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Executives

Misty Wells – Investor Relations

Steve Oldham – President, Chief Executive Officer

Dan Bessey – Chief Financial Officer

Fred Arcuri – Chief Operating Officer

Analysts

Jonathan Levine – Jefferies & Company

Barry McCarver – Stephens Inc.

Barry Sine – CapStone Investments

SureWest Communications (SURW) Q1 2010 Earnings Call April 29, 2010 5:00 PM ET

Operator

Welcome to the quarter one 2010 SureWest Communications earnings conference call. (Operator Instructions) I would now like to turn the conference over to your host for today, Miss Misty Wells, Investor Relations.

Misty Wells

Good afternoon everyone and welcome to our first quarter 2010 earnings conference call and webcast. The earnings press release and financial reports are available on our investor relations website of our website at surw.com and the 10-Q will be filed shortly.

Joining me on the call are Chief Executive Officer, Steve Oldham and Chief Financial Officer, Dan Bessey. Fred Arcuri, Chief Operating Officer will also join us for the question and answer portion of our call.

Before we begin, I would like to cover the Safe Harbor statement and remind you that some of the statements, comments and discussions, which occur during this call, are forward-looking in nature and relate to future events and performance. These statements should not be relied on as historical or absolute fact, as they are subject to numerous risks and uncertainties that frequently cause results and events to change.

Before making any investment decisions about our company, we encourage you to review our company’s most recent annual report filings with the Securities and Exchange Commission which contain a description of many of these risks and uncertainties under the heading Risk Factors.

Also, our discussion may contain certain non-GAAP financial measures. These non-GAAP financial measures are defined and reconciled in the tables attached to the quarterly press release, which are also available for review on our website.

I would now like to turn the call over to Steve Oldham, President and Chief Executive Officer.

Steve Oldham

Thanks, Misty, and good afternoon everyone. Thanks for joining us on the call today. I’m going to start with a brief overview of this quarters financial and operating highlights and our long term Broadband growth strategy. Dan will then review our financial results in more detail.

In line with our past Broadband performance, today we’re pleased to report a strong quarter for our Broadband segment with adjusted EBITDA increasing 56% and revenues increasing 9% year over year. Broadband segment revenues now account for 71% of total revenue, up from 64% in the first quarter of 2009.

On a consolidated basis, revenues decreased by 1% year over year to $60.2 million as the declines in the Telecom segment continue their recent historical trends, in part due to the scheduled reduction in the California High Cost Fund Subsidy, $510,000 during the quarter, and the decline in switch access revenue related to access line losses.

This was a quarter of exciting change for SureWest as we launched the new advanced digital TV product in Sacramento which is one of the most anticipated product launches in our history, and has already proven to be a game changer for the company. In this highly competitive and constantly evolving industry, we must launch new and relevant products to grow our business long term and focus on the future.

We’re a 97 year old company, and with any company that’s going to thrive that long, it has to re-invent itself periodically and invest in future growth opportunities.

We had a short term net loss in residential subscribers during the quarter due to deep competitor promotions on our territory, and we launched aggressive sales and marketing tactics in mid February when they launched aggressive sales and marketing tactics in mid February, which was timed with the launch of our ADTV service, for example, with more than double the number of direct sales reps in both regions from 14 in March in 2009 to 30 in March of 2010.

The ramp began in February this year when we started hiring additional sales reps and it took time to fully train them and have them on the ground and running, which they were by the end of March. This resulted in a positive net subscriber adds in March and through just three weeks in April, we’ve already added 453 net subscribers which is on pace to be our highest net subscriber month since 2008.

I’ll expand on Advanced Digital TV in just a bit, but first I wanted to note that for the fourth consecutive quarter, SureWest is free cash flow positive. Free cash flow for the first quarter increased by $6.6 million year over year to a positive $3.1 million and we have reduced net debt by $30.5 million year over year.

