Jennifer Spaude - Director, IR & Marketing
John Finke - President & CEO
David Christensen - SVP & CFO
Hickory Tech Corporation (HTCO) Q2 2011 Earnings Call August 4, 2011 10:00 AM ET
Good morning. My name is Lindsey and I will be your conference operator today. At this time, I’d like to welcome everyone to HickoryTech’s second quarter 2011 earnings conference call. (Operator Instructions). Thank you, Ms. Jennifer Spaude, Director of Investor Relations and Marketing, you may begin your conference.
Good morning and thank you for joining HickoryTech’s second quarter 2011 earnings conference call. I’m Jennifer Spaude and with me today are John Finke, HickoryTech’s President and Chief Executive Officer and David Christensen, Senior Vice President and Chief Financial Officer.
Before we get started, let me remind you that our earnings release was issued yesterday afternoon and is available on the investor relations section of our website at hickorytech.com. In addition, you’ll find a presentation for today’s call, which we hope you will find helpful in your analysis.
Now I will draw your attention to our Safe Harbor statement. Information in today’s presentation contains certain statements and predictions that are not historical facts, but are forward-looking in nature. These forward-looking statements are based on current expectations, estimates and projections about the industry, in which HickoryTech operates, and management’s beliefs and assumptions as of the time of this call.
Such forward-looking statements are subject to uncertainties. Actual results or outcomes may differ materially from those indicated or suggested by any forward-looking statements, whether as a result of new information, future events or otherwise. You’re cautioned not to place undue reliance on these forward-looking statements made during the call, which represent estimates as of today August 4, 2011.
These statements are not guarantees of future performance and involve certain risks, uncertainties and probabilities, which are difficult to predict. There are many such risks and uncertainties, which could affect the economy, our industry and our company in particular, some or all which affect future results. More information on potential risks and uncertainties is available in the company’s recent filings with the SEC including HickoryTech’s annual Form 10-K report, our quarterly Form 10-Q reports and Form 8-K reports.
This presentation also contains certain non-GAAP financial measures. Reconciliation of these non-GAAP financial measures to most directly comparable GAAP measures are available in our presentation. All participants are advised that the audio of this conference call is being broadcast live over the Internet and is also being available for playback purposes. The audio will be archived on HickoryTech’s Investor Relations website for the next 30 days. Following management’s discussion, we will open the call to a Q&A session.
At this time, I’d like to turn the call over to John Finke.
Thank you, Jennifer. Good morning everyone. I’m pleased to share with you our second quarter 2011 results and highlight the progress we’ve made with our strategic initiatives. Today I will cover several key metrics from our second quarter results and update you on our strategic initiatives including our Greater Minnesota Broadband Collaborative project. Dave will take you through the financial details of our second quarter.
First off, I am very pleased with our second quarter results. Revenue totaled $40.1 million, up 5% from a year ago. We achieved strong growth in equipment and support services as well as double-digit broadband growth and solid growth in our fiber & data services. Net income totaled $2.7 million and operating income totaled $5 million.
Our plan and focus to grow our business and broadband services continues to provide growth opportunities and diversification for HickoryTech. Our business sector and broadband revenue streams accounted for 69% of our revenue in the second quarter and year-to-date. We believe our strategic shift in focusing on business and broadband services has positioned HickoryTech for sustained and reliable growth.
Our second quarter earnings were enhanced as a result of our continued efforts to manage our strong cash flows, our ability to lower our borrowing cost and manage our debt level and our investments in key strategic growth initiatives. Our strategic plan is focused on maintaining and leveraging our Telecom business units, growing our broadband and business services and pursuing new growth opportunities.
The fiber network expansion we completed last year added 350 route miles of fiber connecting our network to Sioux Falls, South Dakota and Fargo North Dakota. The new route have allowed us to target new wholesale customer sales and reduce our off-net costs associated with serving the existing customers in these markets.
Additionally, our enhanced fiber network in Des Moines, Iowa which was completed last year is allowing us to be more competitive in this market with an expanding sales force, strong product portfolio and new promotions all of which have been well received by customers and the agent sales channel.
Turning to our business sector results, which a year ago we referred to as the Enventis sector. Second quarter business sector revenues totaled $23 million, up 8% year-over-year, primarily driven by an increase in equipment and support services and supported by solid growth in fiber & data services.
