Hawaiian Telcom HoldCo's (HCOM) CEO Eric Yeaman on Q2 2014 Results - Earnings Call Transcript

Aug. 4.14 | About: Hawaiian Telcom (HCOM)

Hawaiian Telcom HoldCo Inc. (NASDAQ:HCOM)

Q2 2014 Earnings Conference Call

August 4, 2014 02:00 PM ET

Executives

Brian Tanner - Director, IR

Eric Yeaman - President and CEO

Bob Reich - SVP and CFO

Scott Barber - COO

Analysts

Barry McCarver - Stephens Incorporated

Donna Jaegers - D.A. Davidson

Barry Sine - Drexel Hamilton

Brad Tesoriero - CRT Capital

Operator

Good day ladies and gentlemen and welcome to the Q2 2014 Hawaiian Telcom Holdco, Inc. Earnings Conference Call. My name is Whitely and I’ll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this call is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Brian Tanner, Director of Investor Relations. Please proceed sir.

Brian Tanner

Thank you, Whitely. Aloha everyone and welcome to our second quarter 2014 earnings conference call and webcast. Joining me on the call today are; Eric Yeaman, Chief Executive Officer; Bob Reich, Chief Financial Officer, who will be making prepared remarks about the quarter and Scott Barber, Chief Operating Officer, who along with Eric and Bob will be participating in the Q&A portion of the call.

Before we get started, let me remind you that our earnings release and financial statements are available on the Investor Relations section of our Web site at hawaiiantel.com. In addition, you’ll find a slide presentation for today’s call, which we will be referencing throughout our remarks.

Now I’d like to draw your attention to Slide 3 and our Safe Harbor statement and remind everyone that some of the information provided on this conference call constitutes forward looking statements that are based on currently available information and are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those that may be expressed or implied by such forward looking statements. These risk factors are described in the Company’s most recent Annual Report filing with the Securities and Exchange Commission, which is available on the Hawaiian Telcom and SEC Web sites. Also our discussion may contain certain non-GAAP financial measures. These non-GAAP financial measures are defined and reconciled in the tables attached to the earnings press release which are also available for review in the Investor Relations section of the Hawaiian Telcom Web site.

With that I would like to turn the call over to Eric Yeaman, Chief Executive Officer of Hawaiian Tel. Eric?

Eric Yeaman

Thanks, Brian. Aloha everyone and welcome to our second quarter 2014 earnings conference call. I'm pleased with our second quarter results and the progress we are making in executing our strategic plan. So let me begin in Slide 5 with some second quarter highlights. Revenue for the second quarter totaled $97 million consistent with the same period a year ago. Revenue growth driven by video and high speed Internet and the additional revenue related to the SystemMetrics acquisition, was offset primarily by a $2.4 million decrease in equipment and managed services revenue which tends to fluctuate from quarter-to-quarter.

Adjusted EBITDA for the quarter totaled $29 million and we generated net income of $2.2 million. Consumer revenue grew 4.3% year-over-year to $36 million, driven by two of our key strategic products, video and high speed Internet. We added a record 2,800 Hawaiian Telcom TV subscribers during the second quarter, the highest quarterly net additions since we launched this service. And we expanded the reach of Hawaiian Telcom TV to a 142,000 households on Oahu by enabling an additional 12,000 households in the quarter.

Business revenue totaled $42 million, down $500,000 from the same period a year ago primarily due to the decrease in equipment revenue I mentioned earlier, largely offset by revenue added as a result of the SystemMetrics acquisition and a 4.6% growth in business data revenue.

Our second quarter results closed the first half of 2014 on a positive note with total revenue being up and good momentum in our video business. Moving to the next slide, let me provide you an update on Hawaii’s economic situation. In general Hawaii’s moderate economic expansion continued in the second quarter. The Hawaii tourism authority recently revised its previously reported statistics and as a result for the first half of 2014, arrivals were consistent with the record performance in the same period a year ago while visitor spending was up 2.5%. Supported by increased airlift, arrivals from international markets continue to exceed last year’s levels and helped offset the softer growth from the domestic U.S.

As expected, the rapid growth in the tourism industry has tapered off but the Hawaii construction industry continues its upturn with an increasing number of permits for new construction. Rising home prices and housing demand especially on Oahu, are also providing support for residential construction. New residential building permits are expected to grow 23% this year and 13% next year. New permits for commercial and industrial projects are expected to grow 8% this year and 10% in 2015.