We’ve also decreased our operating expenses 2% through improved operating efficiencies and continue cost reduction efforts. The results are clear. Our Broadband growth strategy is on track to continue drive growth in revenue, EBITDA and free cash flow even during this economically challenging and competitive environment.

We’ve entered 2010 financially and operationally strong, positioned for a new phase of growth on our existing fiber at home network as well as through our new qualified 25,000 copper video marketable homes that can use our Advanced Digital TV service. We can now increase residential penetration without spending additional capital to expand the network while also utilizing our fiber rich network to capture high margin business opportunities.

We are focused on realizing efficiencies whenever we can. For example, we expect to see over $1 million in cost savings beginning in 2011 from an office consolidation effort here in Sacramento. We continue to review the organization and will take whatever steps are necessary to streamline the company and bolster our success.

Our results over the last several quarters are a product of our employee’s hard work and innovation and are reflective of the transformation we began several years ago. By taking significant actions to transform SureWest from a traditional provider of voice products to a full service integrated communications company that delivers the most advanced Broadband offering of voice video and data in the markets we serve, we are offsetting the structural declines in the traditional telephone business.

We have continued to invest in the core Broadband business with such recent actions as upgrading and expanding our network by investing in core assets like directories in the wireless business and moving into the growing Kansas City market, which by the way, more than doubled our residential Triple Play customer base at the time, and shows a promising business service offering.

Since the acquisition, which has been, a full two years this quarter, we have grown monthly revenues in our Kansas City markets by 26%. These value-creating actions were focused on leveraging SureWest Broadband residential and business capabilities and experience and a new diverse market, while narrowing our corporate focus to those things we excel at.

The key to growing in this highly competitive industry is creating incentives for employees to perform, including very effective compensation structures and incentives to reduce churn and improve customer service levels.

We also give the potential customers a reason to switch to SureWest. The launch of Advanced Digital TV, which is powered by Microsoft Media Room, delivers what we believe is the best Triple Play bundle in the market. It has allowed us to stay in the video business and is proving to be an amazing tool for our sales team and gives them a great story to tell.

Coupled with our best in class customer satisfaction levels, which are supported by independent customer satisfaction reports, this new video product delivers high reliability and ease of use and must have features our customers are demanding such as instant channel change, whole home DVR that allows you to record programs on one DVR and watch them on any TV in the house, and we believe these features will keep customers from shopping for service elsewhere.

In addition, our unmatched internet speeds have been a differentiator for customers who have had the similar U-Verse product. Since launching Advanced Digital TV, over 100 customers have switches from U-Verse to SureWest specifically mentioning our much faster symmetrical internet speeds as a reason for the switch.

As I mentioned, our competitors timed a new and deep promotional effort where we compete just prior to and during our Advanced Digital TV launch. Their promotion did impact our early sales results, requiring us to change tactics to counter their efforts. Competitive responses like these are always expected but remember, we believe we have the highest performing network with the most reliable and easiest services to use for our customers which in the long run, we are confident will prevail.

We had over 3,200 Advanced Digital TV video RGU’s by the end of March, representing 14% of overall RGU’s in the Sacramento market with all new video subscribers and customers receiving their products since its launch. We expect roughly 50% of our video RGU’s in Sacramento to be Advanced Digital TV by the end of the year.

In February, our video RGU net additions in the Sacramento market turned positive, then grew by 112 in March and through the first three weeks of April, we already have 258 net video RGU additions, trending to be the highest month since 2008.

Due to customer demand for this product, to date we have converted over 2,300 current customers from the previous video platform to Advanced Digital TV and the conversion calendar is full through May. Similar to new customers, each conversion requires a new 12-month term agreement. Now that we’ve built momentum, we will take a more reactive approach to these conversions.

Compared to our previous video platform, monthly recurring revenue for Advanced Digital TV is 12% higher. The premium network take rate for channels like HBO, Showtime and Starz is 37% higher and the HDTV take rate is 33% higher.

