Xfone, Inc. Q2 2008 Earnings Call Transcript

Aug.18.08 | About: NTS Inc (NTS)

Xfone, Inc. (XFN) Q2 2008 Earnings Call August 15, 2008 10:00 AM ET

Executives

John Nesbett - Institutional Marketing Services

Guy Nissenson – President and Chief Executive Officer

Niv Krikov – Chief Financial Officer

Analysts

Ekta Bhatia – RedChip Companies

Ben Atkinson – Gagnon Securities

[Jennifer Wolpert – Cannon Partners]

[Todd Marzan – TCM]

Unknown Analyst

Operator

Greeting, and welcome to the Xfone, Inc., second quarter results conference call. (Operator Instructions) It is now pleasure to introduce your host, John Nesbett, Institutional Marketing Services for Xfone, Inc.

John Nesbett

On the call today are Guy Nissenson, Xfone’s President and Chief Executive Officer, and Niv Krikov, Chief Financial Officer. Niv will review the financials, and Guy will review the company’s business operations, and immediately thereafter, we will take questions from call participants.

During this call, we may use forward-looking statements. The words or phrases "would be," "will allow," "intends to," "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project," or similar expressions are intended to identify forward-looking statements. Xfone’s financial and operating results should not be construed by any means as representative of the current or future value of its common stock.

All information set forth in this conference call, except historical and factual information, represents forward-looking statements. This includes all statements about the company's plans, beliefs, estimates, and expectations. These statements are based on current estimates and projections, which involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements.

These risks and uncertainties include issues related to rapidly changing technology and evolving standards in the industries in which the company and its subsidiaries operate; the ability to obtain sufficient funding to continue operations, maintain adequate cash flow, profitably exploit new business, and license and sign new agreements; the unpredictable nature of consumer preferences; and other factors set forth in the company's most recently filed annual report and registration statement.

Call participants are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. Call participants should carefully review the risks and uncertainties described in other documents that the Company files from time to time with the U.S. Securities and Exchange Commission.

With that out of the way, I’d now like to turn the call over to Guy Nissenson

Guy Nissenson

The quarter ended June 30, ’08, is our first good quarter including the consolidated operating results of Xfone and NTS Communications, and we reported revenues of $25.9 million and record EBITDA of $3.14 million. We are proud of these results and see tremendous opportunity in front of us to drive profitability further.

In order to understand how solid the quarter was, it is important to understand a few nonrecurring items that impacted our bottomline. Specifically, currency translations for the quarter negatively impacted earnings by $2 million. Furthermore, there were important merger-related expenses in the quarter such as combining the networks and severance that were one-time in nature. These estimate these merger expenses exceeded $500,000. It is also important to note that included in our EBITDA number is $215,000 in stock-based compensation.

Strategically, as most of you are aware, our business of fiber to the premise is very important and going well. FTTP enables us to provide voice, video, and data triple-play offering to our customers. We recently announced the completion of the first phase of our FTTP build-out from Lubbock to Levelland, and to date we have achieved approximately 15,000 passings in Lubbock, including by our estimation, close to 60% of the economically viable businesses in the city. Sequentially, FTTP revenues grew 4% from the first quarter of ’08 and continue at a strong pace.

Importantly, this represents 80% or higher gross margins, so as it grows, we should see improvement in our margins as well. Of the approximately $3.8 million of capital expenditures we reported for first half of ’08, the vast majority was spent on investing in equipment to grow the FTTP network.

Let me now turn the call over to Niv to review the financials.

Niv Krikov

For the quarter ended June 30, 2008, Xfone recorded revenues of $25.9 million, an increase of 122% compared to $11.6 million in the second quarter of 2007. On a sequential basis, revenues were flat compared to the pro forma first quarter revenues.

Breaking out by divisions, our US operation, which now accounts for 72% of our business, demonstrated triple-digit growth year over year for the second quarter achieving $18.7 million in revenue for the quarter, compared to $3.1 million in the same quarter of previous year. Xfone 018 in Israel contributed $2.4 million in revenues during the second quarter, achieving an increase of approximately 21% from $1.95 million in revenues in the second quarter of 2007. The UK business contributed $4.7 million in revenues during the quarter, a decline of 27% from the same quarter of 2007, but essentially flat sequentially.

Gross margins decreased compared to the same quarter of last year due to the acquisition of NTS which currently has lower margins in the legacy at-home business. However, margins decreased slightly from the third quarter pro forma gross margins, and we expect gross margins to continue to shift higher as the revenues grow and more of the revenues come from the higher margin FTTP business.

