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FiberTower (NASDAQ:FTWR)

Q2 2011 Earnings Call

August 05, 2011 11:30 am ET

Executives

Kurt Van Wagenen - Chief Executive Officer, President and Director

Carolyn Capaccio - Vice President

Thomas Scott - Chief Financial Officer, Principal Accounting Officer, Senior Vice President, Secretary and Treasurer

Analysts

Swaraj Chowdhury

Randy Laufman - Imperial Capital, LLC

Eric Reubel - Miller Tabak Roberts Securities, LLC

Romeo Reyes - Jefferies & Company, Inc.

Unknown Analyst -

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the FiberTower Second Quarter 2011 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, Friday, August 5, 2011. I would now like to turn the conference over to Carolyn Capaccio of Lippert/Heilshorn. Please go ahead.

Carolyn Capaccio

Thanks, operator. Good morning, everyone. Thank you for joining us for FiberTower Corporation's 2011 Second Quarter Conference Call. Joining me on the call today are Kurt Van Wagenen, FiberTower's President and Chief Executive Officer; and Thomas Scott, Senior Vice President and Chief Financial Officer. Today, Kurt will open the call with an overview of the quarter, Tom will follow with financial detail, and Kurt will conclude with closing remarks and open the call for questions.

Before we get underway, let me inform you that FiberTower issued a press release yesterday after market closed, which provides the details of the company's quarter financial operating results. The company also prepared a slide presentation for today's call. If you are not logged into the webcast and would like to view the slide presentation, you may do so at the Events and Presentations page in the Investors section of the company's website at www.fibertower.com. If you have any questions, please call Lippert/Heilshorn & Associates at (415) 433-3777. Please note the information recorded on this call today speaks only as of today, August 5, 2011, and therefore, you're advised that time-sensitive information may no longer be accurate at the time of any replay.

Before we begin, I will review a Safe Harbor statement, which can be found on Slide 2 of the presentation. Management's comments today will contain forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995. Information about the potential factors that could affect the company's results is available in the Risk Factors as updated in the company's SEC filings.

Also, please note, the company uses some metrics not in accordance with Generally Accepted Accounting Principles, commonly known as GAAP, to monitor the financial performance of operation. Non-GAAP financial metrics should be viewed in addition to, and not as an alternative for, the reported financial results as determined in accordance with GAAP. Adjusted EBITDA is defined as net income or loss from operations before interest, taxes and depreciation and amortization, impairments and restructuring charges, stock-based compensation, gain on early extinguishment of debt, debt exchange expenses and other income or expense.

Also, during the second quarter, FiberTower recorded revenues associated with early termination liability or ETL of $3.4 million. As this ETL is not recurring revenue, management has adjusted measurement metrics, including revenue and adjusted EBITDA throughout the call and the presentation to exclude the impact of ETL. And reconciliations to this can be found at the end of the presentation.

It is now my pleasure to turn the call over to Kurt Van Wagenen, President and CEO of FiberTower. Kurt, please go ahead.

Kurt Van Wagenen

Thank you, Carolyn, and good morning, everyone. Thank you for joining our call. We issued our second quarter results yesterday. On today's call, I will walk you through our second quarter results, update you on our 2011 priorities and discuss the changes and challenges we are seeing in the business. Then Tom will review the financials and we will open the call for questions.

FiberTower second quarter 2011 results reflect continued solid performance in terms of adjusted EBITDA and liquidity, which remain our key priority. The actions we took to reduce costs last quarter and our continued cost containment efforts resulted in adjusted EBITDA growth from last quarter. Revenues increased from second quarter 2010, however, revenues decreased sequentially as the full impact of the previously announced Clearwire disconnect affected the top line.

Revenues were also impacted by the higher TDM churn we are experiencing as customers evolve their backhaul solutions to Ethernet and pursue competitive alternative. Specifically, we received TDM disconnection notices from AT&T as we disclosed in yesterday's press release.

Our liquidity position remains sufficient at the end of the quarter as we closely managed our cost and working capital while collecting ETLs associated with customer disconnects I just mentioned.

Our cash balance at quarter end was $12.4 million, down from $14.4 million in Q1 and reflects a $1.4 million interest payment in May on our 2012 debt maturities. We remain comfortable that we have adequate liquidity to fund operations and our capital plan through at least June 2012.

During the quarter, we deployed a net 27 new sites, representing 6% growth from the second quarter of 2010, as we continue to execute on new site deployments from previous quarters. These new sites are predominantly Ethernet backhaul services that support next-generation networks for our customers. New sales bookings were up modestly over Q1 and were driven by bandwidth upgrades and new customer locations on our existing network. Ethernet accounted for approximately 25% of new bookings, which is up from 21% in the first quarter.

