Hickory Tech Corporation. Q2 2010 Earnings Call Transcript

Jul.29.10 | About: Enventis Corporation (ENVE)

Hickory Tech Corporation. (HTCO) Q2 2010 Earnings Call July 29, 2010 10:00 AM ET

Executives

Jennifer Spaude - Director, IR and Public Relations

John Finke - President and CEO

David Christensen - Sr. VP and CFO

Analysts

Beth Lilly - Gabelli

Jay Kumar - Midsouth Investment Fund

Operator

Good morning, my name is Tasha and I will be your conference operator today. At this time I would like to welcome everyone to the HickoryTech Second Quarter 2010 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be question-and-answer session. (Operator Instructions) Thank you.

I would now like to turn the call over Director of Investors and Public Relation, Ms. Spaude. You may begin your conference.

Jennifer Spaude

Good morning and thank you for joining HickoryTech's second 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 Relation section of our website at HickoryTech.com. In addition you'll find a presentation for today's call which we hope you will find helpful in your analysis.

Now just to draw your attention to our Safe Harbor statement. Information in today's presentation contains 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. 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 which represents estimates as of July 29, 2010. 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, quarterly Form 10-Q report, and Form 8-K report. This presentation also contains certain non-GAAP financial measures, reconciliation of these non-GAAP measures to our 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 in HickoryTech's Investor Relation's website for the next 30 days. Following management's discussion, today we will open the call to a Q&A session.

At this time, I'd like to turn the call over to John Finke.

John Finke

Thank you Jennifer and good morning everyone. Our second quarter results released yesterday. First let me say that I am very pleased with our results and another quarter of solid increases. I’ll begin my remarks today with a few financial highlights and I’ll update you on our fiber network expansion and our growth plans. David will take you through the financial details of our second quarter later in the call.

HickoryTech's second quarter revenue totaled $38.3 million up 18% from a year ago. Operating income for the second quarter totaled $5.7 million and was up 7% from one year ago. Net income totaled $3.5 million a 66% increase from a year ago. Double digit revenues increases in all Inventor Sector product lines and stable Telecom operating results produced a very solid second quarter for HickoryTech. Earnings were also positively impacted by a couple listing factors. In income tax reserve release and a joint construction project as part of our fiber network expansion. David will provide details on these factors during his remarks.

These results demonstrate our continued growth through our Inventor Sector and focused on growing our business-to-business services. Additionally, the result reflect our effort to transform our company which is producing an increasing level of diversification, strong operating results and a sound financial position.

Looking specifically at our financial results in the Inventor Sector revenues totaled $21.2 million in the second quarter, up 44% from a year ago. Inventors operating income totaled $2.3 million up 33%, Inventors net income of $1.4 million was also up 33% driven mainly by the ongoing growth in our fiber and data services and a recovery in the equipment and services business. Cost and expenses in the Inventor sector for the second quarter were up primarily due to the addition of CP Telecom operations and higher equipment cost, resulting from higher equipment sales.

We have expanded our direct sales force throughout Minnesota and into moving Iowa to focus on small to medium sized businesses. We have also added operational staff to support this imitative. We have made investments in mid-band Ethernet capabilities in specific markets over the past year and we have strategically expanded our network to reach more customers and reduce our off net cost in these markets.

The business fiber and data services revenue totaled $10.8 million an increase of 63% year-over-year, this line of business continues to produce steady double-digit growth. 43% growth in the first quarter 2010, 29% growth in 2009 and 18% growth in 2008. This strong revenue growth is attribute to increase sale of high capacity Ethernet, MPOS and fiber services. The addition of CP Telecom which we acquired in August of 2009 and the impact of our joint fiber construction project.

This pass consistently to our plan and we are making the way for future growth with our fiber network expansion project that are currently under way. We are expanding our fiber network into Des Moines, Iowa and extending our fiber network to Sioux Falls, South Dakota and Fargo, North Dakota. We are focused on growing our retail and wholesale business customer base in these markets and have added staff to support this plan. The construction is expected to be completed in 2010.