In fact, almost three-quarters of all Advanced Digital TV customers subscribe to SureWest HD package. Also driving higher revenue is the Triple Play take rate of 85% for all Advanced Digital TV subscribers, which is the result of our bundling strategy and the strength of the video and data products, and it compares nicely to the company’s overall Triple Play take rate of about 63% at the end of the first quarter.

This is a noteworthy statistic because of our excellent churn results when Triple Play customers are involved. In the first quarter, 86% of residential Broadband churn came from single or double play customers and as a percentage of total disconnects, we saw a 3% decline in Triple Play disconnects during the first quarter when compared with the fourth quarter of last year.

Over the past few years, we have identified vulnerability in the double play customers. Our research has shown that on average 73% of churn on our Ileac copper network is from customers who cannot or historically could not receive video service.

To overcome this churn and to give our customers the services they’re asking for, in the first quarter we extended our Advanced Digital TV video service to over 21,000 existing voice and data ileac marketable homes. We’ve be serving another 4,000 by the end of the second quarter.

Together with the 22,000 Triple Play capable fiber homes in the Ileac and these copper network video upgrades, we have the opportunity to provide a superior Triple Play bundle to over 50% of the Ileac market, which is our most effective tool that we have to reduce our already low churn numbers.

Our competition is not standing still, and we will have to remain aggressive with our tactics. We expect our Triple Play offering, featuring Advanced Digital TV to be successful throughout the year and we believe it will have a very positive impact on churn by the end of 2010.

In addition to the Sacramento Advanced Digital TV product, we are introducing several new residential technology enhancements to support our subscribers and growth of ARPU and subscriber counts in Kansas City, where we already have a very high penetration on the networks of over 38% with 2.7 RGU’s per subscriber.

Currently, we’re implement switch digital video during the latter part of the second quarter, which will free up bandwidth for additional HD channels in Kansas City. We’re already securing partnerships with networks and expect to add a significant amount of new HD channels by the end of the year.

We’re also launching Doxs 3.0, which will allow us to significantly enhance internet speed on the HFC portion of our network, providing up to 50 megabits per second to match the download speed of those on our fiber-based networks in both regions today.

In total, these new products and the network improvements will enable us to remain the provider of choice. The fact that ARPU has grown 4% year over year during a period of relatively flat subscriber growth, tells us that our customers value reliability and superior performance of our networks.

The business segment also performed well in the first quarter compared to the prior year quarter. In Kansas City especially, the pipeline was well positioned after we look at the rest of the second quarter. Businesses are very open to finding more value for their communications dollars and our Johnston County service area, which is the fastest growing area in the Kansas City Metro, our sales teams are taking advantage of this demand. We continue to grow our market share with significant growth opportunities still available in Kansas City.

In Sacramento business customers are looking at value and also be more active now that the economy appears to be strengthening. Sales contracts and proposals increased greatly during the first quarter in the Sacramento region compared to previous quarters and they have continued to increase so far this month.

We’re also encouraged by the prospects of the wireless back haul agreements that we entered into with two national wireless carriers. These projects set the stage for future high margin growth on recurring revenue streams. We have the ability to provide this back haul both quickly and cost efficiently due to our high capacity fiber rich networks and our close proximity to existing cellular sites.

In some cases where the fiber network is already in place, there are very minimal capital expenditures required to serve the site. In other instances, we’ll need to build out to the tower, incurring initial capital expenditures. However, once we build out, we find it easy to enact these new providers.

The agreements we already have secured are multi-year and will provide service to nearly 200 cellular towers, 25 of which are being built today. We’re also in discussions to increase the number of service connections in both Sacramento and Kansas City.

Revenues and margins from our data center services are slightly ahead of our forecast and present good opportunities to increase revenue and EBITDA with little additional capital investment. Through this endeavor we are attracting new subscribers as well as selling vertical services to existing subscribers.

