HickoryTech Corp. (OTCPK:HTCO) Q2 2009 Earnings Call July 30, 2009 10:00 AM ET
John Finke - Chief Executive Officer
David Christensen - Chief Financial Officer
Jennifer Spaude - Investor Relations
Good morning. My name is Maggie and I will be your conference operator today. At this time, I would like to welcome everyone to the HickoryTech second quarter 2009 earnings conference call. (Operator Instructions)
At this time, I would like to introduce the Director of Investor and Public Relations, Ms. Jennifer Spaude. You may begin your conference.
Good morning and thank you for joining HickoryTech’s second quarter 2009 earnings conference call. Our earnings release was issued yesterday afternoon and is available on our website at www.hickorytech.com. This conference call will cover the financial results of HickoryTech for the second 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 Thursday, July 30, 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 impact the economy, our industry and our company in particular. Some or all of which could affect future results. Therefore actual outcomes and results may differ materially from what is expressed or forecasted in such forward looking 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 our most recent filings with the Securities and Exchange Commission and HickoryTech’s Annual Report on 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 of 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 to Q&A session. 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 will turn the call over to John Finke.
Thank you, Jennifer. Good morning, everyone and welcome to HickoryTech’s second quarter 2009 earnings conference call and webcast. Today, I’ll begin by discussing our business strategy with trends affecting our business and highlights of our second quarter earnings. David Christensen, our CFO will provide details on our second quarter financial results.
Overall, we are pleased with our second quarter results. HickoryTech’s second quarter revenues totaled $32.4 million down 18% over the comparable period in 2008 and down approximately 3% on a sequential basis. However, net income totalled $2.1 million or $0.16 per diluted share and was up 30% from the first quarter of 2009 and down 15% year-over-year.
Operating income for the second quarter totalled $5.3 million, up 16% from the first quarter 2009. Our strategy and continued focus to grow our business-to-business operations is clear and we’re executing on this strategy. In May, we announced an agreement to acquire CP Telecom, a facilities based telecom provider serving Minneapolis and Duluth, Minnesota. We plan to close on CP Telecom on August 1 and our comments further on this acquisition later in the call.
HickoryTech has clearly made the transition from a pure telephone company; a LEC into a leading integrated communication solution provider. Our Enventis Sector which is purely business-to-business. Price and services continues to build momentum and huge success in winning new business. While the tough economy had impacted the equipment portion of our Enventis business, we continue to see strong growth in the Enventis transport services.
We have many synergies across our company including deep technical knowledge, strong Telecom and IP expertise and strategic business partners that enable us to deliver competitive solutions and the customer experience and their increasingly competitive landscape. We have the expertise such as our businesses, business customers of all sizes; from small to medium size businesses to large nationwide enterprise customers. In addition, we provide wholesale services to regional and national carriers.
We’re excited about our growth prospects within the SMB customer segment and the benefits acquired with CP Telecom to service this customer base. We continue to experience challenges in the second quarter due to the macroeconomic environment as businesses and consumer scrutinized spending.
The most significant impact has been the Enventis Sector equipment sales, which were down substantially on the year-over-year basis. This factor alone has made a significant impact on our topline and our overall results.
It’s clear our business customers, particularly those making equipment purchases within our Enventis segment are facing difficult business conditions and are being force to delay our total capital convent expenditures until conditions stabilize. That said, our business remain strong, our Enventis transport services revenues grew 8% year-over-year.
Our Telecom broadband revenues grew 8% year-over-year. Net income and operating income increase 30% and 16% respectively from the first quarter of 2009. We further reduced our debt and continued to invest in our business. We increased our cash position which allowed us to fund the CP Telecom acquisition with this cash reserve and no additional debt and we continue to strengthen our balance sheet.
I like to turn my comments now to our telecom sector and its second quarter 2009 results. Revenue totalled $18 million down 1% compared to the second quarter of 2008. Access lines were down 9% from one year ago, turning at the same page at the first quarter of 2009.
Network access revenues was flat as compared to the same period one year ago, which included negative adjustments with settlement agencies. Excluding these adjustments, network access would have continued its moderate decline. We continue to experience growth in broadband services, which include DSL, data and digital TV revenue.
Second quarter broadband services revenue increased 8%. DSL lines increased 5% and digital TV lines posted a 21% increase with our recent expansion of digital TV service in Mapleton, Minnesota, one of our small world highlight communities. We now serve 12 communities and have access to more than 35,000 homes with our digital TV service.
Our digital TV choice plans continue to be an important differentiator in a crowded market of TV competition. These plans allow our customers to customize our channel line up with programming they choose. Additionally our high-definition programming and DVR service at our IC TV communities is very competitive.
All the markets in which we operate are highly competitive. Customers have choices and we continue to offer strong value by leveraging our local customer support and enhancing our product portfolios.
