Axia NetMedia's (AXANF) CEO Art Price on Q2 2014 Results - Earnings Call Transcript

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 |  About: Axia NetMedia Corporation (AXANF)
by: SA Transcripts

Axia NetMedia Corporation (OTC:AXANF) Q2 2014 Results Earnings Conference Call August 12, 2014 9:00 AM ET

Operator

Good morning. My name is Sharon and I’ll be your conference operator today. At this time, I would like to welcome everybody to the Axia NetMedia Corporation Second Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions). Thank you.

Mr. Art Price, Chairman and CEO, you may begin your conference.

Art Price

Thank you. Good morning. Joining me today is Alan Hartslief, Axia’s CFO; and Murray Sigler, President of Axia North America.

Alan will provide an overview of this quarter’s results and discuss the highlights of the France operations and turn it over to Murray to discuss the highlights of the North America operations. Following that we will take your questions.

Before we get into details, I’d like to say that we are pleased with the progress of the business had in the second quarter. Use of our fiber infrastructure continues to increase and we’re winning market share resulting in Q2 business unit growth, unit revenue growth of 21%. Our strategy calls for a targeted investments in Alberta and France to augment the growth of these successful operations. Given Europe our solid balance sheet and cash flow we are able to balance these investments with returning cash to shareholders in the form of the dividend payout, which we commenced earlier this year.

During Q2 we progressed with our two major growth initiatives in Alberta, the community interconnect grid is over 50% deployed and the project is on track and on budget. Our fiber the premise initiative continues with market development and service delivery activity and is positioned for initial fiber deployment later this year.

In aggregate, these investments provide an expanded market opportunity which actually will capitalize on or for the years to come. In France our strategy is twofold, gain market share within our existing network footprint and selectively add new network segments.

In terms of market share Covage continues to steadily add customers to its network resulting in reoccurring revenue growth of 32% this quarter. We continue to see significant upside for this business as it further penetrates the market it currently serves. Regarding new network bids Covage has several well developed bids in progress. Covage has historically been successful in winning a reasonable proportion of new bids and is well positioned to continue its success. With that I would like to turn it over to Alan.

Alan Hartslief

Thank you, Art. I would like to start with the business unit results. Before I begin my remarks please note that in 2013 Axia adopted a new accounting standard which governs the reporting of a 50% owned operation in France. Given this change in order to facilitate the review of Axia’s operations I will first refer to our business unit metrics. These metrics are the sum of 100% of Axia’s operations in Alberta, Massachusetts and France. Our MD&A has more details regarding our business unit structure.

Q2 customer connections of 10,166 grew 12% from the same period a year ago. Recurring revenue of $28.5 million grew 21% year-over-year and accounted for 88% of total revenue. Total revenue of $32.4 million was grew 21%. EBITDA of $7.6 million increased from $7.5 million for the same quarter last year. Included in EBITDA are $2.2 million of business development costs. These costs relate in Alberta to developing the FTT business and in France to deploying two new community networks and preparation costs related to the bids for new business.

CapEx of $8 million was down from $9.8 million a year ago and breaks down as follows. North America CapEx of $2.4 million includes $2 million for community interconnect grid, France CapEx of $5.6 million includes $4.4 million of success based CapEx related to connecting new customers to its network.

I’d now like to turn the IFRS results. Our IFRS income statement reflects the fully consolidated results of our North American business unit and equity consolidation of our France business unit. Total revenue for Q2 2014 was $14.1 million, up 13% from the second quarter last year and recurring revenue of $12.4 million grew 10%. Axia share of income from its 50% interest in Covage was a loss of $0.3 million compared to a loss of $0.5 million a year ago. EPS was naught cents versus a loss of $0.01 in Q2 2013. The company maintained its balance sheet. At quarter end, Axia had $32.5 million of cash and $4.4 million of debt.

I’ll now briefly discuss Covage. Covage continues to grow market penetration and its core business and it’s currently at 11% of its addressable market. In Q2, recurring revenue grew 32% year-over-year to $16.1 million and total revenue was up 28% to $18.2 million. EBITDA of $5.6 million was up 21% year-over-year while CapEx declined 27% to $5.7 million. Absent new network [bids], the majority of CapEx related to connecting new customers to the network, and this was the case this quarter. Covage has established itself as the leading independent fiber operator in France and we are confidence in Covage's ability to continue to grow its business within the existing network footprint.

In addition, they’re actively evaluating several attractive new bids which typically include both a business and residential component. Historically, the focus has been on the business market, but in preparation for what we hope will be a large multi year fiber to the home opportunity, Covage has both FTTH networks that past 40,000 homes in four communities. They have been selling FTTH service for the past few quarters and now has seven retailers active in these markets.

