NTS Inc (NYSEMKT:NTS)
Q1 2013 Earnings Conference Call
May 14, 2013 10:00 am ET
John Nesbett - Investor Relations of Institutional Marketing Services
Guy Nissenson - Chairman, President and Chief Executive Officer
Niv Krikov - Principal Accounting Officer, Treasurer and Chief Financial Officer
Greetings. And welcome to the NTS, Inc. First Quarter 2013 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer-session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, John Nesbett of IMS. Thank you, Mr. Nesbett. You may begin.
Good morning and thank you for calling in for NTS’ first quarter conference call. With me on the call are Guy Nissenson, Chairman, President, and Chief Executive Officer; and Niv Krikov, our Chief Financial Officer.
For this morning's call, there is a slide presentation available that you should access. Presentation can be accessed at the NTS website at www.ntscom.com. The webcast can also be accessed at www.investorcalendar.com.
I will now take a moment to read the Safe Harbor statement. This presentation may contain forward-looking statements. The words or phrases would be, will, allow, should, tends to, will likely result, or expected to, will continue, is anticipated, estimate, planned, project, or similar expressions are intended to identify forward-looking statements.
Actual results could differ materially from those projected in the forward-looking statements as a result of a number of risks and uncertainties. These risks and uncertainties include issues related to the ability to obtain sufficient funding to continue operations, maintain adequate cash flow, profitably exploit new businesses, license and sign new agreements, issues related to rapidly changing technology and evolving standards in the industries in which the company and its subsidiaries operate, the company's ability to compete effectively and adjust to rapidly changing market dynamics, the unpredictable nature of consumer preferences, and other factors set forth in the company’s most recently filed annual report and/or registration statement.
In addition, these and other factors may cause financial results to fluctuate from one financial quarter to another. Statements made herein are as of the date of this presentation and should not be relied upon as of any subsequent date. The company cautions not to place undue reliance on such statements. Unless otherwise required applicable to law, we do not undertake and we specifically disclaim any obligation to update any forward-looking statements to reflect occurrences, developments, unanticipated events, or circumstances after the date of such statement.
You should carefully review the risks and uncertainties described in other documents that the company files from time to time with the U.S. Securities and Exchange Commission.
I would now turn the call over to Guy Nissenson. Go ahead Guy.
Thanks John and good morning everyone. We made steady progress this quarter. As a company, we are transferring from being very focused on the network build out to being very focused on sales and marketing to new customers.
On slide 4 of the presentation, you can see that fiber revenue grew 31% and our EBITDA reached $3.4 million. Importantly, we added more than 940 customers this quarter which is almost three times as many customers than we added last quarter. We also connected our third customer in Hammond, Louisiana, which marked our expansion of our fiber network into that market.
I will turn the call over to Niv, who will provide detailed financial overview. Niv?
Thank you, Guy and good morning. On slide 5, you will that from a revenue standpoint, fiber grew by 31.3% while our legacy business decreased by 11.6%. This is consistent with our overall strategy of driving growth in our highest margin fiber business, while trying to minimize loss of revenues in our legacy markets.
You will also see that the cost of services decreased as a percentage of sales for the quarter due to the larger percentage of fiber revenues. Fiber revenues generated higher margins since we owned the fiber network and are not required to pay a third party for use of their network.
We are very focused on driving down costs as demonstrated by our ability to reduce SG&A quarter over quarter. Financing expenses for the quarter was $1.2 million, down slightly from $1.4 million in the first quarter of 2012. The decrease was related to a decrease in principal of our outstanding bonds and the buyback of 6.4% of our bonds par value.
In the first quarter, we reported a net income of $187,000 or $0.00 per basic and diluted shares compared to a net loss of $339,000 or loss of $0.01 per basic and diluted share in the same quarter last year. The increase in net income is due to the growth of our higher margin fiber business and reduced expenses.
