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John Finke – President and CEO

Jennifer Spaude – Director of IR and Marketing

David Christensen – SVP and CFO

Presentation

Hickory Tech Corporation (HTCO) Q3 2011 Earnings Call November 2, 2011 10:00 AM ET

Operator

Good morning. My name is Lindsey, and I will be your conference operator today. At this time, I would like to welcome everyone to the HickoryTech's Third Quarter 2011 Earnings 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. I would now like to turn the conference over to Jennifer Spaude, Director of Investor Relations and Marketing. You may begin.

Jennifer Spaude

Good morning, and thank you for joining HickoryTech's third 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 will find a presentation for today's call which we hope you will find helpful in your analysis.

Now I'd like to draw your attention to our Safe Harbor statements. 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, 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 are cautioned not to place undue reliance on these forward-looking statements made during this conference call, which represents estimates as of November 1, 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 of which could affect future results. More information on potential risks and uncertainties is available in the company's recent filings with the Securities and Exchange Commission, including HickoryTech's Annual Form 10-K report, Quarterly Form 10-Q report, and Form 8-K reports.

This presentation also contains certain non-GAAP financial measures. Reconciliation of these non-GAAP measures to the 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 recorded for playback purposes. The audio will be archived on HickoryTech's Investor Relations website for the next 30 days. Following management's discussion today, we will open the call to a Q&A session.

At this time, I'd like to turn the call over to John Finke.

John Finke

Thank you, Jennifer. Good morning, everyone. I'm pleased to share with you HickoryTech's Third Quarter 2011 results and highlight the progress we've made with our strategic initiatives. Today, I will cover several key metrics and highlight several news items and events from the past quarter.

Dave will then walk you through our financial details for the third quarter. First off it was an eventful quarter and I'm pleased with our results. Revenue totaled $45.2 million for the quarter, up 4% from a year ago. We achieved continued strong growth in equipment sales, as well as in our fiber and data services and broadband services.

Operating income totaled $6.3 million and net income for the third quarter totaled $3 million. Net income was down year-over-year partly due to $1.9 million release of income tax reserves and $1.1 million net income from a fiber construction project in the third quarter of 2010, both of which increased net income in 2010.

Our third quarter results show continued positive progress with our long-term strategy with focuses on maintaining and leveraging our telecom business, growing our business and broadband services and pursuing new growth opportunities. As we work hard to achieve our long-term goals we continue to stay focused on managing our strong cash flows and leveraging investment in key strategic growth areas. While consumer business remained stable we continue to see solid demand for our business services.

As we extend our fiber network we will look for new opportunities to grow both organically and through acquisitions that will benefit HickoryTech across multiple customer segments in new and existing markets. In the third quarter, our business sector and our broadband revenue streams accounted for nearly three quarters of our total revenue and 70% on a year-to-date basis. We believe our strategic shift in focusing on business and broadband services has positioned HickoryTech for sustained and reliable growth.

We continue to make investments in growth opportunities and we broke ground on our Greater Minnesota Broadband Collaborative Project in the third quarter, which will further expand our fiber footprint in northern Minnesota. Now reviewing our business sector results, which represents our Enventis branded markets. Third-quarter business sector revenue totaled $28 million, up 10% year-over-year primarily driven by increase in equipment and support services and supported by solid growth in our fiber and data services.

Fiber and data revenues totaled $11.4 million, up 3% from the previous quarter, however down 14% year-over-year. A unique fiber construction project last year added $3.3 million of revenue and $1.9 million of pretax income to the fiber and data product line in the third quarter of 2010. Excluding this project fiber and data organic revenue growth was 14% in the third quarter of 2011.

Our fiber and data revenue growth is driven by strong Ethernet and wholesale carrier services as well as our focus on growing our small and medium business customer base. We are actively engaged in coding Ethernet backhaul solutions to wireless providers for tower bandwidth upgrades and have had some success in this area. As such we leveraged our expanded fiber network and the overall demand for higher bandwidth and we feel confident we can continue to grow our fiber and data line of business into the future.

