Inteliquent's (IQNT) CEO Matt Carter on Q1 2016 Results - Earnings Call Transcript

| About: Inteliquent, Inc. (IQNT)

Inteliquent Inc (NASDAQ:IQNT)

Q1 2016 Results Earnings Conference Call

April 28, 2016, 10:00 am ET

Executives

Richard Monto - General Counsel

Matt Carter - President, Chief Executive Officer, Director

Kurt Abkemeier - Chief Financial Officer, Executive Vice President

Analysts

Frank Louthan - Raymond James

Hamed Khorsand - BWS Financial

Operator

Good day and welcome to Inteliquent first quarter 2016 earnings call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Richard Monto. Please go ahead.

Richard Monto

Thank you and welcome to the Inteliquent first quarter 2016 earnings conference call. In our remarks today, we will include statements that are considered forward-looking within the meaning of Federal Securities laws. The forward-looking statements are based on current expectations and are subject to substantial risks and uncertainties that may cause actual results to differ materially from the forward-looking statements.

A description of certain of those risks and uncertainties accompanying these forward-looking statements can be found in our earnings release issued today and in certain of our SEC filings. Inteliquent undertakes no obligation to update any forward-looking statements.

In our remarks, we will also refer to non-GAAP financial measures which we believe, in combination with GAAP results, provide additional analytic tools to understand our operations. Tables that reconcile non-GAAP financial measures to GAAP results are also included in our earnings release issued today.

Now, for the substance of the call, I would like to hand the call over to Matt Carter, Inteliquent's CEO.

Matt Carter

Thank you Richard and good morning everyone. Thank you for joining us as we discuss our results for the first quarter of 2016. Today, I will provide an overview of our results and an update on the progress we have made towards our growth forward plan. After that, Kurt Abkemeier will review our financial performance and provide certain detailed operational metrics for the first quarter of 2016. We will then have a Q&A session at the end of the call.

Let me first start with an overview of our results for the first quarter. Continuing the trend from 2015, we again met quarterly expectations and delivered consistent sequential revenue and net income growth. Our top line grew 49% year-over-year and 7% on a sequential basis in the first quarter, which reflect the execution of our business strategy, the growth forward plan and strong business momentum driven by overall traffic growth. We generated revenue of $82 million, an increase of 49% over the first quarter of 2015 and our net income was $9.1 million. Our adjusted EBITDA, a non-GAAP financial measure was $19.1 million.

During the quarter, we transited 49.4 billion minutes of use on our network, an increase of 41.1% compared to the first quarter 2015. This marks our third consecutive quarter of breaking our minutes of use record. Additionally, the average rate per minute for the first quarter of 2016 increased 6.4% compared to a year ago, which contributed to revenue growth. Overall, I am pleased with our consistent results and the progress we have made in advancing our growth forward plan. Our three-year plan to extend the company in becoming a cloud-based communication provider that enables a broad range of communication services.

I will now provide some highlights of the progress we are making in executing our plan. We continue to focus on grow and protect the core, one of the key pillars of our business strategy. As you will recall, this pillar is focused on optimizing our legacy business so that we continue to be the service provider of choice with traditional phone carriers. On this front, we recently began implementing a deal with a large wireless customer for our Access Homing Tandem product.

As you may recall, when the carrier puts us in at their homing tandem, long distance calls terminating to our customer are routed through our network. As you would expect, we are always pleased to enhance our relationship with the large wireless providers, given the huge volumes of traffic they carry and this deal shows our success in that area. In addition, during the quarter, we also implemented a trial market with a major cable provider for our local transit product. We view these as significant wins in our core service offering. We are being successful in consolidating minutes and taking share from our competitors.

We also made significant progress on the second pillar of our business strategy, diversifying our revenue stream. As I mentioned last quarter, we were planning to announce a formal launch of our comprehensive voice and messaging solution for next generation telecom service providers. Indeed, during the first quarter, we launched omni, a one-stop shop product suite that makes integrating voice and messaging functionality into any solution easy and accessible for these providers.