Hawaii’s job growth continues to bring down the state unemployment rate and helps increase personal income. The state unemployment rate in June drop to 4.4%, down from 4.5% in March and 4.7% in the same period a year ago. The state unemployment rate continues to be significantly lower than the national rate of 6.1% and real personal income is projected to grow 2% to 3% this year and in 2015.

Moving to Slide 7, let me update you on the progress we continue to make against our growth strategy starting with an update on Hawaiian Telecom TV. July 1st marked the three year anniversary of our commercial launch of Hawaiian Telecom TV and we celebrated recording our highest quarterly net additions to-date. What was nascent business three years ago has now developed into a $23 million annualized revenue stream for us and growing.

Hawaii’s best entertainment experience can now reach 142,000 households on Oahu, which we felt was the right sized footprint to initiate the next step in our marketing efforts. On June 1st, we launched a new advertising campaign, including a new TV commercial featuring Miss Hawaii 2005. It’s still early stage and the new campaign is a supplement to the steady buildup of advertising we give throughout the first half of the year. But we are experiencing a lift in promo cost and second quarter performance did realize some benefit from the new campaign.

So the reach and awareness of Hawaii Telecom TV is steadily growing, giving us positive momentum and positioning us to further increase our video market share. Video revenue grew to $5.5 million for the second quarter, nearly double the $2.9 million in the same period a year ago. Revenue growth was driven by the addition of approximately 9500 subscribers over the past year, led by the record 2800 subs we added in the second quarter.

We ended the quarter with approximately 23,100 subscribers giving us a penetration of approximately 16.3%, up from 15.6% last quarter. The subscriber growth, along with an 11% year-over-year increase in monthly video ARPU was the driver for the increase in video revenue, also an increase in the percent of subscribers on our premium subscription package to 66%, up from 61% in the same period a year ago.

Additional drivers have been higher levels of penetration of premium add-on services like movie packages and HD and DVR services. We signed four additional Multi Dwelling Unit or MDU contracts during the quarter, which increased our bulk sales total to 7,700 units, approximately 6,000 of which were installed as of June, 30 with the remaining 1,700 to be installed over the next 12 months based on the timing of the respective contract commitments.

I commented earlier that our video service footprint reached 142,000 enabled households at the end of the second quarter. But I wanted to further highlight that over half or 51% of these are fiber fit, which is up from 32% at the end of the same period a year ago and is really a significant milestone for us. The strategic investments we are making in our next generation fiber network provide the foundation that allows us to deliver a steady stream of innovative products and platforms and capitalize on the key opportunities that exist in our marketplace.

Moving to Slide 8, in the business channel more and more our customers are asking us for integrated communication solutions to help support their business growth and we believe we have the right set of strategic assets from connectivity to cloud that allow us to deliver the right solutions to meet our customers’ needs.

For SOHO and SMB size customers we deliver solutions that bundle voice and data services. Evidence of this was the growth in business high speed internet subscribers, up 2.5% year-over-year in the second quarter. Our hosted VoIP and broadband internet bundle help Business All-In-One, mainly targeted at the SMB market, continues to show good momentum.

We saw approximately 44% year-over-year increase in the number of VoIP lines from this product in the second quarter. In the enterprise space we are delivering more complex, higher bandwidth solutions which help us to drive a 4.6% year-over-year growth in business data revenue, led by demand for our switched Ethernet IP-VPN and dedicated Internet access services. This next generation services accounted for 62% of business data revenue in the second quarter and will continue to be a key driver of growth in the business channel.

We have unmatched capabilities in delivering these next generation IP based services and an ability to combine with equipment to offer our customers integrated solutions which is why one of the state's largest financial institutions contracted with us to help them convert their state wide legacy communications infrastructure to an IP based platform.

The new platform will provide a path for things like wireless connectivity as well as video and virtual applications like remote tellers, which all drive the demand for increased network bandwidth. With the additional datacenter capabilities, SystemMetrics gives us, we further enhanced the integrated solutions we can offer our customers which is why we were able to win a $1.3 million three year contract from a major hospitality company. We will be providing co-location services and connectivity to multiple locations statewide and a disaster recovery state on the Mainland. This is new business for us which will be turned up in the latter part of the year and we are well positioned to further grow this relationship going forward.

We also established a new Internet peering point in Hawaii at SystemMetrics' datacenter. Previously there was only one peering point in Hawaii, so this gives businesses and carriers an on-island alternative for exchanging traffic instead of having to go back to the Mainland. This will allow for faster interconnection between businesses in Hawaii, which as cloud adoption increases, will allow for better connectivity performance and less latency issues.