Now turning to the equipments product line within the business sector, revenue within our equipment product line was up 35% totaling $16.4 million. While equipment sales fluctuate quarter-to-quarter based on the timing of sales and revenue recognition, we have developed strong customer relationships and a good reputation in our industry to generate repeat sales from existing customers as well as attracting new customers. We entered the final quarter of the year with a strong sales funnel and a solid backlog.

Equipment support services were relatively flat year-over-year. We aim to position support services with every equipment sale in an effort to increase the recurring revenue within the equipment product line. In the third quarter, we also announced the enhancement of our total care support offering, which we offer as a single point of contact for support and monitoring of Cisco Systems.

In October, Enventis was a recognized as a Cisco TelePresence Advanced ATP Plus partner having fulfilled the requirements to sell, deploy and support Cisco’s TelePresence video products and solutions. We’re even better positioned to offer end-to-end communications and collaboration solutions now with video being the next evolution of these services. At this time we are one of two in the United States with this prestigious designation.

Now moving to our telecom results, third quarter telecom revenues totaled $17.9 million flat compared to the previous quarter and down 4% from a year ago. Our telecom sector continues to produce strong cash flows. Declining legacy services are partially offset by continued growth in broadband services. Broadband services revenue, which includes DSL, data, digital TV, and Internet services totaled $5.1 million, up 5% from a year ago.

We continue to invest in our broadband services and recently launched TV apps offering our customers access to news and information on demand via our interactive media pages. We're also upgrading several communities to our IP TV platform enabling advanced features such as high-definition and DVR services. We remain focused on customer retention and our current promotion offers value to both new and existing customers.

As I mentioned earlier we broke ground on our Greater Minnesota Broadband Collaborative project in August. This $24 million project is funded by $16.8 million grant from the US Department of Commerce’s national telecommunications and information administration. Additionally we will invest approximately $7.2 million over a two-year period. The 2011 portion of this investment is included in our Capex guidance for the year. This project involves the construction of two high-capacity fiber builds in northern Minnesota as well as last mile fiber builds in southern Minnesota.

The majority of the first fiber route will be completed in 2011 and we will begin construction on the northwestern Minnesota route in 2012. Upon completion of this project in 2013 we will add approximately 430 fiber route miles creating one of the most extensive fiber footprints in our region. This added broadband network will provide rural communities across Minnesota with access to affordable, high-capacity broadband services enabling telemedicine, economic development opportunities, and improves connectivity to state and local government offices.

Likewise the fiber route will serve customers in the healthcare industry, education and will create opportunities for us to offer HickoryTech business services in communities along these routes. Other key highlights for the third quarter included the declaration of a fourth-quarter dividend of $0.14 per share, a 4% increase. We celebrated a 10-year anniversary of our SingleLink Unified Communications solution as a true pioneer in offering hosted voice over IP services. We announced a plan to repurchase up to $3 million of HickoryTech's common stock and we signed a favorable new financing agreement offering our company low-cost capital for growth initiatives.

Now, I'd like to turn the call over to David Christensen, who will cover the details of our financial performance in the third quarter as well as more information on the stock repurchase plan and our new financing agreement. David?

David Christensen

Thank you, John. Good morning. Third quarter 2011 revenue grew $1.8 million or 4%, due to the strong equipment and support sales and continued growth in fiber and data services. Equipment and support revenues increased $4.3 million or 43% in the third quarter. Specific to total services revenues, which showed $2.5 million or 8% decrease from the same quarter last year. It is important to note that the third quarter of 2010 contained $3.3 million of non-recurring revenue related to a joint construction project to extend our fiber network.

Excluding this non-recurring revenue from last year, our core services revenue would have realized a 2% growth rate in revenue for the third quarter. Services revenue is a broad mix of our fiber and data business and our legacy telecom services. For the sixth consecutive quarter, we have delivered more than $10.3 million in EBIDTA, this most recent quarter providing $12.2 million.

Our third-quarter 2011 EBIDTA represented a 27% EBIDTA margin on our overall revenues of $45.2 million. This was similar to the fiscal 2010 margin of 26% and we're pleased to be able to hold or improve our margins as we progress through these years of building and developing new markets under our organic growth plan. Total cost and expenses in the third-quarter 2011 increased by 5% from a year ago. Year-to-date costs and expenses were up just 4% over 2010 as we balance ourselves between our growth initiatives and maintaining our legacy operations.