I am also pleased to report the second consecutive quarterly increase in the inventors equipment services revenue which grew 28% year-over-year. We are encouraged by these increases and believe it as a very positive sign economy is showing some recovery. We recently achieved a CISCOs Master Unified Communication Specialization. We are very proud to achieve this prestigious specialization from CISCO. Affirming our ability to sell, deploy and support highly sophisticated CISCO unified communication solution. The Master of Specialization underlines the hard work and dedication our teams have I suppose to our customers implementation and it differentiates us as the leading unified communication and network integrator.

Now I will turn to the Telecom sector. Second quarter revenue totaled $17.6 million relatively flat versus a year ago. Despite steady competition the telecom sector continues to produce strong stable cash flows. Broadband services revenue which includes which includes DSL, data and digital TV services grew 10% to $3.3 million. Broadband is a primary growth area within the telecom sector and its revenue increases have offset some of the telecom services which are on a gradual decline.

Digital TV subscribers increased 11%. We currently serve 16 communities and are perusing two additional franchise agreements in small role communities and an effort to network to further expand our digital TV services and to retain cord voice and Internet services in these markets.

Telecom network access revenue was $5.9 million a 2% decline from a year ago. Local service revenue totaled $3.6 million even with the first quarter of 2010 but down 6% from a year ago. Access lines declined 7% year-over-year as a result of competition and wireless substitution.

Local customer service remains an important differentiator for us in these markets. We can either aggressively work to retain our current customer base while winning new customers. Despite an increasingly competitive landscape, our Telecom sector continues to produce consistent and stable cash flows, giving us the opportunity to pursue our next phase of growth.

Now I’d like to turn the call over to David Christensen who will provide a more details on our financial performance. David?

David Christensen

Thanks John, good morning. John provided several highlights of our second quarter, I’ll provide a few more details and comment on our outlook for 2010. To recap, our second quarter revenue was up 18% from the comparable quarter last year and totaled $38.3 million. Our inventors equipment and services second quarter revenue improved 28% from a year ago, posting a second consecutive positive quarter. We achieved significant growth in our fiber and data service fueled by wholesale business sales, the addition of CP Telecom and key strategic initiatives to expand our fiber network.

Although this revenue increased expenses were also up. We had a 20% increase in total cost in expenses compared to one year ago. The 48% increase in cost of sales is directly related to the 50% increase in equipment revenue in the Inventor sector. The 24% increase in cost of service was primarily due to our addition of CP Telecom. But also there is approximately $760,000 in cost associated with our fiber construction project to Sioux Falls in conjunction with another carrier.

For 3% increase in our selling, general and administrative cost is favorable considering that we added the cost of our CP Telecom operation and the cost added by our own initiative to expand our direct sales force in the small to medium size business market. Thus our overall 20% increase in total cost and expenses is directly related to our growth initiatives.

Our $5.7 million operating income is 7% higher than last years second quarter. Our pre-tax income of $4.6 million is 27% better than last year due to our operational success and to the 36% decrease in our interest expense this past quarter.

Net income was $3.5 million a 66% increase from a year ago. Included in net income was a $800,000 benefit from reversing income tax reserve. Our reversal we were able to do because of the passage of time and closer of some earlier tax years. Functionally the reversal was not a cash transaction. We did that change or amend any income tax returns.

On our financial statements under the FIN-48 accounting standard we lowered non-prior tax liabilities and through lower tax expense and higher net income we have increased our shareholder equity due to this change. Excluding this unique tax reversal net income would have totaled $2.7 million still a 28% increase from a year ago.

Now I’ll comment on the Inventor sector operating results. My comments are from the pre-elimination numbers in the Inventor sector recap on our earnings release. Fiber and data services which is largely recurring contract revenue increased $4.2 million or 63% in year-over-year comparisons and totaled $10.8 million in revenue for the second quarter. This double-digit percentage improvement represents growth in three areas.

