lightwave fiber deployment and the conversion of our data platform to VDSL for approximately 27% of our entire network. During the coming year, we will complete the fiber builds we started last fall; convert our cable offering in Alabama to DOCSIS 3.1; and complete the VDSL rollout in certain parts of our Maine, Massachusetts, Vermont and West Virginia markets. By the end of 2020, we expect to have improved speed -- data speeds, with approximately 43% of the premises passed having the capability to get at least 25 Mbps, with 19% having access to gigabit speeds.

Total revenue was $15.6 million, a 3.8% decrease from the fourth quarter of 2018, reflecting a reduction in customers, voice services and access revenue. These results are consistent with revenue trends reported for the previous quarters of 2019, with $15.8 million for the third quarter, $15.7 million for the second and $15.8 million in revenue for the first quarter of 2019. Net income decreased 11.5% to $2 million in the fourth quarter of 2019 compared to $2.2 million in the fourth quarter of 2018. Consolidated EBITDA decreased 7% to $5.6 million in the fourth quarter of 2019 from $6 million in the fourth quarter of 2018.

Operating expenses were relatively flat compared with the prior year period with $12.1 million for the current quarter compared with $12.2 million a year ago. We expect that these trends will continue as we move forward through 2020.

During the fourth quarter, we continued to execute the strategy we have discussed in previous calls, with a focus on increasing investment in our business, including significant expansion of fiber-based Lightwave services and data speed enhancement throughout our network. Fiber to the prem will be the primary vehicle to increase data capacity for Otelco's customers where it makes economic sense, the fiber-to-the-node strategy being [employed] is more -- in more sparsely populated areas. In July 2019, we announced plans to install 113 miles of additional fiber in Alabama by early 2020, focusing on the northern part of our territory in and around Arab, Alabama. All of the planned fiber has been engineered and installed and marketing is underway to 3,589 Arab Lightwave locations, with 578 additional locations coming online in this month. Fiber to the premise provides up to gigabit-speed Internet capability.

In 2019, 230 customers in the Arab fiber footprint and 542 total customers upgraded their existing service or signed up for new service on the newly released fiber. A sizable majority of these customers were already customers of Otelco being serviced on our copper network. In addition, equipment has been deployed to support higher-speed VDSL service in all Alabama and Missouri locations, with work underway to upgrade New England sites. In the southern part of our Alabama territory in and around Oneonta, Alabama, where Otelco is also the cable provider, the preliminary work is ongoing to upgrade the hybrid fiber coax network to DOCSIS 3.1. We expect that over the summer of 2020, all of our cable customers will also gain access to gigabit Internet speeds similar to those speeds available over a fiber-to-the-prem network.

During 2019 and in January of 2020, Otelco added a total of 268 miles of fiber inside its service territories, an increase of 50% from 2018. Otelco's Lightwave fiber-to-the-prem network now passes over 12,890 discrete locations on 1,003 miles of distribution fiber. The company has over 2,500 miles of distribution and transport fiber in its network. As a reminder, the majority of our fiber is used within our territory to serve our customers or in providing connectivity between portions of our territory which are not contiguous. We are now offering gigabit speeds in several of our fiber-to-the-prem communities in Maine as well as the fiber-to-the-prem network in Oneonta, Alabama. While gigabit service is probably not necessary for most customers today, it is highly likely that speed requirements will continue to increase in coming years, and we are redesigning our network to provide for these future requirements. Lightwave gigabit will be expanded throughout the company's fiber-to-the-prem services later this year.

During 2020, the company plans to continue to invest in VDSL technology on a standard platform to meet or exceed its revised federal alternative [connect American] model requirements. We have finished filing our [2009] hub reports, which were due the end of February. We exceeded the requirements for the number of locations in ACAM territories requiring increased data speeds. The requirement was to make available 25/3 Mbps for 40% of the locations in the ACAM territory by the March 2023 reporting deadline. And we achieved that goal in Maine, Alabama and Missouri by the end of 2019.

Fiber to the premise and the cable upgrade both create the capability to deliver gigabit broadband speeds, while VDS allows us to offer speeds of at least 25 megabits to 12% of the territory at the end of 2019 and projected to be 24% by the end of 2020 of the territories we serve and in some cases 50 megabits to many customers. While we build out and make these enhancements to the network, we have worked to increase the speeds we are providing our customer base to the maximum the current network can deliver to better meet speed requirements and reduce customer churn. We are pleased with our progress throughout the last year as our employees have worked hard to execute on these and a number of other initiatives as we ramp up to get more broadband speed available to our customers. Looking ahead, we will continue our focus on enhancing the customer experience, improving data speeds and adding new customers.

Looking at some customer metrics for the fourth quarter of 2019. Customers served decreased 0.5% from the end of the third quarter. This compares with a decrease of 0.6%, 1% and 1.6% in the third, second and first quarters of 2019, respectively, for a total customer loss of 3.73% in 2019. Services provided to these customers decreased 1.2% over the fourth quarter period and 4.9% in 2019.

Data services were almost flat at 0.1% decline in the fourth quarter and decline of 1.2% for 2019. We will continue to experience churn in voice services as customers cut the cord with traditional phones in favor of mobile phones. Our enhancements to data speed through our strategy of building fiber and increasing speeds with the deployment of VDSL technology will improve the customer experience in the affected portions of our territories. And these combined efforts is expected to have a continued positive impact on churn for that subset of our customer base in the future, which combined represents approximately 51% of our [net] market by the end of 2020. We believe our concerted effort to enhance our customers' experience and improve available data speeds and product offerings will bring new customers back into the Otelco family of companies.

Curtis will now summarize the fourth quarter financial results.