Annualized data center co location revenue based on March recurring revenue is expected to improve 14% year over year to $2.2 million and this does not include the revenue from required back haul connections to the data center.

Our first data center location in Sacramento is now 85% occupied and the second location is at 50%. We’re also seeing interest in our Kansas City data center, which was launched in the third quarter of 2009 and is currently at 25% capacity. As we reach full capacity in these locations, we can easily convert office space to meet additional customer demands.

Obviously our investments over the last several years in the fiber in the home infrastructure have created the next generation growth platform for the company. Demand for higher bandwidth continues to grow. Our internet speed take rates have increased. 60% of all SureWest internet customers subscribe to speeds of five megabits or greater and 31% take speeds of 10 megabits or greater. In the Sacramento market, 44% of our internet customers receive 10 megabits or higher from us.

Additionally, video streaming services from such sites as Netflix are increasing consumer demand for faster connections, and we are in a position of strength to meet these demands.

I’d like to turn the call over to Dan Bessey, our Chief Financial Officer, who will discuss the financial results in more detail.

Dan Bessey

Thanks Steve, and good afternoon everyone. Overall, our results this quarter reflect our continued long-term focus on profitable growth in our Broadband segment coupled with disciplined expense in capital management.

For the quarter, we achieved $60.2 million in consolidate revenues driven by a 9% increase in Broadband segment revenues. This increase of $3.4 million was offset by $4.1 million decrease in Telecom revenue.

Although we continue to see expected declines in our traditional Telecom segment, we are pleased with the continued growth in our Broadband revenues. Our consolidated adjusted EBITDA continues to be fueled by the growth in our Broadband segment.

Broadband EBITDA increased $2.9 million or 56% in the first quarter 2010 compared to the prior year quarter, and now represents over 42% of our consolidate EBITDA compared to 27% in the first quarter of 2009.

As we continue to focus on increasing our Broadband customer base while exercising cost controls, we expect that the majority of our consolidate EBITDA will be derived from our Broadband operations.

Broadband residential revenues increased $2.1 million or 7% year over year on the strength of ARPU increases as well as an increase of 9% in voice RGU’s.

Among our video customers, we increased our HD penetration from 30% to 32% last year and we also increased our DVR penetration from 52% to 64%, far exceeding the national DVR average of 38%.

Residential churn increased slightly from 1.4% to 1.6% year over year primarily due to the Ileac copper churn of 2.1% where we had limited or no video service offer and could not serve customers looking for a Triple Play bundle.

Although residential subscribers declined by 800 or less than 1%, as Steve discussed, we’re confident Advanced Digital TV will begin to effectively reduce churn throughout the year in both our Ileac and C-leck markets in Sacramento while at the same time facilitating an increase in the number of new sales.

Turning now to our Broadband business service revenues, these revenues represent almost 25% of the Broadband segments total operating revenue. Business service revenue increased by $985,000 or 10% primarily due to 32% year over year revenue growth from our Kansas City Business market. Business customers grew 7% from the prior year to 7,200. Total business ARPU grew 2% from the prior year to $494.00.

Also, excluding the effects of the onetime equipment sale of $247,000 in the first quarter of last year, Broadband business recurring revenue increased by $1.2 million or 13%.

Now let’s discuss our Telecom segment revenue results, which account for 29% of total company revenues. Operating only in the Sacramento market, Telecom segment revenues were $17.6 million in the first quarter of 2010, declining 19% year over year due to lost invoice customers and the associated access and subsidy revenues.

Telecom residential revenues declined 27% year over year to $4.9 million resulting from losses in Telecom voice RGU’s of 28% year over year. Of the 14,000 year over year Telecom residential voice RGU losses, 6,000 or 43% migrated to our voice over IP service and we proactively drive new customers to our Broadband voice offering because we have experienced higher customer loyalty with this service.