Our sales approach continues to focus on replacing TDM churn with new Ethernet backhaul services within our mandate to maintain liquidity according to the stricter payback criteria we put in place earlier in the year. Granted, the more stringent return hurdles limit our ability to be flexible in bidding for long-term project and be aggressive given the increased competition. But we believe it is the right course of action as we consider alternatives to address our balance sheet.

Moving to Slide 5. I will briefly discuss second quarter financial highlights. Second quarter 2011 revenue was $20 million, an increase of 11% from the second quarter last year. Revenue decreased 6% from the first quarter of 2011. Average monthly revenue per deployed site grew 4% to $2,003 from $1,925 in the second quarter of 2010 and as we expected, decreased 6% from the first quarter of 2011. Our base of deployed sites grew 6% year-over-year. Please note, revenue per deployed site reflects the loss of revenue from disconnects.

Q2 adjusted EBITDA of $1.2 million increased 35% from the first quarter of 2011 and improved $2.2 million from the negative position in Q2 2010. As part of our capital program, we expended $3.9 million in Q2 and focused these outlays on, one, increasing capacity for our key customers; two, turning up new customers; and three, fulfilling Internet commitments.

In the first quarter, we increased our capital program range to $13 million to $17 million to capture additional short-term payback projects that we have identified. And yesterday, we announced we have narrowed this range to $15 million to $17 million. We have now utilized the majority of our 2011 capital program and we'll focus the remainder of our allocation on projects with 12 months or better payback horizons. We may elect to prudently increase our capital plan as liquidity permits to support opportunities that can quickly add to revenue and adjusted EBITDA.

Moving to Slide 6. I will discuss first quarter operating highlights in more detail. We ended the second quarter with 5,777 billing customer locations versus 6,244 in the second quarter of last year and 6,151 in the first quarter of 2011. Similar to last quarter, this decrease was primarily driven by customer disconnects at various sites, which were partially offset by the addition of new customers at various sites. Our co-location rate remains roughly 2 customers per site and includes the 27 new sites we deployed in Q2, all of which are Ethernet on a mix of fiber and microwave-fed sites.

Now let's move on to Slide 7 where I will discuss our 2011 challenges and priorities. As we have discussed with you before, the dynamics of the wireless industry are undergoing a period of accelerating change as evidenced by the proposed AT&T-T-Mobile merger and the increased level of competition we are experiencing.

Competition is coming largely from incumbent local exchange carriers and cable companies that are extending their fiber networks to cell sites. While untapped new sales opportunities remain for FiberTower's backhaul services, this change is creating increased churn on our legacy network, which we expect to continue and puts considerable near-term pressure on our ability to grow revenue and maintain positive adjusted EBITDA.

However, the industry is also evolving to a point where carriers are increasingly seeking microwave backhaul solutions to serve sites that are difficult to reach with fiber. This increased interest in, and appreciation for, microwave solutions creates a new long-term opportunity to satisfy demand by extending microwave lengths or [ph] fiber-fed sites and deliver high capacity, Ethernet backhaul at these difficult-to-reach sites.

Given our deep industry relationships and our microwave technology leadership, including recently developed high-capacity radios, FiberTower is well-positioned to capture this opportunity and we have made this a priority within the business. More specifically, and as we reported previously, we have partnered to develop an ultrahigh capacity, multichannel, reconfigurable radio, or MCRR, designed to operate in our unique 24 gigahertz licensed spectrum.

After successful testing, this radio became available on July 1 and can serve as a method of future proofing cell sites with high capacity, cost effective backhaul solutions. While we are now beginning to offer this solution to customers, we are still in the early stages of developing this model as we fine tune our approach based on customer feedback.

In summary, our primary focus this year is to maintain sufficient liquidity to support our business and our capital plan, and we believe we have sufficient liquidity to fund our operations and our capital plan through June of 2012. While remaining adjusted EBITDA-positive for the full year continues to be an objective in 2011, it also continues to be a challenge that we would do our best to mitigate with vigilance over cost and careful planning and execution.

We will continue to actively work with all of our customers to leverage our experience, expertise and strong relationships as we partner to support their Ethernet migrations and to capture opportunities that increase their coverage with microwave extensions as we seek to find potential funding solutions that enable us to better support their growing backhaul needs. Now I will turn the call over to Tom for a review of the financials.

