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Edited Transcript of OTEL earnings conference call or presentation 14-Aug-18 3:30pm GMT

Q2 2018 Otelco Inc Earnings Call

ONEONTA Aug 29, 2018 (Thomson StreetEvents) -- Edited Transcript of Otelco Inc earnings conference call or presentation Tuesday, August 14, 2018 at 3:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Curtis L. Garner

Otelco Inc. - CFO, Secretary & Director

* Drew Anderson

* Robert J. Souza

Otelco Inc. - President, CEO & Director

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Conference Call Participants

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* Ira Sochet

Sochet & Company, Inc. - President

* Walter Walker

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Presentation

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Operator [1]

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Good day, and welcome to the Otelco Second Quarter 2018 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 Ms. Drew Anderson. Please go ahead, ma'am.

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Drew Anderson, [2]

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Thank you, Stephanie, and good morning. Welcome to the Otelco conference call to review the company's results for the second quarter ended June 30, 2018. Conducting the call today will be Rob Souza, President and 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 have caused 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 Rob Souza. Please go ahead, sir.

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Robert J. Souza, Otelco Inc. - President, CEO & Director [3]

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Thank you, Drew. Good morning and welcome to our second quarter 2018 investor call. I'll discuss the second quarter's operational performance and other key issues affecting our business. Curtis will then review our financial results, and then we'll take your questions.

For the second quarter, we introduced a new format for our quarterly earnings release and filed our Form 10-Q coincident with our release. We felt that investors would benefit from this change in the format and availability of operational information.

Our results for the second quarter continue to reflect the trends in our industry and our company, as traditional access revenues and residential RLEC customers continue to decline while cost of service delivery is seeing the impact of inflation and a tightening job market. Total revenue was $16.9 million, down 3% over last year. However, we were pleased that our operational income was up 2.4% to $5.2 million. Our results included additional A-CAM revenue approved by the FCC for investment in Missouri and a positive FCC budget adjustment in Vermont. Net income was also up over the second quarter last year, increasing to $2.9 million compared with $1.5 million last year. This increase includes a $1.1 million decrease in interest expense associated with the new CoBank facility and the benefits of the Tax Act.

Cash increased to $4.2 million. During the second quarter, we reduced the outstanding principal on our credit facility by $4.1 million, including a $3 million voluntary payment. For the third quarter in a row, the company's leverage ratio was below 3 turns when you reflect the cash on the balance sheet, with the quarter's ratio ending at 2.87. An additional $1 million payment was made at the end of July.

As discussed over the past year, Otelco began receiving the FCC's A-CAM payments in the 5 states where the program is applicable to the company. The program funding is being used to enhance and build out our broadband network to provide increased broadband speeds and accessibility to customers over the next 10 years. In addition, we accepted the FCC's enhanced A-CAM offer in Missouri, which will provide an additional $1.5 million in funding over the 10-year life of the program, which began in 2017. The FCC has also adjusted the budget control payments for 2017 and '18, which positively affected our Vermont property. Both changes are reflected in second quarter results, with the cash payments expected to be received before the end of the year.

In addition, Otelco was accepted by the FCC as a bidder in the CAF II auction. This process, which began on July 24, has not yet concluded so there is no information available regarding awards from this process.

Otelco invested $2.1 million in enhancing its network during the second quarter 2018, increasing its fiber network to approximately 2,000 miles of both last mile and middle mile fiber.

In other operational news for the second quarter, 4 communities in Massachusetts are moving forward to build and operate a fixed wireless network using their combined $2 million grant allocated by the State of Massachusetts. These grants bring high-speed Internet to underserved communities, mostly in the western part of the state. Otelco is working to partner with these communities to enhance their voice and data services and make them more competitive in the digital future. This partnership mimics the work we did in Leverett, Massachusetts and demonstrates how municipal partnerships can work to improve broadband access to more communities. The new network, once all contracts are completed, could be operational in one of the towns as early as October, while the other municipalities should follow in early 2019.

Consolidating and streamlining the business operations remains a strategic focus of our business. As announced early last year, we selected a partner to consolidate all of our billing and operational systems on one platform. After an extensive period of planning, development and training, we converted all of our operational and billing systems onto that single platform at the end of July. For the month of June, all carrier customers were billed from the new system. And commencing in August, all end-user activity, from new service ordering, to provisioning, to billing and collecting, is now handled on the new system. The first end-user bills from the system were generated over the past weekend.