Consolidated pretax income totaled $4.9 million, down 7% from the comparable quarter in 2010. The nonrecurring revenue related to joint construction project to extend our fiber network in 2010 contributed $1.9 million of pretax income in 2010. Excluding this construction project from last year third-quarter pretax income would have increased by 43%.

Consolidated net income totaled $3 million, a 41% decrease from one year ago. In the third quarter of the previous year we made a $1.9 million income tax reversal due to the expiration of time sensitive accruals effectively adding to last year's net income. Tax reversals in the third quarter of 2011 were small at $63,000 and for the year-to-date the total reversals of income taxes were $406,000. Excluding the tax releases in years, and also excluding the $1.1 million benefit of the fiber construction project in 2010, net income for the third quarter of 2011 would be 44% higher than the same quarter in 2010.

On a year-to-date basis excluding the income tax reversals and the fiber construction project, net income was 24% higher for the nine-month period in 2011 versus 2010 driven by increases in recurring revenue business, excellent equipment sales and a decrease in interest expense.

Now I’ll review our business sector operating results. My comments are from the pre-elimination numbers found in the business sector recap of our earnings release. Business sector revenues were up 10%. We have two product lines in our business sector. First fiber and data services revenue totaled $11.6 million in the third quarter, a decrease of $1.8 million or 14% from the same quarter in 2010.

However, I will remind you that the third quarter in 2010 we were in the peak of a nine-month project to expand our fiber network to Sioux Falls and Fargo. This fiber expansion project added $3.3 million of nonrecurring revenue for the third quarter of 2010. This was a unique project for us last year. Excluding this nonrecurring revenue from 2010 our core recurring fiber and data business would have realized a growth rate of 14% for the third quarter, which is more indicative of our prior growth rates.

The underlying revenue increase for fiber and data service in the third quarter 2011 comes from organic growth in our business services. Now moving on to the other product line the equipment product line revenue of $16.4 million increased $4.3 million or 35% compared to the same period last year. Equipment sales were up 43% year-over-year. Equipment support services were relatively flat compared to the same quarter last year but we are striving to grow the equipment support services revenue.

The overall business sector capital expenditures for both product lines totaled $3.2 million in the third quarter of 2011, which is $1.6 million less than the $4.8 million spent in the third quarter a year ago. Last year's fiber construction work started earlier in the year while in 2011 our fiber construction is occurring later in the year. Now moving to telecom operating results, based on the pre-elimination numbers in the telecom sector recap of our earnings release, telecom revenue totaled $17.9 million and was 803,000 or 4% less than the results reported one year ago.

We experienced telecom broadband revenue growth of 5% and 16% from the revenue of our bill and data processing subsidiary, which partially offsets the ongoing declines in the other legacy telecom services such as local service and network access. Telecom costs and expenses decreased 5% for the quarter and are down 1% in a year-over-year comparison due to efforts to streamline the cost of service delivery in our telecom business.

Telecom capital expenditures totaled $2.4 million in the third quarter of 2011 approximately $800,000 more than the same quarter one year ago and the 2011 year-to-date telecom Capex is approximately 400,000 or 7% higher than 2010. We anticipate this level of spending to decline to coincide with the gradual reductions in telecom profitability. In August of 2011 we announced the completion of our new debt financing agreement.

This new $150 million facility includes a $120 million secured term loan and a $30 million revolving credit facility, which is unused as of September 30, 2011. The term in our new facility runs through December 31, 2016. Using the current maturities and a long-term debt classifications on our balance sheet in total we have $120.6 million of total debt including capitalized leases as of September 30, 2011. This represented a slight increase from $119 million of debt at the beginning of 2011.

