Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Kevin Inda - IR

Alan Wells - Chairman and CEO

Craig Knock - VP, CFO and Treasurer

Analysts

Simon Flannery - Morgan Stanley

Chris King - Stifel Nicolaus

Patrick Rien - Lehman Brothers

Jason Frazier - Raymond James

Todd Rethemeier - Soleil Securities

Iowa Telecommunications Services, Inc. (IWA) Q3 2007 Earnings Call November 7, 2007 9:00 AM ET

Operator

Good day, and welcome to the Iowa Telecom Incorporated Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Kevin Inda. Please go ahead, sir.

Kevin Inda

Thank you, Rianne. And welcome to this Iowa Telecom conference call to review the company's results for the third quarter ended September 30, 2007, which were released this morning.

During today's call, we'll refer to certain non-GAAP financial measures. We reconcile these measures to GAAP figures in our earnings release, which is available on our website at www.iowatelecom.com.

Conducting the call today will be Alan Wells, Chairman and Chief Executive Officer, and Craig Knock, Vice President, Chief Financial Officer, and Treasurer.

Before we start, let me offer the cautionary note that this call contains forward-looking statements that are not based on historical fact, including, without limitation, statements containing the words beliefs, may, plans, will, estimate, continue, anticipates, intends, expects, and similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause actual results, events, or developments to be materially different from future results, events, or developments described in the forward-looking statements. Such factors include those risks described in Iowa Telecom's Form 10-K on file with the SEC. These factors should be considered carefully, and listeners are cautioned not to place undue reliance on such forward-looking statements.

All information is current as of the date of this conference call. And Iowa Telecom undertakes no duty to update this information.

With that stated, I'll turn the all over to Alan Wells.

Alan Wells

Thank you, Kevin, and good morning. We're glad you joined us this morning as we review our results for the third quarter of this year.

I'd like to take a few minute to focus on our operational and financial highlights and then update you on several market-related topics which we discussed in last quarter's call. Craig Knock, our CFO, will then review the financial results in more detail and we'll then take your questions.

We are very pleased with our third quarter results, which were in line with our expectations, both operationally and financially. Our revenues, our adjusted EBITDA improved over the levels of a year ago, and our DSL product sale continued to grow as we added 2,700 new customers during the quarter.

As we noted on our last quarter's conference call, Mediacom entered many of our markets with a voice service [going] into the second quarter of 2007, and therefore we have expected to have somewhat higher than normal access line losses in the near-term. Our access line loss for the quarter of 4,400 lines was consistent with our expectation. The line loss is primarily residential and the increase in the rate of loss was attributable to Mediacom's initial market entry.

Despite the slightly higher access line loss, total revenue for the quarter increased 1.9% to $60.8 million as compared to the year ago quarter, primarily as a result of our DSL growth and the expansion of our CPE and data business. Operating income for the quarter was $18.8 million and adjusted EBITDA was also up, increasing to $31.9 million.

Our net income was $6.3 million or $0.20 per diluted share, compared to net income of $8 million a year ago. The change in net income was primarily the result of a $2.9 million gain we recorded in the sale of four exchanges during the third quarter of 2006 that Craig will review in a few minutes.

As a reminder, in 2006 we began to record book income tax expense due to our current tax position. Our net income for the quarter was impacted by book income taxes of $4.5 million. It's important to note that this income tax charge is primarily non-cash in nature, and thus does not impact either our cash flow or ability to pay dividends. Despite this charge in the income statement, our actual cash payments for income taxes during the quarter were only $52,000 and were only $494,000 for the first nine months of this year, reflecting the usage of our net operating losses and our continued good will amortization for tax purposes.

Our capital expenditure was $6.6 million in the quarter and our cash interest expense was $7.8 million. Both of these levels are on track with our 2007 guidance and we continue to expect our CapEx a little between $25 million and $27 million for the year and expect cash interest expense to between $30 million and $32 million.

As I previously stated our total access line loss was 4,400 lines during the quarter, as ILEC lines declined by 4,700 lines and CLEC lines increased by 300 lines. Our DSL products continue to have solid growth as we added 2,700 more DSL customers this quarter. Although our distance subscribers declined slightly during the quarter we attribute most of this decline on long distance to some increased competition and a fewer markets and as a by product were access line losses. Nonetheless, our long distance penetration continues to remain strong and nearly 60%.

I'd now like to turn my discussion to the competitive landscape and provide a very brief update on Mediacom's entry into some of our markets with voice service. As most of you know Mediacom launched voice offerings in 100 of the communities within our service area through a business arrangement with Sprint midway through the second quarter of 2007. We have seen no major changes in Mediacom's offering since our last conference call. We continue to believe their focus primarily is residential customers within the city limits of our ILEC markets where they have launched service. While the first full quarter in which Mediacom's is competing for voice service in our markets is also in some of the higher access line losses for us. We believe the preparations we have made for Mediacom's market entry are proving successful. Our DSL broadband service continues to have strong growth as important component of our bundle offerings.

