HickoryTech Corp (OTCPK:HTCO) Q1 2009 Earnings Call May 5, 2009 10:00 AM ET
Jennifer Spaude - IR
John W. Finke - CEO
David A. Christensen - CFO
At this time, I would like to welcome everyone to the HickoryTech first quarter 2009 earnings call. (Operator Instructions)
Ms. Spaude, you may begin your conference.
Good morning. Thank you for joining HickoryTech's first quarter 2009 earnings conference call. Our earnings release was issued yesterday afternoon and is available on our website at hickorytech.com. This conference call will cover the financial results of HickoryTech for the first quarter.
Please note that there is also a slide presentation that accompanies today's call, which is posted on the Investor Relations section of our website. For those of you who're viewing the presentation, you will see our Safe Harbor statement on slide two.
Before we begin, I would like to remind you as a Safe Harbor that this conference call and webcast may contain certain statements 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 that could cause HickoryTech's future actual results to differ materially from such statements. You're cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of which they were made, which is Tuesday, May 5, 2009.
These statements are not guarantees of future performance and involve 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. Therefore, actual outcomes and results may differ materially from what is expressed or forecast in these statements, whether as a result of new information, future events or otherwise.
Before making any investment decisions about our company, we encourage you to review the company's most recent filings with the Securities and Exchange Commission, including HickoryTech's Annual Report or Form 10-K, which includes descriptions of many of these uncertainties and risk factors. These reports are available on our website on our Investor Relations page.
All participants are advised that the audio for this conference call is being broadcast live over the Internet and is also being recorded for playback purposes. The audio will be archived on our HickoryTech Investor Relations website for the next 30 days.
Following management's discussion today, we will open the call today to Q&A. Representing management today are John Finke, HickoryTech's President and Chief Executive Officer; and David Christensen, Senior Vice President and Chief Financial Officer.
At this time, I would like to turn the call over to John Finke.
Thank you, Jennifer. Good morning, everyone, and welcome to HickoryTech's first quarter 2009 earnings conference call and webcast. Today, I'll provide commentary on our first quarter results, our business strategy, and our announcement yesterday afternoon to acquire CP Telecom. David Christensen, our CFO, will provide details on our first quarter financial results.
Overall, we are pleased with our first quarter results. HickoryTech's first quarter revenues totaled $33.5 million. Net income totaled $1.6 million or $0.12 per diluted share, a modest decline from the same period one year ago. And, our operating income for the quarter totaled $4.6 million, down 6% from the first quarter of 2008.
We continue to experience challenges due to the macroeconomic environment. Businesses continued to scrutinize capital spending and delay purchases, which negatively impacts our business equipment sales. Consumers are also finding ways to reduce or eliminate discretionary spending, which impacts our telecom local services.
Despite a tough economic environment, our business remains strong as demonstrated by several factors, including, growth in our transport and business services, further reduction in our debt, an increased cash position, and a strong balance sheet. Additionally, our diverse customer base and our extensive product lines have helped us balance the impacts of the economy.
We operate in highly competitive markets across all of our lines of business. Within our telecom operations, the majority of all of our communities experienced cable, voice and data competition. Customers have choices in all markets for telecom and Internet services. We continue to leverage our local customer service and support in an effort to maintain our market share and win customers back from the competition.
Now, we'll take a look at our telecom sector results. First quarter 2009 telecom revenues totaled $17.9 million, down 3% as compared to the first quarter of 2008. As with past quarters, the primary drivers for telecom declines are lower local service and network access revenues.
Our local line loss in the first quarter was 9%. A Centrex customer loss in the fourth quarter of 2008 inflates this number. Excluding this customer, our line loss would have been 7% year-over-year, which is in line with industry averages.
Network access revenue was down 9% from the same period one year ago. This decline was anticipated and corresponds with local service declines. This is an industry-wide trend across telecom providers.
We continue to see growth in DSL, data, and digital TV revenues. Our first quarter broadband service revenue increased 11%, while DSL lines posted a 5% increase, and digital TV lines grew 19%. We expanded our digital TV service to Mapleton, Minnesota in April of this year. Mapleton is one of our ILEC properties, and is a small rural community, located south of our Mankato headquarters, with about 600 households. We currently provide voice and DSL services in Mapleton, and we are able to cost effectively expand our IPTV services into this community.
We continued to differentiate our TV services through what we call our Choice Plans, which allows customers to customize their channel lineup. Additionally, our high-definition channel offering in our IPTV communities is competitive. And in June, we will rollout our DVR service, after extensive testing with our equipment providers on this service.
