HickoryTech Corporation (OTCPK:HTCO) Q4 2012 Earnings Call March 6, 2013 10:00 AM ET
Jennifer Spaude - Director IR & Marketing
John Finke - President & CEO
David Christensen - SVP & CFO
Good morning. My name is Lindsey and I will be your conference operator today. At this time, I would like to welcome everyone to the HickoryTech’s Fourth Quarter 2012 Earnings Conference Call. All lines have been placed on-mute to prevent any background noise. (Operator Instructions) Thank you.
Jennifer Spaude, Director of Investor Relations, please go ahead.
Thank you and good morning. We appreciate you joining us today for HickoryTech’s fourth quarter 2012 earnings call. I am Jennifer Spaude and with me today are John Finke, HickoryTech’s President and Chief Executive Officer and David Christensen, Senior Vice President and Chief Financial Officer. At the conclusion of the prepared remarks, we will open the call up for questions.
Please refer to the Safe Harbor statements on slide two of our presentation which is available on the Investor Relations section of our website at hickorytech.com. The information in today’s presentation may contain certain statements and predictions that are not historical facts, but are forward-looking in nature. These forward-looking statements are based on current expectations, estimates and projections about the industry in which HickoryTech operates, and management’s beliefs and assumptions as of the time of this call.
Such forward-looking statements are subject to uncertainties. Actual results or outcomes may differ materially from those indicated or suggested by any forward-looking statements, whether as a result of new information, future events or otherwise. You are cautioned not to place to undue reliance on these forward-looking statements made during the conference call.
These statements are not guarantees of future performance and involves certain risks, uncertainties and probabilities which are difficult to predict. There are many such risks and uncertainties which could affect the economy, our industry and our company in particular, some or all, which could affect future results. More information on potential risks and uncertainties is available in the company's recent filings with the Securities and Exchange Commission, including HickoryTech's annual Form 10-K report which will be filed later this week, our quarterly Form 10-Q report and our Form 8-K report.
In addition, today’s discussions will include certain non-GAAP financial measures. Reconciliation of these non-GAAP measures to most directly comparable GAAP measures are available in our presentation and in our earnings release. All participants are advised that the audio of this conference call is being broadcast and is being recorded for playback purposes. Following our discussion, we'll open our call to a Q & A session.
At this time, I would like to turn the call over to John Finke.
Thank you, Jennifer and good morning everyone. I appreciate you joining us today as we discuss HickoryTech’s fourth quarter and fiscal 2012 earnings. I am very pleased with our financial results and the significant progress we made during the past year with our strategic initiatives. It was a year in which we made substantial investments in the future achieving important milestones along the way.
First, we completed the acquisition and integration of IdeaOne and we have rebranded the Fargo, North Dakota market as Enventis. We are now able to leverage a robust fiber network with more than 650 lit buildings in the Fargo area. We have integrated systems and aligned our sales and operations teams. And we are operating as one company. The Fargo network directly connects to our regional five-state network giving us the opportunity to serve multi location businesses throughout the region.
Second, we completed the majority of the construction associated with our Greater Minnesota Broadband Collaborative Project. Approximately 450 fiber route miles have been constructed across Northern Minnesota with the opportunity to connect healthcare facilities, schools, library, higher education institutions and public offices with advanced broadband network.
We grew our overall revenue 12% in 2012 compared to 2011. Our fiber and data segment revenue grew 33% and our equipment segment grew 23% in 2012; both are key drivers in our overall revenue growth. We have enhanced our datacenters and extended fiber deeper into our network to secure commercial and enterprise customers and we have signed long-term contract with wireless carriers to provide fiber services to the towers.
Our business fiber and data services continue to deliver solid revenue growth, offsetting decline in our legacy telecom services. The [fiber] [ph] business is the driving force behind our diversification strategy. And in our telecom segment, we upgraded our digital TV middleware and launched new competitive consumer bundles which have been effective in reducing broadband churn and maintaining revenue per subscriber despite aggressive competition from cable and wireless provider.