We are pleased with initial uptake and Covage now has approximately 4,000 active residential users or 10% market penetration within the first year.

I would now like to turn it over to Murray.

Murray Sigler

Thank you, Alan. In Alberta, we're maintaining our strong base in existing business and preparing for growth. Recurring revenue grew 10% over the same quarter last year to $14.1 million for the quarter. The growth in recurring revenue is a result of an increase in active customer connections, which stood at 5,069 at quarter end compared to 4,741 a year ago.

Non-recurring revenue grew $0.6 million to $1.7 million for the quarter, related to construction activities to connect customers to the network.

Total expenses for Q2, 2014 were up $3.1 million over the same quarter last year this increase is primarily driven by variable cost associated with the growth of non-recurring revenue, totaling $1 million and new business startup expenses related to Fibre to the Premise initiative, totaling $1.2 million for the quarter. This includes a continuation of branding and marketing activities as well as increased IT costs to ensure systems and procedures are in place, to the corporation to scale its operation.

The objective is to new link Axia to attract new customers and to deliver a high-quality customer experience designed to meet needs of this new customer group.

The community interconnect grid project is proceeding as planned. 59% of the 1,526 kilometers of fibre was deployed by the end of this quarter. This includes fibre acquired by a purchase agreement and newly constructed fibre. The fibre grid in the northwest of the Province is complete and build activity is ongoing in the Northeast, Central and Southern parts of the Province.

We expect the majority of CapEx associated with this project to be incurred in the third and fourth quarters of this year as the fibre build is completed and the electronics required to light the network are procured. We planned to light the network and for existing government of Alberta customers to be migrated to our infrastructure through, Q1 2015.

Our fibre-to-the-premise initiative is also making progress. In select target communities we’re building market awareness and are pleased with the level of customer interest we’re seeing for our services. Internally, we continue to perfect our service delivery and customer care capabilities ahead of an initial fibre build plan for later this year.

I’d now like to turn it over to Art.

Art Price

So, just to wrap up we’re growing that business as planned and we’re executing against our growth strategy. We see increasing demand for our fibre infrastructure in the markets we operate in and we’re making focused investment to expand our network footprint to increase our addressable market and drive future growth. We would now be happy to answer your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Blair Abernethy from Cantor Fitzgerald. Your line is open.

Blair Abernethy - Cantor Fitzgerald

Thanks. Can you hear me?

Art Price

Yes. We can.

Blair Abernethy - Cantor Fitzgerald

Hi guys. How are you this morning?

Murray Sigler

Good.

Art Price

Yes, we’re good.

Blair Abernethy - Cantor Fitzgerald

Couple of questions for you. Just wondering if you could maybe help us on the France side for starters with the fibre-to-the-premise initiatives, you’ve been at this now for a year you had or so you had a really good progress. Where does this go over the next three to five years Art? I mean how big is this opportunity that you see in front end?

Art Price

Well the networks that we have today in that 40,000 range of passing residential premises of course that will just grow and continue to grow our penetration there quarter-to-quarter is or expectation. And the other, the larger market beyond that of course is wrapped up in these various bids that we are involved in that are at various stages. So it’s kind of all contingent on those bids. I just say in a broader policy framework it is quite clear in France that this concept of unbundling the fiber to the premise from the services over the premise and creating a shared infrastructure for both the incumbent and the independence to compete is working really well from the end user’s point of view. And so the policy framework is supported by the end user experience where a triple play in France is in the range of €30 to €35 per month, a series triple play with the internet bandwidth connectivity.

So the momentum is with the industry. The industry is headed this way, the incumbents are recognizing that the logical place for them to sell their services when it isn’t in the high density areas is over these networks like Covage’s. And so I just see that policy be in the success that it is continuing to rollout. So our participation there is all patched to these bids that we are involved in.

Blair Abernethy - Cantor Fitzgerald

And can you share with us just a ballpark on how many bids you think you will pursue in the next year or so?

Art Price

Well, I think it's a volatile picture because it comes and grows, a bit grows bid in surges we are involved in around 5 bids of this nature now and I wouldn't be surprised to see 5 bids of this nature kind of be in a rolling type range at the surprise what was less than two at any point in time and more than 10.

Blair Abernethy - Cantor Fitzgerald

Okay. And Art is there a -- does the federal government have a timeline in which they want to see all these tenders completed or what’s your sense on when all of these bids will be completed?