Operating income and net income both increased 16% and all product lines were profitable. Fiber & data revenue increased 4% totaling $11.3 million in the second quarter. Excluding the unique construction project last year, second quarter our fiber & data revenue growth would have been 15%.
Dave will provide more details on the normalized comparison in his comments. Our fiber & data revenue growth is a result of strong Ethernet and wholesale carrier sales as well as our focus on growing our small medium business customer base. We believe our recent fiber network expansion and broadband stimulus project will enable future growth in this product line.
Specific to the equipment product line within the business sector, equipment sales were up 12% totaling $9 million. As we have discussed in the past, equipment sales fluctuate quarter-to-quarter based on timing of sales and revenue recognition. We have had solid results year-to-date and we have a strong sales funnel and solid backlog going into the second half of the year.
Equipment support services, which is a key growth area in this line of business, was up 15% from a year ago. We recently announced the enhancement of our Total Care support offering, which Enventis offers at a single-point of contact for support and monitoring of Cisco systems. Support services produce a recurring revenue source and are our key focus area for us in 2011. As we further develop these services, we expect to increase margins in this line of the business.
Also last week we announced Enventis was recognized as the Cisco TelePresence Video Advanced ATP Partner. This designation recognized our ability to sell, deploy and support TelePresence Video product and solutions at the advanced level.
We are also better positioned to offer end-to-end communications and collaboration solutions now with video being the next evolution of those services.
Now moving to our Telecom sector performance; second quarter Telecom revenue totaled $17.7 million, flat compared to the previous quarter and up 1% from a year ago. Our Telecom sector continued to produce strong, stable cash flows and double-digit growth in broadband services.
Broadband services revenue, which includes DSL, data, digital TV and internet services, totaled $5.1 million, up 12% from one year ago. We continue to enhance our broadband services and recently upgraded several of our digital TV communities by adding high-definition, DVR and interactive media features to our service offering. This upgrade has been well received by our customers.
Our entertainment services are marketed as money saving bundles with local telephone service and flexible options to add broadband services.
Now, let me bring you up-to-date on our Greater Minnesota Broadband Collaborative Project. This $24 million project is being funded by $16.8 million grant from the US Department of Commerce, National Telecommunication and Information Administration or NTIA. Additionally, we will invest $7.2 million over two-year timeframe. This project involves the construction of two high capacity fiber builds in Northern Minnesota as well as last mile fiber build in Southern Minnesota. The entire project will expand our fiber network by approximately 400 rough miles of fiber.
After completing the environment reviews and be given the appropriate federal approvals in June we started constructions in July on the first phase. The Northern route, which would extend from St. Paul to Duluth and over to Superior, Wisconsin. We anticipate phase two of the project to begin in spring of 2012 and the entire project will be complete by August 2013.
This added broadband network will provide rural communities across Minnesota with affordable, high capacity, broadband services enabling telemedicine, economic development opportunities and improve connectivity in the state and local government offices. Likewise, the fiber will help to serve customers in the healthcare industry and education.
Moving away from the business segment discussion, I’d like to take a moment to address a few other key highlights from our second quarter. In April we were pleased to announce the addition of Carol Wirsbinski to our team as Hickory Tech’s Chief Operating Officer. Carol’s career includes over 20 years of experience in the telecommunications industry with specific experience in emerging business-to-business technology sales and customer operations.
Working with our leadership team Carol will implement our company’s strategic initiatives and increase operational execution across all our business channels. And we are very pleased to rejoin the Russell 2000 index following a reconstitution on June 24. We believe this addition will bring additional visibility to our company and our strategic initiatives.
Now I’d like to turn the call over to David Christensen, to provide more details on our financial performance for the second quarter. David?
Thank you John. Good morning. Second quarter 2011 revenue increased $1.8 million or 5% due to the strong equipments and support sales and continued growth in fiber and data services. Equipment and support revenue increased 1.3 million or 13% and fiber and data revenue grew 4% over the same quarter of last year. It’s important to note that the second quarter of 2010 contained $1.1 million of non-recurring revenue related to a joint construction project to extend our fiber network.
Excluding this non-recurring revenue from last year result, our core recurring fiber and data business would have realize a 15% growth rate in revenue for the second quarter, which is more consecutive of our five years trends in this product.