As you will see in slide seven, 76% of our revenue in 2012 was business and broadband services. This is the result of our long-term diversification strategy which has transformed HickoryTech from a telecom company into a competitive and leading communications solutions provider. We remain committed to our strategic plan to grow our company and to increase value for our shareholders.
We were able to grow EBITDA 8% in 2012. Overall growth in our fiber and data segment is helping to offset telecom profitability declines and it's important to note that despite declines in profitability, our telecom segment still produces solid free cash flow.
David will provide financial highlights for each of our three segments. But allow me to touch on a few of our operating highlights. First, we achieved 36% revenue growth in our fiber and data segments in the fourth quarter.
We have been aggressive in promoting our full suite of Ethernet, internet and data services and driving higher margin on that services. The demand or increased bandwidth, but high capacity data network connections is driving revenue in Ethernet, dedicated internet and high bandwidth services.
We are connecting more buildings to our network and have extended our network to wireless tower to secure longer term contracts as part of our fiber to the tower initiative. To date we have contract for approximately 100 towers with about half of those already in service.
We have initiated a value based sales training effort across our sales teams and to align them with added incentives based on cross-selling network based transport services and business equipment solutions. In our equipment segment, revenue was up 44% in the fourth quarter as a result of higher equipment sales. We remain focused on positioning service revenue with each equipment sale in order to grow this higher margin recurring revenue stream.
Our affiliation with Cisco, as a Gold Master unified communications partner and with DMC, VMWare and Netapp allow us to provide complete solutions and differentiate us in the marketplace. With approximately 150 certifications, our team is one of the most highly skilled in the upper Midwest. We’ve experienced a strong demand for our unified communications contact centers and data networking services which drives both hardware sales and professional services.
Our diversification strategy helps offset decline in the telecom segment. Our telecom business is matured and therefore declining. However, this segment continues to produce solid free cash flow.
We continue to migrate and reduce expenses in this area as revenue declines. Our strategy in mid-2012 of launching new broadband bundles with term discounts has been effective in mitigating customer churn and securing new sales. These bundles offer new and existing customers excellent value. We’ve been to reduce churn and attract new customers with the 30% of our bundled subscribers being new customers, 87% of our new bundled subscribers chose a two year agreement. Our broadband subscriber increased during the year while average revenue per customer declined slightly due to the competitive rate structure and price compressions.
Given our primary rural telecom markets we remain focused on leading with our key differentiators, our local customer support and our strong connections to the communities we serve. Our marketing tag line which is responsive, local, committed speaks directly to HickoryTech's position in these markets.
Now I will turn the call over to David Christensen who will discuss our financial results, Dave.
Thank you, John. Good morning everyone. We delivered a solid financial performance to our shareholders in 2012, which increased HickoryTech's overall value, while making strategic investments and committing significant resources to pursue our growth initiatives, we have maintained a positive financial position and continue to return value to our shareholders both financially and through our quarterly dividend returns.
Fourth quarter consolidated revenue totaled $46.6 million and 18% increased from one year ago. This notable revenue boost was primarily due to the addition of IdeaOne as well as organic fiber and data growth, an increase in equipment revenue segment revenues.
The organic growth in our business provided 9% growth or roughly half of the overall growth. Consolidated fiscal 2012 revenue totaled $183.2 million, a 12% increase over 2011. Our revenue growth for the quarter and for the year is net of any price reductions as customers migrate to discounted consumer bundles and as they evolve from our traditional TDM network to IT based services a progression that allows them to benefit from pricing economies.
Now turning to our segments, first the fiber and data segment revenue increased 36% in the fourth quarter totaling $16.4 million. While the addition of IdeaOne was a major driver in this revenue spike, excluding IdeaOne we achieved 8% organic revenue growth in this segment.
For fiscal 2012, fiber data revenue was $16.9 million, a 33% increase over 2011. Through select acquisitions and organic growth, we have significantly grown this product line more than double from just four years ago. In 2009, fiber data was 22% of our total revenue. It is now one-third of our total revenue.
Costs and expenses in this segment increased 36% for the quarter and 33% for the year and are inline with the revenue increases. We continue to expand our operations in fiber and data as we invest in the business and we've added sales staff to support our growth initiatives and in targeted regions.