EBITDA for the second quarter of 2008 was $3.14 million. I’d like to reiterate a few of the items that Guy mentioned. First, net earnings for the quarter and six months were impacted significantly by the weak dollar. For the quarter, $2 million of currency expenses that you see on the income statement was from the weakness of the US dollar versus the Israeli shekels. It is important to note that the US dollar has been increasing in value since the close of the quarter, and so far we can see a gain in the third quarter of the same amount. We have not put in place yet any hedging strategy to minimize the impact of the currency fluctuation, but we are in the process of evaluating this. One of the reason we have not had hedging is that we are still in discussion concerning the acquisition of Tadiran, and should this acquisition consummate, it will provide a natural hedging for us.

Finally, we paid about $3.5 million this quarter to Verizon as a result of a longstanding lawsuit in the UK. Our operating cash flow absent this one-time payment would have been approximately $2.6 million for the quarter. The good news is that this is behind us, and it will not impact our financial statements going forward.

That concludes my formal review of our results. Should anyone have any specific questions related to the company’s financial performance, I’ll be happy to address them during the question-and-answer period.

Guy Nissenson

Let me address a few key issues. First, the strength of our FTTP growth and business revenue and the health of the attrition we are seeing in the residential business like the rest of the industry. This shift drove a slight increase in gross margins, and our goal is to drive continued gross margin improvement primarily through shifting revenues to FTTP. As I said before, FTTP grew 4% for the quarter, and it continues strong into the third quarter.

On the international front, Israel, known as Xfone 018, is doing well; however, I’m not as satisfied with the performance in the UK. As we’ve discussed previously, our UK division has experienced sales pressure from a change in the tariff structure. While the division has effectively mobilized to address these pressures and revenues were essentially flat sequentially, a full return to comparable sales levels will take some time. I assure you that we are keeping an eye on this situation.

In conclusion, overall we are very pleased with our results in the second quarter, particularly our achievement of record revenues and EBITDA. Sum of the key financial metrics like net earnings and free cash flow were unfortunately shrouded by currency fluctuation and the final lawsuit payment, but it looks like the currency situation is now turning positive and I’m relieved to finally be done with the lawsuit.

Looking forward, we are very focused on driving our FTTP build-out and customer growth. The team here has done an excellent job and is very focused on that, and we expect to be signing up our first customers in Levelland in the back half of this year. I urge you to go to our web site at www.xfone.com where we have posted some pictures of the progress of the FTTP infrastructure build-out. We have low cost of capital through the federal government, and we essentially have a semi-monopoly on fiber in our markets. If we execute well, this could be very profitable for Xfone and its shareholders.

With that, I will now turn the call over to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Ekta Bhatia with RedChip Companies.

Ekta Bhatia – RedChip Companies

My question is regarding the UK division. Basically you said you are reallocating your customers to some other services because of change in tariff structure, but your revenues are still down or flat, so can we expect some improvement in the third quarter for the UK division?

Guy Nissenson

We still can be hopeful, hard to see improvement there. We have done tremendous work in the UK to try and shift revenues from being all residential to being more business related. This is a process, and we have done quite a lot of investment in marketing and sales and equipment to try and take more business customers, and we hope to see this improvement as the year progresses.

Ekta Bhatia – RedChip Companies

My other question is regarding the listing of your bonds which issued for the execution on Tel Aviv Stock Exchange, so when can we expect a listing on the stock exchange?

Guy Nissenson

We hope to see the due diligence process finishing soon, and we’ve already done most of the work on this, and we will submit the bond for listing, so you can see it listed well before the end of the year.

Operator

Our next question is from Ben Atkinson with Gagnon Securities.

Ben Atkinson – Gagnon Securities

On your EBITDA, if we were to add back the roughly $500,000 or more of merger expenses, that would put you at $3.6 million of EBITDA or higher which is annualizing at a little over $14 million a year. It looks to me like you’re getting the business track to where you want it to be as a base to grow firm. Does that sound right?

Guy Nissenson

Yes. Although this quarter needs some explanations because of the currency fluctuation and other major costs, we are extremely happy with what we have seen in terms of results, especially with the results in the United States. It’s also noted and I said during my initial remarks, we have in our EBITDA number about $214,000 of stock-based compensation type of expense, which many companies carve out of EBITDA, so if you include that, our EBITDA levels are even higher.

Ben Atkinson – Gagnon Securities

Okay, right, so that was also included. As we look forward to Q3 and beyond, what should we be expecting over the next couple of quarters for merger expense, and do you think you’ll start to see some of the benefit from some of the cost savings that might come from combining the two US operations?

Guy Nissenson

Yes. As we progress, we hope to see less merger expenses and more operating synergies coming through. I cannot give you the exact numbers, but you can see that the trend is going very well since Q1, and we hope to see that continuing in Q3 and Q4, and of course, during the third quarter, we will definitely be able to see, if the dollar stays where it is, a significant benefit from the dollar side of situation.

Ben Atkinson – Gagnon Securities

Do you have a sense for the third quarter whether the merger expense or the synergies would be closer to offsetting each other, or should we wait another couple of quarters to see that?