Thomas Scott

Thank you, Kurt. Good morning, everyone. I'll begin with a review of our financials on Slide 9. Second quarter 2011 revenue grew 11% to $20 million compared to $18.1 million last year and decreased 6% sequentially. Second quarter revenue was comprised of recurring existing business, organic growth, new sold locations and revenue from new billing sites. Second quarter revenue decreased from the first quarter of 2011 primarily as a result of customer disconnections.

As we reported yesterday, during the second quarter, we received service terminations from Clearwire and AT&T, representing approximately $951,000 in monthly recurring revenue and $8.3 million in ETL. The Clearwire terminations were previously announced. The AT&T terminations are related to the increased level of TDM churn we are experiencing and mentioned last quarter as carriers migrate to Ethernet. Relative to AT&T, we received disconnection notices representing approximately $517,000 of monthly recurring revenue and collected $1.4 million of ETL revenue, which was partially offset by new growth.

Cost of service revenue increased 25% to $19 million, or 95% of revenue net of ETL for the quarter ended June 30, 2011. This compares to $15.2 million or 84% of revenue last year. Included in the 2011 figure is $3.1 million related to the write-off of excess equipment compared to a $0.9 million impairment charge in the second quarter of 2010.

Excluding the write-offs, cost of service revenue increase was predominantly driven by a $1.5 million increase in fiber service provider charges reflecting growth in Ethernet services and fiber network expansion fueled by new business and a $0.4 million increase in site rent expense, reflecting the addition of 199 new deployed sites during the past 12 months.

Sales and marketing expense decreased 43% to $0.6 million or 3% of revenue compared to $1.1 million or 6% of revenue in the year-ago quarter as we incurred lower sales commission and other payroll-related expenses. General and administrative expense decreased 26% to $3.4 million or 14% of revenue compared to $4.6 million or 25% of revenue a year ago.

Interest expense decreased 3% in the $3.4 million in Q2 from $3.5 million a year ago. Our second quarter net loss was $11.5 million compared to a net loss of $13.1 million in the second quarter of 2010 and a loss of $10.1 million in the first quarter of 2011.

Adjusted EBITDA for the quarter improved $2.2 million to $1.2 million compared to a negative $1 million of the same period a year ago, and increased 35% from the first quarter of 2011. Capital expenditures were $3.9 million compared to $6.5 million in the second quarter of 2010 and $7.4 million in the first quarter of 2011, respectively. This planned sequential decrease in the second quarter capital investment is in accordance with our 2011 capital plan and focused on committed project, including success-based new site build, capacity adds/upgrades to our current network, investment of Ethernet services and new locations to existing sites.

During the first half of 2011, we expended $11.3 million in capital investment, representing the majority of our 2011 capital plan for the year and capital expenditures should continue to decrease in the third and fourth quarters as the business completes its current capital deployment projects. In keeping with our liquidity position, we are focused on capturing additional rapid payback projects that we expect to contribute to revenue and adjusted EBITDA within 12 months. Now on to Slide 10 to discuss cash flow.

During the second quarter of 2011, cash consumption was $2 million compared to $5.3 million in Q2 2010. The net cash provided by operations was $2 million compared to $1.2 million for Q2 2010. Capital expenditures in the second quarter of 2011 were $3.9 million. Virtually all of this capital spending was devoted to our success-based investments and growth for our business. At the end of the second quarter, our consolidated unrestricted cash and cash equivalents was $12.4 million compared to $21.3 million at year end 2010.

Our 9% Convertible Senior Secured Notes reverted to cash interest paid on May 15, 2011, and on May 16, we paid $1.4 million interest payments in cash. As Kurt mentioned, we have narrowed the range of our expected 2011 capital program to $15 million to $17 million from $13 million to $17 million. During the second half, our capital plan will continue to focus on meeting customer commitments resulting from our sales in previous quarters and making selected additional investments in success-based opportunities.

Let's move to Slide 11 to discuss our second quarter sales or performance. During the second quarter, market level EBITDA margin contracted from 37% in the first quarter to 33% in the second quarter primarily as a result of terminations. Because of our cost containment actions, we are able to expand corporate level adjusted EBITDA margins in a period of declining revenue. We expect the contract terminations received to date to reduce our current average multi-revenue per site by approximately $150 to $200. This expected pressure on the revenue line has the management focused on controlling costs and developing new sources of revenue growth.