The Telecom segment derives up to 48% of its revenue streams from business service offering. Telecom business revenue declined $630,000 or 7% year over year due to a decline in small and medium size business customers and some carrier consolidation related to the economy in Sacramento.

It’s important to note that the majority of our business customer losses in the Ileck are the result of the current economic environment versus losses to competitors. We expect to see the current trend of declining customers mitigate in the Ileck as the California economy recovers.

Telecom access revenues decreased $1.5 million year over year to $4.2 million due to the scheduled reduction in the California High Cost subsidy of $510,000 this quarter and declines to its access revenue and inter-state common line settlement related to asset line declines.

As stated in previous calls, the California High Cost annual subsidy, which is spread evenly over the year is scheduled to be $4.1 million in 2010, a decrease from $6.1 million in 2009 and will continue to decline by $2 million per year through 2011.

On a sequential basis, consolidated revenues remained relatively flat. Broadband revenues increased by $1 million or 2% due to an increase of $507,000 in residential revenue resulting from data and video price increases and a 1% growth in voice RGU’s.

Broadband business revenues increased 2% or $234,000 primarily from a 6% sequential increase in Kansas City business revenue as we continue to add subscribers with higher recurring revenue.

Telecom revenue declined $1.1 million sequentially due to the $510,000 scheduled reduction in the California High Cost fund draw and residential and business Telecom subscriber declines.

Moving on to sequential expenses, consolidated operating expenses exclusive of depreciation and amortization remain flat primarily due to reduction in maintenance and service expense and promotion expense offset by increases in video programming fees and transport costs related to the growth of commercial business services.

We do expect sales and marketing spend for the second quarter to be slightly increases sequentially due to the ramp up in sales and new tactics for our Advanced Digital TV launch and will fluctuate quarterly as we modify promotions to maximize customer response rates.

However, we do expect marketing spend to decline year over year as we’re utilizing a more targeted marketing strategy that relies more on our direct sales channel as opposed to broad based advertising campaigns. This approach enables us to meet face to face with potential customers so we can visually display the features of our new Advanced Digital TV service.

Depreciation and amortization expense increased $296,000 year over year to $15.1 million primarily due to an increase in depreciation costs related to the additional and growth of our Broadband network as well as the accelerated depreciation of our leasehold improvements. This was offset slightly by a decrease in Telecom depreciation as assets continue to become fully depreciated in that segment.

During the first quarter we received a patronage dividend of $979,000 that reduced interest expense. This dividend was roughly the same amount captured last year in the first quarter of 2009. All in, earnings per share from continuing operations was positive $0.04 compared to $0.01 in the first quarter of 2009 and zero in the fourth quarter of 2009.

Net income was $527,000 for the first quarter of 2010 versus $2.5 million in the prior year quarter as a result of the gain from the sale of the wireless towers last year. Sequentially, net income increased $627,000 primarily due to the reduction in interest expense.

Moving to the balance sheet, we ended the quarter with $7 million in cash and cash equivalents and during the first quarter we reduced debt by $8 million. We maintain a $60 million revolver, $14.5 million of which is currently drawn.

Looking at our debt maturity profile, we are in a good position with only nominal mandatory principal payments prior to May 2012 and a significant cushion on all credit facility covenants which we’ll maintain through maturity.

At the end of the quarter, our trailing 12-month net debt to adjusted EBITDA ratio is 2.67 times. Our interest coverage ratio is 7.13 and our average cost of debt is 4.5%. We will continue to de-lever with increasing EBITDA and scheduled principal pay downs.

Consolidated capital expenditures totaled $12.5 million for the first quarter a decrease of $5.8 million year over year due to a reduction in network expansion capital. Sequentially, capital expenditures declined by $2.4 million.

As we discussed last quarter, we spent an additional $3 million in the fourth quarter of 2009 for new Advanced Digital TV hardware, licensing and software and we accelerated $1 million in capital spend for switch digital video in Kansas City.