Fiber and data is a key strategic growth area where we are investing heavily. In the fourth quarter, we invested $7.9 million in this segment and we invested $19.8 million for the entire year or two-thirds of our total CapEx. While this is significantly higher than 2011, the combination of the addition of Fargo operations, our larger push to complete our broadband stimulus route on time and the strong year of success based capital expenditures all provided the increased CapEx level in this area.
Our second segment, equipment, includes the non-recurring equipment or software sales as well as support services. This business incurs quarterly fluctuations based on the size and the timing of sales. Fourth quarter equipment segment revenue totaled $14.8 million, an increase of 44% year-over-year.
Of the two product lines in this segment, equipment revenue was up 59% and support services were down 22%. Costs in our equipment segment are up in alignment with the higher revenue. Operating income and net income are both up 36% and 39% respectively for the quarter. Margins are in line.
Our year-to-date operating income and net income in equipment were lower than 2011 because of the mix of revenues. CapEx in this segment is minimal therefore giving this line of business good value from a free cash flow standpoint. For fiscal 2012, equipment segment revenue totaled $16.1 million, a 23% increase over 2011.
Equipment is one-third of our revenue for 2012. We have a very solid backlog of equipment orders entering the New Year and we feel very good about our position in the market and our partnerships. We understand the peaks and plateaus within this line of business and we are excited about the lead generation and cross referrals between equipment and our network services.
Now, turning to our telecom segment which includes both consumer and business services in our legacy ILEC and CLEC markets. Revenue was down 10% in the fourth quarter and down 9% in 2012. All markets and services are maturing in this segment. Network access and local service revenue declined 11% and 14% respectively in the fourth quarter. The decline in these legacy services are largely due to access reform regulation, access line and minute-of-use erosion and price compression.
This year, we're incurring a higher level of network access revenue declines than historical levels which usually are at 3% to 7% decline as a result of three main factors. First, the exploration of interstate infrastructure support reimbursements. Second, earlier in the year, we cancelled service to a conference call service provider due to the new access rules, further reducing the minute-of-use and business access lines. And third, the initial impacts this year of industry wide access reform regulation.
Going forward, we expect access declines to be at pre-2012 levels as the new Connect America Fund or CAF is expected to help stabilize access revenue decline and make it more predictable over the long run and also the fact that many of those 2012 influences were non-recurring in nature.
We reduced telecom operating cost 7% in the fourth quarter and 4% in 2012 and we will focus on continued cost reductions in 2013. Our investment in the telecom business is based on necessary maintenance CapEx and success based broadband initiatives as we focus on maintaining healthy operating free cash flow from this important legacy business.
Our overall operating income in the fourth quarter increased 40%, despite an 18% increase in depreciation and amortization. Primarily from the addition of IdeaOne’s network and CapEx associated with our network expansion. I want to remind that our fourth quarter last year included more than $500,000 of acquisition related expenses.
For fiscal 2012, operating income was $19.4 million down 1% from 2011. The increased depreciation brought about by our aggressive expansion of our network has the effect of reducing our operating margin.
Our interest expense in the fourth quarter was $1.1 million up 4%. In all number shown in these financial statements and in our prior years according to our restated financial statements issued last November; interest expense is expressed without using hedge accounting for our interest rates swaps.
In 2012 there was less than $40,000 of market value impact included within interest expense, due to not using hedge accounting. Looking ahead, we have redesignated our interest rate swaps using hedge accounting under GAAP on January 1, 2013 and we can predict that our 2013 interest expense will be similar to that of 2012.
Net income totalled $2.5 million in the fourth quarter, an increase of 60%. For fiscal 2012, net income was $8.3 million down 1%. The net income isn’t going up as much as revenue and EBITDA are because of the effects of depreciation as we previously discussed due to our expanding network.
Fourth quarter EBITDA was $12 million and fiscal 2012 EBITDA increased 8% over the prior year totaling $46.2 million. This represents a 25.2% EBITDA margin versus our overall revenue.