We're aggressively marketing our money saving bundles and competitive offers to consumers. Our red carpet customer service approach continues to ensure a quality customer experience and contributes to customer retention.
Now, I will turn my comments to our Enventis sector. Our Enventis sector revenues of $15.9 million in the first quarter of 2009, was a 10% decline, as compared to one year ago. The primary factor in the revenue decline was lower equipment sales. Enventis' operating income and net income were both down 19% and 18% respectively. Equipment sales have been significantly impacted by the economy, as businesses cut back and delay capital expenditures. We have implemented cost reductions in this area of our business to align with the revenue declines.
Enventis Transport Services remained very strong and increased 23% to $6.8 million in the first quarter of 2009. This growth is driven by increased revenues within wholesale and business transport services. Our strategic initiative to increase the number of co-locations throughout our network is helping us successfully grow our transport services revenue. Last year, we added four additional co-locations to our network. This gives us the competitive pricing position for both business and wholesale transport opportunities in these locations.
In the first quarter, we completed a 10-gigabit overlay within our core fiber network in Minneapolis, St. Paul, which provides us with significantly increased bandwidth to support the growth in our transport business and to address new opportunities.
Consumer and business applications continue to drive the need for increased bandwidth. Our network is well positioned to deliver a higher bandwidth and to meet our customers' ongoing needs.
Transport Services growth was also impacted by an increased demand for our hosted voice-over-IP service branded SingleLink. In a downturn economy, a hosted solution such as SingleLink is a viable option for businesses looking to achieve savings by outsourcing and consolidating their communications needs.
We continue to see important growth opportunities within this product line, which can be deployed to mid-sized business with multiple locations throughout our fiber footprint and across the United States through agreements with national carriers.
We are also very pleased with our continued growth in Enventis Network Services revenue. First quarter services revenue increased 13% to $2.3 million. Our focus on growing this primarily recurring revenue stream is strategic as we build a deeper relationship with our business customers. Accordingly, Enventis cost of services expense also increased in the first quarter to support this higher level of service revenue.
Our strategy is to grow our business services, as well as our broadband services, while managing the decline in our core telecom business. We took another step in our business-to-business growth strategy with our announcement yesterday to acquire CP Telecom, a facility-based communication provider serving Minneapolis, St. Paul and Northern Minnesota. CP Telecom primarily service business customers with voice, data, and Internet services over a leased network. This strategic acquisition enhances HickoryTech's focus on the small to midsize business customer. It expands our business product portfolio, adding new products such as mid-band Ethernet and enhancing existing products such as integrated T1s.
CP Telecom has a solid customer base, an experienced management team, a robust product portfolio, and a lease network with numerous strategic co-locations. We project important synergies as we integrate CP Telecom into our Enventis business, specifically as we combine the networks of the two organizations. CP Telecom calendar 2008 un-audited revenue totaled $10 million. The acquisition offers us additional fiber capacity in Minneapolis and St. Paul.
The acquisition also adds 10 additional co-locations to our network and enhances five existing co-locations, and a strategic point of presence in Minneapolis. CP Telecom assets also include soft switching and mid-band Ethernet technology. HickoryTech's acquisition of CP Telecom is an all-cash transaction and will be funded primarily with cash on hand. We anticipate the acquisition will close in the third quarter of 2009.
This acquisition demonstrates our continued efforts to be a leader in the business-to-business market. The addition of CP Telecom will strengthen our SMB focus and provide new opportunities for us to grow our business sector.
Overall, we are pleased with our first quarter results. The economic climate continues to be challenging, but HickoryTech remains stable and our balance sheet is strong.
We continue to monitor all economic indicators impacting our business and will make adjustments as necessary to maintain this position of strength throughout 2009 and into 2010. We will make strategic investments in our network and focus on increased profitability and free cash flow across all our lines of business.
I will now defer to David Christensen, who will provide details on our operational performance in the first quarter.
Thank you, John. Good morning. We reported first quarter net income of $1.6 million, a 9% decrease from one year ago. Consolidated operating income of $4.6 million decreased 6% versus the first quarter of 2008, due to lower telecom revenues, lower Enventis equipment revenue and increased cost of services in the Enventis Service business.
First quarter 2009 consolidated revenues of $33.5 million were a 7% reduction from the same quarter in 2008. Declines in traditional landline telephone services and in the equipment sales business of Enventis were partially offset by increases in telecom broadband revenue, growth in Enventis Transport business, and improvement in the services component of the Enventis business.
Overall, it was a quarter of several puts and takes. It was a quarter which was certainly affected by the economy, but much like our previous quarter, we are pleased with our solid results.