Our employees have worked very hard to get to this conversion point and are pleased to be utilizing the new technology. We look forward to the operational benefits it will provide our customers as well as the favorable financial impact we should see from a more efficient system. In addition to keeping up with every customer's need, location, serving equipment and usage for long-distance minutes to gigabit Ethernet circuits, the system will also enhance our ability to market new products to meet targeted customer requirements. And as we noted earlier this year, with the move to a company-wide operational system, we are now branding all of our services as Otelco throughout our entire service footprint.

We are pleased with our progress in the first half of 2018 as our employees have worked hard to execute on a number of initiatives for both our customers and shareholders. Moving forward, we will continue our focus on enhancing the customer experience, improving data speeds, adding new customers and reducing our leverage to provide additional financial flexibility for the future. Our primary strategy consists of leveraging our strong incumbent market position, improving our ability to sell additional data service to our rural customer base and providing better service and support levels with a broader suite of services. In addition to our focused debt reduction, we believe an improvement in our revenue performance, a continued emphasis on cost management and the move to an enhanced billing and operational support platform will benefit our employees and customers and deliver additional value to our shareholders.

Curtis will now summarize the second quarter financial results.

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

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Thank you, Rob. We appreciate everyone joining us today. As Rob mentioned earlier in the call, we changed our presentation process this quarter. The press release is more focused on operational performance, with the details of financial performance being contained in the Form 10-Q, which we filed in parallel with the earnings release to give interested investors both sets of information before we have the investor call.

I'll provide a brief overview of our second quarter financial highlights as contained in the Form 10-Q. Unless otherwise noted, every comparison is against the same period last year, generally, second quarter versus second quarter.

Total revenues for the second quarter 2018 were $16.9 million, down 3% from last year's second quarter. The decrease was primarily due to the decrease in traditional access revenue affected by the FCC's Intercarrier Compensation reform order and in residential RLEC voice access line equivalents, partially offset by an increase in A-CAM revenue, primarily in Missouri.

If you're going to look at the components of revenue, local service revenue was $5.4 million, a decrease of 5.8% over the prior year period. The decline in RLEC residential voice access lines and the impact of the FCC's order, which reduced or eliminated intrastate and local cellular revenue, accounted for a decrease of just over $0.2 million. A portion of the RLEC decrease is recovered through the CAF, which is reflected in interstate access revenue. The combination of long distance and directory services accounted for a decrease of $0.1 million, and hosted PBX equipment sales and fiber installation revenue accounted for a decrease of $0.1 million.

Network access revenue decreased 0.7% over last year, but remained at $5.6 million.

Internet revenue decreased 3.7% to $3.8 million, primarily due to a small decline in customer and equipment rental charges.

Transport services revenue increased 3.7% over second quarter last year, reflecting an increase in wide area network services.

Video and security revenue was $0.7 million, a 4.2% decline, reflecting small increases in IPTV revenue, offset by small decreases in basic cable and pay-per-view revenue.

And lastly, managed services revenue decreased 4.2% over the same quarter last year.

Going to move on to operating expenses for second quarter. Total operating expenses were down 5.1% over the prior year. The details are as follows: cost of services decreased 7%. Three expense areas: customer service and sales, digital and circuit, pole rental and network operations, were each down $0.1 million, while access and Internet expense decreased $0.2 million.

SG&A was down 1.6% to $2.4 million from $2.5 million last year. The change was attributable to a $0.2 million in training expense, which was associated with our new billing and operating support systems, which there was no comparable expense in 2017. That was more than offset by a decrease of $0.1 million in cloud hosting and uncollectible expense and $0.2 million in senior management incentive compensation expense reflecting the use of stock as part of the incentive compensation plan for 2018.

Depreciation and amortization was unchanged from a year ago at $1.8 million.

As Rob noted, operating income was $5.2 million, up 2.4% for the second quarter compared to last year.

Interest expense for the second quarter was $1.5 million, a decrease of 43.6%. Lower interest rates and smaller outstanding principal amount accounted for just under $0.9 million of the decrease. And the lower loan cost amortization accounted for $0.2 million.

Income tax expense. The Tax Cuts and Jobs Act implemented at the end of 2017 increased bonus depreciation from 50% to 100% and reduced the maximum federal income tax rate from 35% to 21%. As a result, we expect to reduce our cash federal corporate tax liability for this year by approximately $2.1 million under the new tax rates. For the second quarter, the provision of income taxes decreased 15.6% over a year ago. Factoring in all of these changes, as Rob mentioned, net income increased $1.4 million to $2.9 million for the second quarter, primarily due to the lower effective tax rate and the interest reductions associated with the new CoBank credit facility.

Consolidated EBITDA was $7.1 million compared to $7 million in second quarter of last year.