Current maturities in the long term debt classification of debt on our balance sheet totaled $136.8 million at December 31, 2012. The 2012 debt balance represents a year-over-year increase of $16.5 million, as a result of funds borrowed to purchase IdeaOne. Our net debt position which is a measure of actual balance sheet strength subtracts the cash balance from total debt and was $128.5 million as of December 31, 2012.
You will see this illustration on slide 10 of our presentation. As a reminder, we use $6 million of our own cash and the acquisition of IdeaOne in 2012 and we have a $30 million CapEx here which is 40% higher than the previous year. We feel it is the 2012 accomplishment to have completed a $28 million acquisition and the $30 million network expansion, we had only have increased our net debt by $21.3 million, that’s the cash generating attribute of our business.
We continue to operate with a debt ratio of less then three times EBITDA. This ensures favorable terms for our credit agreement, which currently has a maximum leverage limit of three on the quarter or 3.25 to 1 in 2013. We feel we are conservatively leveraged and our credit facility will provide excellent financial support for our growth plans. We remain committed to building shareholders value to our long term business plan. We have provided fiscal 2013 guidance in our earnings release which you will also see on slide 13.
I'll just highlight a few for revenue which in 2012 was a $183 million; we are targeting a range of 2% decline to 3% increase. For EBITDA which in 2012 was $46 million; we are targeting a range of 2% to 8% increase. For net income which in 2012 was $8.3 million; we are targeting a range of 7% decrease to 14% increase.
Further details of our fourth quarter and fiscal 2012 earnings are available in our SEC Form 10-K which we will file within a day or so and with that I would like to turn the call back over to John Finke.
Thank you, Dave. In summary, 2012 was an important year of progress, results and position in HickoryTech’s future. We demonstrated our ability to grow strategic business plans, to drive strong cash flow and provide continued shareholders value through the return of quarterly dividend. Our 65 plus year track record of paying a dividend is supported by our Board of Directors.
Last year, we increased our dividend to 3.5% in the fourth quarter; this being the third dividend increase since 2010. We have successfully produced solid free cash flow, allowing us to invest in our business, pay down our debt and return value to our shareholders through a dividend which is currently at 6% yield.
Our investors business is very important to HickoryTech’s future. We are confident in our belief to provide value through our fiber and data network services and our expertise in deploying equipment solutions. We will focus on driving on net sales across our core regions of Fargo, North Dakota, Northern Minnesota, Minneapolis, St. Paul, Southern Minnesota and the Des Moines, Iowa area.
HickoryTech’s value remained strong having met or exceeded our 2012 objectives, while we invested in growth initiatives that will further strengthen our business. We made significant progress growing our fiber and data revenue through both a strong and strategic acquisition in Fargo, North Dakota and by way of organic growth. We were able to manage the regulatory reform challenges and declines in our legacy telecom operations, as a result of our strong diversification.
In 2013, we will focus on driving sales in our core regions, profitability and enhancing our customers’ experience as a local committed and responsible service provider. Our legacy telecom operations are mature and declining, but continue to reduce solid cash flows. We expect our capital investments to be in line with years prior to 2012. We will continue to use the free cash flow of our business to achieve our strategic objectives and invest in growth opportunities.
We believe HickoryTech is well positioned for success in the coming year and beyond. With a strong balance sheet, growth in strategic pipelines, a healthy dividend with a 6% yield, strong cash flow and the ability to generate cash to fund future opportunities.
Our team of fiber employees is working hard to deliver results and to be our customer’s best choice. I would like to thank our employees, our Board of Directors and our shareholders for their support. Thank you for joining us on the call today and at this time, we will take any questions if you might have. Lindsay, would you initiate those now.
(Operator Instructions) There are no questions at this time. I would like to turn the call over to John Finke for any closing remarks.
Thank you, Lindsay. If you joined us after the call began today or would like to replay of the call, please visit our website at hickorytech.com. A telephone replay of this call will be available beginning at noon today. Thank you again for joining us today. We look forward to our next call and if you have any further questions, I’d invite you to give Jennifer, David or myself a call. Thanks again and have a great day.
This concludes today’s conference call. You may now disconnect.
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