At the operating level. Our near-term focus remains on supporting our revenue line, executing consistently and carefully managing our cost and working capital. We continue to implement our capital plan that is devoted to fulfilling customer commitments, completing earmarked projects and pursuing short-term payback projects that are quickly additive to our financial results. We're also continuing to pursue strategic funding opportunities to support the business. With that, I will return the call to Kurt for final remarks.

Kurt Van Wagenen

Thanks, Tom. In closing, the company remain focused on profitability and liquidity conservation in Q2. We are working to address the challenges we are facing by leveraging our unique expertise and positioning to capture backhaul opportunities in the evolving wireless industry landscape. Because we continue to be engaged in a number of confidential processes related to alternatives that support our business, we remain limited in what we can share with you today and ask for your understanding during the Q&A session. We will provide updates as we have them in the future. That concludes our prepared remarks. Operator, we are ready to begin the Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of Randy Laufman with Imperial Capital.

Randy Laufman - Imperial Capital, LLC

I just wanted to dive into a little bit more detail on the AT&T cancellations. The cancellations you received to date, obviously through July, you had some additional ones. Have you received any indication that there are more to come? Do you think that this is the extent of it? Can you give us an idea of what the pipeline with AT&T looks like?

Kurt Van Wagenen

We can speak to that a little bit, Randy. We reported in our release yesterday everything that we have to date, including subsequent to the quarter end, disconnects that we've received from AT&T. I think we need to acknowledge that AT&T does have an aggressive initiative underway to convert TDM backhaul services to Ethernet services over time. So we would expect that those TDM services would be converted to Ethernet services over time. What I will say is, we are in active discussions with AT&T to be able to support their Ethernet backhaul needs, which are significant over time. So our ongoing relationship with AT&T is very active, discussions are very constructive. But we would caution folks on the call that certainly, we are aware and what we are seeing is an aggressive campaign to convert TDM services to Ethernet over time.

Randy Laufman - Imperial Capital, LLC

Got it. And I guess in regards to the loss business, were those jobs that actually the company bid on and attempted to keep from AT&T that it was a pricing issue as you kind of mentioned with your 12-month payback requirement, you've had to be pretty firm on pricing. Was it jobs that you actually bid on our was it just AT&T's choice to leave the network?

Kurt Van Wagenen

Randy, we typically don't comment about the specific discussions we had and specific opportunities, customer opportunities that we bid on and reasons for winning or losing that business. What I would tell you is, we're seeing a significant amount of disconnect as we reported. It is associated with their TDM conversion to Ethernet. The competition, as I mentioned in my prepared remarks that we're seeing is largely from incumbent local exchange carriers and cable companies, I won't say that's specific to AT&T, but that's the competition we're seeing in our markets for all of the opportunities we bid on. We're very, very active with AT&T, they remain our largest customer. And obviously, pro forma T-Mo will be a higher percentage of our revenue from when that transaction closes. So we remain very, very active with them and are in constructive discussions to be able to support their Ethernet needs on a backhaul basis going forward, which again we believe are significant.

Randy Laufman - Imperial Capital, LLC

Okay. Tom, you mentioned expected reduction in average monthly revenue of $150 to $200. I'm just wondering if that's reflecting all of the cancellations to date, and if that's kind of a reduction from the number reported in this quarter or a different number?

Thomas Scott

What we looked at Randy was through the first half of 2011, the overall growth disconnect number that we received was approximately $1.5 million in monthly recurring revenue. Through the end of July there was an incremental portion just under $400,000 bringing the number for the year, $1.8 million. Now a subset of that number has been offset by new growth that we received the first half of the year. So in providing that range of $150 to $200 on a per site basis, we baked in the growth disconnect number plus our view of what offsets we've received from new growth and expected growth continuing through July and the rest of the third quarter to establish that range.

Randy Laufman - Imperial Capital, LLC

Got it. So is it safe to say that the $150 to $200 is a reduction off of first quarter?

Thomas Scott

Off of second quarter.

Randy Laufman - Imperial Capital, LLC

Off of second quarter. Okay. And then I guess lastly, just on the cost side. You guys took down SG&A quite a bit this quarter. I was wondering if there's any additional cost containment efforts going on and if you think that, that number is going to continue to come down?

Thomas Scott

In that section, Randy, one of the things that we noted was in the second quarter, we are able to keep the business, adjusted EBITDA positive during a period of declining revenue by, number one, the SG&A reduction but also for looking up for opportunities on our direct site cost or on the cost of service where we could eliminate expenses that are no longer required based on the lower capacity. We are continuing to analyze ways to keep the business adjusted EBITDA positive that include everything from new sources of revenue growth to incremental cuts on cost of service, as well as other opportunities within SG&A. The one thing that we are definitely focused on though is we're not going to be able to cut our way to growth. So we're looking to make sure that we have adequate resources at the firm's disposal to continue to have productive dialogue with our carrier customers as we do look for ways to develop Ethernet products on some of the harder-to-reach sites.