In the first quarter of 2010, residential and business success based capital remained relatively flat from the fourth quarter 2009, roughly $8.4 million. This included almost $1 million for wireless back haul opportunities.

In addition, we spend roughly $1 million for the necessary work to reach additional homes on our copper network with new video service capability. Although these capital initiatives may have an impact on our free cash flow in the near term, we believe they are strategic investments that will continue to drive long-term growth in our Broadband revenues.

As an example, the wireless carrier back haul opportunities are five to seven year agreements and we expect renewal rates on these deals to be high, and also believe customers will upgrade services during the term of the agreement and beyond as data bandwidth usage increases.

Regarding the additional $3 million to add 25,000 copper video marketable homes, we expect a pay back within two to three years based on our goal of reaching penetration rates greater than 33% on these homes. We consistently evaluate penetration rates, customer demographics and gross margins on our various services as we make decisions on how to allocate our capital spend diligently.

The projected 2010 capital expenditure remains at $55 million to $60 million with the exception that spending may fluctuate or be reallocated if new high margin business revenue opportunities arise, which may cause free cash flow to fluctuate quarter to quarter.

Overall, we continue to operate from a position of strength with continued focus on strong sales growth and cost savings. We have the resources and capital in place to continue to invest in the business. This will allow us to aggressively continue our growth strategy while affording us the financial flexibility to adjust capital spending as necessary.

Now I’ll turn the call back over to Steve for closing remarks.

Steve Oldham

Thanks, Dan. We expect continued Broadband growth in 2010 and beyond as consumers take advantage of the superior network performance and speed only SureWest can offer with the goal of delivering shareholder value.

We’re very excited about the potential of some key products such as Advanced Digital TV, wireless carrier back haul and our data centers and look forward to building on this momentum to continue our strong performance and capture the opportunities that lie ahead.

Thanks again for joining us this afternoon, and we can now open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jonathan Levine – Jefferies & Company.

Jonathan Levine – Jefferies & Company

I wanted to talk a little bit in terms of the competitive pressures that you spoke about. Can you talk a little bit in terms of what were some of the offers that they had in the marketplace. Do they still have them in March and April when you were talking about the improvement and how have you countered them in terms from a pricing standpoint and a promotional standpoint?

Fred Arcuri

We did see heavy competition when we first launched the product and the competition would put out an offer that looked something like a heavily bundled triple play with premium channels, may eight megs of internet service and a fully featured voice product for between $80.00 and $90.00.

We came back with something that wasn’t nearly as deep, promoting along with it the new Advanced Digital TV service. We continue to see that sort of pressure, but they kind of step in and out. They promote for a week, and they pull back. They go to a different area and promote.

Jonathan Levine – Jefferies & Company

So I guess when you were experiencing it sounds like the growth in March and April, was the promotional activity still going on? I guess really what I’m getting at, is I’m trying to figure out your activities and your promotional activities to counter it and is that going to play its way through in regards to potential lower ARPU as we move forward?

Fred Arcuri

We will see some short term impacts of ARPU because they continue to promote and we’re having to promote back at them. We are, now that the word has gotten out with ADTV however, we are pulling back on the promotions. It isn’t as deep. It took us awhile to get some momentum and get the word out there about ADTV so we anticipate pulling back on the promotions.

Steve Oldham

One other thing as I tried to point out, the ADTV customers are actually taking stepped up packages of about 12% more ARPU which helps offset some of the promotions that we’re putting into place. The product itself is conducive to up selling.

Operator

You're next question comes from Barry McCarver – Stephens Inc.

Barry McCarver – Stephens Inc.

On the success that you’ve had on the Advanced Digital customers and really just in general, it sounds like some of your California markets, there’s a general pick up in spending by the customer base in addition to incentives going back and forth. Is that fair? Can you talk a little bit about your target market there?