Our fiber and data services to customer for backbone transport and their data and voice traffic. Our newly acquired CP Telecom combined with our growing small medium business and posted VoIP service. And approximately $1.1 million of revenue from the fiber network construction project to Sioux Falls in collaboration with another carrier.

In the second quarter we began a construction project with another carrier to extend our fiber network. We will receive revenue for this project which is part of our strategic initiative to grow our wholesale and B2B fiber and data services.

Equipment and service revenue increased 28% and as John said, we are pleased to be coming as allowing our customers to resume their ordering levels again. It is our second consecutive quarter of strong rebounding revenue for this product line. Most of the product lines in the inventor sector showed good profitability and very robust increase over the same quarter last year.

Inventor sector capital expenditures totaled $3.9 million in the second quarter of 2010, up from the $2.3 million a year ago. We continue to invest in the fiber and data portion of the inventors business to support growth, expand our network, reach more business customers and make specific network builds to address the increased demand for bandwidth.

We have a quarter of success based capital spending projects for the year and we'll continue to seek go into those projects to invest in based on return on investment. As mentioned earlier we are in the early stages of fiber network expansion project in Des Moines and to Sioux Falls and to Fargo. All of these initiatives are part of our 2010 capital expenditure plan.

Now I will comment on the telecom operating results, my comments are again from the pre-illumination numbers in the telecom sector recap of our earnings release telecom revenues in the second quarter declined just under 2% compared to one year ago, cost increased 2%. We have an operating income decline in our telecom sector of $700,000 or 19% which is a common trend in our industry. We plan to offset the trend with growth of our inventor sector and future telecom capital expenditure will moderate to coincide with the trend and telecom net profitability.

Telecom capital expenditure were $3.2 million in the second quarter of 2010 approximately $800,000 higher than a year ago of the same quarter. This is primarily due to our investment for a school cons odium a contract which we want to provide voice, data and video conferencing services to schools or libraries in 69 sites across South Central Minnesota. The three year contract will add a minimum of $4 million of revenue over its term.

After two consecutive quarter of voluntary reduction in our senior debt balance our June 30, 2010 balance of $121.3 million increased 5.1 million from the previous quarter and is $800,000 higher than the balance of the beginning of the calendar year 2010. Seasonality in our construction season along with sales increase associated with our equipment business caused a temporary increase in debt at the end of 2010.

Even with the second quarter increase our debt is still lower than what it was on June 30, last year when it was at $125.2 million. We continue to operate with a ratio of less than three times debt to EBITDA which is a key metric in our industry and puts us well below our target levels and in senior debt agreement and consequently saves some interest expense.

In the second quarter of 2010 we experienced a 36% decrease in net interest expense from a year ago and we're now at a level of $1.1 million of interest in the second quarter. This was accomplished primarily as the result of locking in our interest rate at a lower level than before and because our debt level is lower than last year.

We enjoy a very favorable credit facility relative to market and it has 18 months remaining with some of its functionality expiring at the end of 2011 and the majority of its term expiring in 2012. We are not concerned with the refinancing of this debt capitalization in the next business cycle. We feel we are truly positioned for growth with our strong financial position and our cash generating power.

We updated our fiscal 2010 guidance in our earnings release and specifically increased our net income and EBITDA ranges. For revenue we are targeting a range of $150 million to $158 million unchanged from our previous outlook. We’ve increased our net income target to a range of $9.7 million to $10.6 million and our diluted earnings per share is targeted at $0.73 to $0.80 per share.

For CapEx we are targeting $22 million to $26 million unchanged from our previous guidance. And we’ve increased our EBITDA target to a range of $41.5 million to $44 million, EBITDA is an important performance metric for us due to our industry and due to our debt agreement.