Operator

The next question is from the line of Eric Reubel with MTR Securities.

Eric Reubel - Miller Tabak Roberts Securities, LLC

A couple of questions if I can. As you engage with customers, I'm sure that they want both higher coverage consisting of new tower deployments as well as Ethernet capacity. Can you give me a sense of where you are with respect to Ethernet conversion as a percentage of total towers? And how much capital is required to upgrade the remaining portion of the tower footprint that has not been made Ethernet-capable?

Kurt Van Wagenen

I'll start and then Tom can answer the questions about capital requirements. I think we've publicly reported in the past, we're right at about 20% of revenue, billing revenue on average about Ethernet-related, all right. And in my prepared remarks, I reported that our second quarter bookings consisted of 25% of the bookings were Ethernet-related. So the proportion of bookings that Ethernet-related has been increasing over the last 18 months or so, as has the proportion of billing revenue but today stands at about 20% of our overall billing revenue.

Thomas Scott

Eric, to your question, so Kurt was noting 20% of revenue is Ethernet, approximately 1/3 of our sites have an Ethernet connection as of today. When we think about what is required to upgrade a site to Ethernet, there are really 2 considerations that come in to play. Number one is, do we have the equipment at the site that enables us to provide an Ethernet handoff at the ANC [ph] location to the carriers? The second consideration that comes into play is do we have adequate capacity at the site to provide the aggregate amount of bandwidth that the carrier customer is looking to purchase? As we go through that analysis, on the low-end, when we are just looking at providing an Ethernet connection to a site where there is adequate capacity, we are looking at its incremental capital investment of approximately $5,000 to $7,000 and that largely consists of the soft cost to go in there and provide the labor, as well as putting in an Ethernet switch or NIC to make that handoff. In cases where we're putting in incremental capacity, as well as the Ethernet connection, you can be looking at a number of approximately $450,000 per site, which includes either a fiber connection or incremental radio capacity at that site. Now the one thing that I'll caution that's on an unit economic basis, the one thing I'll caution is, as we look across our portfolio of 3,000-plus sites, we're just simply not going to be overhauling the entire network to bring excess capacity or extra capacity, as well as Ethernet to all the sites. The return profile just does not always makes sense. So we are going through a relatively selective process right now where, as carriers, entertaining conversations with carriers about Ethernet conversion, we are assessing what is the incremental return available to us as we put in that capital. And today, given the liquidity of the business, we're assessing those opportunities on a 12-month payback horizon.

Eric Reubel - Miller Tabak Roberts Securities, LLC

Okay. With respect to AT&T, obviously they are a very large customer, and as I understand, the pricing environment for Ethernet sort of -- let's say if you were to migrate from a DS3 switch or 45 megabits roughly of capacity, of TDM capacity, to 100 megabits of Ethernet that they may or may not be, it might not be a one-for-one, there's probably some increasing cost above one-to-one, but there is not a tremendous price increase by making that migration. I wanted to ask if I could understand -- if I'm thinking about that correctly? And then with respect to AT&T, in order to keep the revenue constant, what sort of the hit rate that we can assess between making that migration for the existing TDM to Ethernet backhaul capability for AT&T? How successful are you in getting them to convert onto your network?

Thomas Scott

Let me speak on the first part in terms of the overall pricing environment. In assessing where price points are from the historical TDM basis to where they are now on an Ethernet model, there has been a considerable amount of price contraction on a per megabit basis. As we look at 100 meg pricing, there is very little incremental revenue relative to a DS3 pricing, which really forces just about any carrier that's out there to look at this on an incremental revenue compared to incremental capital framework as they're looking at these opportunities. That incremental revenue continues to be a function though, on a price point basis, of what specific geography that you are dealing with. And within that specific geography, where those sites happen to be relative to other competitive alternatives. So even though we're certainly seeing a fair amount of price contraction on certain sites, you have to take a very site by site specific view of the world to figure out where this business, in particular, should be investing its capital dollars. With respect to the second part of your question in terms of where we are with AT&T. We're at very early stage in the conversations with AT&T in terms of conversions to Ethernet. We have a 2-part conversation that's going on with all of our customers, including AT&T, which is -- what's the framework, what sites make sense for us to convert from TDM to Ethernet on our existing 3,000-site footprint and then what is the model where it makes sense to provide Ethernet services on some of harder-to-reach sites. And as Kurt indicated in prior calls, as well as on this call, a lot of the dialogue that we're having with customers on new business involves conversations where we're asking them to put some upfront cash into the deal to enable this business to expand the footprint given the current liquidity profile.

