Iowa Telecommunications Services Inc. Q3 2009 Earnings Call Transcript

| About: Iowa Telecommunications (IWA)

Iowa Telecommunications Services Inc. (IWA) Q3 2009 Earnings Call October 29, 2009 9:00 AM ET


Alan L. Wells – Chairman and Chief Executive Officer

Craig Knock – Vice President, Chief Financial Officer and Treasurer

Kevin Inda – Investor Relations


David Coleman – RBC Capital Markets

Frank Louthan – Raymond James

Christopher King – Stifel Nicolaus & Company

Michael Nelson – Soleil – Nelson Alpha Research

Madhu Kodali – Fertilemind Capital

Aram Fuchs – Fertilemind Capital

Barry McCarver – Stephens Inc.

Edward Cass – Morgan Stanley


Good day and welcome to the Iowa Telecom Incorporated conference call. (Operator Instructions). 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

Welcome to the Iowa Telecom conference call to review the company's results for the third quarter which ended September 30th, which were released this morning. During today's call we will refer to certain non-GAAP financial measures and we reconcile these measures to GAAP figures in our earnings release, which is available on our website at

Conducting the call today will be Alan Wells, Chairman and Chief Executive Officer and Craig Knock, Vice President and 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 limitations, statements containing the words beliefs, may, plans, will, estimate, continue, anticipate, intends, expects and similar expressions.

Such forward-looking statements involve known and unknown risks and uncertainties and other factors that may cause actual results or eventual developments to be materially different from future results of eventual developments as 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 put 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.

That stated, I'll turn the call over to Alan Well.

Alan L. Wells

We're glad you joined us this morning as we review our results for the third quarter. I'd like to take a few minutes to focus on our operational and financial highlights and update you on several events which occurred during the quarter.

Craig Knock, our CFO, will then review the financial results in more detail and we'll then take your questions.

We are extremely pleased with our results for the third quarter, which for the first time reflect our acquisition of Sherburne Telesystems, which we closed on July 1st. Our results for the quarter were meaningfully impacted by this transaction and by the resulting integration we have begun.

We believe our quarter's results illustrate the benefits of our strategy of growth through prudent acquisitions.

Our revenues for the quarter increased 8.5% to $68.3 million, reflecting the Sherburne transaction. Operating income for the quarter was $14.9 million and our net income was $4.6 million or $0.13 per diluted share.

Our adjusted EBITDA was $33.4 million, an increase of $1.8 million to the $31.6 million we reported a year ago.

Our income tax expense for the quarter was $3.3 million, compared with $4.3 million a year ago. This income tax charge is virtually all non-cash in nature and thus does not impact either our cash flow or our ability to pay dividends.

Craig will elaborate on income taxes in his remarks, but it is important to note that the combination of our unused net operating losses and our goodwill amortization shield us from most cash tax payments.

Capital expenditures were $5.9 million for the quarter and our cash interest expense was $8 million for the quarter. We continue to expect capital expenditures for the year to be between $26 million and $28 million, but are confident that our results for the year will be in the lower end of that range, even after including capital expenditures for our newly acquired Sherburne assets.

We expect cash interest expense will be towards the upper end of the earlier estimate of between $29 million and $31 million, including interest on the newly issued debt related to the Sherburne acquisition.

For the first nine months of this year capital expenditures were $16.3 million and our cash interest expense was $22.8 million. Overall, our company continued to deliver strong financial and operating results during the third quarter despite the ongoing weakness in the general economy.

In terms of access lines, we ended the quarter with 255,600 total access lines, reflecting additions from the Sherburne acquisition. The Sherburne assets added 14,300 ILEC lines, 9,600 CLEC lines and 14,600 new cell subscribers as of the end of the period.

From a product standpoint, total long distance customers increased by 16,900, DSL subscribers increased by 15,400 and dial-up Internet subscribers decreased by 1,900 and video subscribers increased by 3,900 during the quarter.

Excluding the Sherburne acquisition total access lines decreased by 3,800 lines, as ILEC lines decreased by 3,400 lines and CLEC lines decreased by 400 lines.

Consistent with the past several quarters, we believe much of our ILEC line losses are attributable to both wireless substation and cable competition in several of our markets. We continue to respond to the offerings of our competitors with our bundled DSL and video offerings, which we believe are attractive low cost alternatives for our customers.

While there have been no major changes that we're aware of in our competitor's offerings in the quarter, Mediacom has recently announced some price increases that we believe should further enhance the attractiveness of our product offerings.

