Otelco, Inc. (NASDAQ:OTEL)
Q4 2013 Earnings Conference Call
February 26, 2014 11:30 AM ET
Kevin Enda – IR
Michael Weaver – President and CEO
Curtis Garner – CFO
Chris Brown – Aristides Capital
Good day everyone and welcome to the Otelco Conference Call. Today’s conference is being recorded. At this time for opening remarks and introductions I would like to turn the conference over to Mr. Kevin Enda. Please go ahead sir.
Thank you, (indiscernible) and welcome to this Otelco conference call to review the company’s results for the fourth quarter and year ended December 31, 2013. Conducting the call today will be Michael Weaver, President and CEO; Curtis Garner, Chief Financial Officer.
Before we start let me offer the cautionary note that statements on this conference call that are not statements of historical or current fact constitute forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other unknown factors that could cause the actual results of the company to be materially different from the historical results or from any future results expressed or implied by such forward-looking statements.
In addition to statements which explicitly describes such risks and uncertainties, listeners are urged to consider statements labeled with the terms please, believes – belief, expects, intends, anticipates, plans, or similar terms to be uncertain and forward-looking. The forward-looking statements contained herein are also subject generally to other risks and uncertainties that are described from time-to-time in the company’s filings with the SEC.
With that stated I’ll turn the call over to Mike Weaver.
Thanks, Kevin. Good morning everyone and welcome to this call. I’d like to start today just with a simple look back at 2013 and the pivotal decisions that we made and the significant accomplishments that resulted. Just starting with the successful reorganization of the company that – within that process, formal process for about 61 days and one of the circumstances proved challenging we were able to implement Atlas Resources-organization plan that allowed us to simplify our capital structure.
In addition we can vary it approximately $118 million or subordinated debt and deferred interest in the new equity in Otelco and perhaps equally important we extended the terms of our senior debt by three years. In addition we reduced the senior debt by $33.4 million. It consisted of a payment of $28.7 million at the end of the re-organization process and $4.7 million in scheduled and voluntary principal payments for the end of the year.
We started 2013 with $271 million in debt and finished with $128.6 million which means that we decreased total debt by $142 million. In addition we paid 100% of all unsecured clients during the re-organization process which allowed us to avoid any significant operational problems both during and after the re-organization. Since the completion of the re-organization Otelco has performed consistently. Our EBITDA for the last six months of the year was $14.6 million and that which translates into $7.3 million for both the third and fourth quarters.
As usual our CapEx spike during the fourth quarter we work to complete our existing projects. For the year we spend $6.2 million in CapEx which is roughly in line with our CapEx spending in 2012. Shifting the focus a little bit, 2013 results were generally in line with the pro forma included in our registration disclosure statement but I’m going to highlight some of the key items.
Our actual EBITDA for the year ended in 2013 was $31.8 million versus our projection in the pro forma of $32.5 million which means we had a shortfall of $700,000 which is approximately 2%, we missed our goal by about (6%). Cash balance at the end of the year was roughly $10 million which is a $1.5 million increase over our projected pro forma cash balance of $8.5 million. This increase in cash was primarily due to the lower than anticipated re-organization expenses which has a lot to do with the fact that we’re only in the formal process for 61 days.
Finally our total debt at the end of the year as I mentioned was $128.6 million which is in line with our pro forma projections of $128.7 million. As we turn our focus to 2014 we find ourselves excited by the new opportunities. First as we announced on January 6 we’ve acquired the assets of Reliable Networks which satisfies an existing market need and more expertise in the managed services arena as well as expanding our existing customer base. With the continued success of our Hosted PBX product which experienced a 37% growth rate in 2013, our customers are regularly asking us to manage and maintain their IP and (VoIP) networks.
With the Reliable Networks now an integral part of our business we have the expertise and experience necessary to provide these services to customers within the Otelco footprint and beyond. In addition Reliable’s customer base which is not limited to any specific network is very geographically diverse with the majority of their customers located in the Eastern half of the country. This acquisition provides Otelco with an opportunity to introduce our full suite of IP products to a new group of customers.
As we disclosed previously the terms of the deal may not Otelco acquire the assets of Reliable Networks by paying $500,000 cash upfront payment with the balance of the purchase price being paid in common stock over the next three years subject to Reliable achieving specified financial objectives. (Steel) represents the first time we’ve used our common stock as consideration for purchasing the company. Just completing the acquisition we made significant progress with the integration of the two companies. The sales and technical training has been completed and we’re introducing the new products and services to our customer base.
We’re excited that customer feedback has been positive and we’re encouraged by the initial response. The sales cycle for these services tends to be a bit long so we don’t expect to see meaningful results from these sales efforts until the second quarter of this year. Of course the customer revenue from Reliable’s existing base will be visible in our first quarter results. We continue to review our cost structure and are constantly searching for ways to reduce our network cost and manage our operations more efficiently. We’re currently undergoing a comprehensive review of our existing switching and transport network in New England in an effort to identify potential cost savings. In addition we continually monitor and work to control our labor cost as evidenced by the 5% reduction in staff we experienced in 2013.
