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Consolidated Communications Holdings, Inc. (NASDAQ:CNSL)

Q3 2010 Earnings Call Transcript

November 4, 2010 11:00 am ET

Executives

Matt Smith – Treasurer and Director of Finance

Robert Currey – President and CEO

Steve Childers – SVP and CFO

Analysts

Gray Powell – Wells Fargo Securities

Barry Sine – CapStone Investments

Operator

Good day ladies and gentlemen, and welcome to the Consolidated Communications Holdings third quarter 2010 results conference. At this time, all participants are in a listen-only mode. Later, we have a question-and-answer session and instructions will follow at that time. (Operator instructions) As a reminder, today’s conference may be recorded.

I would now like to turn the conference over to your host for today, Mr. Matt Smith, Treasurer. Sir, you may begin.

Matt Smith

Thank you Mary, and good morning everyone. Welcome to our third quarter 2010 earnings call to review the company’s results that were released this morning. Joining me on the call today are Bob Currey, President and Chief Executive Officer; and Steve Childers, Chief Financial Officer.

After the prepared remarks, we'll conduct a question-and-answer session. I will now review the Safe Harbor provisions of the call and then turn it over to Bob. This call may contain forward-looking statements within the meaning of the federal securities laws. Such forward-looking statements reflect among other things management's current expectations, plans and strategies and anticipated financial results, all of which are subject to known and unknown risks, uncertainties and factors that may cause the actual results to differ materially from those expressed or implied by these forward-looking statements. Please see our public filings with the Securities and Exchange Commission for more information about forward-looking statements and related risk factors.

In addition, during this call, we will discuss certain non-GAAP financial measures. Our earnings release for this quarter's results, which has been posted to the Investor Relations section of our website, contains reconciliations of these measures to their nearest GAAP equivalent.

I will now turn the call over to Bob, who will provide an overview of our financial and operating results. Steve Childers will then provide a more detailed review of the financials. Bob?

Robert Currey

Thanks Matt, and good morning everyone. We appreciate you joining us today as we review our results for the quarter. And is our normal practice, I will start with high-level financial and operating highlights, and then Steve will provide a detailed review of those financials.

The third quarter was another solid one for us. Revenue and adjusted EBITDA were $95.6 million and $45.2 million respectively. We delivered another solid and secure return to our shareholders with a 73.1% payout ratio for the quarter and 69% year-to-date. With respect to our operating performance, I am pleased to report our total connections grew by 600 in the period, led by a record IPTV subscriber growth and industry-leading access line performance. We grew IPTV subscribers by 1,900 in the quarter and now serve 28,000. They are increasingly choosing our full suite of digital TV offerings. Our HD and DVR penetrations also increased in the quarter to 22% and 24% respectively. These additional services are becoming very popular and along with increased video on demand consumption, have helped drive our video ARPU to near $60 per sub.

Finally, with respect to IPTV, we hit a milestone this quarter by passing over 200,000 homes, and we currently penetrate 14% of these. We increased our total broadband connections by 3,400 in the quarter. This is the fourth consecutive quarter we have increased our broadband connections by more than our access line declines. This highlights our success in the multi-year transition from being a traditional voice telephone company to a leading provider of broadband services.

Our total broadband connections now stand at 133,000, which represents a year-over-year increase of more than 11%. Our industry-leading DSL penetration stands at 44%, and our triple play subscriber count is now at 24,000. And importantly, 9 out of 10 of our video subscribers choose the full triple play with the voice offering.

Clearly, our broadband success is positively impacting access line performance as our year-over-year line loss was 4.3%, representing our best rate in three years and reflecting a 42% improvement over the same period in 2009. As a comparison, at the end of the third quarter last year, our line loss for the trailing 12-month period was 7.4%.

And finally, we spoke last quarter about the growth we are seeing with our Metro E copper and fiber products in commercial opportunities. The third quarter was another solid quarter for Metro E circuit growth, with an increase of 5% for the current period and 23% over last year. Looking ahead, we will continue to provide the highest quality of service and the most competitive products in our markets, while focusing on growing the business organically and looking for accretive acquisitions.

With those comments, I will now turn the call over to Steve for the financial review.

Steve Childers

Thanks Bob. Good morning to everyone. Overall, we are pleased we reported another solid quarter of financial results. Before I review the details of the quarter and provide updated 2010 guidance, let me first discuss a couple of material tax-related adjustments that occurred in the quarter.

First, our third quarter net income benefitted from a net $4.6 million non-cash reduction to our income tax provision associated with a net reduction in the liabilities for uncertain tax position. In that reduction and liabilities, with a combination of $5.4 million increase due to the expiration in the federal statute of limitations with respect to one item, and an $800,000 increase related to positions on our 2009 state income tax filings.