Turning to Slide 9, in wholesale we continue to invest capital in the fiber-to-the-tower projects, enabling our participation in the growing demand for wireless broadband. As of the end of the quarter, we had 338 fiber-to-the-tower cell sites completed, which equates to annualized revenue of approximately $4.9 million and another 140 sites under contract to build, which many other carriers are asking us to accelerate the pace of our builds, due to the increased bandwidth demand. And we are currently pursuing a number of additional sites. I'm confident about the progress we are making in executing our strategic plan and I believe we are well positioned to improve performance in our key areas of growth to drive long-term shareholder value.

With that I will turn the call over to Bob to review the details of our second quarter operating and financial results.

Bob Reich

Thanks, Eric and thanks again everyone for joining us on the call today. I will move directly to Slide 11 and we can review the second quarter financial results in more detail. Revenue for the second quarter was $96.8 million, compared to $97 million in the second quarter of 2013.

Revenue growth in the quarter, driven by video and high speed Internet as well as $2.1 million of incremental net revenue related to the SystemMetrics acquisition was offset by a $2.4 million decrease in equipment and managed services revenue, primarily related to lower sales of equipment and a 5.5% decline in total access lines.

Adjusted EBITDA was $29 million for the quarter, a decrease of $900,000 year-over-year, primarily due to higher levels of advertising spend and increased direct cost of services related to video. Net income was $2.2 million for the quarter compared to $4 million in the same period a year ago. The decrease was primarily due to a one-time $6.5 million gain from the sale of property we recorded in the second quarter of 2013, partially offset by a one-time $ 3.7 million loss on early extinguishment of debt during the same period in 2013 as a result of our credit agreement refinancing last year. Absent these one-time transactions during the second quarter of 2013, net income would have been virtually unchanged year-over-year.

Let’s now move to Slide 12 and walk through more details on the quarter results beginning with the consumer channel. Second quarter consumer revenue totaled $36.3 million, up 4.3% from the same period a year ago. The year-over-year increase was driven primarily by a $2.6 million increase in video revenue. The expanded reach of our next generation fiber network and the increased penetration of our premium packages and add-on services continue to drive revenue growth in video.

We added a record 2822 video subscribers during the quarter, including a record number of higher ARPU single family home subscribers. As the chart on Slide 12 indicates, 2321 of our net video subscriber ads were new non-bulk single-family home subscribers, which is an increase from 1848 added last quarter, evidence of the positive momentum that Eric commented on earlier. The remaining 501 subscribers added during the quarter were bulk multi-dwelling unit subscribers which is up from the 38 added last quarter. As we have discussed in the past, the timing of bulk MDU installations will cause bulk subscriber ads to be lumpy quarter-to-quarter.

Of our approximately 23,100 total video subscribers, 74% are in the non-bulk single-family category, which is up from 67% at the end of the second quarter last year. These subscribers have a higher ARPU, which is another factor that’s contributing to the growth in blended ARPU that Eric described earlier. Approximately 58% of the video subscribers we added this quarter are new to Hawaiian Telcom and across all our video subscribers we continue to see a very high rate of broadband attachment.

When we look at our existing video subscribers, approximately 91% have both TV and broadband. So as we continue the expanded reach of our enabled footprint, Hawaiian Telcom TV will be critical than helping drive market share gain in broadband. High speed Internet revenue was also a driver of consumer revenue growth, led by a 1.9% year-over-year increase in subscribers and a nearly 9% increase in consumer HSI ARPU. On Oahu, where approximately 70% of our consumer HSI subscribers are located and where the focus of our next generation fiber network investment has been, approximately 60% of our consumer HSI subscribers are on 11 Megabit or higher speeds, which is up from 46% at the end of the second quarter last year.

So we’re seeing increased adoption of our higher speed offerings which is driving meaningful year-over-year growth in HSI ARPU. Revenue increases driven by video and HSI were partially offset by revenue declines related to the year-over-year decline in consumer access and long-distance lines of 8.4% and 7.7% respectively. The majority of the consumer access line loss was attributable to the secular challenge of wireless substitution.

As we said before we believe this highlights the importance of investing in our next generation fiber network which gives us the foundation to capitalize on key growth opportunities from strategic products like video and high-speed Internet, so we can continue to successfully offset the industry wide structural declines in legacy services.