We are in the process of transforming our business. A compelling case is that there is a shift taking place over time from traditional carriers to the next generation community. For those not familiar with this area, we believe that several trends are occurring that makes this an exciting growth area. The next generation providers want telephony services like phone numbers, SMS, MMS with high quality, reliable connectivity to improve communications with or between users. We are building a cloud based platform that enables that experience.

This technology shift is resulting in a major acceleration of the use of software-based solutions to facilitate communications across a wide range of exciting new use cases. In addition, the market is also moving towards cloud based communications solutions that allow enterprise customer to eliminate costly on-premise equipment and have greater control over their applications. Through Omni, we are the first provider able to offer a comprehensive one-stop shop integrated voice and messaging solution to serve this market.

Our solution is assessable to customers with an easy-to-use web portal along with a state-of-the-art API that provides full automation and integration with our customer systems. This easy-to-use one-stop shop solution with both voice and messaging coupled with our carrier grade quality network differentiates us from our competitors. This offering allows us to serve a new market and attract next-generation communications service providers to our business, a key component of our growth forward plan.

These next generation customers include providers of VoIP and OTT services, API platforms and cloud based communications services. As an example of the type of customers that are now proliferating, we may provide telephone numbers to an API platform provider. For those not familiar with an API platform provider, an API platform provider will typically enable software developers to power their applications with voice and messaging services. Their customers might then build applications through retail stores that allow customers to call a specific customer service representative directly from the application via a click-to-call button. This would allow a customer of the service to speak to the appropriate customer service individual without ever dialing a phone number.

Another example, one of our customers might be a unified communications provider. Unified communication providers offer integrated telecommunication services to their users. For example, a UC provider will provide desktop voice services, voice mail, call forwarding, messaging and fax services on an integrated basis. In order to provide that service, the unified communication providers needs phone numbers and telecommunications voice and messaging connectivity. We can provide all of the phone numbers and all of the voice and messaging connectivity the UC provider needs via Omni one-stop solution.

We are very pleased with the initial response on our Omni solution as our conversion rate for agreements remains strong. We currently have 20 customers using the portal and have sold 357,000 telephone numbers. Next generation customers and our core legacy customers are both attracted to our value proposition, a reliable high quality network that allows them to deliver an exemplary customer experience to their end users. We will continue to deliver that value to customers as our business transforms into a single source solution to power all types of new economy communications services.

Turning back to our growth forward pillars, our third initiative is to maximize our margin. We continued to drive margin optimization during the quarter through achievement of our cost savings targets identified as part of our 2016 budget process. Although we can't disclose specifics due to competitive concerns, during the quarter our team successfully achieved a savings targets set out for them on the network and operating expense line items.

We enter 2016 with positive momentum resulting from our strong competitive position, confidence in the long-term growth prospects of our business. Our expectations have not changed, as a result of our belief in the sustainability of our strong cash flow. Earlier today, we announced an increase to our quarterly dividend. As I stated previously, our Board of Directors regularly examines our balance sheet and returns cash to shareholders when appropriate. Accordingly, the Board formally approved increasing next quarterly dividend payments to $0.16, which represents an almost 7% increase compared to the prior payment.

In closing, I am pleased with our consistent performance quarter-over-quarter. Anchored by our growth forward plan, we are successfully growing market share from our competitors, entering to new growth segments and strengthening our financial disposition for long-term shareholder value. I like where we are going and have extreme confidence in the management team's ability to execute the plan and deliver value to our shareholders. I want to thank the entire Inteliquent team for all their efforts during the quarter and I look forward to continued success in 2016. We are off to a good start.

With that, I would turn the call over to Kurt.

Kurt Abkemeier

Thank you Matt. Before diving into the financial section of the call, I would like to note that I have decided to condense the commentary on the results of the quarter and to really only focus on those areas that we believe are out of the ordinary or need a little more explanation. We are working on so many great things that I don't want to dilute some of more important messages we would like to communicate, especially the more strategic ones that Matt has articulated already.

From a financial perspective, the one message, I would like investors and analysts to take away is that we continue to deliver increasing adjusted EBITDA growth each quarter and that we continue to do that consistently. It's no more complex than that from a financial perspective. We are committed to growing adjusted EBITDA while working on exciting new strategic imperatives that puts the company on firmer footing as we move forward.