Furthermore our video service included our bundled packages enabled through our partnership with Echostar's dish network is proving to be an attractive low cost alternative for our customers.

While we expect, we may continue to have slightly higher than normal access line losses due to Mediacom's market entry in the near-term. We continue to believe that customers will find our bundle packages, including our dish service, to be a very attractive and economical alternative.

Furthermore, we believe the strong financial results for the quarter reflect our emphasis on and success in our CLEC data and CPE operations, which were not that materially impacted by Mediacom's market entry.

In closing, we are very pleased with our financial and operating results for the first nine months of the year. Looking ahead, we intend to continue our efforts to grow our DSL product penetration, our bundle offerings, and our CLEC, CPE and data businesses. We will also continue to evaluate or pursue acquisition opportunities that meet our free cash flow focus and plan to continue return a significant portion of our cash flow back to our shareholders in the form of our dividends.

I'll now turn the call over to Craig Knock, who will review our third quarter financial and operating results in some more detail. Craig.

Craig Knock

Thank you, Alan, and good morning, everyone. Since you have access to our full news release, let me review certain of the financial highlights for the quarter, and then we will take your questions.

Overall, operating revenues for the quarter were $60.8 million, compared with $59.6 million in the third quarter of 2006, reflecting an increase of $1.1 million, or 1.9%. Local service revenues decreased $763,000, or 4% for the quarter. The decrease is primarily due to access line erosion, however, this was partially offset by higher revenue from enhanced local services and local rate increases. Network access revenues decreased $47,000 or 0.2% for the quarter. The decrease is primarily due to access line erosion combined with a decrease in [DSL] revenue. However, these were partially offset by an increase in switched access revenue.

Long distance revenues decreased by $234,000 or 4.3% for the quarter. The decrease in revenue is due to decreases in both the number of long distance customers, which decreased by approximately 500 or 0.3% and in the average minutes of use per customer.

Other services and sales increased $2.2million or 19% for the quarter. DSL internet access service revenues increased $1.5 million, or 33.6%, due primarily to customer growth. This increase was partially offset by decreases in dialup internet revenue of $503,000. Additionally the revenue increase was due in part to growth of our CPE and data business, principally as a result of our acquisition of Baker Communications in August 2006.

Cost of services and sales increased $1.4 million, or 7.8% for the quarter. The increase was principally due to the growth of our CPE and data business, driven by our acquisition of Baker Communications in August of last year, as well as some additional operating costs for our newly acquired corporate headquarters.

SG&A cost increased $2.1 million, or 24.8%, primarily due to a non-recurring benefit in 2006. The third quarter of 2006 reflected the benefit of a $2.9 million gain on sale of exchanges. Excluding this non-recurring items, SG&A costs actually decreased by approximately $800,000.

Depreciation and amortization increased $565,000, or 4.8% for the quarter, as compared to the same period in 2006, primarily due to higher average [plant] balances.

Operating income was $18.8 million for the quarter, compared to $21.7 million a year ago. Again, the change is principally attributed to the $2.9 million gain on sale of exchanges in 2006. Interest expense increased $18,000 or 0.2% for the quarter. This is due to higher interest rates on the term loans fee and partially offset by a lower average balance on a revolving credit facility.

In terms of income tax expense, we reflected $4.5 million in book income tax expense during the quarter, compared to $5.6 million last year. We continue to estimate that book income tax expense will be recorded in an effective tax rate of approximately 41% in future periods.

The recorded book tax expense did not impact the cash taxes paid during the quarter. Again, let me remind everyone as related to cash income taxes, the book accounting for income tax expense does not change our outlook for paying cash income taxes as we continue to expect an overwhelming majority to be deferred. Again, we have a very strong tax shield position driven by our continued goodwill amortization at a rate of approximately $40 million per year through June 2015, coupled with our existing NOL of approximately $158 million.

Both of these items will shield us from material cash income taxes for a good number of years. However as we previously disclosed we may be required to pay nominal amounts of cash taxes in the near-term. And as noted in the release we paid cash income taxes of $52,000 during the third quarter and $494,000 for the first nine months of the year.

The bottom line for us this quarter was net income of $6.3 million or diluted earnings per share of $0.20 compared with $8 million or diluted earnings per share of $0.26 a year ago. A change from the prior period was primarily due to the $2.9 million gain on sale of exchanges in the year ago period. Our adjusted EBITDA as defined in the credit agreement and reconciled in the press release was $31.9 million for the quarter, up $674,000 or $31.2 million from a year ago.