Moving to Slide 13, second quarter business revenue totaled $42.1 million down $500,000 from the same period a year ago. This decrease was primarily due to a $2.4 million decrease in equipment and managed services revenue mostly related to the sale of equipment to a large Hawaii based private school last year which totaled $1.8 million for the second quarter of 2013.

As you know sales to customer premise equipment can vary significantly from quarter-to-quarter. We continue to believe CPE is an important part of our integrated portfolio of services because it deepens our relationship with our customers and allows us to be an end-to-end solutions provider. However, the nature of this CPE business is changing as companies are making less direct investments in equipment and shifting to more hosted and cloud solutions, opting for a single offering that combines the services, hardware and business applications. We are beneficiary of this trend as we’re leader in our market place for hosted solutions, but we do expect this shift to potentially have an impact on CPE revenue going forward.

Business revenues were also impacted by a decline in business voice revenue related to the year-over-year decline in business access and long business lines, of 2.6% and 1.8% respectively. These decreases were largely offset by $2.1 million of net incremental revenue added as a result of the SystemMetrics acquisition as well as increase demand for higher bandwidth IP based data services.

Business data revenue which now accounts for 16% of total business revenues was up 4.6% year-over-year. Also contributing to revenue growth in the business channel was higher business HSI revenue as a result of a 2.5% year-over-year increase in business HSI subscribers to approximately 90,500 subscribers. As Eric discussed earlier, our bundled voice and data solutions for SOHO and SMB customers continue to drive business HSI growth.

SystemMetrics generated $2.1 million of incremental net revenue during the quarter and has contributed approximately $4.3 million of incremental net revenue for the year. We spent the majority of the first half of 2014 enhancing our marketing tactics, training our sales force and educating the business community on a capabilities of SystemMetrics.

We’re now beginning to see some of the positive results of these efforts. As Eric highlighted we won a contract from a large hospitality company and have several other significant opportunities in the proposal front. So we believe we are well positioned to capitalize on the long term growth opportunities in this space.

We remained confident in our portfolio of integrated communication services which combined with the datacenter capabilities added through the SystemMetrics acquisition, continues the expansion of our business offerings.

Moving to Slide 14, second quarter wholesale revenue which consists of wholesale carrier data revenue and switched access revenue totaled $15.8 million, down $800,000 from the same period a year ago. Wholesale carrier data revenue, which consists of wholesale customers buying network capacity in the form of special access circuits declined $500,000 year-over-year to $14.3 million. The decrease was mainly due to certain wireless carriers disconnecting lower bandwidth legacy circuits, which were replaced with new more efficient fiber based higher bandwidth Ethernet circuits.

Wholesale switched access revenue, which consists of usage based charges to wholesale carrier customers declined $200,000 year-over-year to $1.5 million. Consistent with prior periods, this decline is attributable to the overall declines in access lines and corresponding minutes of use traversing our network as well as the impact on rates as a result of regulatory reforms.

Moving to Slide 15, let me turn now to operating expenses. If we exclude depreciation and amortization, non-cash stock compensation and other non-recurring items, our second quarter operating expenses totaled 67.7 million, up approximately 1% when compared to $67 million in the same period a year ago. The bridge on Slide 15 illustrates that the increase in our operating expenses was primarily due to increased direct cost of services related to video, incremental costs related to the operations of SystemMetrics and higher advertising spend. These increases were partially offset by decreased cost of goods related to lower levels of equipment sales and other cost reduction programs.

I should also point out that non-recurring items during the quarter included approximately $500,000 of lease termination and restoration costs related to the consolidation of an internal outsourced datacenter that was transitioned to our headquarters facility in Honolulu.

Moving onto Slide 16 let me turn to capital expenditures. Reported CapEx was $51.3 million for the first half of 2014, up from $45 million in the same period in 2013. The year-over-year increase was largely attributable to equipment and other cost associated with the consolidating and virtualizing of our internal data centers, timing of maintenance investments on facilities and fleet and the success-based spending associated to support the growth of Hawaiian Telcom TV subscribers. Approximately 70% of our new video subscribers in 2014 were fiber-to-the-premise customers, which required the installation of an optical network terminal at the customer premise. We expect this trend to continue as the reach of our next generation fiber network continues to expand. As we've previously indicated generation, our capital program for 2014 is expected to approximately $90 million as we continue to investment in next generation fiber network and deploy success-based capital to support the subscriber growth of Hawaiian Telecom TV.