I'd like to now provide an update on our recently acquired Sherburne operations. We completed our acquisition of Sherburne on July 1st and immediately began work on integrating its operations into our systems and processes. Over the last few weeks we completed the integration of the billing and order entry systems and now have all major operating systems in the Iowa Telecom platform. As a reminder Sherburne is located only approximately 30 miles from the ILEC operations we acquired from Bishop Communications in July 2008.

We expect to realize additional synergies as our Minnesota operations are further combined and are fully integrated over the next several months. Also relative to our Minnesota operations, on September 24th we completed our acquisition of New Ulm Telecom's ownership interest in Intel Communications LLC, Shell, LLC and Shell Networks, Inc., for $1.9 million cash. We now own all of the outstanding equity in the Shell entities and substantially all of Intel.

Intel Communications is a CLEC based in Wilmer, Minnesota, providing local voice, DSL and digital video services. We're especially excited about our prospects for Shell, which owns and leases a 2,500-mile fiber optic network throughout Minnesota, used to provide low cost, high quality transfer facilities.

We believe the Shell Network is an excellent fit with our ILEC and CLEC operations in Minnesota and provide us a tremendous opportunity to further expand our data services business and wholesale operations in Minnesota.

Lastly, we still anticipate that our acquisition of WH Comm will close next month. As a reminder, on June 23rd we announced our intent to acquire substantially all the assets of WH Comm for $1.1 million, subject to regulatory approval.

WH Comm is a CLEC, which provides telephone and high-speed DSL Internet in several communities near the western suburbs of Minneapolis, and operates today as a division of Wright-Hennepin Cooperative Electric Association. More importantly, WH Comm serves in between out Lakedale and Sherburne operations, enabling us to operate these assets very efficiently.

As of September 30, 2009, WH Comm had approximately 2,000 access lines and 700 DSL subscribers. As a result of these transactions, beginning with Bishop Communications in July 2008 and ending with WH Comm, expected to close next month, we will have completed four acquisitions in 18 months, within a fairly compact geographic area in Minnesota, and it broadened our operations and the markets that we serve.

We continue to believe that each of these acquisitions, individually are accretive to our cash flows. When combined and fully integrated, we believe these transactions and the resulting synergies provide us a unique opportunity to grow our business and our profitability in Minnesota. We believe the transactions and the results released today, illustrate the power of our strategy of prudently growing our business to accretive of acquisitions.

We're excited about our new operations in Minnesota and are competent that these transactions will be beneficial to our company for years to come.

In summary, we believe our business continues to deliver strong results, despite the ongoing weakness in the overall economy. Our business is well capitalized and most of our term debt is fixed through November 2011, at attractive interest rates. As of September 30, 2009, we have drawn $41 million of $100 million dollar credit facility, providing us ample capacity to prudently take advantage of opportunities as they arise.

Despite the past unrest in the financial markets, we've maintained a financial flexibility and as you know, we have funded the acquisition of Sherburne with the proceeds of $75 million of new term debt, issued into our existing credit facilities, coupled with borrowings on our revolving credit facility and cash on hand. The new term debt bears interest at LIBOR plus 2% and will mature in November 2011. At current rates, the all-in borrowing rate on the $75 million of new term debt is approximately 2.26%.

To close, let me reiterate that our strategy remains unchanged as we continue to focus on five key areas. First, we are focused on increasing pre-cash flow by extending sales of our DSL and bundled product offerings. Second, we continue to expand our sales of CPE and advanced data services to business customers in the upper Midwest.

Third, through our competitive local exchange carrier subsidiaries, we intend to continue the selective pursuit of new business customers in markets which are near our existing markets, including our recently acquired Minnesota markets. Fourth, we will continue to pursue and integrate acquisitions that align with our cash flow focus and that clearly meet our criteria for transactions to be accretive to cash flow on a per share basis.

Our recently closed acquisitions are Sherburne, New Ulm's interest in Shell and Intel, and our pending transactions to purchase WH Comm reflect this strategy.

And finally, and perhaps most importantly, we remain committed to returning a stable income stream to our shareholders in the form of our $1.52 annualized dividend. I will now turn the call over to Craig Knock, for your third quarter 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 financial highlights and then we will take your questions. As a reminder, our results for the quarter include the acquisition of Sherburne as of July 1, 2009.

Overall, operating revenues for the quarter were $68.3 million, compared with $62.9 million in the third quarter 2008, reflecting an increase of $5.4 million or 8.5%. Local service revenues increased $1.6 million, or 8.9% for the quarter. The increase was primarily due to higher access lines resulting from the Sherburne properties.

Network access revenues increased $454,000, or 2% for the quarter. The increase was primarily due to the acquisition of Sherburne, partially offset by lower minutes of use per access line, and a decrease in switched access rates for our CLEC operations in Iowa and at Montezuma Telephone.