Kurt Van Wagenen

Let me just add a few other comments on that. Eric, we tend not to view it as on a static basis what s the hit rate of how many sites we need to convert and how much Ethernet revenue at the existing sites we need to convert. I mean, clearly and obviously, we are very mindful and very focused on trying to convert as much of the TDM business as we can profitably with our largest customers. So I mean, we're certainly having those conversations. I think the bigger opportunity -- and I kind of alluded to this in my prepared remarks, the bigger opportunity with large customers like AT&T and other customers that we're talking to that have significant bandwidth demand over time on all of their sites, particularly these hard-to-reach sites, are microwave expertise. There's been an increased interest in our microwave solutions. And in particular, these 1 gig radios that we recently announced. I mean what's exciting about the 1 gig radios, for us and for our large customers, is not only the bandwidth that we can provide to meet their needs over time on a relatively cost-effective basis. When you think about bandwidth solutions cost over time, but also the fact that there are no geographic constraints for us with respect to our existing 13 markets where we have core fiber network in place. We can deploy these microwave lengths virtually anywhere in the nation for customers where they have fiber-fed donor sites for us to link off of. So it creates a very sizable opportunity. Obviously, there's no guarantees around the order of magnitude associated with these solutions but we're certainly having large-scale solution discussions with a lot of our customers related to this product set.

Eric Reubel - Miller Tabak Roberts Securities, LLC

So if I could just ask one follow-up question on that notion. Let's say that a carrier was operating their own backhaul from fiber-enabled tower facility to a ring. The carrier might engage you with the high-capacity gigabit radio to operate a microwave, additional component to that and manage it from your network operations for them, without them getting involved in the microwave portion of backhaul.

Kurt Van Wagenen

That's correct, Eric. I mean we've always believed and have stated that microwave is a critical tool in the toolkit, providing high-capacity backhaul solutions on a nationwide basis and particularly in Tier 3 and Tier 4 cities where there's just not the density of fiber networks and many more sites that are very, very difficult to reach with fiber cost-effectively. This microwave solution becomes even more attractive in those markets. And that's where a lot of the carriers are now focusing their attention, given that many of the Tier 1 markets have solutions in place.

Eric Reubel - Miller Tabak Roberts Securities, LLC

Can ask one more question, and then I'll get back in the queue. I'm going to go back, and I'm sorry to focus so specifically on customers. But since there are only a handful, it's important to know what they are thinking and we talked a good deal about your largest customer. I wanted to ask if you could give us an update on where you are with Verizon. Back in March of last year, you press release work that you were doing with Verizon in the Midwest, I think the Ohio and Michigan. Verizon is, as I see, a company that you have limited exposure to -- they're falling into the bucket of other customers that are less than 15% of revenue, and given that the model really relies on the operating leverage to add new customers to already enabled sites. Can you give us a sense of where you are with this program in Michigan and Ohio and whether or not you're getting traction for Verizon. As I understand they're really active with 100 megabit RFPs for 2012, and would like some color that.

Kurt Van Wagenen

I'll share with you what I can given my earlier comment that we don't talk about specific conversations with specific customers on specific opportunity. But we're largely complete with the initial order that we won last year, and we're very, very active with Verizon in terms of providing solutions or proposing solutions to meet their Ethernet backhaul needs to support their LTE deployments in the various regions.

Operator

[Operator Instructions] The next question is from the line of William Pohlman [ph] with Bren Corp. [ph]

Unknown Analyst -

I wonder if you could just talk a bit about timing as it relates to these confidential processes and kind of when you think we might have a more substantive update as to how things might look. And I'm sure you guys are anxious to get this completed as well as it relates to your discussions with carriers and just kind of moving forward here?

Thomas Scott

I think the limit of what we can really say about timing is that we're providing full disclosure on material updates on the business on as timely a manner as possible. So with respect to material events such as the disconnects we've experienced, we're getting that information out very quickly. With respect to processes that we're working with customers, not only is it in all of our various stakeholders' best interests for these to move swiftly. We're certainly pushing those along. It's definitely premature for us to put a time line out there in terms of actual dates where we will have a more complete update. But this is the highest priority of the management team in terms of developing these relationships with the carriers such that we've got much more visibility in terms of how this business is going to unfold over the next few quarters.