Also as Eric mentioned in his remarks, we currently have 140 cell sites under contract of fiber enable. So we expect continued success-based spending in 2014 related to the fiber-to-the-tower builds as well. The level of spend will be largely dependent on the schedule our wireless carrier customers.

Moving to Slide 17, let me provide some detail on net cash flow. Our net cash flow for the first half of 2014 was negative $14 million, compared to negative $9 million in the first half of 2013. The negative $9 million in the first half of 2013 included certain onetime items, including approximately $7 million of transaction cost related to our June refinancing last year and approximately $13 million of net proceeds from the sale of a land parcel. If we exclude these two onetime items, net cash flow for the first half of 2013 would have been a negative $15 million, which is illustrated on Slide 17.

In 2014, we’ve realized approximately $3 million now as of cash interest savings as a result of the refinancing as well as an additional $4 million of cash flow favorability from working capital. And as we’ve already discussed, CapEx was approximately $6 million higher year-over-year through June, so that was a primary additional use of cash in the first half of 2014. From a liquidity standpoint, we ended the second quarter with $36 million in cash and cash equivalents and we had access to an undrawn revolving credit facility of $30 million. So we had $66 million of total liquidity at quarter end. We’re conservatively capitalized with a net debt to EBITDA ratio of just over two times and an interest coverage ratio of approximately 6.5 times. So that concludes my comments.

And with that, I’ll turn the call back over to Eric for some closing remarks.

Eric Yeaman

Thanks Bob. So in summary, I’m pleased with the results for the quarter and the progress we are making in executing our strategic plan. We are building positive momentum in the key areas of our business and I'm confident about our growth prospects and ability to drive long-term value for our shareholders. And we look forward to reporting further progress to you on future calls.

With that, let me turn the call over to the operator, so that we can take your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Barry McCarver of Stephens Incorporated. Please proceed.

Barry McCarver - Stephens Incorporated

So I guess starting off on the IPTV, you talked a little bit about the marketing spend that began late in the quarter. So it did have some positive effect on 2Q results. Can you give us a little more idea about what that effect was and maybe we can extrapolate to the expectations for subscriber growth in the second half of the year?

Eric Yeaman

Sure, Barry, just a sort of cover kind of how this build-up occurred is, we started with print, radio, mall signs, billboards, online banners and then we also opened up a kiosk in one of the local shopping centers sometime late last year. And then in April, we ran a movie, Hawaiian Telcom TV movie trailer, which was sort of a brand ad that we then converted in May to a TV commercial, as a teaser ahead of our launch in June of the new advertising campaign with Miss Hawaii.

And then in addition to that, the second quarter we went out with the significant direct mail offers to potential subscribers in our mature footprints. So it’s sort of the combination of all of that is sort of what drove I think some really strong results in the second quarter.

As you know, of 2800 subs, we identified that 500 were bulk and as you know bulk is lumpy. So the 2300 non-bulk single family is a record for us. We sort of anticipated this question from you and when we sort of caucused [ph] over the weekend, we think that if we had another quarter in the 2300 non-bulk area, we'd be happy. We think we’re on track to something higher than that, maybe between 2400 and 2500, which would make it an even stronger quarter. So that’s kind of where we’re thinking right now. Although we’re mass marketing, we are sort of managing the level of that to ensure that we can manage the call volume as well. One other data point that might be helpful is we did see our overall promo call volume go up about 25% plus.

Barry McCarver - Stephens Incorporated

And I guess then that raises the next question is; are you comfortable with your installation teams being able to handle that kind of rise in volume?

Eric Yeaman

Yes, they have been doing a great job and let me tell you a couple of things. One is we always have the ability, if necessary, to deal with spikes with our contractors and we mainly use them on the bulk deals. But we have been installing wireless set top boxes over the last couple of months, which has really helped increase the capacity of our existing team. So that’s been the other thing that’s helped and I don’t know if Scott you want to add anything else to that?

Scott Barber

The only thing I would add is that almost all of our crew now is cross-trained to be able to do TV ads, which gives us that flexibility to do both station, installation repair as well as TV. And the experience that they have gained over the last couple of years has really helped us get a workforce that is capable of handling the current volumes. So, we're very confident that we can handle those volumes going forward and in fact we can increase those volumes with contractors as we train more technicians to handle it.

Barry McCarver - Stephens Incorporated

Okay that’s very helpful and I guess one more to you Scott on that. I think during the prepared remarks it was mentioned that 7,700 bulk units contracted, 6,000 installed as of June 30th. Is that 1700, is there any lumpiness in the 1,700? Is that kind of frontend loaded for installs for is it more linear over the 12 months?

