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Edited Transcript of OTEL earnings conference call or presentation 9-May-19 3:20pm GMT

Q1 2019 Otelco Inc Earnings Call

ONEONTA May 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Otelco Inc earnings conference call or presentation Thursday, May 9, 2019 at 3:20:00pm 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. - COO & President

* Robert J. Souza

Otelco Inc. - CEO & Director

* Stephen P. McCall

Otelco Telephone LLC - Director

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Conference Call Participants

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* 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 the Otelco's First Q 2019 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. 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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Thanks, Brian, and welcome to the Otelco conference call to review the company's results for the first quarter ended March 31, 2019.

Today's call will begin with an introduction from Steve McCall, Chairman of the Otelco Board of Directors. Following Steve's comments, Rob Souza, Chief Executive Officer; Richard Clark, the new President of Otelco; and Curtis Garner, Chief Financial Officer of Otelco will offer remarks about the financial and operating results.

We also have a slide presentation posted on the Investor Relations section of the company's website and management will be referring to these slides during today's call.

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 SEC.

With that stated, I will now turn the call over to Steve McCall. Please, go ahead, sir.

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Stephen P. McCall, Otelco Telephone LLC - Director [3]

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Thank you, Dru. As we mentioned, we have just concluded Otelco's 2019 Annual (inaudible) shareholders and a number of the meeting participants are with us today, including members of our Board of Directors as well as investors who intended the meeting.

On behalf of our Board, I want to thank everyone for joining us today, both in person and those dialing in.

Following the prepared remarks, we'll take questions from the room in addition to questions from those of you listening in today.

I would ask those in the room to please hold your questions until we complete the presentation.

As part of our first quarter press release, we announced that Rob Souza is planning to retire at the end of 2019. He has been part of Otelco's leadership team since October 2008, when the company acquired the Country Road properties. He has more than 40 years of telecom experience, which he has used effectively over more than a decade with Otelco. I would like to thank Rob for his service and leadership.

Richard Clark was appointed President on May 1 and will add the title of Chief Executive Officer at the end of the year upon Rob's retirement. Richard brings not only recent telecom experience to the position but also financial and operational leadership in other industries.

The Board actively searched for the right person to succeed Rob and take our business through the next decade and today's announcement confirms the Board's support of Richard.

Rob, I will turn it over to you to begin the presentation.

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Robert J. Souza, Otelco Inc. - CEO & Director [4]

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Thanks, Steve. Our first quarter 2019 investor call will be a little different than our normal calls. As Steve mentioned, we have our Board and the investors, who attended the annual meeting in the room with us. In addition, we're going to review the updated investor presentation that can be found on our website, the investors section of our website. This is part of our ongoing effort to provide as much transparency about the business as possible.

Richard, Curtis and I will shorten our normal quarterly results remarks to allow more time for this presentation. The details of the first quarter are covered in the earnings press release and the SEC Form 10-Q that was filed last night.

Our results for the first quarter reflects both the trends experienced in our industry and in recent quarters at Otelco.

Revenues decreased as access revenues and residential RLEC customers continue to decline.

Local competition impacts our pricing options while we continue working hard to bring a larger percentage of our customers to a fiber-based network.

Total revenue for the first quarter was $15.8 million, down 5.8%, compared to $16.7 million in the same quarter of 2018.

We expect this trend will continue until we can serve the majority of our customers with a fiber-based product, either fiber-to-the-premise or fiber-to-the-node.

As we have mentioned, we are increasing our investment in the business to $9 million in 2019.

Income from operations from the first quarter was down 7.3% to $3.8 million. Cost and expenses were both significantly below the same quarter last year but not enough to offset the revenue decline.

Net income was $2.3 million in the first quarter 2019 compared to $2 million in the first quarter 2018.

Lower interest expense and an increased CoBank dividend were the key factors in that change.

Richard, why don't you provide a brief update on ACAM, as we'll go into more depth about our fiber plans in the investor deck.

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Richard Allen Clark, Otelco Inc. - COO & President [5]

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Certainly, Rob. The FCC has acknowledged our acceptance of their offer of additional funding in Missouri, we have started reflecting that additional revenue in the first quarter.