I would like to take a minute now to discuss our debt and related interest expense. As of September 30, 2007, we had outstanding $477.8 million of senior debt under term facilities and $8 million drawn under our $100 million revolving credit facility, which are offset by 7.89 of RTFC capital certificates and $4.5 million of cash. Our net debt or adjusted total debt, as defined in the credit agreement, was $473.5 million at quarter end. That level of adjusted total debt correlates to a leverage ratio as defined in the credit agreement of approximately 3.6 times. Additionally, I should note that since year end, our net debt has decreased approximately $13.9 million.

Our cash interest expense, as defined in the credit agreement, was on track with our expectations for the quarter at $7.8 million. For 2007 guidance, we continue to expect that our cash interest expense will be between $30 million and $32 million.

Turning to our capital expenditures, for the quarter our capital expenditures were $6.6 million. As Alan indicated, we continue to expect our 2007 capital expenditures will be between $25 million and $27 million. Now I'd like to summarize our cash sources and uses for the last 12 months, as they demonstrate the strength of our ability to pay dividends. Starting with adjusted EBITDA of $131.3 million, and deducting cash interest expense of $31.5 million, capital expenditures of $27.5 million and cash income taxes of $804,000, results in $71.4 million in cash available for dividends.

At our dividend rate of $1.62 per share, we paid dividends of $51.4 million. Thus, for the trailing 12 months, our payout ratio of our free cash flow was approximately 72%. It is also equally important to note that as of September, 30, 2007 we had cumulative distributable cash or actual dividend capacity, as defined in our credit agreement, of $76.3 million or said in another way, nearly 1.5 years dividend requirement.

Overall we are very pleased with our results for the quarter and for the first nine months of the year.

Operator, we will now answer any questions. Kindly provide instructions for the Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We'll take our first question from Simon Flannery from Morgan Stanley.

Simon Flannery - Morgan Stanley

Thanks very much. Good morning everybody. I was wondering if you could give us any sort of sense on run rate, CapEx and interest expense into 2008, any changes due to this sort of turmoil in the credit markets to your cost of funding on interest, and any major initiatives or savings that you see on CapEx? And also if you can talk about any productivity initiatives or cost cutting that might help you over the next few quarters? Many thanks.

Craig Knock

Good morning, Simon and thank you for the question. Let me start with the line of credit [jumping at us], as far as going into 2008, obviously we haven't issued guidance yet for either CapEx or interest expense in 2008. But one of the things that you probably saw was during the quarter we locked in for additional debt with the RTFC sometime, and I think it was July period, that, as a result of that we've got 90% of our debt locked in fixed rates through sometime of 2011.

So I think the turmoil in the credit markets really don't affect us too much. As with the CapEx, I think, as we go through our budgeting process we continue to look for ways to improve the operation both from CapEx on operation and our expense side, and are continuing to do that. But nothing major we've announced beyond that.

Alan Wells

All right yeah. And to just to highlight on the cost of funding Simon, over 90% of our term debt is of locked at fixed interest rates right now, so.

Simon Flannery - Morgan Stanley

Okay great. Well may be another with the way on productivity can you just talk about trends in headcount where they have been over the last couple of quarters, and where you see them going?

Craig Knock

We haven't had any material changes on that, but if you look to cost containments along those lines if you recall in the second quarter, we negotiated a longer-term agreement with CWA and part-and-parcel to that were certain reductions in post-retirement healthcare and that will benefit us to the tune of roughly $1.1 million annually for the next five years.

So there are a number of items like that that we continue to focus on in both that healthcare cost.

Simon Flannery - Morgan Stanley

Thank you.

Operator

We'll take our next question from Chris King with Stifel Nicolaus.

Chris King - Stifel Nicolaus

Good morning, guys. Two quick questions for you. First of all, your DSL penetration has certainly increased nicely over the course of the last year or so. I think you guys are running it right around 25% penetration of your total access line count at this point. How do you see that trend playing itself out over the course of the next year or so, in other words, I guess what ultimate level of penetration by the end of 2008 do you think is reasonable to assume now?

And secondly, in terms of long distance revenues, it looks like your long distance revenue per subscriber has been slipping a little bit over the course of the last couple of quarters. I was wondering if that was more of a result of a lower pricing or lower minutes of use or some combination of both? Thanks.

Alan Wells

Good morning, Chris. Thanks for the question. Let me start with the DSL sale and let Craig talk about long distance. I think, we continue to think our DSL penetration can grow as time goes by.

If you look at -- as you have said, we have had increased penetration for quite sometime, I think that's going to continue. Probably like a lot of the rest of the industry, we think the rate of growth is going to slow a bit, just because it’s been on a pretty strong trajectory in the past several quarters. But we think there is still quite a bit of room on DSL. We don’t provide guidance on penetration rates, but it wouldn't be out of line if we continue this pace for quite some time.

Craig, as far as LD?