Secondly, third quarter earnings also benefited from a pre-tax reduction of $1.4 million in interest expense that had been accrued for the expiring tax reserve. While these adjustments positively impacted net income, they had no impact on adjusted EBITDA, cash access, or cash interest expense. As part of the adjusted net income schedule in our earnings release, we reflected a normalized net income and earnings per share calculation by excluding these tax-related adjustments.

Now, let me update you on our financial results for the quarter. Operating revenue for the third quarter was $95.6 million compared to $101.6 million for the same period of 2009. Of the $6 million decline, one half was attributable to the sales of our telemarketing business, which we sold in the first quarter of this year and the ongoing process of the phase-out of our operator services division. The $3 million reduction associated with these business units is neutral to earnings. The remaining year-over-year decline in our ongoing revenue streams consisted the following

Local calling, long distance and network access revenue were down by $3.2 million, primarily due to lower access lines. Subsidy revenue declined by $1.8 million also as a result of access lines, but impacted more by the increase in the Federal High Cost for our National Average Cost per Loop.

While the National Average Cost per Loop is going up, our costs are going down. Finally, revenues from our broadband growth products increased by $2 million as seen in our data in Internet revenue. Total operating expenses, exclusive of depreciation and amortization were $58.1 million compared to $61.8 million for the same period last year. The third quarter of 2009 included $1.4 million in integration and severance expenses, as well as $2.7 million in expenses with telemarketing operations, which I had mentioned previously, was sold in the first quarter of 2010.

Based on the 30% year-over-year growth in IPTV subscribers, we incurred approximately 1.1 million in increased video programming and equipment-related costs. Net interest expense for the quarter decreased by $3.1 million to $11.7 million compared to the same period of 2009. As previously discussed, the quarter included a $1.4 million reversal of accrued interest tied to the change in the liability for uncertain tax positions.

The remaining $1.7 million improvement is driven by 68 basis points decline in our weighted average cost of debt, which was 5.58% throughout the quarter. As a reminder, we had 175 million of interest rate hedges rolling from a rate of 4.5% to 1.83% at the end of the year, which will improve the weighted average costs of debt by 40 basis points going into 2011. Other income net was $7 million compared to $6.6 million for the same period last year. For the quarter, we recognized 6.8 million of our pro rata share of earnings from our wireless partnerships, which compares to 6.2 million for the third quarter of 2009.

Weighing all of the factors on a GAAP basis for the quarter, net income was $11.8 million and net income per share was $0.40. This compares with 7.1 million in net income and income per share of $0.24 for the same quarter last year.

As detailed on the adjusted income per share schedule on the earnings release, adjusted net income per share was $0.24 in the current quarter compared to $0.29 for the third quarter of last year. Adjusted EBITDA was $45.2 million compared to $47.3 million for the same period last year. Capital expenditures for the quarter were $10.8 million. Year-to-date capital expenditures are $32.6 million. Our spend rate for the first three quarters would set us in a run rate of well over $43 million for the year. However, we are committed to our full-year CapEx guidance of $41 million to $42 million.

From a liquidity standpoint, our cash in the balance sheet at the end of the quarter was $56 million, which was an increase of $24.1 million compared to the same period last year. In addition, our $50 million [ph] revolver remained undrawn and we have no debt maturities until December of 2014.

For the quarter, our total net leverage ratio as calculated in our earnings release was 4.4 times. Our leverage and coverage ratios were well within the compliance levels of the credit facility. Cash available to pay dividends was 15.8 million compared to 19.9 million in the same period of 2009.

Now, let me update our full-year guidance for 2010 CapEx, cash income taxes and cash interest. Capital expenditures are now expected to be in the range of $41 million to $42 million, which tightens the range from previous guidance of $40 million to $42 million. And cash interest expense is now expected to be in the range of $49.5 million to $50.5 million, which improves the top end of the range by $1 million. Cash income taxes are now expected to be in the range of $18 million to $20 million, which is down from our previous guidance of $21 million to $23 million. The change in our cash income tax is a result of our election to take bonus depreciation as part of the recently enacted Small Business Jobs Act of 2010.

With respect to our dividend, our Board of Directors have declared the next quarterly dividend of approximately $0.39 per common share, payable on February 1st, 2011 to shareholders of record on January 15th, 2011.

With that, I will now turn the call back over to Bob for closing remarks.

Robert Currey

So, in summary, we are pleased to deliver another solid quarter highlighted by record growth for IPTV subscribers and ongoing improvement in our access line losses. We continue to provide the best communications services in our markets, while generating strong and sustainable cash flows in support of our dividends.

And with those comments, Mary, I would like to now open it up for questions.

Question-and-Answer Session

Operator

(Operator instructions) And our first question comes from the line of Gray Powell from Wells Fargo Securities

Gray Powell – Wells Fargo Securities

Good morning guys. Thanks for taking the questions. I just had a few quick ones. So, the access line trends continue to look pretty good. Losses have been in the mid-2,000 range for the last three quarters. Do you see that being a fairly sustainable run rate going forward?

Robert Currey

Hi, good morning Gray. Yes, we absolutely do. We hope to stay sub-5%, and maybe even improve on that going forward.