The extension of the ACAM program for an additional 2 years acknowledges the significant task of modernizing rural America's data infrastructure. The speed of implementing out fiber plans will determine the timing of reducing customer churn and stabilizing end-user revenues. We'll provide a more in-depth review of our plans at the -- in the investor deck in a few moments. I would note that our work with the Town of Leverett, Massachusetts and 4 towns that are part of the WiValley cap 2 projects have stimulated other municipalities to involve Otelco in the development of their plans in the future.

Curtis will now summarize the first quarter results.

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Curtis L. Garner, Otelco Inc. - Secretary & CFO [6]

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Thanks, Richard. Rob covered the key comparisons of revenue and net income. I'll just cover a few other points. Consolidated EBITDA was $6.4 million compared to $6.1 million for first quarter a year ago. The increase in the CoBank annual dividend partially offset by the decline in income from operations accounted for the change.

Cash was $5.5 million at the end of first quarter, an increase of $0.8 million compared with our cash position at the end of 2018 of $4.7 million.

Capital expenditures were $1.5 million compared to $1.2 million in the first quarter of 2018, reflecting our announced plans to increase investment in our network.

We made a quarterly principal payment of $1.1 million to CoBank and elected to use our 2018 voluntary prepayments to offset the annual excess cash flow payment under that agreement.

Leverage is measured by debt agreement dropped to 2.83 turns, when you make the calculation net of cash it's 2.63. That covers the highlights for the quarter with additional details in the press release and our 10-Q.

Let's move to the investor presentation. Please note that the presentation is available on our and the SEC's website. We will try to indicate each page as we go through the material to allow you to track comments with the deck.

But please hold your questions until we complete the presentation. If -- the first 2 pages are our get started points. Beginning with the next couple of pages, it provides an overview and a highlight of what Otelco is. Otelco operates 11 RLECs in 6 states and the CLEC serving much of New England. We provide a full suite of services other than wireless to broadband -- to a broad range of carriers, businesses, resident customers, wholesale and retail.

If you look at Chart 4, it goes back to 1998, when the first part of Otelco started with the acquisition of Otelco Telephone by Seaport Capital.

Since then we've -- you can see the acquisitions over time and the changes in debt agreements and other things that were critical to our progress as a company so far.

So Chart 5 is the list of the management team that leads the various key functions in the company, 3 of the 6 folks on that list are here in the room today.

If you look at Chart 6, it provides kind of an overview of the company. We have 28,000 RLEC customers and over 2,000 CLEC customers, with the RLEC spread across 6 states and the CLEC serving in 3 states but principally in Maine.

$66 million in revenue, $25 million in EBITDA and about 200 employees.

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

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On Page 7, you'll see a network footprint and what you'll notice is we have over 2,200 miles of fiber of which 50 -- over 1,500 is transport fiber, and that fiber represents connecting our network to other networks and to our own capability within.

We have about 660 miles of distribution fiber, which is fiber used to connect to the last -- we call the last mile connecting to end-customers.

We have 56 service -- towers we serve. And on top of that we have a 5600-mile copper network, which is the legacy network related to our RLECs.

Page 8 shows the full product suite. As you'll note that we have many things to offer, both the business customer and the residential customer. These products are necessary in this market, and we continue to look at new products as we move forward.

Cable is available in some of our markets as we are a cable operator in Alabama. And then Hosted PBX is also a large product set of ours. If you look at Page 9, we are constantly upgrading our network, and our switching capability is striving over time to have network uniformity as it relates to electronics utilized on our network.

The company in the past invested in building fiber from COs and remotes in Alabama, Missouri and Maine, which is the foundation for improving connection speeds in certain parts of our market. That is why we have over 1,000 miles of transport fiber. That fiber network will allow the company to deploy its fiber to the nodes strategy more quickly with lower cost in the future.

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Robert J. Souza, Otelco Inc. - CEO & Director [8]

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If you turn to Page 10, you can see the 6 revenue categories that we report against across our territories. Comparing 2015 with 2018, you can see the impact of residential line loss on local service. ACAM funding in Missouri on access and increased demand for higher speeds on the Internet line.

