Jennifer Spaude - Director, IR and Public Relations
John Finke - President and CEO
David Christensen - Sr. VP and CFO
Phillip Myth - Fetl
Hickory Tech Corp. (HTCO) Q1 2010 Earnings Call April 27, 2010 10:00 AM ET
Good morning. My name is Bonnie and I will be your conference operator today. At this time, I would like to welcome everyone to the HickoryTech first quarter 2010 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be question-and-answer session. (Operator Instructions). Thank you. I would not like to turn the call over to Ms. Jennifer Spaude, Director of Investor and Public Relations. Please go ahead ma'am.
Good morning and thank you for joining HickoryTech's first quarter 2010 earnings conference call. I'm Jennifer Spaude and with me today are John Finke, HickoryTech's President and Chief Executive Officer; and David Christensen, Senior Vice President and Chief Financial Officer.
Before we get started, let me remind you that our earnings release was issued yesterday afternoon and is available on the Investor Relations section of our website at HickoryTech.com. In addition you'll find the presentation for today's call which we hope you will find helpful in your analysis.
Now I'd like to draw your attention to our safe harbor statement on slide two. Information in today's presentation contain certain statements and predictions that are not historical facts, but are forward-looking in nature. These forward-looking statements are based on current expectations, estimates and projections about the industry in which HickoryTech operates and management's beliefs and assumptions as of the time of this call.
Such forward-looking statements are subject to uncertainties. The actual results or outcomes may differ materially from those indicated or suggested by any forward-looking statements whether as a result of new information, future events or otherwise. You're cautioned not to place undue reliance on these forward-looking statements made during this conference call. These statements are not guarantees of future performance and involve certain risks, uncertainties and probabilities which are difficult to predict. There are many suck risks and uncertainties which could affect the economy, our industry and our company in particular. Some or all of which could affect future results.
More information on potential risks and uncertainties is available on the company's recent filings with the Securities and Exchange Commission including HickoryTech's Annual Form 10-K report, our quarterly form 10-Q report, or our Form 8-K report. This presentation also contains certain non-GAAP financial measures, reconciliation of these non-GAAP measures to the most directly comparable GAAP measures are available in our presentation.
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 HickoryTech's Investor Relation's website for the next 30 days. Following management's discussion, we will open the call to Q&A.
At this time, I'd like to turn the call over to John Finke.
Thank you Jennifer and good morning everyone. Yesterday we reported our first quarter 2010 results. Let me begin this morning with a few financial highlights and remarks about the business climate and then I'll comment further on the next phase of growth for HickoryTech. David will take your through the financial details of the first quarter later in the call.
We are very pleased with our first quarter results. HickoryTech's first quarter revenue totaled $38.7 million up 16% from a year-ago. Operating income for the first quarter totaled $4.5 million and was down 2% from one year ago. Net income totaled $1.4 million and was down 12% from a year ago. Earnings were affected primarily by a onetime income tax charge related to the Healthcare Reconciliation Act of 2010 and an increase in sales and operational support staff in our S&B segment a key growth initiative in our Enventis sector.
Looking specifically at our financial results in the Enventis sector which provides business-to-business products and services. Revenue totaled $21.5 million in the first quarter, up 35% from a year ago. Enventis operating income increased 65% to $1.9 million a net income of $1.1 million was up $200,000 or 65% from one year ago.
Enventis cost and expenses in the first quarter were up primarily due to increased equipment costs resulting from higher equipment sales but also due to the addition of CP Telecom and our expanded workforce. We expanded our direct sales force throughout Minnesota to focus on small to medium size businesses and have added operational staff to support this initiative as well. We are also making investments in mid-band Ethernet capabilities in specific markets and over the past year we've strategically expanded our network to reach more customers and reduce our off-net costs in these markets.
Overall we are pleased with the first quarter's increase in revenue and a notable 29% increase in Enventis equipment and service sales as the economy begins to recover and businesses start to invest again in communications equipment.
Our Enventis fiber and data services revenue increased 44% in the first quarter and this line of business has consistently grown year-over-year 19%, 18% and 30% respectively over the past three years. The strong revenue growth is attributed to increased sales of high capacity Ethernet, MPLS and fiber services and the addition of CP Telecom which we acquired in August of 2009.
