Kevin Enda – IR
Michael Weaver – Chairman, President and CEO
Curtis Garner – CFO
David Coleman – RBC Capital Markets
Otelco, Inc. (OTT) Q1 2011 Earnings Call May 5, 2011 11:00 AM ET
Good day everyone and welcome to the Otelco Incorporated Conference Call. Today’s conference is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Kevin Enda. Please go ahead, sir.
Thank you Paula and welcome to this Otelco conference call to review the company’s results for the first quarter and year ended March 31, 2011, which were released yesterday afternoon. Conducting the call today will be Michael Weaver, President and Chief Executive Officer and Curtis Garner, Chief Financial Officer.
Before we start, let me offer the cautionary note, the statements made on this conference call that are not statements of historical or current fact constitute forward-looking statements. Such forward looking statements involve known and unknown risks, uncertainties and other unknown factors that could cause the actual results of the company to be materially different from historical results or from any future results expressed or implied by such forward-looking statements.
In addition to statements which explicitly describes such risks and uncertainties, listeners are urged to consider statements labeled with the terms believes, beliefs, expects, intends, anticipate, plans, or similar terms to be uncertain and forward-looking. The forward-looking statements contained herein are also subject, generally, to other risks and uncertainties that are described from time to time in company’s filings with the SEC.
With that stated, I’ll turn the call over to Mike Weaver.
Thanks Kevin. Good morning everyone and welcome to our call. After record revenue and EBITDA in 2010, our first quarter results are somewhat disappointing. Our plans for this year calls for the continued expansion of our CLEC operations in New England. And we set an aggressive schedule providing new sales staff as well as expanding our service area to include five new sites in New Hampshire, two new sites in Northern Maine and our first CLEC venture into Massachusetts. Due to a variety of factors, we experienced unexpected delays in both expansion of our sales staff and the implementation of the proposed new CLEC market areas. While these processes are now complete, the delays negatively affected our first quarter results. However, we remain committed to continuing the expansion of our CLEC services in New England.
As you may have seen our recently announced plans to acquire Shoreham Telephone Company in Vermont will actually this expansion. Shoreham has approximately 5,000 access line equivalents and we plan to use their existing switching and transport network to form the back bone for our entry into the CLEC market in this state. At the present time, we’re currently working through the regulatory process and we remain hopeful this transaction will close in either the late third quarter or early fourth quarter of this year.
In keeping with our expansion plans, capital expenditures for the first quarter were $2.8 million, these included approximately $1.1 million for our softswitch for Alabama and the initial CapEx expenditures for our new CLEC site in Massachusetts. This first quarter CapEx was a bit higher than we normally have in the first quarter but even with these increased capital expenditures, our cash balance still increased by $200,000 in the first quarter.
I wanted to just to give you an update on the recent tornadic activity in Alabama, as you may have seen on the news, we certainly experienced some damage through our outside plant facilities and we’re continuing to work to restore our plant. It’s certainly an advantage to us to have operations in multiple states and in order to have the restoration efforts in Alabama, we’re able to bring construction and repairs cruise from our Missouri and New England locations to speed this restoration.
This concentrated workforce supplemented by contractors, we are again to help us, get the repairs done as quickly as possible allowed us to restore service to the majority of our customers within a couple of days.
As of the end of the day yesterday, we had service restored to Albert 600 customers representing approximately 2.5% of our Alabama customer base. The cost for these restorations generally be reimbursed by our existing insurance policies.
Finally, we paid our 23 of consecutive IDS distribution in March and we remain committed to continuing our policy of returning cash to our shareholders. I’ll now ask Curtis to discuss financial results.
Thank you, Mike. And thanks to everyone on the call for joining us today, I know it’s a busy day for many of you. I’ll provide a brief overview of our financial performance for the quarter and then we can take questions.
Total revenues decreased 1.6% in the first quarter to $25.4 million from $25.8 million a year ago. Mike mentioned the slower growth in CLEC revenue which was not enough to offset the declines from the traditional loss of RLEC voice access line related revenues.
Breaking down the revenue a bit local services revenue decreased 1.9% in the first quarter to $12 million from $12.2 million a decrease of $0.3 million in RLEC basis Services revenue including long distance was partially offset by an increase of $0.1 million in CLEC revenue, mostly from one of our newer product hosted private branch exchange and services.
Network access revenue decreased 1.6% in the first quarter to $7.9 million from $8.0 million a year ago. The CLEC component of access revenue actually grew by $0.1 million that was offset by a decline in RLEC including net adjustments.
Cable television revenue increased 13.1% to $0.8 million from $0.7 million in the same period in 2010. Growth in digital family packages of $0.1 million and revenue of $0.1 million associated with the conversion of our Missouri cable customers to satellite services is partially offset by $0.1 million decrease in basic cable.
Our continuing cable services in Alabama actually grew subscribers by 71 including IPTV, when you take out the conversion to direct TV customers for Missouri.
Internet revenue for the first quarter of 2011 decreased 1.6%, say basically flat at $3.5 million in both quarter ended March 31, 2011 and 2010. Growth in broadband data access lines basically offset the loss of dial-up subscribers.