Unknown Analyst -

Got it, got it. And I'm sorry, I think someone may have asked this question a bit earlier, but in terms of core OpEx, kind of for the quarter obviously we saw a nice sequential decrease. Do we feel like there's more opportunity there in terms of optimizing that level in the cost structure?

Thomas Scott

There's a couple of things that we're doing well. In terms of thinking through the cost structure, we really have gone through 3 elements of cash spending. So we are somewhat limited in our ability to scale down cost of service revenue at the same speed of which we have seen revenue declines over the last quarter. However, we have been very aggressive in terms of turning down sites where we have lost customers and have the ability to exit leases. We've been very aggressive in terms of analyzing our fiber service provider costs to make sure that as leases come up on term that are no longer required we are turning those down. So we have some discretion in the cost of service revenue and it’s something that we certainly stay focused on. In terms of SG&A, we are much more off balancing act there. We obviously implemented a reduction in force in early March, back in the first quarter that was intended to enable the business to continue to stay adjusted EBIT positive at levels that were appropriate. However, we were also balancing that with the need to continue to develop capabilities for the carrier customers, such that new products will enable us to restart revenue growth in future quarters. There are obviously some opportunities in that bucket but right now, we feel that we're doing everything we can to hold the cost flat and continue to develop capabilities. The third area that we analyze was capital spending. And we had a base of projects at the beginning of the year that offered appropriate returns for this business. However, we continue to push on all aspects of these capital projects to bring the overall number down within the budget and continue to evaluate those numbers on a weekly basis to make sure that we're pulling in cash wherever possible. So these are really the 3 buckets that we've identified and continue to work towards the next 2 quarters.

Operator

The next question is from the end of Swaraj Chowdhury with Dalton Investments.

Swaraj Chowdhury

So what is your plan, I mean, you were saying that you will -- the current cash or current liquidity will help you to remain in operation until June 2012? Does that include about $6 million of ETL cash that you are going to receive?

Thomas Scott

What is the question? The question is what is the plan with respect to liquidity?

Swaraj Chowdhury

No, no. The question is, the liquidity that you are assuming will help you to remain in operation until June 2012, how much of ETL cash receipt further receipt in the future that you are assuming in that?

Thomas Scott

In terms of -- let me try and break this down in terms of how we think about our going concern projections. So number one, the business analyzes our ability under a series of assumptions to go out over the next 12 months and beyond and continue to operate as a going concern. What we do is we take a look at the ending cash balance of $12.4 million as of June 30, 2011. We analyze the $5.6 million in ETL cash that we received in July. We also added to that the $4.1 million in incremental ETL that we expect to receive in August as part of disconnect that we received in the month of July. We also run a series of cash flow views based on our committed capital plan, which is within that $15 million to $17 million range plus the capital that was already spent in the first half of the year. It was all interest payments that are part of the business. And then we take a look at testing our revenue and adjusted EBITDA lines to understand what is our ability under a variety of different disconnect assumptions to continue operating as a going concern. So there are certainly scenarios that we look at that have significant ETLs in them that offsets the decline in monthly recurring revenue. And we also looked at the view of the world where we get much fewer disconnects and don't receive ETLs. Under both of those constructs, the business has sufficient liquidity to continue operating as a going concern through June 30, 2012.

Swaraj Chowdhury

Okay. Yes. That certainly helps. I mean, that's what I was interested to know. So you got $5.6 million and another $4.1 million you expect to receive on ETL. So that's about almost $9.7 million or $10 million of liquidity after the second quarter.

Thomas Scott

That is correct.

Swaraj Chowdhury

Okay. So the question is that about a year liquidity, so are you proactive and have you hired any restructuring advisor to see how you will restructure your balance sheet?

Thomas Scott

What I would say with the business is doing is we are continuing to evaluate all options that are in front of us. The first priority of this business right now though is developing these customer relationships specifically with respect to Ethernet conversions and bringing Ethernet to harder-to-reach sites. Any conversations that involve capital structure are further down the road because the key issue in front of the business today is remaining relevant with carrier customers through a period of high competition and enormous volatility. As we get better clarity from these customers in terms of the size of the opportunity and where we fit within that context, that then enables us to have conversations around what form should future financings take, and what's the best structure to have the business oriented around in the future.

Swaraj Chowdhury

Okay. And I believe you have a carve out of about $20 million as a senior debt. Do you plan to use that? Is there any problem of issuing those debt if it is necessary beyond June 2012?