For our year end debt we’re targeting a range of $117 million to $120 million, we’ve made a slight up-tick on the high end of the range due to the high business and construction activity this year. You can look for our 10-Question, we plan to file it later today. And in summary our second quarter of 2010 and the first six months of 2010 has registered a solid and strategic foundation for our future. It is giving us what we need to build in reaching our goal of doubling the company’s value in five years.

With that I’d like to turn it back over to John Finke. John?

John Finke

Thank you, David. We are on a path of continued growth with a goal to grow our operations and manage our cash flow in order to double the value of our company over the next five years. As I mentioned last quarter it is an aggressive goal of one that we’re committed to achieving.

Our growth plan is focused on growing our business-to-services and leveraging and extending our state wide fiber network. Our progress during the first half of 2010 to implement a fiber network expansion plan is an example of our commitment and ability to leverage our assets, our existing cost structure and our core competencies to expand into new markets and enhance shareholder value.

Additionally our broadband growth initiative are meant to protect our Telecom customer base. Although future broadband growth rates are expected to slow as we reach higher penetrations of broadband services in many of our community, the Telecom sector produce a solid consistent cash flow and 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 in development and investments in our new growth initiatives. We will continue to review and pursue opportunities to grow your business either through organic growth initiatives or strategic acquisitions. We have applied for a broadband stimulus grant to the NTIA for a middle mile project to build a high capacity Ethernet network connecting actual institutions throughout Minnesota and expect to hear on the status of this application by September 30.

HickoryTech is an experienced Telecom provider with a long history of stability. Our Telecom or all that classification is both a very good plan which leverages our state wide fiber footprint and increase business-to-business focus. The purchase and integration of CP Telecom in 2009, the expansion of our business services and the extension of our fiber network are all well underway and laying the ground work for an accelerated growth plan.

We are focused on growing our inventory 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, we are pleased with our results for the first half of 2010 and we are committed to achieving our goal of doubling the value of our company. HickoryTech is in good financial position to grow, we have solid net income, a high level of recurring revenues, a growth trends in key strategic product lines, shareholder value and healthy dividend, low cost debt covered by strong cash flow and the ability to generate cash from future opportunities.

We are excited about our growth plans, appreciate your support and we just thank you for joining us on the call today. At this time we’d be happy to take any questions. Tasha, if there are any questions please initiate them now.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line Beth Lilly with Gabelli.

Beth Lilly - Gabelli

Good morning.

John Finke

Good morning, Beth.

Beth Lilly - Gabelli

I wanted to ask a question just in terms of the two business and the growth rates you expect for them I mean inventors is knocking the lights out and growing very rapidly and telecom as expected is declining at a low-single rate. So as you look forward in terms of the two growth rates of the divisions, can you talk about where you see those going?

John Finke

Yes, that we can. I mean what we talked to about in the past is that we do expect that telecom sector is going to continue on a gradual decline and we talked about that in the low single-digit range. We've also talked about that inventors with the two different lines of business that we would expect that would be in the high single-digit, maybe into the low double-digit resulting in an overall mid to high single-digit growth rate for the company.

Beth Lilly - Gabelli

Okay.

John Finke

David you want to add any thing to that?

David Christensen

The history is the best indicator of future. What has been in the past is what I think its going to continue doing.

Beth Lilly - Gabelli

Okay. And then can you just talk about directionally operating margins for the six months the operating margins were about 13% and that had $200,000 in it right from the fiber payment?

John Finke

13% you are going --

Beth Lilly - Gabelli

Okay. So your operating income for the six months or even for three months, for three months was 5.6 million, right?

David Christensen

Yes.

Beth Lilly - Gabelli

Okay. And that included $200,000 of the payments for the joint venture?

David Christensen

That's an after tax -- the 200,000 is an after tax number. I think you might want to use a $300,000 number for prescription tax.

Beth Lilly - Gabelli

Okay. So if we look at your margins on a six month basis, okay? Your operating margins are probably high 12% low 13%, right? Are you tracking with me?

David Christensen

Yeah. I most of all working with EBITDA margins. But I'll track in. Okay?