Gray Powell – Wells Fargo Securities

Okay. And then the IPTV ads obviously picked up nicely. Can you talk about the main drivers there, and is there any reason for this momentum not to continue over the next few quarters?

Robert Currey

I think what you have seen us accomplish over the last two or three quarters is a good place to predict the future. We have proven that we can stimulate the demand, and what we are doing, Gray, is to try to balance the demands on the back office, the demands on the installation crews, along with profitability. So, we know we can attract the customers. It’s a compelling product. The bundle is popular, it’s a word-of-mouth product, and so we are balancing that growth with profitability.

Gray Powell – Wells Fargo Securities

Okay. And then just kind of along those lines, the 14% penetration includes sort of a, I guess, dilution you could call it with the markets that you've launched this year. Just overall, where do you think you can get penetration, say the next 12, 18 months?

Robert Currey

We should continue to show nice improvement and get into the 20% range. Longer term, we have always talked about we should be in the 30% range and that’s still our goal and we think we can get there, but in the short term, I think modeling somewhere from 1,600 to 2,000 per quarter is the appropriate number taking into account the balance that I mentioned in my previous comments.

Gray Powell – Wells Fargo Securities

Okay. Great. And then just last question, how should we think about you guys further expanding the IPTV footprint?

Robert Currey

As far as more homes passed, we are about where we need to be from an economic standpoint on the way we can pass homes. You will see some incremental passings next year, but our opportunity or our focus is on the penetration of the existing homes. I would add though that we are blessed with some territories, particularly in Texas where there is still some housing growth. So, as those sub divisions take off, we are there with Fiber to the Home. So, you could probably expect 5,000 to 6,000 additional homes passed next year, but it would be along the lines of – more of it would be new sub divisions, new growth opportunities, and I would add that we have over 3,500 of our broadband customers are served by Fiber to the Home.

Gray Powell – Wells Fargo Securities

Got it. Okay, thank you very much.

Robert Currey

You are welcome.

Operator

(Operator instructions) And our next question comes from the line of Barry Sine from CapStone Investments.

Barry Sine – CapStone Investments

Good morning gentlemen.

Robert Currey

Good morning.

Barry Sine – CapStone Investments

In terms of the line losses for the quarter, obviously, very good results. Could you give some qualitative comments in terms of what are you seeing in the marketplace? Is it the cable operators are becoming less aggressive? Have you just given up all the low-hanging fruit? What do you think that you can attribute that to?

Robert Currey

Yes, good morning, Barry. Thanks for the question. It’s a series of things. First, to your comment about the cable guys, you know, we haven’t seen really any change there. They are pretty much the same offers that they have had, they tweak them a little bit, but that’s pretty steady and predictable. What I will tell you is, is that the port outs are down. The year-over-year, quarter-over-quarter, that has trended in the right direction. And finally, I think obviously, it’s our triple play IPTV offering. That’s certainly working in our favor, the power of the bundle that we have talked about and it’s been our strategy now for three, four years, it’s playing out and proving to be accurate.

Barry Sine – CapStone Investments

Okay. And then shifting gears, in the press release and on the comments, you gave some visibility in terms of the revenue decline in the area of subsidies. What do you expect that to likely be for the fourth quarter and going into 2011?

Steve Childers

Barry, this is Steve. With respect to subsidies, I would probably model fourth quarter – third quarter – for fourth quarter I would probably model the same as third quarter. I don't think we're going to see anything dramatic happen, but going into '11, we do have a little bit of upside in terms of maybe giving potential new local switching support as certain cost study areas get down below 50,000 access lines, but then that’s going to be offset as we continue to lose some subsidies just as a result of the continued access line loss plus as the National Average Cost per Loop goes up relative to our cost structure.

Barry Sine – CapStone Investments

Okay. And my last question, turning to your hometown in Mattoon, obviously disappointing news on the FutureGen project. There was some talk that you might get some economic development as kind of a consolation prize. What's the latest? What's going on there with that, and how do you expect whatever is going to happen to impact your business?

Robert Currey

There is really nothing specific to announce there, but with the money that was spent, the geological studies that have taken place on that land, there is a lot of optimism that there will be some other opportunities now that, that those dollars and many millions of dollars were expended in the study. So, we expect that as sequestration continues in the power industry and particularly in coal, that there is going to be an opportunity there, Barry. I wish it was further along and we could announce some groundbreaking, we don’t have that yet, but I can tell you that the organization that is responsible for that is very excited about the possibilities on that tract of land.

Barry Sine – CapStone Investments

Okay. Thank you very much.

Operator

Thank you. I am showing no further questions in the queue. I would like to turn the conference back to Bob Currey for closing remarks.

Robert Currey

Thank you all for joining us today and for your continued interest and support in Consolidated Communications. We look forward to talking to you next quarter about our numbers and our performance. Have a good day.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may all disconnect at this time.

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