Moving to Page 11, about 20 years ago, portions of our RLEC territories avoided competition. Today the major wireless carriers have a presence in virtually all of our geography. The service varies depending on the exact location, but they pretty much have coverage throughout our territories.

You can see we have well-known competitors in every segment of the business, whether it's Verizon or Consolidated Communications in our CLEC markets, cable competition in our RLEC territories, or as I said, MSOs throughout the regions we serve.

If you'll turn to Page 12, we can talk a little bit about what the FCC has done. The FCC has provided a revised ACAM offer that extends the length of the legacy -- of this legacy funding program 2 years. In addition, the offer provided more funding in Missouri and in turn increased the number of locations Otelco is required to serve with a minimum speed requirement of 25/3 throughout its entire footprint. And just last week, the FCC provided information regarding ACAM for our Shoreham, Vermont property. As in the past, we're analyzing their offer.

Our initial review suggests this is an attractive offer as it will convert and stabilize legacy funding in Vermont for 10 years with the additional requirement of being able to provide 25/3 speeds to over 3,600 locations.

Once Richard's team has reviewed those requirements, we'll make a decision on the FCC's offer before the June 17 deadline. And one of the things that I'd like to enforce on this call is that the ACAM funding is a replacement of the legacy funding that we have received in the past, which had the possibility of declining over the years. The FCC had indicated they would probably provide about a 10% reduction in that funding per year over that 10-year period. What the ACAM money does is replace that legacy funding and stabilizes that funding across the 10-year now 12-year period. But along with it comes the responsibility and the requirement to spend that money capital to reach these locations with a 25/3 minimum speed requirement.

1 day last week -- turning to Page 13, I'm sorry. 1 day last week our stock closed at $18. This is a significant improvement over the $4 to $6 range it traded for in the 2013 to 2016 period.

Investors who purchased stock during those days and still hold the shares have experienced a substantial return on their investment, and we're pleased with that accomplishment.

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Curtis L. Garner, Otelco Inc. - Secretary & CFO [9]

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If you look at the Page 14. In November of 2017, the company replaced 2 credit facilities with the new 5-year $87 million term loan from CoBank, which included a $5 million undrawn revolver. We have reduced the outstanding principal on that debt by $13.5 million through the end of first quarter. Our interest rate is LIBOR plus 4.25%, which is a significant improvement over the previous 2 facilities.

You go to Page 15. Otelco is a taxpayer, we don't have any NOLs sitting on our balance sheet to offer us any protection from tax. The Tax Act helped us in that it extended bonus depreciation and lowered our effective tax rate significantly, which has helped free up cash for investment in the business and a reduction in our leverage.

When Otelco went public, our loan facility required no amortization. I know that sounds strange and you wouldn't find that in today's world. But since that time, the leverage expectations within our industry have dropped materially for lenders who are, and is partially due to industry competition and the alternative services that are available to customer base. We have taken a full turn off of leverage in the last 4 years with the end of first quarter dropping to 2.83 as calculated by -- under our credit facility.

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

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So we'll talk about the operational objectives of Otelco. There are 4 key elements, one is obviously executing on the ACAM commitments we've made and taking that funding source and stabilizing that revenue source. Realizing efficiencies of the consolidated billing and operations and other key strategies and then deploying capital efficiently and effectively.

If you go to Page 18, when you talk -- when we talk about executing the ACAM fiber-to-the-prem and fiber-to-the-node strategy, it's our continued expectation and continued goal to meet the obligations required by ACAM funding at the lowest cost -- possible cost, balance against the various benefits of each technology to achieve those requirements.

We have met all the goals in this area so far and striving to meet certain speed goals well in advance of the regulatory requirements. Our goal is to exceed 40% of the ACAM eligible locations with 25/3 in 2020.

When we achieve that, it will be a full 3 years ahead of the regulatory requirement. We believe this will benefit our customer base by creating a better value equation for the service and speed that we deliver. It is entirely focused on trying to reduce revenue churn and customer churn and creating a better value equation. At the same time, though, we will deploy the most practical and cost-effective technology to achieve that.