One of the first quarter highlights is the strong position of our balance sheet, including reduced debt and higher levels of cash on hand. This is our game plan this year and we are succeeding very well on it.
Our results are reported in two sectors and I will begin with the telecom sector. For these discussions I'm using the pre-elimination numbers from our telecom sector recap in our earnings release. Telecom operating income of $3.4 million decreased 5% or $162,000 in the first quarter of 2009. Telecom revenues declined, but we were able to move telecom expenses down to mitigate the decline to a degree. This will remain a focus. Telecom cost control is something we have a very strong track record on, and we are committed to continue strides in this area.
The telecom sector's first quarter 2009 revenue of $17.9 million was down 3% from the $18.4 million reported in the first quarter of 2008. Telecom's network access revenue for the first quarter of 2009 was down 9% or $615,000 from the same quarter in 2008. The decline was anticipated, but was a somewhat larger decline than we expected due to line count trends and lower minutes of use on our network.
We experienced the same downward network access trends which our industry peers also experienced, caused by the reduction in minutes and network utilization by end-user customers and carriers. Access revenue, due to volume and rate reductions, has been in gradual decline for many years and it is a condition we can plan for and offset with other growth areas.
There is a chart in our accompanying slide presentation, which depicts quarter-by-quarter access revenues over the past three plus years. The variability in year-over-year network access revenue is expected to level off. That is, next quarter's decline in access is not expected to be as profound, and that is due to anomalies and unique adjustments related to disputes recorded last year. This year, the trend is more consistent.
As a reminder, our interstate rates will reset in July 2009 as part of biannual rate rebalancing.
Telecom's broadband revenue, which is a combination of our data and our digital TV products, increased 11% or $292,000 over the same quarter last year, continuing a long-standing positive trend. This revenue increase offset the decline in local service revenue.
Telecom costs, other than depreciation and amortization, which amount to $10.4 million this quarter, decreased 5% or $541,000 in the first quarter compared to one year ago. In our previous calls, we've indicated that over the longer run, telecom costs can be leveled and even lowered. Telecom costs control will continue to be an area of focus for us.
Telecom capital expenditures were $1.4 million in the first quarter of 2009, compared with $2.4 million a year ago. We're able to reduce the telecom CapEx, and we'll continue to be very frugal in where we invest. We still have broadband growth to nurture and we want to continue to maintain our telecom network, but we foresee a lower level of telecom CapEx in 2009 than previous years.
Now, I will move on to the Enventis operating results. Again, my comments are from the pre-elimination numbers in the Enventis sector recap in our earnings release. Enventis operating income totaled $1.2 million for the first quarter of 2009, and was lower than the first quarter of 2008 by $266,000 or 19%, because of the economy induced decline in equipment sales and our cost of service increases, offset by good profitability increases in our fiber transport business.
The Enventis sector's first quarter 2009 revenue of $15.9 million was 10% lower than the $17.7 million reported in the first quarter of 2008. Our focus on increasing Enventis service revenue is clear as Enterprise Network Services revenue increased $300,000 or 13% in the first quarter, to a level of $2.3 million in the first quarter of 2009.
Transport Services, which is also recurring services revenue, increased $1.3 million or a 23% in year-over-year comparisons, and is $6.8 million for the first quarter of 2009. We highlight the equipment revenue and the services revenue distinctly within Enventis on slide nine and 10 of the accompanying presentation. The comparison depicts service revenue as a growing portion of our business and that is our strategy.
Equipment revenue within the Enventis sector was $6.8 million in the first quarter, compared to $10.2 million a year ago. Equipment sales open the door to other products and services. This revenue will always vary on a quarter-to-quarter basis and can be impacted by the economy, as customers look to reduce spending and delay their equipment purchases.
Fortunately, the cost of equipment sales component moves in sync with ENS revenue, giving us less quarterly fluctuations in operating income than you see if you look at the equipment revenue line alone. The gross sales margin dollar impact of the decline in the equipment business for the first quarter was approximately $700,000, a much smaller amount than the total revenue decline in the equipment business.
Enventis' overall cost of service and selling, general and administrative expense, excluding depreciation and amortization, totaled $7.6 million in the first quarter and increased 15% or $1 million, compared to the same quarter last year. This is due to our commitment to grow our service business and invest in our network. We have added staff and third-party resources for the heightened activity we are seeing on the service side of Enventis. We have reduced this area of cost by over $1 million from the previous sequentially quarter, the fourth quarter of 2008, in reaction to the economy and will continue to manage this cost depending on how the demand, sales portion of the Enventis business trends in the future.