Fred Arcuri

I think part of what we’re seeing in the target market is a pent up demand for things like whole home DVR where we can compete with Comcast. They’ve been waiting for a home DVR product all around the service territory. We’ve been riding the wave and the type of the marketing that AT&T has done on their product and Comcast doesn’t have it. So where we go in head to head with Comcast, there’s a pent up demand for a whole home DVR.

Barry McCarver – Stephens Inc.

Could you go over the numbers you talked about for the Steve for the success you’ve had in the last couple of months in the marketing campaign. I just couldn’t write fast enough.

Steve Oldham

Let me find them again.

Fred Arcuri

While Steve’s looking at those numbers, I just wanted to point out one other thing about the California economy. On the business side, we are also starting to see some demand pick up on the business side, a lot more RSP’s out there. Customers getting closer to actually making buying decisions, so we’re seeing a lot of good leading indicators from the business community and starting to see some signs of healing out here.

Barry McCarver – Stephens Inc.

In regards to the marketing and selling expenses, I didn’t see any pickup in 1Q on selling expenses versus your previous run rate. Do you expect since you’re kind of going at full speed now, a pick up there in the spending in the second quarter?

Dan Bessey

A slight pickup, but I don’t think it’s going to be significant, really because of the launch of ADTV. We have changed our marketing strategy this year compared to prior years which should actually drive it down.

It’s more compelling for us to actually get in front of the customer and have a feet on street approach than our prior tactic which was to use more broad based advertising and driving them into our indirect channel. So it’s a much more focused approach and that’s because, that’s to re-educate our customers about the change in our video service over the prior services.

So that’s how we’re thinking about advertising and we do expect it to be on average less this year than it was last year.

Steve Oldham

I’m going to throw a couple of statistics at you. ADTV customers now are bringing 12% more monthly recurring revenue than our prior customer platform due to the higher take rates of premium services in particular.

71% of ADTV customers are taking the HD package compared with 38% on the old platform. 37% higher premium channel take rate as well, 85% of ADTV subscribers are Triple Play compared to 63% of all subscribers.

A couple of other things, through the first three weeks of April we’ve already had 453 net subscribers as this momentum had begun to build through the ADTV product. It kind of sells itself a little bit because of the ease of use and it’s pretty feature rich, and so as more people know about it, you get inbound calls on their own. Through the first three weeks of April we have 258 net video RGU additions.

Barry McCarver – Stephens Inc.

On the wholesale wireless back haul, you mentioned in the press release a couple of new contracts. What do you have there? I don’t think you’ve ever broken that out before that I can remember, but what do you have on an annual run rate currently for wireless, for wholesale wireless back haul. I’m using the term wireless, I’m assuming, or wholesale, I’m assuming that’s appropriate.

Fred Arcuri

$2 million.

Barry McCarver – Stephens Inc.

Is what you have now?

Fred Arcuri

Yes.

Barry McCarver – Stephens Inc.

Are you going to disclose what the contracts are for.

Fred Arcuri

No, we’re not going to. We have some competitive issues there that we’re going to keep that a little close to the vest.

Barry McCarver – Stephens Inc.

But those are new. They’re not something you already had.

Fred Arcuri

That’s correct. All of the wireless back haul that we’re talking about here is new. It’s all on the fiber network as opposed to some of the T1 stuff we were doing before.

Operator

You're next question comes from Barry Sine – CapStone Investments.

Barry Sine – CapStone Investments

In the last quarterly conference call, I think you said that for 2010 you expected an uptick in EBITDA and revenue growth. We start the year with a slight decline in both of those. You’ve just given some pretty good metrics in terms of subscriber additions to start of 2Q. Are you still expecting for the overall year for 2010 to see an uptick in both revenue and EBITDA growth after the down first quarter?

Steve Oldham

We’re not really forecasting the end of the year, but let me answer the question this way. The momentum, we started out a few weeks late in getting the full, because we made a change in tactics to go with a lot more direct sales reps as opposed to promotions on the ADTV product. Getting everybody trained and up to speed and in the field towards the end of February, we’re a little behind, but the momentum is catching up.