Including VDSL, including DOCSIS 3.1 in our cable network, fix wireless solutions where appropriate and also fiber-to-the-premise.

VDSL will allow us to deliver 25/3 megabits per second to customers within 4,000 feet of a remote or a CO and up to 100 megabits, depending on the distance from those technology. So upgrading our cable network to DOCSIS 3.1 will allow us to offer up to 1 gig service to certain customers on that network. So all of these are driven towards increasing the service speed to our customer base, fiber-to-the-prem will also allow us to offer up to 1 gig to that customer base in those markets.

If you go to Page 19, our billing system implementation and consolidation is complete. In many regards a Herculean task that this company undertook since we went live in mid-2018. Those -- the consolidations occurred and the efficiencies gained from it, at least the first round has been achieved.

The next stage is to take the same disciplined approach to deploying a digitized mapping solution that is integrated with our billing system. What benefits does that provide? It should reduce the time and effort it takes to deploy future fiber network and customer install.

It will provide our marketing team better access to sales tools where targeted marketing can be deployed. As all of you know, based on the presentation, we have a very disjointed marketplace. So traditional marketing techniques like advertising on things doesn't have the same reach, so we are deploying a very marketed -- very targeted approach. This tool will help improve that targeting.

On Page 20, when we talk about deploying capital effectively. The key for us is to maximize the impact of capital to build fiber and upgrade our network speeds to lowest cost with maximum market coverage.

This is our foundation for growth more efficiently. It's all about scale. The cheaper we can deploy faster speeds, the better our returns. It provides the market a reason to stay with -- to stay an Otelco customer, which should reduce revenue churn and strive to stabilize revenues over time.

Our total investment of $9 million in 2019 focused -- focuses on achieving the parts of the 2-year goal of upgrading our network and service speeds to nearly 50% of our market.

As I talked about earlier, those service speeds will vary based on the technology deployed. Part of that strategy is to rollout VDSL to all of our colos and remotes in our entire network, upgrading the cable network to DOCSIS 3.1. And we're planning on building over a 117 miles of fiber-to-the-premise in ACAM territories and non-ACAM territories in 2019.

The other element of realizing -- deploying capital effectively is to maintain our banking relationships and maintaining reasonable leverage is always a goal of the organization.

When we talk about optimizing key strategies, we will continue to focus on exploring ways to expand our market. Either through collaborating on municipal bills like Leverett and WiValley, that is one way to expand our market.

When appropriate these private public partnerships harness the resources of municipalities in underserved markets to bring broadband to their communities. We can co-invest in the network or just be the operator depending on the goals of the municipalities. This is one element of our ability to grow.

Ongoing efforts to manage costs as evidenced by the nearly 12% cost reductions achieved over the last 4 years since the end of 2014 will always be a focus of the company.

Upgrading our network to bring uniformity should also bring efficiencies and broaden our capability to handle growth. Utilizing each technology available appropriately to balance the capital cost against the market benefits. So it's not 1 solution for all places. It's going to be used -- driven towards managing the cost ratio -- ample cost ratio to the market benefits.

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Robert J. Souza, Otelco Inc. - CEO & Director [11]

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As I think, Richard has done a fairly good job of summarizing. Page 22 kind of continues on with the idea that significant work is being done to document and understand our entire market utilizing outside consultants to map in geo code every physical location in our network. There are multiple benefits in doing that. Better information about the market we serve and the penetration rates we have achieved and the competition that we face. It's going to assist us in identifying areas where deploying fiber will produce the highest return possible on the investment.

Our in-market fiber deployment strategy allows for the construction of fiber on existing copper-based infrastructure at a cost of around $15,000 to $18,000 per mile. The mapping integration is a key element of our continuous improvement, which has been the foundation of the company over the past few years, as evidenced by the significant expectance improvements we've seen over the past 4 years. The consolidated company-wide billing and OSS system implementation was a big part of those improvements. And as Richard mentioned, we're always looking to upgrade our network.

The appendix that follows these pages provides additional detailed information including financial information and our 2019 fiber-to-the-prem and fiber-to-the-node projects. They can be found in the appendix as well. But we're not going to cover those pages at this time.