On an EBITDAS basis, we saw considerable improvements to EBITDAS of $3.4 million in the first quarter of 2013 as compared to $2.7 million for the same quarter in 2012. EBITDAS margin improved to 22.5% as compared to 18.1% in the first quarter of 2012.
Turning to the balance sheet on slide 6; as you know we are in a transitional period, as we invest in our fiber network, factors as government financing, metro build, and marketing expenses when rolling out new markets resulted in a working capital deficit as of March 31, 2013. Over time, we expect this deficit to become positive as we grow our customer base.
Furthermore, please note that $39 million of our debt is in notes payable to the U.S. Department of Agriculture. which is low cost, non-recourse capital provided under favorable terms.
I will now turn the call back to Guy.
Thank you, Niv. On slide 7, you can see the profits we have been making over the past few years growing our fiber business and its impact on our profitability margin. The top chart is our overall fiber growth including our networking level. You can see the steady growth since 2010 in fiber revenues and an increase of almost 10% sequentially.
On the bottom left, you can see the growth in our new fiber markets that are, for the most part, being funded by grants and by low-cost capital from the Federal Government Stimulus plan. Importantly, on the bottom right, you can see the impact that this fiber growth has had on our EBITDAS margin since 2010.
On slide 8, you can see some of our key metrics for our business. We currently have a 23% penetration rate of our passings, up from 21% at the end of the fourth quarter, with the big portion of the passings completed recently. Our target is to at least double that penetration rate over time, and the primary focus of the company right now is the marketing of our fiber services.
While residential is the key part of our business, business customers have always been a higher margin. We believe that there is a very high need for broadband in the business sector. This is reflected in the higher ARPU and lower churn in that portion of our business.
Turning to slide 9, you will see that, we recently connected our first fiber customer in Hammond, Louisiana. When completed, the NTS fiber network in Louisiana is expected to add approximately 11,500 passings, bringing our total fiber passings to over 50,000. The Louisiana network expansion is being funded using a portion of approximately $100 million in Federal Stimulus fund.
Slide 10 shows our overall fiber footprint. You can see that our markets are clustered in West Texas and Louisiana. We have spent a lot of time studying the markets that we are building out. These second tier markets, while not an (inaudible) gives us the best mix of both desirable business and residential areas while having limited competition.
Slide 11 focuses on the Texas market and the progress we have made. You can see that the light blue towns are ones that we are in the process of building out in 2013, specifically Hale Center, Abernathy, New Deal, and Iowa Park. All of the other towns have been built out as of December 31, 2012.
We also did a metro build, the gray dot which represents Wichita Falls. This was a project that we funded through our outside sources to leverage our fiber network and access primarily business customers in that area.
On slide 12, you can see our Louisiana market. Building out the Louisiana market is a major initiative as we continue to expand in 2013. In conjunction with building out Louisiana, we have begun marketing into that market. Hammond is our first market in Louisiana, and we are currently marketing aggressively into that city. I personally have been spending time there and making sure that construction is on track in beginning the marketing process to new customers. We are very encouraged by the progress we are making in the Louisiana region.
Before I turn over to Q&A, I would like to recap on slide 13, the three macro themes that are very important to keep in mind when assessing the long-term opportunity of this company. First, the secondary broadband market is a very attractive and growing market. Three out of every ten people in the United States still don’t have access to broadband. Broadband is becoming more and more essential. NTS is playing an important role in bringing it to Texas and Louisiana, and it is an attractive growth opportunity.
Second, consumers' broadband needs are increasing at an incredible rate. Bandwidth usage is expected to increase tenfold by 2020. We do not believe that any technology is faster or better quality than fiber. So, NTS is well-positioned to fulfill the bandwidth needs in the markets it serves.
Related to this, the trend toward Internet TV is picking up momentum, and this will further help NTS. Fiber provides the best solution for online delivery of our markets and customers. We feel we are very well positioned to benefit from this powerful trend in the market place.