Now I’ll turn my comments to our Enventis Sector. Enventis operating income and net income were down 40% and 39% respectively from one year ago. Enventis sector revenue totalled $14.7 million in the second quarter of 2009 down significantly from one year ago.
As I mentioned earlier, our Enventis business was primarily affected by lower equipment sales, which also affected our Enventis services revenue in this segment. The equipment sales have been significantly impacted by the economy as businesses have cut back and delayed capital expenditures. Nevertheless we have responded aggressively to these conditions putting in place a wide variety of cost savings to help offset the decline in revenue.
As a result, our Enventis business remains profitable and it is more efficient, conditions that’s position us to respond effectively when the economy improves. Enventis transport services remains strong with revenue totalling $6.6 million, an increase of 8% from one year ago. This growth is driven by an increased demand for wholesale and business-to-business transport services such as high-capacity ethernet, MPLS and wavelength services.
Our position has an experienced service provider with strong engineering expertise enabled us to develop customize solutions and continue to grow our transport services. Additionally the increased number of colocations throughout our network, it is like competitive pricing position for both business and wholesale transport opportunities. Our network is well positioned to deliver higher bandwidth and meet our customers’ on going needs.
Overall we are pleased to have achieved another solid quarter. Despite the tough economy, HickoryTech remains stable and our balance sheet is strong. We continue to control cost to maintain this position of strength, so we were able to take full advantage of opportunities when the economy recovers.
I will now refer to David Christensen who will provide details on our operational performance in the second quarter. David?
Thank you, John. Good morning. We reported second quarter net income of $2.1 million, a 30% increase sequentially from this year’s first quarter, but down 50% from one year ago. Consolidated operating income totalled $5.3 million in the second quarter, up 16% from the first quarter of 2009, however down 10% from one year ago to a lower Enventis equipment and services revenue.
Second quarter consolidated revenue totalled $32.4 million down from $39.7 million a year ago. As was the case on the income lines, the primary driver for the revenue decline was lower equipment sales within the Enventis business. This was partially offset by increases in telecom broadband revenue, growth in the Enventis transport business and excellent cost controls in all of our business lines.
Overall as John mentioned, we achieved solid results despite the significant impact of lower equipment revenue. Our balance sheet at the end of the second quarter remains strong including higher levels of cash on hand and reduced debt. This enables us to complete the acquisition of CP Telecom in a couple of days without borrowing. I will begin with our telecom sector highlights for these discussions I’m using the pre-elimination numbers from our telecom sector recap in our earnings release.
Telecom operating income totalled $3.7 million up 23% from a year ago. Telecom revenue was relatively flat, but we were able to control a reduced telecom expenses to achieve this increase in operating income. We have the solid track record with telecom cost controls and we’re committed to continual process improvement in every aspect of telecom sector costs.
The telecom sectors second quarter 2009 revenue of $18 million was down 1%. Telecom’s network access revenue was flat from one year ago. Last year’s second quarter included a negative one-time adjustment of $475,000 from settlement agency disputes. Looking forward network access revenue will continues as normal industry right trend of a moderate decline due to less traffic on our network and rate reductions.
Refer the chart in our accompanying slide presentation, which depicts quarter-by-quarter access revenue over the past three and half years. You will see the variability is starting to level off as most of the anomalies and unique adjustments are behind us, this year the trend is more consistent.
Telecom’s broadband revenue which is a combination of our data and our digital TV products increased 8% over the same quarter last year, continuing the long standing positive trend. Broad band revenue increases offset the decline in local service revenue. Telecom cost other than depreciation and amortization, which were $10.5 million in the second quarter decreased 6% or $666,000 compared to one year ago. This is a key element to holding our telecom sector profitability during this time of industry change.
Telecom capital expenditures were $2.4 million in the second quarter of 2009 compared to $2.5 million a year ago. We were able to reduce the telecom CapEx and will continue to be conservative with our investments. We will continue to support our broadband growth and maintain our telecom network but we foresee a lower level of telecom CapEx in 2009 than previous years.
Now I’ll comment on Enventis operating results. Again my comments are from pre-elimination numbers in the Enventis sector recap at our earnings release. Enventis operating income totalled $1.7 million in the second quarter of 2009 down 40% from one year ago, because of the economy and due to this decline in equipment sales offset by increases in our high profitability fiber transport business.
Enventis sector’s second quarter 2009 revenue totalled $14.7 million down 32% from one year ago. Enterprise network services or ENS revenue totalled $2.7 million and was up 17% from first quarter of 2009, but down 10% from one year ago. Enterprise transport services or ETS increased 8% to $6.6 million in the second quarter of 2009. We have IP equipment revenue and the services revenue distinctly with an Enventis on slide nine and ten of the accompanying presentation and on the last page of the press release.