Art Price

Well, the actual decision to bid is the municipal [depart mall] level, so that federal government program is out there for the foreseeable future, I think the Government of France thinks of it as like a decade type project. But the municipalities are the ones, the [depart mallers] are the ones to decide whether they proceed or not, there is no requirement for them to go ahead. So it's the regions of France that decide they want this infrastructure and then they have the policy framework within which to proceed.

Blair Abernethy - Cantor Fitzgerald

Okay, okay, that's great. And then just in France the existing DSPs have there been any trades of later things that you may have ticked the tires on to expand your backbone base?

Art Price

There hasn’t been any material transactions there, I think the SFR and [Americable] transaction has kind of changed the playing field somewhat. With SFR being agreed to be acquired by [Americable] but that transaction not completed and SFR was one of the DSP players. And [Americable] was actually not a DSP player. So I think what's happens is there is a lot of thinking about what that means. I mean I think it's good news for Covage, the everything that’s happening is these fiber assets are starting to become recognized as more strategic assets whether in Europe or North America and around the world. So, I think there is a period of time here where people are kind of assessing their situations.

Blair Abernethy - Cantor Fitzgerald

Okay, great. Thanks very much. That's very helpful.

Operator

(Operator Instructions). Your next question comes from (inaudible) Partners. Your line is open.

Unidentified Analyst

Hi. Good morning.

Art Price

Good morning.

Unidentified Analyst

A quick question on the corporate expenses. I guess there as the current number of 1 million or better quarterly run rate for last years of kind 800,000 or better run rate.

Art Price

Somewhere between the two is a good estimate. We have one or two little unusual expenses this quarter, but somewhere between 800,000 and 1 million is a good run rate.

Unidentified Analyst

I see. And how far you guys along with kind of Axia system? You guys are implemented for Alberta?

Art Price

So -- (inaudible) last quarter we mentioned that we were spending money, kind of stabilizing and bringing that -- making that system operational. We’ve come a long way down that road and our expenses in that area have trailed off. We refer to IT systems in our commentary in our MD&A, but these IT systems that we invest in are slightly different. These are IT systems which would allow us to do essentially web based business with consumer customers. So, kind of there is two ways of IT investment, one is to get our OSS business working and two the one we’re referring to this quarter is the one which is enabling us to do web based commerce in a good fashion or in a customer friendly fashion.

Unidentified Analyst

Got you. And you guys are still targeting Q2, 2015 as everything being done?

Alan Hartslief

Correct.

Unidentified Analyst

Got you. And also in France, can you guys comment on the politics and if that's slowed down your business there or slowdown your ability to secure the bids or the bid process, because I think that was mentioned in last call?

Art Price

I think the -- if you say it on the national front and then on the municipal front, on the national front, there was a slight period of time when the government was taking stock of not this program so much as other programs and broad expenditures. And as part of that, the [depart malls] were in a little bit of a period of time when they were uncertain as to the overall financial picture that they were operating in. I think that’s pretty much behind us. I think the second thing that’s happened a bit is that these bids that are involving residential premises is kind of like a new wave of bids with a bit of complexity because they involve probably some prior DSP that was business focused and then coming along secondly in the same [depart mall] with the residential focus bids that have to be somewhat integrated. So, a number of the [depart malls] that were going to one time processes to kind of gear up for the new way of doing things. And as part of that some of the various bids were delayed or restarted. But I think we kind of true all that and so I think the process is better understood by the municipal level governments now.

Unidentified Analyst

Understood. That’s helpful. And for the networks that you Covage has been operating for a while, has the penetration growth been steady or has -- have you seen any acceleration in the penetration rate?

Art Price

Focusing on the business side of it, because those are the ones that have been operating for a while, I would say the penetration growth has just continued to be steady. I don’t think it’s been accelerating and it hasn’t been peaking.

Unidentified Analyst

Great.

Operator

Your next question comes from Kris Thompson from National Bank. Your line is open.

Kris Thompson - National Bank

Great, thanks. Alan, just on the remaining CapEx, what’s remaining under the $10 million fiber-to-the-home initiative in Alberta and the $20 million interconnect initiative?

Alan Hartslief

So Chris, we spent $2 million on the fiber-to-the-home in Alberta, which leaves us with

$2 million on the fiber to the home in Alberta which leaves us with $8 million. I am not sure we will deploy all of that $8 million this year but that leaves us with $8 million. With regard to the interconnect grid, we haven’t spent too much, maybe $1 million and we anticipate spending $19 million between now and end of the year on interconnect grid.

Kris Thompson - National Bank

Okay, that’s helpful. And Murray maybe on Alberta the $2.2 million bid spend I guess the 1.2 for fiber to the home but the 1 million variable cost associated with the growth of non-recurring revenue can you elaborate on what that non-recurring opportunity is?