Scott Barber

It’s a little bit lumpy but it is probably a little bit more on the later part of the 12 months than it is on the front side of it. So, the construction and the cranes are going here in Hawaii and so the buildings are under construction. So we're just sort of weighting on the timing for the window for us to come in. But I would say it’s probably more the latter half or the 12 months than the front half.

Barry McCarver - Stephens Incorporated

Okay, that’s fair. And then just lastly on the SystemMetrics contract you mentioned and what was in the slides, did you say when that contract would start? If you did, I missed, so sorry about that.

Scott Barber

Yes, I basically said the latter part of the year, probably to be safe in the fourth quarter sort of our early part of the fourth quarter.

Operator

Your next question comes from the line of Donna Jaegers of D.A. Davidson. Please proceed.

Donna Jaegers - D.A. Davidson

I just had a question. Given the 91% attach rate of high speed data with your video sub-ends but the lack of growth in overall high speed data numbers. What’s going on with churn on your residential high speed data?

Eric Yeaman

Great question, Donna. First let me mention that we did experience some of our normal second quarter seasonality dynamics with snowbirds and university students breaking for the summer. But from a TV perspective, we're seeing as you indicate very good pull through on the single-family non-bulk MDUs. It’s a little lower percentage on the bulk because it really depends on the nature of the contract. Sometimes the bulk contracts come with a double-play, sometimes it’s a single-play. It’s about slightly over 50% I believe right now in terms of double-play versus single-play. So in our next generation network which is the 142,000 homes, we're seeing great expansion with regards to HSI. We're seeing great movement into the higher speeds which is driving the ARPU.

One of our challenges is obviously the areas where we don’t have the next generation network, which we continue to build out which includes the neighbor islands. And so we have actually seen the demand for speed change over the last six to nine months. It’s reflected in the growth in our ARPU but it’s also reflected in our churn in the non-NGN footprint.

In addition to that, we see our competition sort of advertising on the low end to get the phone to ring and so we have taken steps to address that and starting to see some good results. But that’s kind of the dynamic. Until we can build the next generation network across Oahu then the state, this will be a dynamic that we are going to deal with.

Donna Jaegers - D.A. Davidson

And so some of the other islands, given the carrier access or the Connect America Fund II from the FCC, is there any potential benefit from you guys maybe getting more subsidies to help out build out faster speeds on Maui and some of the other…?

Eric Yeaman

Yes, absolutely. It’s not yet finalized how much we will receive. So we haven’t publicly disclosed. But we do know that we will get some meaningful funding for that very purpose and it looks like the timing of the funding will probably be first quarter or early 2015.

Donna Jaegers - D.A. Davidson

Okay and then on ARPU, on your Video, on your IPTV revenues, did you talk about on ARPU?

Eric Yeaman

Yes. Not sure within the prepared remarks, but our blended is at $84 and that splits out into bulk at 48 and single family non-bulk at 99. So about 11% increase I believe I had mentioned in my, script over a second quarter of last year. So we did see another slight uptick in ARPU over the first quarter, which was at $82 blended.

Donna Jaegers - D.A. Davidson

Good. And then fiber of the tower, last question, on the -- obviously, you guys are still sort of suffering from the cannibalization as you deliver fiber connects then they turn down the copper, special access line. When do you think that sort of cannibalization will be past and the amount of bandwidth that they are ordering on the fiber line sort of supersede that so that we and see wholesale revenues on the special access side starting to grow again?

Bob Reich

Hey, Donna its Bob. So there’s -- I think there’s a couple of different dynamics as Eric reported and I think we had in the slides we now have 338 towers built and one of the ways to look at this is we have, we now have well over half of the towers now with the fiber enabled on the higher capacity Ethernet circuits and so we now have sort of more towers on the Ethernet circuits that have the capability of upsizing than we do on the legacy circuits that are ultimately disconnecting. So when you look at the population of our revenue generating towers, more of them are in the position where they are going to increase revenue as opposite to decrease the revenue. So I think that’s a positive position to be in.

I think the towers, so the - - 338 that we have and a 140 that we have under contracts that part gets you to for almost 500 towers in total. We think that we’re actually very close to be in at the position where we hit the inflection point on special access, I think if you look at it sequentially –the sequential quarter trend, there’s not a significant amount of download pressure on special access, when you look at year-over-year it was $500,000 down, but if you look at over the last two quarters it's sort of stabilizing. So I think as we move into '15 we should be very close to and in a position where we get the inflection point on special access. And we also know that we’ve got a fair number of the sites in the 338 population that are on the cost us of actually upgrading from 100 to 200 mega circuit. So that’s going to be a nice lift in ARPU on that prove of towers, but I think it’s going to have a positive impact in 2015 in terms of the trends.