Equipment revenue within the Enventis sector was $5.4 million in the second quarter compared to $12.7 million a year ago. This revenue will always vary on a quarter-to-quarter basis and is mostly impacted by the economy as customers have reduced spending or have delayed their equipment purchases. Fortunately, the cost of the equipment sales component moves in sink with equipment revenue. Giving us less quarterly fluctuations in operating income then you would see if you only look at the equipment revenue line.
The gross margin impact of the decline in the equipment business for the second quarter was approximately $1.3 million significantly less than the gross revenue decline of $7.3 million in equipment sales. Enventis overall cost of service and selling, general and administrative expenses excluding depreciation and amortization totalled $7.1 million declining 2% or $150,000 compared to the second quarter cost of last year.
We have reduced this area of cost in 2009 due 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. Enventis sector capital expenditures totalled $2.3 million in the second quarter of 2009 up from the $2 million in the second quarter of 2008.
We continue to invest in the transport portion of the Enventis business. We have a quarter of success based capital expending projects for the year. And will continue to seek only the highest return on investment projects. Approximately half of our CapEx allocation is planned to support the Enventis sector. Therefore for CapEx is projected at 17 to $19 million annually Enventis will draw 8 to $10 million of it and would represent an increase in CapEx for the Enventis sector over the prior year.
Our debt balance of $125.2 million as of June 30, 2009 is down $1.8 million from the beginning of the year and down $8.4 million from one year ago. One of our strengths is our $125 million worth of debt, which is covered with the 3 to 1 ratio of debt-to-EBITDA. Most of which is borrowed and only 175 basis points over the LIBOR and the majority of which is protected with fixed rate products until September of 2011.
In addition, we had $11.3 million of cash in our balance sheet at June 30, 2009 up from $1.6 million at the beginning of the year. We feel we are truly positioned for growth with this strong balance sheet and our ability to generate free cash flow. An example of our free cash flow illustrated on slide 12. Free cash flow on that slide 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 GAAP or book taxes for several years now due to the tax benefits of our enhanced CapEx levels. The cash turn on slide 12 starts on the left with our cash flow from operations for the first six months of 2009, which was $20.2 million.
As you move across to the right, the Churchill, we spend $3.4 million on interest, $7.3 million for capital expenditures and $500,000 for cash taxes. This allows $9 million remaining as positive free cash flow.
We paid out $3.4 million in dividend payments in the first six months creating a dividend pay out ratio of 45% of our free cash flow are healthy and safe pay out percentage. Thus even in a period of lower earnings due to the economy, we are generating strong cash flow, strong enough to support the dividend to pay down debt and to build substantial cash for future growth.
I’d like to add that our 10-Q is lined up for filing later today and should provide you more details the kind that we usually provide you. Referring to the CP Telecom acquisition, we receive regulatory approval from both Federal and State Authorities and intend to close on the acquisition of CP Telecom on August 1. The $7 million acquisition price will be funded with cash on hand requiring no additional debt. We will have more details on CP Telecom in our next quarterly update.
In summary, our first half of 2009 has been a balance of solid performance and cost controls. To cost controls, we’ve adopted to the economic phase and we are proving we can proceed from a position of strength to make it better able to grow when the economy gets out here. With that I would like turn it back over to John Finke now. John?
Thank you, Dave. In summary of the second quarter 2009, we are pleased with our position and look forward to closing the CP Telecom, which we expect to incur down on August the 1. To recall the CP telecom reported unordered revenue of approximately $10 million in fiscal 2008. The company offers us an additional fiber capacity in Minneapolis and St. Paul along with additional network colocations throughout the same markets.
This acquisition enhances HickoryTech’s focus on the small to mid size business customer demonstrating our continued efforts to grow our business services and strengthen our SMB focus as a new channel of growth. CP Telecom before we expand our business product portfolio adding new projects such as mid band ethernet and enhancing existing products such as integrated T1s.
We are projecting important synergies as we integrate CP Telecom into our Enventis business. Specifically as we combine the networks of the two organizations. As Dave mentioned, we will fund our CP acquisition in all cash by using the cash that we have in our balance sheet.
Our strategy is to grow our business services as well as our broadband services for managing the decline in our core telecom business. Our balance sheet is healthy and we are in a strong financial position to remain stable and to grow.
Our strengths include strong net income, high level of recurring revenue, a growth trend in key strategic product lines, share holder value through our dividend yield, low cost debt covered by cash flows and the ability to generate cash to fund future growth opportunities.
We will continue to invest in strategic opportunities for organic growth such as fiber network Enventis investments that allow us to expand our geography and further penetrate our business-to-business services. 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 on the call today.
At this time, we’d be happy to field any questions. Maggie? If there are any questions please initiate them.
(Operator Instructions) We have no audio questions at this time.
All right Maggie. Thank you very much. If you joined us after the call began today 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 do have any additional questions that come to your mind later today, I’d invite you to give Jennifer, David or myself a call. Thank you, and have a good morning.
This does conclude today’s conference call. You may now disconnect.
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