So in the interest of efficiency, let me quickly go through our high level results and make some comments on the rest of the year. During the first quarter of 2016, we delivered on our projections of increasing MOU volumes, revenue and adjusted EBITDA quarter-over-quarter.

Now let's look at the results in a bit more detail. We experienced strong MOU growth, with an increase of 3.1 billion MOUs largely due to the continued ramping of T-Mobile traffic compared to the fourth quarter of 2015, which represents a growth rate of 6.7%. ARPM has continued to exhibit stability and even grew modestly this quarter to $0.00167 from $0.00166 in the fourth quarter of 2015. This resulted in revenue of $82.3 million in the first quarter, representing a 6.9% increase from the fourth quarter of 2015 or $5.3 million sequential change.

Network and facilities expenses were $50.2 million in the first quarter of 2016, which represents an 8.2% increase compared to the fourth quarter of 2015. A significant component of our revenue growth was in lower margin off-net traffic products. As such, there was an increase in variable costs associated with this traffic. Gross profit per minute was $0.00065 or 39.0% of revenue in the first quarter of 2016, compared to $0.00066 or 39.7% of revenue in the fourth quarter of 2015. The growth in minutes of use during this quarter and expected in future quarters will provide the opportunity for further cost reductions as we work to optimize our network cost structure.

Moving to profitability. Adjusted EBITDA was $19.1 million in the first quarter of 2016, an increase of $700,000 from the fourth quarter of 2015. Our adjusted EBITDA per minute came in at $0.00039 which compares to our new current level of around $0.0004 per minute. Similar to the comments I just made about network expenses, adjusted EBITDA per minute is also diluted, so to speak, by some of the relatively low margin off-net long distance traffic that is part of our T-Mobile contract.

As for capital expenditures, we spent $2.8 million in the quarter largely to augment our network to accommodate the significant MOU growth we anticipate over the next year. This amount is more than what we would anticipated for the quarter and is purely a matter of timing with some of the spend being pushed out a quarter or two such that we anticipate the total spend for the year to be unchanged from prior expectations.

As for free cash flow, defined as adjusted EBITDA less CapEx, we generated $16.3 million during the quarter compared to $12.9 million in the fourth quarter of 2015.

As for some comments on the rest of the year. We continue to anticipate MOU levels to increase from the current level of 49 billion MOUs in the first quarter to in excess of 60 billion by the third quarter. Also consistent with what we have articulated on the last earnings call, we anticipate adjusted EBITDA to increase with each successive quarters throughout the year, which results in an upward slope drop year. So far this year, we recorded $19.1 million in adjusted EBITDA on the first quarter compared to $18.4 million in the fourth quarter of 2015. This is the second consecutive quarter of adjusted EBITDA growth since the third quarter of 2015, which was the first quarter during which we initiated the on ramping a significant new amounts of T-Mobile traffic.

As I noted before, the take away from a financial perspective is that we are committed to consistently delivering increasing adjusted EBITDA results even as we work on all of strategic imperatives to strengthen and enhance our position for the future.

With that, I would like to open up it up for questions. Operator

Question-and-Answer Session

Operator

[Operator Instructions]. We will go first to Frank Louthan with Raymond James. Please go ahead. Your line is open.

Frank Louthan

Great. Thank you. So what does the path look like, given the rest of the revenue from the T-Mobile traffic on any other carrier cooperation that you need? And then, can you give us an idea for the expectation for year-end run rate on the Omni product, that would be great? Thanks.

Matt Carter

As for the T-Mobile ramp, we would expect traffic to be going up throughout the rest of the second and third quarter. By the fourth quarter, we would expect most of it to be ramped. Some of the traffic can be carrier dependent. And it's going to depend some upon us getting our facilities in place, some on T-Mobile getting it's facilities squared away and some where we have got to get third parties involved. I would characterize this traffic that we have yet to get on compared to the stuff that we have already ramped up tends to be more influenced by third party facilities as opposed to anything on our end or T-Mobile's end. But if there were any kinds of delays, I wouldn't expect anything that would really go beyond say a few months.

Kurt Abkemeier

And then I will take on Omni, we don't expect significant increases this year. We are still ramping and building up the pipeline. It will start to have some impacts starting late second half of the year, but really look towards for 2017 when you will start to see significant increases from Omni.