In summary we remain focused on efficiently operating and growing our enterprise and business customer base and providing more to services they need to operate their businesses effectively. And now Curtis to summarize the financial results and then we’ll be happy to take your questions.
Thanks to everyone on the call for joining us today. The re-organization and the results and change in our debt and cash were material to the full year 2013 financial results summarized in the earnings release. Mike has placed them an operational contact so I don’t think any further review of those topics is needed.
I’ll provide an abbreviated review of the other financial highlights and then we’ll open it up for questions. Looking at fourth quarter 2013 results revenue decreased $4.6 million or 19% when compared to fourth quarter of 2012. Three quarters of the decline can be attributed to the fact that Time Warner Cable did not renew their network services contract with Otelco at the end of 2012. Majority of the balance can be attributed to two factors. The first factor is the decline in our residential customer base. The residential decline in wireline and telephones is not a new industry phenomenon with cable competition in wireless substitution being the two frankly driving forces.
Our results continue to be on part or better than the industry in this measure. We’ve separated out our subscriber metrics beginning with this report to better show the impact of competition on residential customers by separating business and enterprise results from residential results. The second factor that impacts is the impact of the continued implementation of the FCC’s Intercarrier Compensation order. In July of 2013 the interstate access rates were again reduced this time to the same level as the interstate access rates.
And the other payments that rural high cost entities received or reduced by another 5% and the annual of currents that we’ll keep on for the foreseeable future. Mike and the operations leadership team has implemented pricing actions where they can be sustained and marketing campaigns to effectively portray our products to the subscriber base but it’s not realistic to assume that they will fully be able to or fully replace the lost revenue to subscriber loss.
The breakdown of the revenue change is shown in the tables in the press release and detailed by category in the discussion. Operating cost and expense decreased in all three categories in fourth quarter 2013 for a combined decline of $3.3 million to $15.0 million or decline of 18.2%. Again Time Warner had a major impact on the cost of services as did lower cost of total and Internet.
Selling, general and administrative expenses decreased 26.7% to $2.8 million in fourth quarter 2013 from $3.9 million in fourth quarter of 2012. Reorganization expenses which are separately identified for 2013 in the income statement are shown in SG&A in 2012 and that accounted for a decrease of $1.1 million when you look at 2012 to 2013. This brings the total for 2013 to $9 million excluding the cancellation of debt income.
Depreciation and amortization decreased 31.3% to $2.9 million in fourth quarter 2013 from $4.3 million in fourth quarter of 2012. Amortization associated with the Time Warner contract intangible asset decreased by $1.2 million as the contract was fully amortized in June of 2013 again accounting for the lion’s share of the decrease in that category.
You probably note that I don’t mention net income in my discussion. There are two reasons, first for Otelco it is not a particularly good indicator of cash used or cash generated. EBITDA provides a better look at our performance in these areas. As Mike mentioned adjusted EBITDA was $7.3 million in fourth quarter of 2013 compared to $11.5 million in the same period a year ago and $7.3 million in the third quarter of 2013.
The second reason for this is that significant swings in net income are caused by large non-cash events. In 2012 looking at Otelco we had a significant net loss after-taxes due to recognition of impairment of goodwill and long-lived assets. For 2013 we had a significant positive net income due to the large cancellation of debt income shown in re-organization items. Both of that impact the provision for income taxes as does the re-organization expense which must be shown as a permanent difference when calculating the tax provision.
In short without digging into the details in the footnotes when we issued the 10-K net income loss can be misleading to many (indiscernible). This covers the highlights for the quarter with additional detail being found in the press release. Our SEC Form 10-K is expected to be filed in March which will provide additional details on our overall 2013 results. It will probably more productive if we shift to answering some questions at this time. (indiscernible) if you will provide directions we can take questions at this time.
Thank you sir. (Operator Instructions) We’ll take our first question from Chris Brown from Aristides Capital.
Chris Brown – Aristides Capital
Hi, good morning gentlemen. I was just wondering what you think your cash taxes will be in 2014.
Curtis, you’re in a better position to answer that than I’m I think.
Sure, Mike. The – well we don’t provide projections, I think that with the re-organization going on in 2013 we will have – had to utilize all of our tax assets on the balance sheet other than those that are associated with property plant equipment. So for 2014 we should be a fairly traditional tax payer in terms of being fairly close to the federal tax rate.
Chris Brown – Aristides Capital
Okay, great. That’s all I had. Thank you very much.
(Operator Instructions) We’ll move next to (Tucker Goldman) from Solas Capital.