Brian, our operator, will now take questions from those who are on the line dialing in. But we're actually going to start with those of you who have joined us here in New York City and have questions. And if you would like to post those questions now we'll do our best to answer them, and we will probably repeat your question to make sure that those on the call can hear what was asked. So at this point, we open it up to the floor here in New York for anyone who might have a question.

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Questions and Answers

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Robert J. Souza, Otelco Inc. - CEO & Director [1]

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Yes, [Wally Walker.]

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Unidentified Analyst, [2]

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[Wally Walker,] private investor. Regarding Otelco's Vermont operation, which is being operated on the $1.4 million annually for the next 10 years under ACAM II announced last week. Rob you mentioned that ACAM in itself provides stability over legacy program. Not only that, isn't that a significant increase in annual support from what Vermont is currently receiving under the legacy program?

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

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[Wally,] I'm going to answer that in 2 ways and actually, I'm going let Richard answer the second part about some of the analysis. But when you compare the legacy funding to the ACAM II funding, it's only roughly about a $10,000 annual increase in funding. The current legacy funding is approximately $1.35 million. The ACAM funding is $1.36 million. And that's why I indicated earlier on the call, ACAM is not additive, it isn't newfound money, it's really replacing the legacy money that we've already -- always received. What it does is do exactly what you said. It provides the stability of that revenue over the next 10 years because there are no incremental haircuts that we're going to take on that revenue over the next 10 years. The issue is that we now have to cover 3,600 locations with 25/3 speeds. And Richard can give you some information on that.

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

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Right. So currently the reason why that property was not eligible for ACAM I was that we were able to provide up to 10/1 in that marketplace with our existing infrastructure. But as we look at this new funding option or the new funding stability, there is an obligation to build capability to provide 25/3. We are analyzing what that cost would be because there will be a cost. And the question is how fast do we have to spend it against the revenue stabilization versus some type of projection and what the revenue decline would be under the old funding mechanism. So we're working through that, looking at the routes and where the locations are, and trying to determine what is that capital costs over what time. So there's always this breakeven analysis as to what is the funding requirement against what the -- basically, incremental revenue over 10 years is on these 2.

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

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And [Wally,] just as we did in March when the FCC came back and offered roughly $450,000 per year to Missouri, everyone would think it's just an automatic, yes. And basically, we needed to go through the same type of analysis that Richard is doing right now. Just to verify that, that $450,000, which came with additional requirements that it made sense to us. And ultimately, we came to the conclusion that it did. We believe this makes sense, but we really don't want to make a commitment on it until Richard's had a chance to look and say, okay, what does it really mean to us from the standpoint of capital expenditures, revenue churn, long-term benefit to the company. And we will do that long before the June 17 commitment date.

Open the floor, again, to anyone else in the room that might have a question.

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Curtis L. Garner, Otelco Inc. - Secretary & CFO [6]

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Brian, why don't you give instructions to those who are on the call in terms of asking questions so that you can queue them up.

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Operator [7]

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(Operator Instructions)

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Robert J. Souza, Otelco Inc. - CEO & Director [8]

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And as Brian is pausing to allow star 1, does anyone in the room have another question they'd like to ask?

Yes, sir could you identify yourself.

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Unidentified Analyst, [9]

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My name is [Doug Malone]. I'm a private investor from Houston, Texas. I have a couple of questions on capital allocation. First, often the discussion of dividend comes up, I believe that any dividend that you pay -- that you pay in the form of money given our debt situation, and so it's not a wise use of money. And so when you need some additional funds from investors I would recommend sell a share or 2 and give them some of their own dividend. Definitely with the revenue decline that we're starting to get, I'm concerned that the debt leverage calculation is actually -- whilst, it's 2 numbers not just how much debt we pay down but the ratio of how that compares with our earnings. And Robert, currently we're on a virtuous path whereas we pay down more debt we get lower interest rates which helps us pay down further debt. I'd hate to see that reverse. And one of the concerns I have there is not the rate of debt that we're paying down but what the implications of the earning on this leverage ratio would be. And do we have any projections on when do we see some of these new projects in New England where we're servicing new communities in Massachusetts would look like, and massive opportunities for the company. When we'll start to see that revenues come online?