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Curtis L. Garner, Otelco Inc. - Secretary & CFO [4]

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Thank you, Richard. We appreciate everybody joining us today.

Richard already touched on several results areas, and the press release includes a number of other fourth quarter metrics for your review. I will highlight a few financial items for the fourth quarter, and then we can take your questions. Unless noted otherwise, every comparison against -- is against the same period in the previous year.

Total revenues for the fourth quarter were $15.6 million, down $3.8 million (sic) [3.8%] from last year's fourth quarter. Local services revenue declined 8.2%. Network access revenue declined 1.5%. Internet revenue decreased 2.3%. And transport services revenue decreased 5.9%, while video and security was up 3.8% and managed services increased 6.1% from the fourth quarter last year.

Moving to operating expenses for the fourth quarter. Cost of services decreased 1.6%. SG&A was down 3.3%, reflecting fewer employees and more employee time associated with the increase that we had in our capital expenditures enhancing our network. Depreciation, on the other hand, increased 5.2%, reflecting increased assets from higher capital expenditures.

Operating income for the fourth quarter was $3.5 million compared to $4 million for the prior year period, primarily driven by change in revenue. Interest expense decreased some 16% as a result of both lower principal and lower interest rates. Net income decreased 11.5% to $2.0 million in the fourth quarter of 2019 compared to $2.2 million in the fourth quarter of 2018, again primarily driven by the change in revenue.

Basic net income was $0.58 per share for fourth quarter 2019 compared to 66% -- $0.66 per share in the same period last year. Consolidated EBITDA was $5.6 million for fourth quarter 2019 compared to $6 million in the same period in the previous year, driven by the decrease in revenue.

Our balance sheet reflects cash of $3.1 million at the end of 2019 compared to $4.7 million at the end of 2018. As Richard noted, during 2019, the company invested $12.4 million in improving its network and operational capabilities by reducing its loan balance by $4.4 million. Total assets increased from $114.4 million at the end of 2018 to $120.7 million at the end of 2019.

Our ratio of debt to consolidated EBITDA, also known as leverage, was 3.00 at the end of 2019, reflecting the use of additional cash generated from the business to improve our network rather than make additional prepayments on the company's indebtedness. The interest rate margin on our loan will increase from 4.25% to 4.5% for 2020, although with the current decline in LIBOR may more than offset the bank rate increase.

Otelco and our lender amended the credit agreement on March 2, 2020, to reflect the plans to continue a higher level of historical investment in our business. The amendment is available on our website as it was filed on a Form 8-K.

I think that covers the highlights for the quarter. Kevin, if you'll provide direction, we can shift to taking questions from our investors at this time.

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Questions and Answers

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Operator [1]

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(Operator Instructions) There are no questions in the queue at this time. We now have some questions in the queue. Our first question comes from Ira Sochet of Sochet & Company.

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Ira Sochet, Sochet & Company, Inc. - President [2]

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I'm going to get you off speaker somehow. I have no questions. I want to say good job and thank you.

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Curtis L. Garner, Otelco Inc. - Secretary & CFO [3]

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Thanks, Ira.

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Richard Allen Clark, Otelco Inc. - CEO, President & Director [4]

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Thank you, Ira.

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Operator [5]

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Our next question comes from [David Bender of VTB Capital].

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Unidentified Analyst, [6]

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I just had a question. Have you guys considered exploring strategic alternatives at all, either selling off parts of the company or the entirety of the company?

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Richard Allen Clark, Otelco Inc. - CEO, President & Director [7]

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As you are aware, I mean, as a public company, we're always trying to maximize shareholder value. The company and the Board -- the management and the Board are always looking for ways to enhance it. Right now, we view that as a way -- as a continued investment in increasing our broadband speeds so that customers stay with us, so we can win the customers we've lost over the years back.

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Operator [8]

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Our next question comes from [Tim Bergin].

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Unidentified Analyst, [9]

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A question on the Internet. So we've invested $12.5 million last year. Internet revenues, I think, [per] the $500,000 adjustment, are roughly flat. Given historical trends on the uptake in customers and we've reached 3,500 more premises, at what point do you think that goes positive?

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Richard Allen Clark, Otelco Inc. - CEO, President & Director [10]

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It is not our practice to predict the future. You have to recognize that, only by the end of next few months, we will only have 20% of our network -- 19% of our network with fiber. The rest of the network is still a copper network or a copper derivative using VDSL to increase speeds. So you're always having to balance the fiber against the non-fiber part of our network.

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Unidentified Analyst, [11]

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Okay. And how long of an investment do you think it would be before the whole network was fiber? I know it's rough guess.

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Richard Allen Clark, Otelco Inc. - CEO, President & Director [12]

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Well, we have 1,000 miles of distribution fiber, and we have 5,600 miles of copper fiber -- copper network, I apologize. It will take some time and a significant capital investment.

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Unidentified Analyst, [13]

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Great. And then I guess the follow-up question to that is considering that telephone revenues continue to decline. Does Otelco have the sufficient capital to make such an investment?

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Richard Allen Clark, Otelco Inc. - CEO, President & Director [14]

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I think we have the capital that's available from our free cash flow. We've invested a great deal of it over the last 2 to 3 years. We'll continue to invest what's available.

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Operator [15]

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As there are no further questions, I would like to hand the call back to your hosts for any additional or closing remarks.

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Richard Allen Clark, Otelco Inc. - CEO, President & Director [16]

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We appreciate you joining us this morning. We always welcome your questions, and we plan on keeping you informed regarding the developments of our business. Thank you.

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Operator [17]

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Ladies and gentlemen, that does conclude today's conference call. Thank you for your participation. You may now disconnect.