Thomas Scott

The business does have a $20 million carve out as part of its 2016 indenture package. That is a portion of which is senior to the 2016 and a portion of which is paired with it. There is no issue with respect to business accessing that carve out, as long as it remain in compliance with the rest of the indenture. We do not really have a need to access incremental liquidity at this point in time. As we looked at how we're managing the business for cash over the next 12 months, we believe that we have sufficient liquidity to operate as a going concern without accessing any line of credit there. The view of this team is to continue to develop, discuss more opportunities and then assess whether or not it makes sense to access that form of liquidity and grow the business.

Swaraj Chowdhury

No, that's why I wanted a little clarification on. Because you were saying you expect to be a going concern until June of 2012, but I saw that you didn't expect this, you were not anticipating drawing this $20 million. Does that mean you think -- I mean, of course your performance is good but you lost a customer. Is June 2012 assumptions time to grow into a cap structure you believe so that you don't have to use additional debt?

Thomas Scott

In terms of the $20 million is not included in the going concern projection, since that is not a committed financing package. So we do have sufficient liquidity over the next 12 months excluding access to that capital that's available. In terms of whether the next 12 months is sufficient or not, it's premature to comment on that. We believe that we have opportunities in front of us to continue developing with customers and that, that liquidity in that time frame offers us the appropriate runway to have those discussions.

Operator

The next question is from the line of Romeo Reyes with Jefferies & Company. [Operator Instructions]

Romeo Reyes - Jefferies & Company, Inc.

Just to clarify on the liquidity here. So if we take the $12.4 million plus the $5.6 million that you already received from AT&T plus the $4.1 million that you expect to receive, you get about $22 million of cash, correct?

Thomas Scott

Correct.

Romeo Reyes - Jefferies & Company, Inc.

Plus you have $6 million of restricted cash that's going to be used for interest payments on the 16?

Thomas Scott

That's correct.

Romeo Reyes - Jefferies & Company, Inc.

So that gets you to $28 million of cash, pro forma. Secondly, I'm sorry if I missed this, Tom, but did you go through kind of what your exit normalized revenue and EBITDA pro forma for backing out the $951 million and backing out the $304,000 from July?

Thomas Scott

We have not provided that number now.

Romeo Reyes - Jefferies & Company, Inc.

The $951 million that you have that Clearwire and AT&T terminated, $951,000 of MRR. How much of that did you book in Q2? Did you book any of it or did they give you notice like halfway through the quarter? How much of that $20 million that you have is kind of a recurring number? Is that $951 million in there? Is there $3 million that we should back out of that number or no?

Thomas Scott

The $951,000 that occurred through the first half of the year was spread throughout the quarter. The Clearwire disconnects largely happened early in the quarter, in the month of April. Whereas the AT&T disconnect occurred pretty much throughout the quarter.

Romeo Reyes - Jefferies & Company, Inc.

So should we back out $450,000, $500,000 per month?

Thomas Scott

I wouldn't tend to use them at the quarter convention on the numbers that we provided.

Romeo Reyes - Jefferies & Company, Inc.

Okay. And then I guess, so if we can back out, $450,000 and then we can back out the $300,000 because that was obviously early in July from AT&T, $300,000 or $400,000?

Thomas Scott

That's correct.

Romeo Reyes - Jefferies & Company, Inc.

So we'd have to back out $750,000 or so from your $20 million exit number?

Thomas Scott

That's correct.

Romeo Reyes - Jefferies & Company, Inc.

Okay, that sounds good. And then when you look out at the end of the year, I think you've already spent $11 million of CapEx, so your guidance towards $16 million plus or minus $1 million. So you're looking at around $5 million of incremental CapEx by the end of this year?

Thomas Scott

Correct.

Romeo Reyes - Jefferies & Company, Inc.

Okay. So would you expect cash flow from operations to be roughly breakeven for the remainder of the year?

Thomas Scott

We expect to be roughly breakeven.

Romeo Reyes - Jefferies & Company, Inc.

Cash flow from operations?

Thomas Scott

Cash flow from operations, correct.

Romeo Reyes - Jefferies & Company, Inc.

Before CapEx, right?

Thomas Scott

Before CapEx.

Operator

Ladies and gentlemen, that is all the time we have a question and answers today. I will turn it back to management for any closing remarks.

Kurt Van Wagenen

Thanks everybody for joining our call today and that concludes our call.

Operator

Ladies and gentlemen, that does conclude our conference call for today. Thank you for your participation and you may now disconnect.

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