Murray Sigler

Yes. During the quarter with successful number of funds in new connections in Alberta one log activity regarding the Alberta first responders program where we were connecting at our number of our pop locations services to further solicitor general ministry. There has also been a number of new P3schools that were built in the province primarily in the public sector those two and then some growth in the enterprise sector some service for Husky primarily around the oil sands.

Alan Hartslief

So expenses attach to non-recurring revenue.

Kris Thompson - National Bank

So, you are not going to get any more revenue streams from those deployments? I don’t understand that.

Art Price

That would in the recurring revenue category but we do go through that phase of some expenses attached to non-recurring revenue. And then of course the follow on is recurring revenue.

Kris Thompson - National Bank

Okay. I think I got it.

Art Price

Kris, I mean maybe, when do the contraction when we construct the connection, in Alberta the customer pays for that connection and we make a little bit -- we make some revenue on that, we incur some costs in that. But then of course once the customer is connected, we then sell them our recurring service as we go forward.

Kris Thompson - National Bank

I got you, so that's (inaudible).

Art Price

Yes, it is good news.

Kris Thompson - National Bank

Got you. Okay that makes sense. And then I'm just trying to figure out why are you breaking that out, its unusual because you have that expense to every quarter and it's always high in June, because the weather is favorable for a new connection?

Murray Sigler

Correct, correct. But we just want to highlight that because it's a variable component of our expenses and the rates isn't really variable.

Art Price

Right, you know on recurring was 1.7 million again those expenses.

Kris Thompson - National Bank

Got it. And then just last maybe in France, there is some speculation that your JV partner is looking to exhibits 50% ownership. I'm just wondering, what rights that actually has in place to make sure that the other half that asset lands in friendly hands?

Art Price

Well, just observe on the speculation that was actually a story that was planted to by one of our competitors in the DSP bids. So there is just no merit in it, just to make that observation, it would be better from his point of view if we were, if Covage was for sale, but of course it's not. But then to answer that second part of the question, the parties have neutral rights of first refusal and effectively with each other is most likely that's say as the industrial partner and then being the financial partner we are the ones that are kind of setup to be the buyer and that's for both sellers.

Kris Thompson - National Bank

Okay, that makes sense. Thanks a lot for taking my questions.

Art Price

Okay.

Operator

Your next question comes from Blair Abernethy from Cantor Fitzgerald. Your line is open.

Blair Abernethy - Cantor Fitzgerald

Thanks. Just a follow-up on Alberta when or have you started marketing services with the community interconnected part of the network, you’ve got the ending site as to when that's going to be complete, when are you or have you started marketing?

Art Price

We, we're in the information stage as opposed to let’s say the pure marketing stage so we are taking our customers through the services that are going to be available on locations that they are going to be available. The industry doesn't really work much in advance of the network being actually available in terms of actually buying services.

Blair Abernethy - Cantor Fitzgerald

Okay. So, you are just out there letting to know where this is coming out next year?

Art Price

That’s the essence of it, yes.

Blair Abernethy - Cantor Fitzgerald

So, looking for contracts that are maturing I guess on the customer side?

Art Price

Yes.

Blair Abernethy - Cantor Fitzgerald

Okay. And I missed the first part of the call, but on industrial, whether you talked about all about Massachusetts, how things progressing there?

Art Price

Well, we are continuing to add customers more or less on plan, without -- we still have the claim for the lateness and quality of completion of the network is going through the normal course under the contracts that is fundamentally binding arbitration, so that's proceeding on that basis. And I’d say our customer adoption is more or less on plan having given regard for the fact that the network was substantially delayed after taking that into account.

Blair Abernethy - Cantor Fitzgerald

Okay. And just any other thing you can update us Art, on some of the U.S. landscape overall state level, community level for networks?

Art Price

You mean outside Western Outside Western Massachusetts on a broader context?

Blair Abernethy - Cantor Fitzgerald

Yes. The broader context, what's the temperature there, water like out there?

Art Price

Well, I think of course it's a big country and it's all over the map. It's quite obvious that if the regulatory level, there is a lot of controversy over the net [locality] positioning of the regulator and the idea of reasonable rates and everybody understanding that there is no possible way of anybody ever determining what a reasonable rate is.

It's quite clear that if you take the broader industry picture, the major incumbents in mobility are beefing up there, their fibre assets. It's becoming quite obvious that these two particularly in the United States, it's also true in Canada the major mobility companies are now essentially also fixed wireline companies, you don't have much of the independent mobility company growth initiative, it's tough for those parties.