For the fifth consecutive quarter we have delivered more than $10.3 million in EBITDA the most recent quarter producing $10.7 million. Our second quarter 2011 EBITDA represented a 26.7% EBITDA margin on revenue of $40.1 million. This was similar to our calendar year 2010 margin of 26.5% and we are pleased to be able to hold on to this margin as we progress to these early years in our organic growth plan.
Total cost and expenses in the second quarter 2011 increased by 8% versus the second quarter of 2010. Year to date costs and expenses were up just 3% over 2010. Pre-tax income of $4 million decreased 12% from the comparable quarter in 2010. The non-recurring revenue related to the joint construction project to extend our fiber network in 2010 contributed $330,000 in pre-tax income in 2010. Excluding this, the decrease in quarterly pre-tax income would have been 6%. Net income in the second quarter 2011 totaled $2.7 million, a 23% decrease from one year ago.
In the second quarter of 2011, we made a $343,000 income tax reversal due to the expiration of time sensitive income tax accruals. In the same quarter last year the income tax reversals totaled $807,000. Excluding tax releases from both years, net income from the second quarter 2011 would be 13% lower than the same quarter in 2010. On a year-over-year basis excluding the income tax reversals net income would be 9% higher for the six-month period in 2011 versus 2010 driven by decreases in interest expense.
Now, I will review the business sector operating results. My comments are from the pre-elimination numbers found in the business sector recap of our earnings release. Fiber and data services revenue of $11.3 million in the second quarter increased $448,000 or 4% from the same quarter in 2010. I will remind you that in the second quarter 2010 we started this nine-month project to expand our fiber network to Sioux Falls and to Fargo and this fiber expansion project added $1.1 million of non-recurring revenue to the second quarter of 2010. This was a unique project for us last year and excluding this number recurring revenue from 2010 our core recurring Fiber and Data would have realized a growth rate of 15% for the second quarter which is indicative of the prior trends.
The underlying revenue increase for Fiber and Data service in the second quarter comes organic in our business. Equivalent product line revenue $11.7 million increased $1.3 million or 13% compared to second quarter for the same period of last year and there are up 12% year-over-year. Equivalent support service, our strategic growth area for us grew 15% in the second quarter compared to the same quarter last year and we’re showing some of highest margins we produced in a while for this product line all for the quarter and for the year-to-date.
Business sector capital expenditures totaled $2.5 million in the second quarter of 2011, which is $1.4 million less than the 3.9 million spent in the second quarter a year ago. Last year, our Fiber construction started earlier in the year while in 2011, we will be a little more back and loaded for the year for our construction in this sector.
We did the Telecom operating results based on the pre-elimination numbers in the Telecom sector recap of our earnings release, revenue totaled $17.7 million and was flat or within 1% of the results reported one year ago. We experienced strong Telecom/broadband revenue growth of 12%, which offset the ongoing declines in the other legacy Telecom services such as local service, network access, long distance and directory advertising revenue.
Telecom costs and expenses increased 3% for the quarter and are just 1% up year-over-year comparisons due to the efforts to streamline the cost service delivery in our Telecom’s business.
Telecom capital expenditures totaled $2.2 million in the second quarter of 2011, approximately $900,000 less than the same quarter a year ago. And at mid-year 2011, CapEx is $346,000 or 8% lower than 2010. It is our strategy to match the gradual declines in Telecom profitability with reductions in Telecom capital spending in order to maintain good free cash flow.
As of June 30, 2011 our senior debt balance was $118.7 million, using the combined look of our long-term and the current maturities classification in our balance sheet. This represented a slight reduction from the $119 million at the beginning of 2011.
We continue to operate with the ratio of less than three times debt-to-EBITDA as of June 30th which is a key metric in our industry. Our debt-to-EBITDA ratio is approximately 2.75 as defined in our senior credit agreement using trailing 12 month data which puts us in very favorable terms on our senior debt agreement and consequently saves us some interest expense.
In the second quarter of 2011, we experienced an 8% decrease in net interest expense compared to the same period last year and on a year-to-date basis, our interest expense savings was 23%. We accomplished this by locking in our interest rate at lower levels than last year, holding our debt ratio below 3:1 which is where it has been since the end of 2009 and finally due to lower intra-quarter level of debt outstanding. We continued our strategy of holding a higher level of cash on hand as of June 30, 2011 specifically we held $14.9 million at the most recent quarter end.