Transport services revenue decreased 5.5% to $1.3 million in the first quarter from $1.4 million for the same period in 2010. The decrease was basically due to price changes in the WAN transport market.
Moving on to expenses, operating expenses in the first increased 0.7% to $20.1 million from $19.9 million a year ago. Cost of services and products increased 3.9% to $11 million from $10.6 million a year ago that included a non-recurring accrual for Universal Service Fund costs in Maine, some start-up network costs in New Hampshire, and increased employee and benefit costs for $0.4 million increase in this category.
Selling, general and administrative expenses increased 3.0% to $3.3 million from $3.2 million a year ago, primarily related to the increased sales employees in Maine and other employee and benefit costs.
Depreciation and amortization for first quarter of 2011 decreased 5.9% to $5.7 million from $6.1 million in first quarter of 2010. Amortization of intangible assets associated with the Country Road acquisition decreased $0.3 million, including contract and customer base intangible assets. The remaining decrease of $0.1 million reflected lower depreciation on plant assets in Alabama, which was partially offset by an increase in depreciation for Missouri assets.
Interest expense increased 3.0% to $6.2 million in the first quarter from $6 million a year ago. The increase in interest is primarily driven by the interest on the additional senior subordinated notes that were issued in the Class B conversion that occurred in June of 2010. And the impact of our second swap, which was only effective for part of first quarter of 2010, we had 39 days of lower rates on $60 million before the swap became effective.
Adjusted EBITDA as Mike mentioned was $11.4 million for the first quarter compared with $12.3 million a year ago and $12.8 million in the fourth quarter of 2010. Cash flow from operating activities was $5.4 million in the first quarter compared to $7.5 million a year ago. Cash used in investing activities amounted to $2.8 million compared to $1.8 million a year ago as Mike mentioned, reflecting the higher investments in both CLEC and RLEC businesses including the softswitch in Alabama.
Cash flows from financing activities for the quarter amounted $2.3 million compared to $2.2 million a year ago reflecting the dividends on the converted Class B shares.
Turning to the balance sheet, we ended the quarter $18.5 million in cash compared to $18.2 million a year ago. Total long term notes payable was $271.6 million as we noted in release we will make $0.4 million voluntary prepayments in May or in, actually on Monday of our senior long term notes payable reducing the balance to $162 million, this represents a combined reduction of $11.5 million since the Country Road acquisition in October 2008.
First quarter distribution of $5.6 million in interest and dividends to our shareholders and $0.3 million in interest to bond holders occurred on March 30, this represents the 25th consecutive quarterly distributions since going public in December of 2004. We anticipate that the company’s 2011 dividends will continue to be treated as a return of capital for tax purposes as they have been since 2008.
Each quarter, the Board will consider the declaration of dividends during its normal scheduled meeting. For this quarter, the Board will meet on May 12, the scheduled interest and any dividends declared will be paid on June 30, to holders of record as of June 15. Our Annual meeting is also scheduled for May 12 in Atlanta.
Paula, if you will provide directions, we can take questions at this time.
Thank you. (Operator Instructions). Our first question will come from Dave Coleman of RBC.
David Coleman – RBC Capital Markets
Great. Thanks a lot. Just, as far as the conversion of the Missouri video subscribers to satellite. How many video subscribers are involved in that conversion? What are the economics to Otelco post conversion, first prior? And then, do you have any, it seems like the video subscriber growth has been a little sluggish. Just wondering what kind of, sort of initiatives or promotions you have in place to possibly improve the video subscriber growth. And then finally, just any thoughts as far as cellular cell possibly entering in North Alabama markets with NLP built? Thank you.
David, thank you for the question. We’ll talk those in order. The Missouri conversion, Missouri has about 350 roughly cable TV subscribers. We do not have our own heading in Missouri, they were in the cable business when we brought those guys in December of ‘04 and the cost of programming that they had gotten in tough and where it was not competitive, might be tough to have any margin on the product. So with that, small serve, amount of customer serve we elected to go with Direct TV, and get out of the cable business as far as the co-ax plan what we had. Because we didn’t have high editing, or any serve on existing facilities, there is really no significant impact to our plan as it’s all. The margin for those customers is certainly the last on the Direct TV, but this was, I mean we recognized early on this, where we would want to with those few customers that few of customers in Missouri for cable. On our Missouri operations that actually is the last populist of our RLEC. So, the only place where it might seems to have cable they already had when we bought them. So, this was a natural progression for us and it’s been coming for some time. And actual I’m glad we finally bit the bullet and have made that move. You’re correct, I mean as we’ve said on pervious calls our video growth has been somewhat slow just particularly in Alabama which is where we have been building IPTV services. We attribute that as much of the economy as anything else. You’re also correct and that were continually trying to tweak the products that we offer in the pricing. We currently have a triple play bundle for 89, 95 for all of our customers, and it includes of course landline, internet and AV Robust Cable TV offering, it’s the lowest price at which we’ve offered it, it puts it slightly below our competitors for that.