In conclusion, this was a solid quarter for us. We intend to aggressively drive fiber growth and expect to continue to see our business shift to higher margin fiber customers, while finding ways to protect our legacy markets. We will continue to selectively evaluate metro builds like we did in Wichita Falls to identify additional areas and opportunities that can expand our network and add value to our shareholders.
Finally, as we demonstrated in the quarter, we will aggressively manage our costs to drive value in the business for our shareholders.
I would like to turn the call for Q&A, and operator?
Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) My first question is coming from Bernard Revilla, a private investor. Please proceed with your question.
Good morning Guy, congratulations on a nice, solid quarter. One of the things I wanted to maybe trying to illuminate here is in addition to – I’ve become an investor in the last several months, but I’ve also talked to others who’ve also become investors, and I understand the economics behind Wichita Falls , but I find when I introduced the idea to a lot of investors, they don’t, and what I would -- I’d love for you to do here is maybe kind of briefly just outline, why it makes sense to borrow money at those rates to build out Wichita Falls?, Number one.
And number two, kind of a two-parter here, if you can just kind of give us a little bit of color on where we can expect to see NTS maybe two to three years from now with the FTTP business versus the legacy business existing. Thanks a lot.
No problem and thank you for this. In terms of Wichita Falls, the idea behind it is to identify business areas that we can build out quickly, turn up customers, and enjoy additional scale due to the other build outs that we are doing, for example in the Wichita Falls area or in other areas, and part of that is probably, you know Wichita Falls and other markets are also one of our select markets, one of our corporate markets, which means we can use any kind of build out to defend and get those customers move from copper to fiber.
The metric is, if we go in, the Wichita Falls build out is about $3 million, and that is more than 1000 potential customers there, given our take rates in other markets like Levelland or Lubbock, more mature markets which are way over 50% take rates, and we expect to get that also on the Wichita Falls side, and we actually managed to grow very nicely there in the first few months of that market.
And all of that is going to bring us revenues, those revenues are because of the lack of the content side or the TV or video portion, thus these revenues are very high margin revenues and the calculation on the return on the investment is justified, the interest rates also justifies the whole project.
At the moment, we also as we mentioned before in 8-K, we are looking at two additional markets. We are building two additional markets at the moment also in our select geographies and hope to repeat the success we are having in Wichita Falls.
In terms of your second question, in two or three years I believe that the company will have the majority of its revenues coming from the fiber network, and we will cannibalize some of our copper markets and move to fiber, some other copper customers will just obviously disconnect and go to other competitors, but in general, we hope to see higher revenues and then much higher percentage of fiber relative to the copper which means that also EBITDA and net income will continue to increase during – while we get there and change the percentage of our fiber network. Does that answer your question?
Thank you. The next question is from [Katy Parish] from Northwest Management, Inc. Please proceed with your question.
Hi good morning guys.
Can you elaborate on some of the customer growth that you are seeing what you say is primarily new markets, are you also seeing growth in your more mature FTTP market by (inaudible)?
Yes, that’s a good question. We have been – obviously we have seen tremendous growth in all the new markets that we are opening up, it is at Wichita Falls , at Plainview, in Lamesa, and some other very recent markets. A lot of the growth going forward is obviously going to come from the Louisiana markets as well, but one of the interesting things to look at is the fact that the company has started to grow again also in its more saturated markets on the business side. Our Lubbock and Levelland and Wolfforth markets in terms of business fiber rates has been growing steadily in the last few months or the last few quarters. I cannot say the same residentially in Lubbock, of course we have not put a big emphasis on that, but the business growth in all of those markets have been really encouraging and in the right direction.
Okay, great, thank you. That was helpful.
(Operator Instructions) There are no further questions at this time. I’d like to turn the floor back over to management for any further closing comments.
Thank you all for joining us today and hope all of you would join us in the second quarter and have a great day and the rest of the week. Thank you so much.
Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.
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