Beth Lilly - Gabelli

Okay. And debts versus high 14% six months ago. So as you look out going forward and you can translate this into EBITDA where do you see those margins going?

John Finke

Now we go and translate, while we translate into EBITDA because I think that is more of the way that we have looked at it.

Beth Lilly - Gabelli

Okay.

David Christensen

I like working with long year time periods rather than six month time periods because you can get seasonality working in a six month period, first half of the year versus second half the year. So why don’t you put it this way Beth, the EBITDA margin that we’re seeing in the first half of the year is pretty overall, total company composite is pretty indicative of a 12 month margin that we should be able to sustain for the whole year.

Beth Lilly - Gabelli

Yeah.

David Christensen

That margin maybe a little less than last year because we started the growth initiative. We’ve added some cost, we’ve added some sales people, we’ve added cost in advance of revenues. So it’s -- you say we’re diluting the margin percentage with the absolute number, the total number is getting larger, because we are a growing company.

Beth Lilly - Gabelli

Right. Okay, so if I take the mid-point of your revenue guidance which is 154 million, okay? And I take the mid point of your EBITDA guidance, you’re talking about around like a 27% to 28% EBITDA margin, is that correct?

David Christensen

That’s right.

John Finke

That’s right.

Beth Lilly - Gabelli

Okay. And if you look out at your business over the next several years where do you see that margin going?

David Christensen

We’re not giving any guidance beyond the calendar 2010. So I would be remiss if I started answering your question.

Beth Lilly - Gabelli

Okay.

John Finke

I guess the one thing that I would say that, I think it’s going to depend a lot on the mix, and that’s why I think it’s hard for us to give you that projection and we don’t give our future projections on that. But we cover a lot of things going on in our line business. We have the initiatives to grow the small-medium business, part of our company which is going to bring in some margins that are lower than the pure fiber and data, or the larger bandwidth parts of the business in that line of business. We also have the equipment business. So if there is a high level of equipment in any quarter or any 12 months period that also is going to have an impact on our margins. So I think David is right, I think when you have to look back at our margins over the past several years and kind of use that as an indicator looking forward.

David Christensen

Why do we that? I mean in spite of all the changes, if you go back to 2007, the margin in 2007 was probably 26% now it’s 27%, in spite of all the change. Erosion, two or three years of telecom high margin revenue, adding in all the stuff in inventors it really hasn’t changed that much.

Beth Lilly - Gabelli

Yup.

David Christensen

So all of the dialog about what’s the margin percentage going to be, in the last three or four years it hasn’t changed all that much.

John Finke

Does that help?

Beth Lilly - Gabelli

That’s very helpful. Thank you.

John Finke

Okay.

Beth Lilly - Gabelli

And my last question is, when you talk about doubling the value of the company over the next several years, are you talking about revenues or are you talking about earnings, you’re talking about EBITDA, you’re talking about stock price, what are you referring to?

John Finke

When we refer to doubling the value we’re really looking at a couple of factors. And it’s really the factors that built around continued growth of EBITDA and the management of the cash flows in order mange our debt and to keep our debt at a level that will be -- we’re not going to spend a lot of money to get EBITDA growth. So we’re hoping by balancing the expenditures and controlling the debt level, continuing to pay down the debt somewhat, that that in conjunction with growth in EBITDA will double the value of -- the shareholder value that we’re seeing in the company.

Beth Lilly - Gabelli

Okay, alright. So you’re statement is, if you can grow your EBITDA on an absolute basis the value of your stock will double?

John Finke

Staying away from the doubling of the value of the stock price, we’re saying that the value that -- the value of the company should double. How that impacts and how that translates into stock price we’re not trying to make any predictions on that.

Beth Lilly - Gabelli

Okay.

David Christensen

The interesting value of the company it will double. It's up to the stock market to figure out how to value our stock.

Beth Lilly - Gabelli

Got it, okay. That's helpful. Thank you those were all my questions.