So I suspect it’s possible we won’t make up the first quarter slight short fall, but we think the momentum is there to keep on track for what we anticipate for the remaining nine months out of the year. That appears to be where we are right now.

The second thing is, we still have other areas of costs to attack throughout the rest of this year that has not yet shown up in our reported results, and I’m pretty confident there’s room for us to move as well.

Barry Sine – CapStone Investments

I want to follow up on the first quarter from Jonathan Levine, was the $80.00 to $90.00 package you talked about from competitors, was that from both Comcast and AT&T and if now, which one of those was that from, and what was your package and what was the price point at?

Fred Arcuri

That $80.00 to $90.00 package was from Comcast and that was within the Ileck service territory primarily that we saw that. Our package was right around $100.00 for a similar package including ADTV with DVR.

Barry Sine – CapStone Investments

In terms of the capital spending, I think the guidance you just gave is a reiteration of the past numbers, and in the past you’ve talked about this wireless back haul opportunity. What are the odds we might see a jump up in the EBITDA for this year and how do you look at that and balance that vies a vies free cash flow generation. You just had a pretty good quarter free cash flow generation wise, so what’s the balance and what are we likely to see out of you there?

Fred Arcuri

When we look at the wireless back haul opportunities and the terms of the contract and the margin on that, that is obviously a very compelling case and something that we would pursue. The build out schedule for that typically occurs over a year and you start billing those revenues throughout that process, or billing the customer for those revenues, so we expect those 200 sites to be fully built by the end of this year and so you’ll see a full year’s ramp of that in 2011.

Steve Oldham

There’s one other thing I think is important. There are multiple buttons that can be pushed. Importantly I think again, on the EBITDA numbers we still have certain things that we can do with our expense and expense control that we have not yet done this year.

The second thing is, on the capital spend side, if opportunities, we pretty much rank all of our capital spend opportunities in order of return and the speed with which we’re going to get that return. So if additional wireless back haul that we’re not currently aware of materializes, we can pull back on some of the conversion dollars that we’ve planned on in that $55 million to $60 million for ADTV customers converting from our old platform to the new.

We have the ability to slow those kinds of expenditures down to some extent and then take advantage of what may be perhaps higher return opportunities during the year. So we have quite a bit of flexibility and the ability to manage that spend given the opportunities that may present itself.

Barry Sine – CapStone Investments

If you could kind of give us an update in terms of your current thinking for potential acquisitions. What is the state of the market out there as far as you look out there and as you’re thinking vis a vis your prior comments on potential acquisitions. Has that changed any recently?

Steve Oldham

The anecdotal evidence that we’ve seen out there is that there’s some pretty rich valuations on properties that may be of interest to us. So we’ll continue to look very hard at those sorts of properties, but I think it would be a mistake for us to be in a position of overpaying for those properties at this point in time.

Barry Sine – CapStone Investments

Could you just shed a little light on the interest expense line. That was down pretty significantly year over year, a lot more than the debt was. I know you said that includes netted off against the Patronage dividend. Could you give us the amount this year and what was that last year, and kind of walk through the math why interest expense fell so much?

Dan Bessey

The Patronage dividend was just under $1 million in the first quarter in each of those years. It was about $1 million in each year. The decline in interest expense is really a function of the decline in our overall debt balances as well as the impact of our leverage ratio declining.

We have step-downs in the rates that we pay when we get under three times and so the effects of those also reflected itself in the interest expense line item.

Operator

At this time, I would like to turn the call over to Mr. Steve Oldham for closing remarks.

Steve Oldham

I want to thank you all for taking the time to join us this afternoon and we look forward to working with you in the future. Thank you.

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Source: SureWest Communications Q1 2010 Earnings Call Transcript
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