Donna Jaegers - D.A. Davidson

Okay. And then I had a higher number on the backlog of towers maybe a quarter ago, but I am not sure if maybe that was just a dated number now you guys have fulfilled that backlog or did the spreads slip out from under contract?

Eric Yeaman

No. was off the towers that we were bidding on, I think was the higher number that you had. I think we reported may be 125 sites to bids and one of the providers did pull their RFP so it wasn’t a contract that was pulled. It was a RFP that was pulled and held as they contemplate their strategy.

Operator

(Operator Instructions) Your next question comes from the line of Barry Sine with Drexel Hamilton. Please proceed.

Barry Sine - Drexel Hamilton

Kind of, two part question on the video strategy. One, I guess maybe for Bob on the cost to install now that you have the wireless setup boxes, maybe you could give us bit of an update on what that’s looking like to how much for modeling purposes. And then kind of more of a higher level question may be for Eric, what is your intention in terms of advertising and installation? You kind of have a lever here you can pull ramping up or ramping down, the marketing spend obviously that’s going to cost you more in the short term for installation. Are you looking to continue to ramp that number up for installs or you’re happy where you are? What can we expect going forward?

Eric Yeaman

So Barry, I'll take the first part of your question with respect to cost per gross ad. So far what we're is the utilization of wireless set top boxes is sort of a balancing. So what ends up happening is the install times actually improve. So the amount of labor costs that we're incurring on a per install basis is a little bit lower. But the actual cost of the device is a little bit higher. So at least what we're seeing right now is that CPGA is actually staying consistent and so from a modeling standpoint I don’t think you really need to make any changes to the model. But what it does do is it obviously allows us to get a little bit more capacity because it accelerates the time of installation. So it ultimately puts more capacity into the system for us to handle more installs. So we haven’t changed our expectation with respect to CPGA whether it’s wireless setup box or wired setup box.

Bob Reich

And then Barry, I would add one another comment to the wireless setup box and that is, it does improve the overall customer experience. One is the shorter install time does make it a better experience for the customer and two, it gives them the portability of moving their TV set around with the wireless setup box. So we see a lot of value to the customer experience as well as to increase capacity there.

But in regards to the marketing efforts, I’ll make some comments and then maybe hand it over to Scott to add, but we -- as I made reference to in answer to one other earlier questions. We are sort of being moderating to some degree our level of advertising. One, you know there’s a cost associated to it. We want to see it what the value proportion is from that, as well as we want to see -- we want to be able to manage the capacity in such a way that we are careful about preserving a good quality customer experience. But I think we’re going continue to try to ramp it slightly from month to month to capture as much of the market as we can, but to be thoughtful about it so that we again preserve good customer experience.

Eric Yeaman

Yes, Barry, the only thing I would add is that although we might moderately change that going forward, probably more of a shift of tactics. As we mentioned, we're doing radio and print and direct mail and banner ads and kiosk. Now that we have a TV commercial in the market, as we see the market react to that, we may shift our tactics around, we spend more there and less in other areas.

Barry Sine - Drexel Hamilton

Okay and then staying on video obviously Time Warner cable is in a M&A process, trying to get approval there. A lot of times we see that in companies maybe who are not as aggressive then they lose focus. Can you talk a little bit about their marketing focusing on the low-end of the market? Would you say they’re as responsive? Have you seen them do anything for example in terms of the network upgrades to respond to what you’re doing?

Eric Yeaman

I mean, I think from a tactical standpoint, they continue to have a pretty loud voice in the market and continue to nimble in their marketing tactics. With regards to investments, I don’t think we’ve seen anything significant or any significant pullback either.

Barry Sine - Drexel Hamilton

Okay and my last question, this is a little bit early but I’ll throw it out anyway. In terms of the Board's thinking on a potential dividend in the future, I know you’ve got a bit of time still wiring up or fibering up Oahu, but as we look out, one can see on the horizon there a date where perhaps free cash flow starts to improve. What’s the Board thinking on deploying some of that free cash flow?