John Finke

Thank you, Beth.

Operator

Thank you. Your next question comes from the line Jay Kumar with Midsouth Investment Fund.

Jay Kumar - Midsouth Investment Fund

I have two questions, one is, one your broadband initiative are you guys doing any thing or any part with Obama's broadband initiative on the rural front?

John Finke

Yes we are. That as well I refer to briefly in my comments and I can give you a little more detail on that. We did apply for a broadband grant toward the NTIA and this grant is really to continue to provide further extension of our current fiber network in the state of Minnesota. It will connect us to 36 additional rural communities in 23 Counties across the state. It is really set-up to look at healthcare, higher education, K-12 all of different public safety locations and those types of state offices.

Jay Kumar - Midsouth Investment Fund

So does any of revenue right now have that initiative? Or is something that's planned in the pipeline?

John Finke

Its not part of any of the guidance that we have given you for 2010. We have not received that grant and we have been through the application process and we have been through the diligence process. But we have not yet been awarded the grant, so we have not calculated that into any of the future projections that’s we've given.

Jay Kumar - Midsouth Investment Fund

Okay.

David Christensen

In April we applied for a $17 million grant. We planned of match that with our own $7 million of funding, about 30% of a $24 million overall project. And the dead line to receive that is -- to receive word on that is no later than the end of September.

Jay Kumar - Midsouth Investment Fund

Looking at the balance sheet looks like your cash portion doesn’t look that great. So you got to any concerns on that? Or are looking gracing money in the market?

David Christensen

Jay, I can take that one. We consider to decide a success that our cash is near zero. We managed to not have any cash. The only time we deviated from that was during the financial crisis in 2008 and 2009. We didn't hold the cash and that allowed us to buy CP Telecom with cash and not borrow. But our whole objective is to apply cash to the debt balance. So we don’t think we are managers of cash, we think we are managers of assets and minimizing the debt balance.

Jay Kumar - Midsouth Investment Fund

Okay. Are you guys comfortable with the foreseeable because it looks like it's a third of the revenue. So is that Okay? It greater by 6 million.

John Finke

Receivables go up in advance of or in conjunction with supports in our equipment our sales and service business. So I think your question was are we concerned about it, no. We did a lot of collecting in the third quarter already on those balances that you're noticing. So it's not a point of concern.

David Christensen

If you look back at our history you can see that when the equipment business was very strong that was very high number. We are able to collect it. We have very low write-offs in that line of business if any. So we're not concerned about that at all.

Jay Kumar - Midsouth Investment Fund

Finally, what percent of your business is small business I mean as compared to the large corporation, what percentage of the small business and what percentage is large business?

John Finke

We don’t disclose those metrics right now at this point in time. I would tell you that at this point of time a considerable amount of revenue, the majority of the revenue coming out of the inventors, fiber and data business is larger enterprise. We’re just starting the small to medium business initiatives, CP Telecom we're adding some revenue and income in that from small medium business. But we are really just getting those initiatives underway.

Jay Kumar - Midsouth Investment Fund

Because the biggest concern right now is the small business not spending so much. So equipment wouldn’t make a big difference. The large guys are really spending right now. So that was my concern. So --

John Finke

Good to hear.

Jay Kumar - Midsouth Investment Fund

Alright, thanks guy.

John Finke

Thank you, Jay.

David Christensen

Thank you, Jay.

Operator

(Operator Instructions). I am showing no questions at this time. I would like to turn the call back Mr. Finke for closing remarks.

John Finke

Thank you, Tasha. Thank you for question today. And if you joined us after the call began or would like the replay of call, please visit our website at HickoryTech.com. The replay of the call will be available beginning at around noon today. And thank you again for joining us today. We look forward to our next call. And in the mean time if you have any questions I’d invite you to give Jennifer, David or my self a call. Thank you again and have a great morning.

Operator

Thank you. This concludes today’s conference call. You may now disconnect your line.

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