The Enventis sector capital expenditures totaled $1.2 million in the first quarter of 2009, up from the $1 million in the same quarter of 2008. We have a quota of success based capital spending projects for the year and we will continue to seek only the best projects to invest in based on the return on investment. Just under half of our CapEx allocation is planned to support our Enventis sector. Therefore, if our CapEx is projected at $17 million to $19 million for the year, Enventis will draw $8 million to $10 million, which would represent an increasing CapEx in Enventis over prior years.
Our debt balance of $125.6 million at the end of the first quarter is a reduction of $1.4 million from the beginning of 2009. In addition, we had $6.6 million of cash on our balance sheet at March 31, 2009, an increase of $4.9 million from just three months ago. We feel we are truly positioned for growth with this strong balance sheet and our ability to generate free cash flow.
To illustrate where our money is used, we provide an example of free cash flow on slide 12. Free cash flow is depicted as cash flow from operations or EBITDA, minus interest, minus CapEx, and minus cash taxes. Our cash taxes have been quite a bit lower than the GAAP or the book taxes for several years now, due to the tax benefits of our advanced CapEx levels.
The cascade chart on slide 12 starts on the left with our cash flow from operations in the first quarter of 2009, which was $9.8 million. As you move across to the right, this chart shows we utilized $1.7 million for interest, another $2.6 million for capital expenditures, and we spent $300,000 for cash taxes. This allows $5.2 million remaining as positive free cash flow in the first quarter.
We paid out $1.7 million in dividend payments, creating a dividend payout ratio of 53% of our free cash flow. 53% represents a very healthy and safe payout percentage, and we've been consistently at this kind of level for several operating periods. Thus, even in the period of lower earnings due to the economy, even in this recession, we are generating strong cash flow, strong enough to support the dividend and to pay down debt, and even to build cash to fund growth.
As John discussed earlier, we are proud to announce another acquisition for HickoryTech. We reached agreement with CP Telecom, and the gaining item to close, as it is with most telecom providers, is to obtain regulatory approval from both federal and state authorities. That is, gaining the SEC approval for the transfer of CP Telecom's activities as a facilities-based carrier, and gaining the Minnesota Public Utilities Commission approval for the transfer of CP Telecom's activities as a CLEC.
Both sides feel that approval will be routine, but this process may take 60 days or longer. We hope to close this by the end of the second quarter or possibly early in the third quarter. The $7 million acquisition price is subject to adjustments after closing and some of the proceeds will be set in escrow pending any change. The all-cash consideration on this deal will come primarily from our cash on hand; debt if any involved with this transaction will be minimal, and available from our $30 million bank line of credit, which is entirely unutilized at this time.
In summary, our first quarter of 2009 is off to a solid and strategic start. There were several financial measurements in the first quarter, such as cost reduction and cash accumulation, which demonstrate we are adapting to the economic pace and we are proving we can proceed from a position of strength to make HickoryTech better able to grow when the economy gets healthier.
With that, I would like to turn the call back over to John.
Thank you, Dave. In summary of our first quarter 2009, we're pleased with our position and our progress in growing our business services. HickoryTech's balance sheet is healthy, and we're in a strong financial position to remain stable and grow HickoryTech.
Our strengths include strong net income, a high level of recurring revenue, a growth trend in key strategic pipelines, focus on debt reduction, shareholder value through our dividend return, and the ability to generate cash for future opportunities. We will continue to look for strategic opportunities to invest in organic growth, such as last mile network investments and geographic expansion, to further penetrate our business-to-business services.
As we continue to build our cash reserves, we will also evaluate additional external growth opportunities that fit in our strategic direction. We are excited about our acquisition of CP Telecom and look forward to its closing. We will update you on the closing and integration in our second quarter conference call.
While we are cautious about the economy, we are confident in our strategy to maximize our core telecom business, while growing our Enventis business, and focusing both sectors on cash flow. We appreciate your continued interest in HickoryTech, and thank you for joining us today.
At this time, we'd be happy to field any questions.
(Operator Instructions) There are no questions at this time. I will now turn the back over to John Finke, for closing remarks.
If you joined us after the call began or would like a replay of the call, please visit our website at hickorytech.com. A telephone replay of this call will be available beginning at noon today.
Once again, thank you for joining us today and we look forward to talking with you in the future. If you have any questions that come to mind, I'd invite you to give Jennifer, Dave, or myself a call. Thank you, and have a good morning.
This concludes today's conference call. You may now disconnect.
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