As of today, in our brand market which again is where we’re concentrating our IPTV efforts there. We do not have competitor that offers all three services. So, we’re hopeful that that will be part of the answer that we’ve been looking for. Now, it’s always interesting when storms come through because it affects things, like I just mentioned on the call is the plant facilities. The other thing it would do is slowdown the project that you already have in place. We will take a step back, I expect on cable TV, primarily because some of the customers that we serve for, it will take some time before we get those services back. So it’s difficult, it’s a little bit difficult to predict what we think that will be in the next quarter.
I think the last question you have is, we understand that sale soft are upgrading their plant and we actually, they have some number of towers in our tier 2, what we actually see that as an opportunity to provide giving the transport to their towers. We contacted those guys as a few other carriers say is way over, we would like to upgrade facilities that we already have going into your towers that we serve. So, we already completed with them, they’re a good company and they certainly have service in our areas. So we are choosing to look at this move as an opportunity to try to get some transport revenue from their build.
David Coleman – RBC Capital Markets
Great, and then just as soft – sale soft, how many of theirs, I guess, existing soft sale locations are in our Alabama footprint. And then just get back their Missouri Cable Subs, is this a force migration or do you continue to support them or how does that transition from cable to satellite work and is there sort of some, I guess orphaned cable subsidiaries that you’ll have to continue to support until they eventually migrate over? Thank you.
Actually I think, as Curtis, he may have better information on the towers. But I want to say that the sale soft sales towers in the Alabama footprint somewhere in the 20s. And we have facilities going to all those towers there whether it’s copper or tin ones means there we’re currently providing them connectivity and some transport. But obviously as you know, as we all know when we upgrade their network they’re going to move far. So I believe the correct answer on the key is in their 20s. And I apologize that it was not explicit enough on Missouri. This is not a course migration, it’s a plan thing, we could certainly continue to incur higher programming cost from the hearing and that’s providing them today. It just doesn’t make sense. We are a direct TV distributor, we have the right to do. And in Missouri, I think over 90% of our customers transitioned from our co-ax to our direct TV. And so there is no support that the 5% or 10% that did not transition from another supplier or another provider of their service.
David Coleman – RBC Capital Markets
Great, thanks a lot.
And there are no further questions in the queue at this time. (Operator Instructions) Moving on we will go to Tim Horan with Oppenheimer & Company.
Hi, thanks for taking the question, this is (inaudible) actually Tim’s associate, and just had a couple of quick questions on the normalized EBITDA shortfall this quarter, should we expect margins to bounce back to historical levels or it is just kind of the expected level going forward. And if margins do bounce back to the historical levels, would this be a gradual process throughout the year. Do we expect pretty significant pickup maybe in the second quarter. And my second question is on the Tornado damage, what would be the timing of the reimbursements when the insurance company, will this taking place during the second quarter or would this be later in the year? Thanks.
Let me talk to you. Let me talk to EBITDA of course and I will ask Curtis if he will to weigh in on the reimbursement product, we won’t get back to the EBITDA level in the second quarter that we were at last year, last year we had a number of pleasant surprises, I guess, in non-recurring advance that worked in our favor that we related to certain accounting estimates and the positive settlement that we had with a fair point bankruptcy, those things actually have to increase our EBITDA margin. What we do expect improvement and in over the year it will be, it will not be a one quarter, I think. So, as you saw in and I hope we are conveying to everyone on the car, we simply, frankly I got too aggressive with my timing for the rollout of new services on new CLEC sites and the expansion of our sales force took much more time than I anticipated. So, I have to follow my soul for that, I was a bit too aggressive in those schedules, it’s not uncommon when you have those kind of expansions to be a little bit behind, bit behind the curve and certainly that’s we find ourselves. We do expect a return to a more normal EBITDA levels for us, but the margin will be, and the margin will come, will certainly improve, but it will not be a one quarter. Curtis, I think you better speak to the insurance coverage in particular reimbursements schedules.
Hi Herbier (ph) we’ve been keeping, we notify the insurance carrier the night of the storm that we would have a claim, so we would be ready to go with them, the next day we set up tracking information capability in each of the four Alabama company, so that we can keep up with the details of each costs as it is incurred whether it’s equipment or people or supplies. So, we should be able to file the claim relatively quickly as we complete the storm damage. Now, my guess is that the insurance carriers will take anywhere from 30 to 60 days to respond to the claims. So, it’s entirely possible that from a cash flow perspective the expenditures will be made in the second quarter and the reimbursement we will be received in the third quarter. We’ll probably file an interim claim by the end of May with the intent of hoping to have some of that covered by June. But, with all of the carriers having lots of damage to review, it’s not clear how quickly they will review all the pieces.
Great, thank you. That’s very helpful.
And it appears there are no further questions. Mr. Weaver, I would like to turn the call back to you for any additional or closing comments.
Thank you Paula, and just thanks again for everyone for joining the call and we would hope to talk to you again in three months. Thank you.
And that does conclude today’s conference. We would like to thank you all for your participation.