Hi, it’s Tucker (Goldman), Solas Capital. Hi, Chris, Mike. I know you’ve referenced how you’re tracking against projections and in this difficult environment it’s not surprising that you’re trailing a little bit, at this point the last couple of quarters look more like what 2016 was estimated to be. Can you at this point start to think about kind of revising those that sort of longer term guidance or at least the trend you expect or you can’t get too specific on numbers here, can you at least tell us how you might be able to stem EBITDA decline or whether we need to readjust our expectations to expect the continuing decline going forward?
Good question, Tucker. Thank you. We don’t provide guidance on our earnings as you probably are well aware. There are a couple of things we can talk about and kind of share some thoughts with you. We – we’re proud of the fact that the last two quarters of 2013 were pretty consistent, that’s important to us to consistently have relatively stable EBITDA situations.
We – in our comments – my comments about the Reliable acquisition, we’re hopeful that and we believe that, that acquisition has an opportunity to bring additional revenue and EBITDA to our bottom-line. So that’s a small company and it’s not – and it’s a really – I’m proud of that acquisition, it’s not something that’s going to move the needle in 2014. But we think that with proper integration into our existing customer base and the new customers that we’ve added we think that that’s a really good growth prospect for us in the long-term.
So, we’re looking at that – we’re looking at that to be a help to us to add additional revenue and EBITDA long-term. The challenges that we face and part of the reasons that make this so hard to provide meaningful guidance is that the regulatory environment is still a mess despite what you may hear about it, there is a – we certainly feel like we have a good hand along that. And when I say it’s a mess what I mean is there is a lot of things that are not yet as well defined as they should be for operating companies like us. And it makes it harder to predict with certainty for that. I think the positive for us going into 2014 and beyond is that I’m – we’re pleased that our cash balance that we finished the year ahead of our projections and that was after making some voluntary payments that were not required by the terms of the existing debt agreement.
So, we certainly have that – as a (fallback) position $10 million is $1.5 million ahead of what we thought we would be. It may build as we go forward we’ll certainly take your request seriously to provide additional guidance. Part of the reason that we – I wanted to provide the contrast against the pro forma is because that’s the last thing, the only thing that we published and I want to give you guys some sense of who we are in relation to that. So I hope you’ll take that as the best answer I can give you at this time.
That’s helpful. And I don’t want to scare you off continuing to sort of reference back to that last point because it is helpful that I kind of hear where the deviation has come from and I understand how the environment is impacting you and what’s changed. I guess another question I had is have you disclosed, I saw that in the announcement regarding the acquisition that you pay $0.5 million in cash and then there was a earn-out that will be paid in stock, that’s solely in stock and have you disclosed to the extent or the amount of shares, how it could be issued and over what timeframe?
I think we have disclosed the shares, I don’t know the exact number of shares but it’s roughly 200,000 shares that would be paid over a three-year period once assuming certain what we did is agreed on financial objectives and in each of the years that those financial objectives are met essentially one-third of the 200,000 shares would be paid as consideration to the former owners of Reliable Networks.
How do you value the equity component?
We actually put a value on the entire business and based on current market metrics and then our – based on our own internal projections of what we thought the opportunities were for that business to grow over time and that’s how we arrived the total consideration that is all for – our opinion of the value of the total consideration for the acquisition. As a CEO it was very comforting to me to have a seller that was willing to take our stock to actually see that as great, it’s a great consideration for them as well as for us because assuming that we could have growth in our overall business that benefited from that and it just – it’s both highly to me of their own confidence if they can achieve the financial goals that we set.
And when you thought about what their business was worth, were you valuing our equity at market or were you valuing at a different level? If you took the price you’re willing to pay for Reliable and subtracted the cash. Were you valuing your remainder portion at market at $5 or $6 or $7 a share or you’re valuing it at a different level?
Well I’d really rather not for competitive reasons I’d rather not get into that level of discussion of exactly the method that we use to value it to the level that you’re asking me to. I think it’s in…
Okay. You view that the market value stock is currently accurate or do you feel your shares are undervalued?
Well as a shareholder I believe I’d like to think that the shares are undervalued based on where we are and what we see in our industry, let me just leave it at that.
Okay. I mean just from my perspectives it’s – these are small numbers but it’s still somewhat concerning the few shares used as consideration I know you don’t have lot of other options but when they are undervalued I would hope that you’re not valuing them at market and kind of constructing your purchase price, that’s just a comment more than a question I guess?
No, as I said my only response to that is I would – it’s my personal view that the shares are the current value – market price of the shares don’t reflect the value. So..
Okay, alright. Thank you.
(Operator Instructions) And at this time gentlemen, there are no further questions in the queue.
Well thanks. We just we’ll close the conference call by thanking you for spending the time with us and thank you for your questions and we will continue to work hard to grow our company and we hope to speak to you next quarter if not before. Thank you.
And that does conclude today’s teleconference. We thank you all for your participation.
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