We continued our strategy of holding a higher level of cash on hand. Specifically we held $11.3 million as of September 30, 2011. Net debt a measure of actual balance sheet strength that subtracts the cash balance from total debt was $109.3 million as of September 30, 2011 and represented a $9.6 million improvement from the net debt position 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 and we see it as a useful statistic for measuring the health of our balance sheet. We continue to operate with a ratio of less than three times debt to EBIDTA as of September 30, which is a key metric in our industry. Our most recent debt to EBIDTA ratio is approximately 2.8:1 as defined in our senior credit agreement using trailing 12 month data.

This puts us on favorable terms for our new senior debt agreement, which currently has a maximum leverage limit of 3.5:1. We feel we are conservatively leveraged and this new five-year credit facility will provide excellent financial support for our future growth plan. Specifically it has an accommodation for up to $50 million of new term debt financing for acquisitions and it also does not specifically restrict our organic Capex levels.

In the third quarter of 2011 we experienced a $359,000 increase in net interest expense compared with the same period last year. We had a $310,000 adjustment in our third-quarter interest expense increasing it to write off the unamortized debt fees of our 2005 debt financing due to the expiration of that old agreement. Under our new credit agreement when a full quarter effect is in place and our run rate interest expense will be approximately $1.3 million per quarter. This is lower than the third quarter 2011 because in this last quarter we have that $310,000 of unique cost from the old agreement, and they're not recurring.

But it is higher than we've been running earlier this year because the new agreement does have slightly higher marginal interest rates. We continue to have favorable financing terms compared to the market. Our interest is priced at 300 basis points over LIBOR at our current leverage levels. We are able to minimize the threat of LIBOR rate fluctuations by utilizing interest-rate hedges which are now in place and give us protection in a laddered amount for at least three more years ending in 2015 and 2016.

Thus overall interest expense for us should be relatively stable for the next several years. Further details of our new debt financing are contained in the SEC Form 10-Q which will be filed later today, and our full credit agreement was filed in our August 8-K filing. We are pleased with our new bank syndicate an arrangement feeling it fits our business plan perfectly. In the third quarter we announced a new company share repurchase program, whereby up to $3 million worth of HickoryTech stock maybe repurchased and retired by the company under normal SEC rules and guidelines.

We have no intent to utilize this all at once. In the third quarter we acquired and retired approximately 36000 shares at a cost of $324,000. We are updating our fiscal 2011 guidance by increasing our range for revenue, net income, earnings per share and EBIDTA. For revenue we are targeting an increased range of $162 million to $166 million. For net income we are targeting an increased range of $9.3 million to $10.2 million and our diluted earnings-per-share is targeted at $0.69 to $0.77 per share.

For Capex we are targeting $20.5 million to $24 million and these numbers are net of government grants received from the broadband stimulus project. For EBIDTA we are targeting an increased range of $42.3 million to $44 million and for the year-end debt we are targeting a range of $118 million to $123 million. We remind you that there is seasonality in our business and that all calendar quarters are symmetrical. Our past has been indicative of this trait.

In summary we are very pleased with our strong financial results for the quarter and our successful refinancing. 2011 is shaping up to be a very good year. More details of our financial results are available in our quarterly report on form 10-Q which is due to be filed later this afternoon. With that I'd like to turn it back over to John. John?

John Finke

Thank you Dave. With three quarters behind us we are on track to meet our increased financial outlook for 2011. We're investing in long-term strategic initiatives and focus on increasing shareholder value while maintaining strong cash flows and a solid balance sheet. We remain confident in our investment plan and are executing on our strategic initiatives.

We are committed to growing HickoryTech both organically and through acquisition as we execute on 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 and broadband services. Key to this expansion is leveraging and extending our regional fiber network.

In closing we have delivered six consecutive quarters of strong financial results. These solid results along with our debt refinancing in the third quarter position us to end 2011 on target and exceeding our original plan for the year. As you compare 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 and key strategic product lines, a healthy dividend and 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'd be happy to answer any questions. Lindsey if you could initiate any questions now I'd appreciate it.

Operator

Thank you. (Operator instructions) There are no questions at this time. I would like to now turn the call over to John Finke for any closing remarks.

John Finke

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 the call will be available beginning at noon today. Thank you again for joining us and we look forward to talking to you on our next call. If you have any further questions I'd invite you to give Jennifer, David or myself a call at any time. Thanks again.

Operator

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

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