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

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All right. Just to summarize the last part of the question. Certainly, appreciate your statements ahead of the real question. But really, you're asking us to give you some sense as to when we believe revenue will stabilize based on the projects that we have underway. I can give you some initial thoughts and then Richard may want to add some of his own thoughts based on some of the networks that we're deploying. Those municipal opportunities, they are a wonderful opportunity for us because in effect you talked about capital allocation. In those projects there's very little capital involved for us because usually the municipality or some government funding is building either fiber optic cable or in some cases wireless capabilities. So for us, it's an easy entry point. The issue for us, and it's not really an issue, is we wish they were even larger, but most of these are small communities. So while they are an improvement to the overall revenue stream -- top line revenue and bottom line performance, they aren't as large as we would like to see. So some of the things that we're doing, which the internal things that Richard is going to talk about, we hope begins to change the trajectory of revenue decline and begins to stabilize that. Richard, maybe some of the VDSL discussion.

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Richard Allen Clark, Otelco Inc. - COO & President [11]

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The other thing to note on municipal roles, any time one of these projects comes up it has a life of about 2 years before the municipalities can line up the financing and the funding to start construction. So those are long lead time opportunities when they arise. Relative to how we're driving technology enhancement, really what we're talking about with VDSL and other things. It's all designed to drive increased speed so that we can compact our competitors where we have competitors, who are offering higher speeds. VDSL is for us because we already have fiber-to-the-node and fiber-to-our-cos, is a very cost-effective way to increase speeds. To those customers that are within 3,000 to 4,000 feet of that CO. At some point, an ACAM territory, as an example, the strategy will all like -- will likely be that in those territories which has the lowest density of our footprint to build-out more nodes to use VDSL as 1 technology. Fixed wireless may be a solution once we get down. Remember, we have to deliver 100% to 25/3 within the 10-year time frame. So it is a phased approach. We've been able to accelerate that approach from relatively low capital dollars over the next year to get to that 40% because we believe the market response will be positive. So we can say to this customer base, we've increased it. We don't have this much market. We hope some of you will come back to us and we will go target them to do that because we'll be able to offer something that is pretty close to what else is available.

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Robert J. Souza, Otelco Inc. - CEO & Director [12]

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Brian, do you have any calls on the conference bridge or questions on the conference bridge?

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Operator [13]

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We'll take our first question from [Jean Riley], who's a private investor.

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Unidentified Analyst, [14]

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I have a question if you look at Chart 29. There is -- when we look at the take rate, we see 52% from Missouri and roughly 30% for everywhere else, and could you explain why is that? Why is Missouri so much higher take rate than the other 3 regions?

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

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Mr. Riley, we can answer that question. Did everybody in the room hear his question, why Missouri take rates are higher than anywhere else. In Missouri, we built a couple of small communities and one of those communities, when we built it, it was an underground project, in other words, buried cable. The municipality basically insisted that when we build the fiber we convert 100% of the customers to fiber immediately. When we overbuild fiber in an aerial situation, generally speaking, we will only convert a customer to fiber when the customer wants or demands a higher service or speed level. We don't just automatically go down the road and convert everybody to fiber. In this municipality, we had to and that basically drove the penetration rates, obviously, much higher because it was pretty much 100% in that 1 community.

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Unidentified Analyst, [16]

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Right. And then just one more, just a comment. It'd be nice if there was just one more column in there that would say for each of these territories what your ACAM requirement is, that way we could just keep track of it.

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Robert J. Souza, Otelco Inc. - CEO & Director [17]

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Yes. If we're talking about ACAMs specifically, I don't think it would be too difficult for us to add the number of locations we're required to serve. A round number to keep in mind for Otelco-wide is roughly 13,000 locations. A fair number of them, I think, over 7,000 of them in Alabama, around 1000 in Maine. And I think now roughly 3,000 I believe in Missouri. Maybe a little higher, my numbers are slightly off. But that's something we could certainly provide.