Now let's turn to the Telecom sector. First quarter revenue totaled $17.8 million relatively flat with a year ago. Telecom costs and expenses were up just 3%. The Telecom sector continues to produce strong, stable cash flows. Broadband services revenue which includes DSL, Data and Digital TV services grew 12% to $3.2 million. Broadband revenue growth continues to offset some of the decline of Telecom services which were on a gradual decline.
Digital TV subscriber increased 16% to 9,789 and DSL subscribers increased 3% year-over-year totaling 19,494. We are pursuing two additional franchise agreements in small rural communities in an effort to further expand our Digital TV services and retain (inaudible) voice and internet services in these markets. Network access revenues were $6.1 million down less than 1% from a year-ago. Local service revenue totaled $3.7 million and was down 5% and access lines declined 6% year-over-year. Local customer service and quality customer support remains important (inaudible) for HickoryTech to retain customers and win new business in this competitive landscape. We have increased our focus on customer retention through new loyalty programs and marketing plans. Our Telecom sector continues to produce consistent and stable cash flows giving yet the opportunity to pursue our next phase in growth.
I will talk more about our growth plans later in this call but at this point in time I'm going to turn the call over to David Christensen who'll provide more details on our financial performance. Dave?
Thank you John, good morning. John provided several highlights of our first quarter; I'll provide a few more details and comments on our outlook for 2010. To recap, our first quarter revenue increased 16% and totaled $38.7 million. Along with this revenue increase, expenses were also up. We had a 19% increase in total costs and expenses compared to one year ago. The 41% increase in cost of sales is directly related to the 46% increase in equipment revenue in the Enventis sector. The 14% increase in overall cost of service was primarily due to our addition of CP Telecom which we acquired in August of 2009. The Telecom sector increased in cost of service was 5.6% driven up by $200,000 increase in our TV programming, costs which is our content cost per TV and also by a $100,000 of increased post retirement healthcare costs.
The 20% increase in our selling, general and administrative costs were again mostly influenced by our CP Telecom acquisition, but also we're nudged up by the initiative which John talked about, we expand our direct sales force in the small to medium sized business market. Our $4.5 million consolidated operating income is about the same as last year, same quarter.
Our pre-tax income of $2.9 million is also about the same as the first 2009. Net income was lower than last year, because we took a $279,000 income tax charge due to the legislation which was signed in late March, the National Healthcare Reconciliation Act of 2010. It is a non-cash charge against earnings like many other companies have also have to do and has to do with loosing the future deduction of healthcare we provide our employees as it interacts with Medicare Part D reimbursements. Without this unique tax charge, we would have had approximately $1.7 million of net income this first quarter and been ahead of last year's same quarter.
Now I'll comment on Enventis operating results, my comments are from pre-elimination numbers in the Enventis sector recap in our earnings release. Fiber and data services which is one of our recurring product lines increased its revenue $3 million or 44% in year-over-year comparisons and totaled $9.6 million in the first quarter of 2010. Equipment and service revenue increased 29% and as John said, we are pleased that the economy is allowing our customers to reduce their ordering levels again.
The Enventis sector as well as both of our major product lines within it show good profitability and very robust percentage increases over the same quarter last year Enventis sector capital expenditures totaled $2.1 million in the first quarter of 2010 up from $1.2 million in the same quarter of 2009. We continue to invest in the fiber and data portion of the business to support growth, expand our network, reach more business customers and to make specific network builds to address the increasing demand for bandwidth. We do this by extending our fiber to lighting buildings for service or lighting up data centers or wireless towers or by co-locating into more central office switches to reduce costs and move our network closer to our customers.
We have a quarter of success based capital spending projects for the year and we'll continue to seek only the best projects to invest in based on return on investment.
Now I'll comment on the Telecom operating results. My comments again are from the pre-elimination numbers in the telecom sector recap in our earnings release. Simply, Telecom first quarter revenues only declined 1% over a year-ago. Our cost increased 3%. We have the same type of minor decline in Telecom operating income and resulting net profits that has been the trend for several years and it is our own expectation that this will continue. We're managing the trend through expansion of broadband revenue and by working hard on managing our costs. We also tightly control our invested capital in Telecoms still making good investment to ensure our customer's broadband needs are maintained.
Telecom capital expenditures were $1.4 million over the first quarter of 2010, 5% lower than a year-ago in the same quarter.