Frank Louthan

Okay. Great. Thank you.

Operator

[Operator Instructions]. Our next question comes from Hamed Khorsand with BWS Financial. Please go ahead. Your line is open.

Hamed Khorsand

Hi. Good morning. Just first off, it sounds like, are you providing guidance on this call? Or are you sticking with the guidance you provided on last call?

Kurt Abkemeier

Yes. Our guidance is unchanged.

Hamed Khorsand

Okay. And as far as the profitability goes, was there any impact or benefit given the trial that you are doing with the cable operator this past quarter?

Kurt Abkemeier

No.

Hamed Khorsand

Okay. If they were to come in, would you see an increase in costs in a way because of the traffic flow or can you handle that?

Matt Carter

We have already.

Kurt Abkemeier

From like a CapEx and facilities prospective, we would be able to handle that, for the most part.

Matt Carter

Yes.

Hamed Khorsand

Okay. And then, this T-Mobile deal and now this cable operator, it seems like business is changing in a manner where companies are signing to have exclusive agreements with one provider or maybe two. How do you create the smoke that all is under the belt in this market? How do you sustain it?

Matt Carter

Well, our focus is really to be a consolidator in the industry and to take market share. And so we have to and what we have been doing is going out with a different value proposition. Essentially, let us be your de facto tandem service provider. And as we look at our customers and what's important to them and strategic to them, this piece of business is may be less strategic for them than some other things that they are doing. But for us, it's obviously critically important. And so, our ability to be able to convey that message, convince them that they can outsource their tandem services over to us, we view as an opportunity. And what's actually good about this too, is that the T-Mobile deal provides confidence, real evidence that we can handle huge volumes of traffic with the highest quality. So as we look at our business, we don't see it as a melting ice cube. What we actually see is that there is significant opportunity for us to continue to grow and garner more market share. And what you are seeing our numbers are the beginning steps of us advancing that value proposition in the marketplace.

Hamed Khorsand

Okay. And last question is, with the Omni product and the 20 customers, is it too early to give us what kind of benefit you saw as far as minutes that came onboard?

Matt Carter

Yes. We don't want to talk about that. But I will share with you at least some initial customer sentiment. What customers like is the flexibility of Omni. It's easy to use. Our web portal, we have been told, is good if not best in the industry, making it easy for them to order and process numbers. They like working with our team. We are collaborative. One of the benefits we have had in launching Omni is that we had, although we are somewhat a little bit late to the party but feel confident that we are catching up, is that we have had the benefit of being able to examine the market, analyze the market, talk to customers, see what's working, what's not working and really develop our platform based upon those unmet needs backed by what we consider to be the industry's best network.

So we feel confident in terms of what we are hearing initially from our customers that we actually are hitting the mark on a platform that they find to be really good for them. What we have to do going forward, I have confidence we will get the product, the platform right and continue to build those capabilities, features, et cetera, the real opportunity what we have to demonstrate is that we can channelize it, continue to build up our sales organization, get out there and continue to grow our sales pipeline of customers and start executing those agreements. We have a strong pipeline, but we have to continue to show that we can continue to grow that pipeline at more customers throughout our product portfolio.

Hamed Khorsand

Okay. Thank you.

Operator

[Operator Instructions]. And it appears we have no further questions at this time.

Matt Carter

Well, thank you. So let me close by summarizing three takeaways from today's call. first, we are executing on our business strategy and delivering consistent sequential quarter-over-quarter growth, successfully growing market share from our competitors, minutes are up, revenues are up, net income is up. Two, we are positioning ourselves to offer a broad range of communications services to serve both traditional carriers and next generation community, evidenced by the launch of our Omni product in the marketplace, evidenced by the fact that we continue to win major deals with traditional phone companies. And then three, our strong cash position gives us the flexibility to explore numerous options to return value to our shareholders. In essence, we are a growth company that pays a dividend. We are in a pretty good place. Again, we want to thank you for joining us today in the call. We look forward to speaking with you next quarter. Thanks.

A -Matt Carter

And this does conclude today's program. You may disconnect at this time. Thank you and have a great day.

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