Any -- Brian, any more questions on the bridge?

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Operator [18]

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It appears there are no further questions via telephone. I would like to turn it back to you Mr. Souza.

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Robert J. Souza, Otelco Inc. - CEO & Director [19]

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All right, Brian. Why don't we hang on because we do have a question in the room. I'm sorry, who would like to ask a question. Did someone want...

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Richard Allen Clark, Otelco Inc. - COO & President [20]

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Somebody raised their hand down there.

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Unidentified Analyst, [21]

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Just with regards to VT, if you did not accept the ACAM what are the repercussions?

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Robert J. Souza, Otelco Inc. - CEO & Director [22]

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The question is what if we don't accept ACAM in Vermont. The repercussions are as follows: we'll continue to get legacy funding, as I indicated about $1.35 million per year, but the FCC has indicated that they're going to give us what we refer to as a haircut. They had estimated in the past that haircut would be about 10%. So in year 1 you're looking at about $135,000 reduction in that legacy funding. In the past, they have varied from the 10% and it hasn't been to vary lower it has been to vary higher. Last year it was 15.5% and then fortunately they decided to say wait a minute it was going to be 15.5%, we have decided to put a hold on the reduction for this year as we're trying to figure out how we make an ACAM II offer to all of the companies that were not eligible for ACAM in the first go around. We would anticipate that those haircuts would resume after this year and if you figure a 10% reduction over the 10-year period. It's almost $5 million less over that 10-year period if we don't take the ACAM offer. Those are the numbers that Richard is working with to analyze, okay, what does this mean to us from reduction in revenue versus cost to build, customer penetration, all of those variables are part of the puzzle that he's piecing together for us.

Are there any -- yes, Mr. [Walker].

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Unidentified Analyst, [23]

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Seems like Otelco is shifting their focus now, for example, last year in addition to the $4.4 million required debt payments. Otelco made $7 million in voluntary debt payments significantly reducing its leverage. It sounds like now the plan, if I'm reading this right, has used those dollars to invest in the business. And if this is the plan, isn't the previous estimate of $9 million CapEx for this year a bit too low. Last year, for example, you had $8 million in CapEx, paid down voluntarily $7.0 million. I'm trying to figure out where those dollars are going this year. If we're going to -- are we going to continue making voluntary payments?

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Stephen P. McCall, Otelco Telephone LLC - Director [24]

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Yes. I think as you sort of pointed out, our focus right now is building out the network to upgrade the network and be able to provide higher speeds to our customers. And we're doing this because if we don't do this revenue will keep declining forever. So we definitely are looking at whether we need to accelerate CapEx. I wouldn't expect any voluntary principal payments on the debt to happen going forward for the near future. We're going to be putting our free cash flow into CapEx to upgrade the network and be able to provide higher speeds. And...

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Unidentified Analyst, [25]

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So the $9 million number is too low.

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Stephen P. McCall, Otelco Telephone LLC - Director [26]

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I mean over a period of time, yes, I think it needs to go up.

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Unidentified Analyst, [27]

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Okay. Because it seems like there's a big canyon there as far as -- I mean there's $7 million last year of voluntary payments. And therefore, only increasing CapEx from $8 million to $9 million.

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Curtis L. Garner, Otelco Inc. - Secretary & CFO [28]

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There's also a decline in EBITDA.

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Stephen P. McCall, Otelco Telephone LLC - Director [29]

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There's a decline in EBITDA.

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Curtis L. Garner, Otelco Inc. - Secretary & CFO [30]

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So that takes your cash down some.

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Stephen P. McCall, Otelco Telephone LLC - Director [31]

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Right.

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Richard Allen Clark, Otelco Inc. - COO & President [32]

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And part of the $7 million prepayment was also a reduction in cash on the balance sheet, which is a onetime opportunity.

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Curtis L. Garner, Otelco Inc. - Secretary & CFO [33]

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Correct.

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Robert J. Souza, Otelco Inc. - CEO & Director [34]

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If you remember, we had a much higher cash balance at the beginning of last year or through the year that we decided to keep at a much lower level throughout the year so that contributed to it.