Craig Knock

Yeah, Chris you hit on the key points for LD. Minutes used per subscriber have gone down just normally over the past several quarters as we believe, more folks are using wireless substitution for their LD usage. We haven't really changed pricing on a downward basis, but for bundling packages and so forth, that we have done. And again, this is not really a real growth area for us, but it's still a meaningful revenue stream to us.

And just one other point on the DSL, to help expand that number if you recall, we have estimated in the past that we can have DSL reach to about 75% to 80% of our network as we continue to expand that out further into the network. We envision we will be able to pick up additional customers from there.

Chris King - Stifel Nicolaus

Thank you.

Operator

And we will take our next question from Patrick Rien of Lehman Brothers.

Patrick Rien - Lehman Brothers

Good morning, and thanks for taking my question. Just a follow up on that in terms of the DSL penetration, are you able to break out what your penetration rates are in the areas where Mediacom is providing service? And then also, can you break out maybe what [speed] offerings you have there and how that compares to what Mediacom has? And then just one last final question, it looks like in the Mediacom results they had kind of a flat quarter-over-quarter in terms of net ads. So we would assume, maybe there is some high level of churn, that they are seeing, are you guys starting to see any defectors come back to you, and if there is any general trends there? Thanks.

Alan Wells

Okay. Good morning Patrick. Yeah on the DSL penetration by market we haven't broken that out historically or publicly but as we've said I think several quarters ago we believe that we were perhaps first to market in many of the key media compounds and so I think that we perhaps probably have a higher market share in those areas relative to high speed internet. Specifically to your speed question I think we talked on last quarter that we announced a new product and I'll probably get this wrong but we call it extreme DSL and that was in approximately 65 -- 68 of our top markets and though we have speeds up to 15 meg depending on location and proximity to the central office. So with that I think that we have you know a product parity if not perhaps even better than what the cable guys can offer relative to that. And as far as diffractions of course we monitor that and we monitor all the losses, we monitor who comes back but there is no stats that we would put out at this juncture.

Patrick Rien - Lehman Brothers

Okay, all right. Thanks a lot guys.

Alan Wells

Thank you, Patrick.

Operator

Our next question comes from Jason Frazier with Raymond James.

Jason Frazier - Raymond James

Hey good morning. As you guys could talk really about any economic impact you guys have been seeing here over the last quarter or two if there is anything at all going on there where expectations are for that going forward and also just what you guys have been going to do with the excess free cash flow where your priorities are buy back, debt pay down what your plans are? That will be great. Thanks.

Alan Wells

Jason, thank you for the question. I think as the general economic trends probably they are not a lot of different for us from [half of] the rest of the nation. I think we've seen housing slow downs and some decline in spending levels but I think probably whatever you see for the rest of the country that wouldn't be different by our markets. As far as excess cash flow we have said for quite some time we continue to evaluate what the right thing for us to do with our extra cash is as you know we generate, I think based upon the last 12 months $70 million of $80 million of extra cash flow by way of our dividend pay out and historically we've used that to make acquisitions to reduce our debt. We reduced our debt so far this year by above $13 million and we'll continue to evaluate that on an ongoing basis. It's a regular topic for our discussion about should we buy something with that, that's as cash flow accretive on a per share basis, should we pay it on debt, should we buyback stock or should we do I think that's an ongoing discussion.

Jason Frazier - Raymond James

Great, thanks.

Operator

(Operator Instructions). Our next question is from Todd Rethemeier from Soleil Securities.

Todd Rethemeier - Soleil Securities

Thanks, good morning. Could you may be talk about the CLEC business a little bit. There seems to be a drop in the access lines are down to 300 houses this quarter and then obviously about debt this quarter and how does that compare to your [last]? Thanks.

Craig Knock

Good morning, Todd. This is Craig, just a couple of commentaries on our CLEC, as we've kind of talked about over the past several quarters. We are not so much focused on an absolute growth in CLEC numbers. We are much more business focused now and what we are seeing is a constant change to a more business focus and I can tell you just over [the quarter] of past year, we've gone from roughly one-third business to nearly 45% of our product mix as business customers. So we have had churn out in some of the residential but we are much more focused on the business market and therefore our ARPU's are going up and the business customers are much more, stickier and churn out loss and they are frankly more profitable for us. So that's what we've focused on now relative to the CLEC business. As to bad debt of course we monitor that but I don't think that we have necessarily the subprime meltdown or anything like that impacting our overall customer base and we don't have any [note book] churn relative to our bad debt.

Is that it?

Operator

Thank you. There are no further questions. For closing remarks, I will turn the call back over to Mr. Alan Wells.

Alan Wells

Well thank you again for joining us this morning. We appreciate your time. We welcome your questions and hope you can join us again on the next quarter's call. Thank you.

Operator

This concludes today's conference. You may now disconnect and have a good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Iowa Telecommunications Services Q3 2007 Earnings Call Transcript
This Transcript
All Transcripts