Guy Nissenson

We are sure that the merger costs will be lower than what we saw in Q2, and hopefully we can see higher synergies as well, and we are also hopeful of seeing higher gross margins as we move more customers to the FTTP and sign up more businesses.

Operator

Our next question comes from [Jennifer Wolfert with Cannon Partners].

[Jennifer Wolpert – Cannon Partners]

You’ve given pretty good detail about the currency fluctuation. If were to exclude the currency translation, could you give us an indication of what EPS would have been for the quarter?

Niv Krikov

I can walk you through some of the numbers. If we had the loss of $900,000 and the currency fluctuation was $2 million expense, you need to remember that we also had an expense there that relates to the Israeli Inflation Index, and again that could change from quarter to quarter. On top of that, as we said, we had more than $500,000 of nonrecurring merger expenses, so if you put all of that together, you can see that our actual EPS is in line with what we have shown on the pro forma on Q1.

Operator

Our next question is from [Mr. Todd Marzan with TCM].

[Todd Marzan – TCM]

There are lots of internal options and warrants activity that revolves around $3 to $3.50 share price, Guy, I wanted to ask you, what do you think your company is worth at this point?

Guy Nissenson

I don’t know if I can answer the question. Usually the CEO will be certainly on the optimistic side. I think it’s worth much more than what it is now. Again, if you look at our peers and our normalized EPS and EBITDA levels, I’m sure you will come to the same conclusion, but I don’t want to give you a specific number.

[Todd Marzan – TCM]

What efforts are going on in order to get the story out and get people interested, get the volume on the stock up so that it’s a little bit more liquid?

Guy Nissenson

On top of putting out great numbers and getting the synergies and increasing sales and profitability, we have been working with an investor relations firm that is putting us in front of the institutional investors. We are doing our best to get the word out. Hopefully, as we continue to grow, we’ll be able to attract more attention and get some more serious investors to look at our story and invest.

[Todd Marzan – TCM]

What kind of feedback are you getting from serious investors that you’ve been taking to recently, in terms of their interest or their inability to invest at this point?

Niv Krikov

We’ve seen very good feedback. You know that the market itself has not been very good for small cap and micro cap companies. We’re trying to do our best to attract long-term investors. We’re getting good response. People like the numbers that we’re showing, the fact that we are unlike a lot of our peers we manage to move revenues from residential customers to business and fiber-to-the-premise which is a great low-churn type service, and we’ve been getting good response, and again hopefully this will be reflected in our valuation going forward.

Operator

Our next question is from Mr. Michael Wise with [inaudible] Capital.

Unknown Analyst

A couple of things; one, backing out all the merger expenses, etc., are we still on track with the pro forma that we were talking about earlier in the year?

Niv Krikov

Yes.

Unknown Analyst

Two, when do you think we’ll know with Tadiran one way or the other, by the end of Q3?

Guy Nissenson

That’s a good question. With Tadiran, we’re still in the negotiation mode. Of course, we like Tadiran. We like the company. We like their ability to increase our foothold in state of Israel, and as Niv stated, it gives us natural hedging on the dollar as their income is in shekels and a lot of their expenses are linked to the US dollar, but I cannot comment at this point because this is still in negotiations.

Unknown Analyst

In the UK, the way you look at it, do you plan on still being a three-country company? Are you still holding these things in your long term future, or do you see maybe getting rid of one or two somehow and standing alone?

Guy Nissenson

With the NTS merger, we are a US company. More than 70% of our revenues, profitability, employees, assets, etc., are based in the United States, and in terms of future goals now, they’re mostly here in the US as well. We will look at the opportunities in the market. We don’t have any specific plans. The UK is doing very well. It’s a creating cash flow on a consistent basis, and we don’t have any specific plans for it, but of course, if we get the opportunity, we will look at it in depth.

Unknown Analyst

Has the market from your point of view, and I know you said that you see some depression in residential, but in the business market, are you gaining share, and how’s the competitive situation?

Guy Nissenson

I think this is where we really have a big advantage. With our field, with all this commercial war that is going on between the our folks and the cable companies and the cellular providers, Xfone and NTS has been able to secure a lot of registration in residential, which is now maybe about 20% of our revenues, so it’s relatively low. With new business sales, they usually come with very long term contract. With FTTP sales, they come with very low churn and have the ability to provide cable television service, internet, and telephone, so we’ve been very successful in the last quarter to further move revenues towards business and FTTP, and again our residential sightings in the US is only about 20% at the moment.

Operator

There are no further questions at this time.

Guy Nissenson

I’d like thank everyone for listening to our second quarter results. It’s been a tremendous quarter for us, and we hope, as the year progresses, to continue to show additional merger synergies, and I’d like to say to everyone have a great weekend and we hope you will come back and listen to our call next quarter as well. Thank you.

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