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Richard Allen Clark, Otelco Inc. - COO & President [35]

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Probably about $3 million of the $7 million. So the $7 million came for operations.

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Robert J. Souza, Otelco Inc. - CEO & Director [36]

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And to speak to Steve's answer, that's the stuff that we're analyzing right now. Richard's knee-deep in that to say, okay, what can we spend on CapEx, where should we spend the CapEx, how do we get the best return. I don't know that we've come to any decisions on that but your question is a reasonable one. It's something the Board considers and we're going to continue to look at and discuss.

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Stephen P. McCall, Otelco Telephone LLC - Director [37]

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Right. Because the faster we can spend the CapEx and upgrade the network the quicker we can slow the revenue decline. And so it really depends on, if we want to spread it out over a long period of time we can do that but revenues will keep going down at a pretty high rate. And so we believe if we can accelerate the CapEx we can also change the curve with a revenue decline.

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Robert J. Souza, Otelco Inc. - CEO & Director [38]

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Thank you. Any more questions in the room? Yes, sir.

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Unidentified Analyst, [39]

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Earlier in the call you've -- in the presentation you've mentioned out leverage ratio have been reducing across the industry and some of your competitors got a little carried away in their acquisitions and took on more debt than they could handle. However, I still think that this is a consolidating industry and that there'll be opportunities to be acquired or acquire. And one of the things that will come into play is the opportunities in different service areas. In 5 years I think the environment will look different but the value of the fiber will probably stay consistent. Is your equipment capability -- what kind of timeline are you planning for capital investment? And will these investments be of value to ever like be running the company in 5 or 10 years?

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Robert J. Souza, Otelco Inc. - CEO & Director [40]

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Let me summarize the question. You're asking are the capital investments that we're making today going to bring reasonable value to the company in the future. I think that's what you're asking us. And my answer would be, yes. I'll allow Richard to comment as well because he's on top of that even more than I am on a day-to-day basis. But we believe that with every mile of fiber that you place that brings you closer to the customer you have a superior product to deliver service to the customers. And that's what we're trying to do. So we think in the long term investing in fiber, even when it's fiber-to-the-node, to serve a customer because that gives you basically the foundation to then build off of that fiber in the future to get closer and closer to your customers with fiber. We believe it is a good investment. But at the same time he wants to look and say if I spend the dollar here. Am I going to get the biggest immediate return on the dollar I've spent? So Richard maybe you can add something.

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Richard Allen Clark, Otelco Inc. - COO & President [41]

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So -- and also -- to answer one part of your question, fiber has long-term value, it does. But it's directly linear maybe not linear but linked to how much revenue you can generate from that fiber. There are other players in this industry that own a lot of fiber that don't have much revenue on them and their valuation is driven by revenue and profitability. So that's why when we talk about where we're building fiber it is going to be at least initially in the highest dense markets because that has the greatest revenue opportunity. Will it be beneficial to somebody in the future? Yes. The industry is consolidating, I agree with you I did that for a couple of years. Consolidated a bunch of companies in New England. But at the same time the residential fiber play right now is sort of in its infancy. And people are still gauging what it means. In some regards, we're ahead of the curve. But again, it's about creating value by stabilizing revenue and giving an opportunity to grow.

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Robert J. Souza, Otelco Inc. - CEO & Director [42]

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Brian, are there any more calls on the conference bridge -- I'm sorry, questions.

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Operator [43]

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No, sir.

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Robert J. Souza, Otelco Inc. - CEO & Director [44]

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Okay. Any additional questions from those within the room.

All right, Brian, it looks like we are done here. If you'd like to -- I guess, I'm supposed to close the call, not you. We really appreciate all of you that have gathered here in New York. It's good to see so many of you face-to-face and have an opportunity to talk to you. And those on the conference call, on the conference bridge we always appreciate your participation as well. We look forward to speaking to you, again, I think in the August time frame when we will be reporting out our second quarter results. And until then we'll keep doing as much as we can to prove the position of our company. So thanks so much for being with us today.

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Operator [45]

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This concludes today's call. Thank you for your participation. You may now disconnect.