For the second consecutive quarter we used our excess cash to make a voluntary reduction in our senior debt balance. Our debt balance of $116.2 million at the end of the first quarter is a reduction of $4.3 million from the beginning of the year 2010 and it followed a $4.4 million reduction in the fourth quarter of 2009. We have lowered the debt by $10.8 million in the past 15 months. Lower debt levels are acting as one of our strengths right now. We are operating now with a ratio of less than 2.9 times debt to EBITDA which is a key metric in our industry, puts us well below our target levels in our senior debt agreement and saves us a great deal of interest expense.
We enjoy a very favorable credit facility relative to market and it has a little less than two full years remaining with most of its term expiring at the end of 2011. We feel we are truly positioned for growth with a strong balance sheet and our cash generating power.
We affirmed the previous annual guidance we provided in our last conference call in March. With the only change being to uplift net income guidance through the lower expectation on book income taxes. To restate what is listed in the press release for revenue, we are targeting a range of $150 to $158 million of revenue. For net income we are targeting a range of $8.7 million to $9.6 million and diluted earnings per share of $0.66 to $0.73 per share. For CapEx we are targeting $22 to $26 million with a little over half of it being maintenance CapEx and a little less than half of it being opportunity or success based CapEx. Let me correct that statement, in the CapEx area, less than half of it will be maintenance CapEx and little over half of it being success based CapEx.
For EBITDA which is an important metric for performance for us due to our industry and due to our debt agreement, we are targeting a range of $40.5 million to $43 million and for year-end debt we are targeting a range of $117 to $119 million for the year end debt.
In summary, our first quarter of 2010 is off to a solid and strategic start. There are several financial measures in the first quarter which demonstrate we're using the economic pace to our advantage and we're proving we can proceed from a position of strength and make (inaudible) better able to grow when we implement all of our organic construction and expansion plans. With that I'd like to turn it back over to John Finke. John?
Thanks Dave. As we enter our next phase of growth, our goal is to double, is to manage our cash and lower operations in order to double the value of our company over the next five years. It's an aggressive goal but one that we're committed to achieving. The steps we've taken over the past several years to develop and enter new lines of business in our Enventis sector alongside our investments in our Telecom broadband services have brought us to this point.
Our growth plan includes the extension of our fiber network to new markets, (inaudible) fiber bills to specific customers and select tower used by wireless carriers and an investment in new services for business customers especially in the small to medium business customer segment. We are expanding our network into moving Iowa and extending our network to Sao Paulo South Dakota and further North Dakota. We will focus on growing our retail business customer base into Moines Iowa and growing our wholesale fiber and data services into Sioux Falls and Fargo. This is another step in our overall plan to expand our network geographically and provide competitive, high capacity bandwidth solutions through Enventis. The new routes are expected to complete late in 2010. Additionally, our broadband growth initiatives are meant to protect our Telecom customer base. Although we expect future broadband growth rates to slow have to reach higher penetrations of our services in these markets, it is an important part of our overall plan.
Our growth plans require investment. We expect the cash flow of our existing lines of business to help us fund the development in investments in new growth initiatives. As in the past, we examine our investments and evaluate their potential to create value to our shareholders. We'll continue to review and pursue opportunities to grow our business either through organic growth initiatives or strategic acquisitions. HickoryTech is in a solid position as they are an experienced Telecom provider with a long history of stability. We have a successful track record of delivering quality services to both businesses and residential customers. We have deep technical knowledge, IT expertise and strategic business parters that enable us to deliver a competitive, communications solutions.
All this is bostered by a growth engine of our Enventis sector focused on fiber network expansion. In summary, we are pleased with our start to 2010. We took steps in 2009 to lay the groundwork for an accelerated growth plan to purchase an integration of CP Telecom, the expansion of our businesses services and the extension of our fiber network are all well underway. Clearly, our goal to double the value of our company is an aggressive one, but one that we're committed to achieving.
We are focused on growing the Enventis sector while maintaining the free cash flow within our Telecom sector. Our strategic direction is well defined and we are on track with most of our key initiatives.
In closing, HickoryTech's balance sheet continues to be strong and we are in good financial position to grow our company. We have solid net income, a high level of recurring revenues, a growth trend in key strategic product lines, shareholder value and healthy dividend, low cost debt covered by strong cash flow and the ability to generate cash to current future opportunities. We are excited about our growth plans, appreciate your support and wish to thank you for joining us on the call today.