Looking at the balance sheet, we ended the second quarter with $4.2 million in cash compared to $3.6 million at the end of 2017. We made a voluntary $3 million prepayment at the end of May and our scheduled principal payment of $1.1 million at the end of June, reducing the outstanding balance on our credit facility to $80.7 million at the end of the quarter.

Our ratio of debt, net of cash, to consolidated EBITDA was 2.87 at June 30. We made an additional $1 million voluntary prepayment at the end of July, which is not reflected in the current financial statements.

Capital expenditures were $2.1 million for second quarter 2018 compared to $2.5 million last year. Including the implementation of our new billing and operations support system, we expect to invest approximately $8 million this year in operations. To meet all of our A-CAM obligations as well as investment in our network, we expect our capital expenditures to increase to $9 million in the 2019-2020 period.

That kind of covers the highlights for the quarter. Additional detail is in the press release and the Form 10-Q. Stephanie, if you'll provide the directions, we can shift to taking investor questions at this time.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll take our first question from Wally Walker, who is a private investor.

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Walter Walker, [2]

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Great quarter, really liked the aggressive debt reduction you guys are doing.

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Robert J. Souza, Otelco Inc. - President, CEO & Director [3]

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Thank you, Wally. We believe we heard the message from the majority of our investors that they appreciate what we're doing there.

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Walter Walker, [4]

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Yes, we do. And although Otelco has done a wonderful job on cost control recently, you've been hesitant to call an end to the slow revenue declines. I'm just wondering, with the certainty of A-CAM now, the potential of additional CAF II revenue and the work that Otelco has been doing with rural towns, the latest example that resulted in a $2 million grant from the State of Massachusetts, do you think we're closer to revenue stabilization?

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Robert J. Souza, Otelco Inc. - President, CEO & Director [5]

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Wally, I always kind of provide my comments in a little bit of quotation marks. We certainly continue to see some decline in local revenues through what Curtis mentioned, the natural shift and decline in access revenue and also line loss, but we certainly believe that all of the things that you mentioned are positive signs and signals, in addition to the fact that we continue to build fiber as a result of the A-CAM funding. And we believe that funding and the construction of that fiber, that last mile fiber to customers, certainly continues to improve our ability to stabilize top line revenue.

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Walter Walker, [6]

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Wonderful. And bidding in the FCC's CAF II auction has now entered its fourth week. From your vantage point, do you think that it's nearing its conclusion?

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Robert J. Souza, Otelco Inc. - President, CEO & Director [7]

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Well, the one thing that I can share, Wally, is that the national CAF II budget cleared. I believe it cleared last Thursday or Friday. And then the FCC gave all of the bidders Monday off, I believe, to kind of rethink where they were. The budget clearing means that, obviously, we're in the final stages of the bidding. And now we might be down to some competitive bidding in individual markets as the FCC might have multiple participants in various census blocks. So I do believe we're getting close to the end. I'm just not sure how long it will take for the rest of the markets to get to the bid point where the FCC can award individual winners. And as of this point, nothing has been made official regarding how Otelco stands in that process.

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Operator [8]

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And it seems there are no further questions in the queue. (Operator Instructions) And we do have one question from Ira Sochet from Sochet & Company.

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Ira Sochet, Sochet & Company, Inc. - President [9]

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Has there been any more payments since June 30 on the debt other than what's scheduled, or is there any additional planned other than what's scheduled?

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Robert J. Souza, Otelco Inc. - President, CEO & Director [10]

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Curtis, why don't you respond? I think you mentioned that in your comments and you can reply to Ira, please.

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Curtis L. Garner, Otelco Inc. - CFO, Secretary & Director [11]

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Yes. Ira, our scheduled payments at the end of the quarter is $1.1 million. So we had $1.1 million scheduled in September. We made a $1 million extra prepayment at the end of July. And we'll decide between now and the end of September whether we make any additional prepayments based on the availability of cash after operations.

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Ira Sochet, Sochet & Company, Inc. - President [12]

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Okay. So our net debt is $1 million lower than what was shown on the 10-Q?

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Curtis L. Garner, Otelco Inc. - CFO, Secretary & Director [13]

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Correct.

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Operator [14]

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And there are no further questions. (Operator Instructions) And there are no further questions in the queue. I'd like to turn the call back over to Mr. Rob Souza.

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Robert J. Souza, Otelco Inc. - President, CEO & Director [15]

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Thank you, Stephanie. We certainly appreciate your participation this morning as we discussed our second quarter results. We definitely remain focused on managing Otelco in tandem with the changes that continue to occur in the industry. And we continue to look for additional growth opportunities in that current marketplace. As always, we are dedicated to delivering greater value to our shareholders. And once again, we appreciate your participation and your questions, and we look forward to sharing additional information with you in the future. Thanks so much.