Eric Yeaman

Barry, I think, we have talked before about sort of the cash inflexion point being sometime in maybe early 2017 as we still have another 2.5 years build-out here on the Oahu, and then obviously there is going to be some need to continue to deploy capital on the neighbor islands as we are a broadband provider and want to continue to enhance our broadband capabilities state wide. So that’s kind of from a timing standpoint, what we’re looking at.

We continue to look at whether there are opportunities to invest are capital for high growth opportunities within our market and within our business. But absent that I think that the Board -- we look at every summer and we just had a Board retreat last week in terms of all our strategic opportunities and objectives; and the dividend continues to be an item that gets evaluated. And as we approach the cash flow inflexion point, we will evaluate that again. We obviously -- if we do initiate a dividend, we want to make sure that we have exhausted the growth opportunities per se and that is one that’s sustainable and that can hopefully be increased periodically overtime. So that’s kind of sort of at a high level -- our thinking around this.

Operator

Your next question comes from the line of Lance Vitanza with CRT Capital.

Brad Tesoriero - CRT Capital

This is actually Brad in for Lance. I had a quick question for you guys on voice access lines. It seems it's been pretty consistent, that they're declining at about 1.5% each quarter in terms of total lines. Is that a trend you guys think is going to continue for the next half a year to a year? Or is there anything out there that you see that could cause an acceleration or deceleration in the number of voice access lines leaving?

Eric Yeaman

We certainly don’t see anything in the next 12 to 18 months that would suggest an acceleration. Honestly, our expectation is that as the reach of the next generation fiber network expands, our ability to offer triple play to consumer customers grows, that that has an impact of arresting consumer line loss. This last quarter, there is always a seasonality impact in the second quarter. If you just look at historically, generally the second half of the year is the lower net access line loss than the first half of the year. And I think that’s really what our expectations are. We don’t see anything -- any kind of material changes to us in next 12 to 18 months, but gradually over time our expectation is, is that level of access line loss both on the biz side and consumer side will slow. If you look at the state of Hawaii, at least on the consumer side we’re sort of approaching 40% wireless substitution at this point, fairly consistent with I think the rest of the Mainland and wireless substitution continues to be the dominant reason for net access line loss on the consumer side. So, we think that there is a terminal penetration level at some point in time and ultimately over time that the line losses will slow.

Operator

Your next question comes from the line of Donna Jaegers with D.A. Davidson. Please proceed.

Donna Jaegers - D.A. Davidson

Two quick follow-ups. Eric, on your Board Meeting, talking about strategic options, any conversation about the win realty investment trust option and whether that would be an option for Hawaiian?

Eric Yeaman

Yes, we did talk about it. Our situation is very different from Windstream in that we are not a cash tax payer and won’t be for quite some time. So a little bit of a different value proposition for them. Obviously we were intrigued by it. We try to make sure we fully understood what was happening and we will continue to sort of monitor the situation to see if and when this opportunity might make sense for us. But on first plans, the real value comes from the cash tax savings which we will be able to take advantage of at this stage.

Donna Jaegers - D.A. Davidson

And then another longer term question. As you guys replace aging copper with newer fiber, this should be a lot, you should lower the maintenance cost on your network. What did you think now from, and I know that’s still very early days as far as the replacement of fiber in your network with copper but what are you seeing as far as maintenance expense on the new fiber plant?

Scott Barber

Donna, this is Scott. We're seeing that the maintenance in the fiber plant is about less than a third of what it is on the copper and so it’s definitely beneficial to us from a maintenance standpoint. We are basically maintaining both networks as we transition customers off from copper onto fiber and at some point in time we may have to, and proactively go move customers. We're not at that stage yet but we're monitoring the cost to maintain both networks and it’s definitely beneficial to us on the fiber side from a maintenance perspective.

Donna Jaegers - D.A. Davidson

Given that you are putting in more fiber long haul as you tack these fiber-to-the-tower build outs, is there an inflexion point there as far as maintenance expense. You guys are already, you are probably cut to the bone or you are being very frugal with your maintenance. Is there any inflexion point there that we should see in the next few years because of increased fiber in the network?

Scott Barber

I don’t know that you would see it in the next couple of years but we should see that in the next five years, where we definitely see something as material in terms of expenses to the Company.

Operator

There are no further questions in queue. I will now turn the call back over to Mr. Brian Tanner for closing remarks.

Brian Tanner

Great, thanks again for joining us today and for your continued interest and support of Hawaiian Telcom. I'm available for any follow-up questions and can be reached in office at 808-54634-42 or by email. Thanks.

Operator

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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