At this time we'd be happy to take any questions. Bonnie if there are any questions, please initiative them now.
(Operator Instructions). Our first question comes from Phillip Myth of Fetl.
Phillip Myth - Fetl
Yes, good morning, and thank you for the presentation. I have two questions. Number one, would you discuss the debt balance year-end number which is higher than today and your pay-down this quarter which is really nice. Do you expect to maintain a ratio of below three because you are increasing EBITDA or do you plan to pay-down debt during the year and then add to it for some reason at the year end?
And then was there a second question Phillip?
Phillip Myth - Fetl
Yes, I would be happy to go ahead with that. And number two would be, on your strategic initiatives for the year. I noted that, first of all it's a very nice goal to double the value of HickoryTech and you even used a different color so I assumed that that was the highlight that which is very nice and your slides are very nice by the way. But my question is can you help me understand how when you as a company look at the value over the next five years and doubling it, what that really means? There is a lot of ways of using that word and if we were to go out five years and you had in fact accomplished your internal goal, what would that mean, not that you are predicting but your general range of dividend and what you think that market value might be or a range of that?
Thank you for questions Phillip. I'll take the first one and John will take the second one. The debt question you asked, it's a pretty simple matter of timing. You're right, we've been able to push the debt down even below our guidance for this first quarter, but we aren't really into the construction season yet. We have an ambitious construction season coming up. So, the prospects may hold that by the end of the year we're slightly above where we are right now in debt or we may not be but I think the second part of your question about debt was could we hold on to the favorable position we have now of being below three to one in debt to EBITDA relationships which is kind of vital to our debt agreement and yes even at the range that we gave given if we're lucky enough to get in the range we want to be for EBITDA for our guidance. We'll still be at three or below, 3:1 debt to EBITDA. So, thanks for observing that. Its sort of timing as far as whether we've be able to hold on to the $116 million level but the relationship to EBITDA should still be strong by the end of the year. John you want to handle Phillip's second question?
First of all, thanks for the question and while I'll not going to be able to give you a real specific number on your question, the question was around, how do we view doubling the value and as I try to state in my talk here is that it's a combination of growing the EBITDA and being able to manage the cash and manage the debt balance to be able to grow that overall value of the company in the marketplace. We're going to look at it as the EBITDA (inaudible) multiple that Telecom stocks would trade in the marketplace and subtracting our data of that and growing basically the value of the organization over the five years based on using those metrics. Does the provide you with some inside into what you're looking for?
Phillip Myth - Fetl
May I just ask this then and is that if you were looking at the value of HickoryTech today, compared to the market value as represented by the stock price, is it fair to say that you feel the value is more than that and so therefore the doubling of value might be what you feel the real value of HickoryTech is probably a bigger number than just the stock price doubling?
Well we didn't really talk about this stock doubling.
Phillip Myth - Fetl
I tried to stay away from that. It would be one thing to say to double the value; some shareholders would say okay that would be a value. And I wasn't trying to ask that. That's not the point; the point is that do you not feel that the value of HickoryTech on a private basis is probably more than what the market is recognizing at the moment? So therefore when you are doubling the value then it's actually probably a bigger number than just ring about what the stock price does or doubling the value of the stock price.
Yes I would say your analysis is correct. I mean we're looking at it more as the mathematical way of calculating value in a way that we can grow based on and trying to measure our success based on that and the stock prices saw the reflection of a bunch of different pieces that we don't try to predict what that is going to be. So, we are looking at the metrics behind it which would probably equate to the way you put it in and the value is different than what it's shown in the marketplace.
(Operator Instructions). At this time there are no further questions, I would like to turn the call back over to Mr. John Finke, President and CEO.
Thank you Bonnie, appreciate it. Thanks for the question today. We appreciate those. If you joined us after the call began over like the replay of the call, please visit our website at HickoryTech.com. A telephone replay of the call will be available beginning at noon today. Once again, thank you for joining us today. We look forward to talking with you in the future and if something just (inaudible) later today, I'll invite you to give Jennifer, David or myself a call at any time. Thank you and have a good day.
This concludes today's conference call. You may now disconnect.