Net debt a measure of actual balance sheet strength that subtracts cash balance from the total debt was $103.8 million as of June 30, 2011 and represented a $5 million improvement over the net debt as of March 31, 2011, and a $15 million improvement from the net debt as of December 31, 2010. Net debt is not a factor in our current debt agreement, but it is a common banking term in comparable situations. We see it as a useful statistic for measuring the health of our balance sheet.
We enjoy a very favorable credit facility relative to market. With another six months remaining on its term, some of the facilities’ functionality will expire at the end of 2011 and the majority of its term will expire in 2012. We are set for a routine refinancing of our senior debt and we’ll close on it shortly. We foresee no issues in reestablishing reasonable senior debt financing for our foreseeable business plan. Typical credit agreements for us have had a term of five or six years. Our last refinancing was in late 2005.
As I said, we expect to have a new senior credit facility in place soon and we expect our new credit facility to have a similar structure as our existing credit facility. We also expect to experience changes in pricing of our credit facility to coincide with current market conditions for similar financing with other companies in our industry.
We currently have financing terms priced at 150 basis points over the LIBOR rate. At this time, we estimate our interest expense could increase by $2.5 million to $3 million annually in the first 12 months after this refinancing, as a result of bringing our debt up to current market terms.
Our projections of cash flow indicate we will be able to pay for this change with cash flow provided by our operations. We will provide a public filing when we have completed our refinancing later this quarter.
We feel we are truly positioned to growth with our strong financial position, our cash generating power and a sound business plan. We are reaffirming our fiscal 2011 guidance with no changes as follows: For revenue, we are targeting a range of $158 million to $164 million. For the net income we are targeting a range of $7.4 million to $8.7 million giving diluted earnings per share roughly $0.55 to $0.65 per share. For CapEx we are targeting $20.5 to $24 million and these numbers are net of any government grants received from the Broadband Stimulus Project. For EBIDTA we are targeting a range of $41 million to $43.2 million and for the year-end debt we are targeting a range of $118 million to $123 million.
We remind you there are seasonality in our business and not all calendar quarters are symmetrical, 2010 was very indicative of this trade. So as you compare our guidance to our 2010 results we remind you that we also want to remind you that we have the unique income tax reversal and the fiber construction project that we mentioned earlier, both unique items which contributed positively to the prior year comparative results.
In summary, with our second quarter of 2011, we’ve now had five quarters in a row of strong financial results. We trace our success back further than that though, in 2009 we embarked on an aggressive growth plan. 2011 was our inflection year for our long-term growth plan, so not always possible to have back-to-back inflection years and for 2011 we are in a strong financial position to provide a solid base year for another step forward.
More details on our financial results are available on our quarterly report on Form 10-Q which is due to be filed later this afternoon.
With that, I would like to turn it back over to John. John?
Thank you, Dave. We are off to a good start in 2011. We are investing in long-term strategic initiatives with a focus on increasing shareholder value while maintaining strong cash flows and a solid balance sheet. We remain confident in our business plan and are executing on our strategic initiatives.
We are committed to growing HickoryTech and we are executing a disciplined strategy one that will increase shareholder value, gain market share and further strengthen our position as a leading communications provider.
Our strategic plan is focused on expanding our business in Broadband Services. Key to this expansion is leveraging and extending our regional fiber network. This expansion requires investment and while we expect the cash flow from our existing lines of business to support funding these new initiatives, we may need to increase debt in the short-term.
In closing, I am pleased with our second quarter results and the first half of 2011. As you compared 2011 results to last year, it is important to take note of the unique factors of the tax reserve release and the fiber construction project which added revenue and enhanced our earnings in 2010.
HickoryTech remains in good financial position to grow and increase shareholder value. We have a strong balance sheet, solid net income, a growing level of recurring revenues, growth trends in key strategic product lines, a healthy dividend, and a yield of approximately 5%, strong cash flow and the ability to generate cash to fund future opportunities.
We appreciate your support and wish to thank you for joining us on the call today. At this time, we would be happy to take any questions. Lindsey, if you can initiate the questions please?
(Operator Instructions) There are no questions at this time. I would like to turn the call back to John Finke for closing remarks.
Thank you, Lindsey. If you joined us after the call began today or would like a replay of the call, please visit our website at hickorytech.com. A telephone replay of this call will be available beginning at noon today.
Again thank you for joining us on the call today and we look forward to your joining our next call. If you have any further questions, I would invite you give Jennifer, Dave or myself a call. Thank you again and have a great morning.
This concludes today's conference call. You may now disconnect.
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