And the fixed wireline guys are building are looking for acquisitions to grow their fixed wireline business fundamentally fibre based business. I think you are seeing that trend even outside the United States.

And so, I think if you move it to the royal communities they kind of get left behind in that, because that's not the map that these guys are consolidating. So, I think there is a growing local level interest in high performing internet connectivity. And that side, I would say sort of the state of play with a very uncertain regulatory environment. And I think the next space in the United States will be when the capital market start betting this independent real fibre investments.

So when people can prove that the independent rural fibre investments can make financial sense then I think the American capital markets will have to be the leaders in that with these independents because I don’t think the incumbence will be practically focused on the more rural markets.

Blair Abernethy - Cantor Fitzgerald

Okay, great. Thanks very much guys.

Operator

Your next question comes from David Shapiro from (inaudible) Capital. Your line is open.

Unidentified Analyst

Good morning gentlemen.

Art Price

Good morning.

Alan Hartslief

Good morning.

Unidentified Analyst

Most of my questions have already been answered. Just one question regarding the interconnect grid, maybe you can talk about some of the most significant short-term revenue opportunities that may come on shortly after you build that grid whether be with cellular customers or other larger business customers? Are they sort of broken down into two groups where you may have some larger customers that want that rather quickly and kind of maybe a long-term aspect for getting revenue on that asset?

Art Price

Yes. I think, recognizing the markets that are actually added what the community kind of grid does is it adds the 27 larger markets to our 400 currently served markets. And so that’s a new service in Axia’s context in the 27 larger markets. And of course the earlier adopters will be that bigger enterprise customers that never had the opportunity attached to that, typically a big enterprise customer we have to build some amount of network to get to that customer. So, that early opportunity will involve some network investments of the local connection character to that customer typically that being the bigger local customers. The other market of course is the mobility backhaul market that’s I would call the bigger customer category, although it’s the carrier category. And this province wide community interconnect grid makes it a lot more practical for the mobility parties to use this grid on a province wide basis instead of the segmented ways. So those are early customers but take some investment to get from the network to the tower or to the premise.

The other category would be our current independent wireless RSPs who could move into these markets from their current markets, their current markets being the 400 as opposed to the 27 that we’re currently connecting. That group can move a little quicker in the sense of the wireless connectivity. And so this marketing information and understanding is going out to all three of these groups. And those groups are sort of in the process of considering how they might take advantage of it.

Unidentified Analyst

Are you guys able to quantify I guess what the revenue or EBITDA opportunity is in near-term from these larger groups?

Art Price

Well the key challenge is those words you put there in near-term, this industry is not a spontaneous fast moving industry for a lot of reasons, mainly it’s the infrastructure, always needs to be adjusted, it’s not at -- the community interconnect grid is not a fiber to the premise grid. So, if I take near-term to be five years, and I know you’re not thinking five years as near-term, but if I took near-term to be five years, then this incremental markets is at least as big as the market we already serve on the non-government side in Alberta, which is running at about a run rate of about 8 million a year. So the question of how fast this market evolves, that’s more of a challenge, because that’s sort of like the detail on the ground infrastructure issue.

Unidentified Analyst

Okay. Thank you.

Operator

(Operator Instructions). Your next question comes from Lee Matheson for Broadview Capital. Your line is open.

Lee Matheson - Broadview Capital

Good morning, gentlemen.

Art Price

Good morning.

Lee Matheson - Broadview Capital

Just a quick question. Did you guys quantify the EBITDA loss from mass broadband within the North American segment?

Murray Sigler

No, I don't think so.

Lee Matheson - Broadview Capital

Could we speculate on what that would be?

Murray Sigler

What we do say is that we anticipate that we would be at a breakeven position within two years of receiving the completed network. So it gives you some sense of…

Lee Matheson - Broadview Capital

Yes, okay. You guys don’t -- you mentioned a number of connections, but can you give us some sense of maybe the ARPU from those connections or the higher gated revenue in that business unit?

Alan Hartslief

On page nine of the MD&A, I think we have a comment on the revenue for the quarter.

Lee Matheson - Broadview Capital

Okay, great.

Alan Hartslief

300,000 quarterly revenues from those 350…

Lee Matheson - Broadview Capital

Okay. And then in terms of the allocation of cost to that segment, there is only six people who work there, but also obviously the network operating cost?

Alan Hartslief

Correct.

Lee Matheson - Broadview Capital

Okay, great. Thanks guys.

Operator

(Operator Instructions). We have no further questions at this time. I turn the call over to the presenters.

Art Price

Thank you for joining us today. Our next call will coincide with the release of our Q3 results in November. Good bye.

Operator

This concludes today's conference call. You may disconnect.

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