Long distance revenues decreased $187,000 or 3.2% for the quarter. The decrease in revenue was due to the decrease in minutes used per line, partially offset by Sherburne.

Data and Internet service revenues increased by $2.5 million or 27.7% for the quarter. The increase is principally due to the continued growth in revenue from our existing DSL internet access service of 648,000, combined with the growth in our advanced data products of 543,000, along with incremental Sherburne revenues.

Other services and sales increased by $972,000 or 13.7% for the quarter. Revenue increases primarily due to Sherburne and increased revenue from our video services.

Our total operating cost and expenses increased $7.2 million or 15.7% for the quarter. Cost of services and sales increased $2.2 million, principally due to the operating cost of Sherburne. SG&A cost increased $2.3 million, primarily due to operating cost related to Sherburne, along with acquisition costs of $766,000 that are now charged to expense in accordance with the new accounting guidance adopted in January of this year. Depreciation and amortization increased $2.7 million or 19.5%. The increase is primarily due to $1.7 million of depreciation and amortization expense related to Sherburne.

Interest expense increased $300,000 to $8.3 million for the quarter. The increase is primarily due to the higher average balance on a revolver, and the incremental $75 million term loan B debt that was issued to acquire Sherburne, all partially offset by lower variable interest rates.

In terms of income tax expense, we reflected $3.3 million of book income tax expense during the quarter, compared to $4.3 million last year. The recorded book tax expense did not impact the cash taxes paid during the quarter, which were zero. Again, let me remind everyone as it relates 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 the overwhelming majority to be deferred.

Again, we have a very strong tax shield position driven by our existing NOL of approximately $157 million coupled with our continued goodwill amortization from our initial acquisition of GTE, at the rate of approximately $41 million per year through June 2015. Furthermore, since the Sherburne acquisition was an asset purchase, we have additional goodwill amortization from this transaction or approximately $1.8 million annually through 2024.

Collectively, these items will shield us from material cash income taxes for a good number of years. However, despite our tax shield, we may be required to pay modest cash AMT taxes along with Minnesota cash taxes in the near term. And as noted in our filings, we paid cash income taxes of $71,000 during the first nine months of the year, and again, paid nothing in the quarter.

The bottom line for us this quarter was a net income of $4.6 million or diluted earnings per share of $.13. Our adjusted EBITDA as defined in our credit agreement and reconciled in our press release was $33.4 million for the quarter, an increase of $1.8 million over last years'.

I would like to take a minute now to discuss our debt and related interest expense. As of September 30, 2009, we had $569 million of debt under term facilities and $41 million drawn under our revolving credit facility, which are offset by $7.8 million of RTFC capital certificates, and $12.1 million of cash.

Our net debt or just a total debt as defined in the credit agreement was $590.1 million at quarter end. That level of adjusted total debt correlates to a leverage ratio as defined and calculated in our credit agreement of 4.36 times. Our cash interest expense, as defined in the credit agreement, was on track with our expectations for the quarter at $8 million.

For 2009 guidance, we continue to expect that our cash interest expense will be between $29 million and $31 million. However, with the acquisition of Sherburne, and the issuance of debt to fund the purchase, we will be near the upper end of that range.

Turning to our capital expenditures, for the quarter our capital expenditures were $5.9 million. As Alan indicated, we continue to expect our capital expenditures for 2009 will be between $26 million and $28 million, including the capital expenditures for Sherburne. However, we are confident that the total for the year will be toward the lower end of that range.

Now, I would like to summarize our cash sources and uses for the last 12 months as I demonstrate the strength of our ability to pay dividends. Starting with adjusted EBITDA of $126.2 million and deducting cash interest expense of $30.9 million, capital expenditures of $24.3 million and cash income taxes of $124,000 results in $70.9 million in cash available for dividends, and our annual dividend rate of $1.62 per share would pay dividends of $52.4 million.

Thus, for the trailing 12 months, our payout ratio of our free cash flow was approximately 73.9%. This is also equally important to note that as of September 30, 2009, we had cumulative distributable cash for actual dividend capacity as defined in our credit agreement of approximately $99.1 million, or said another way, roughly two years dividend requirement. [Elizabeth], we will now answer any questions.

Question-and-Answer Session


(Operator Instructions). Your first question comes from David Coleman – RBC Capital Markets.

David Coleman – RBC Capital Markets

Just a question on the Sherburne acquisition, can you talk about how much revenue and EBITDA impact that had on the third quarter? And then I believe you guys picked up additional 700 megahertz spectrum with some of these acquisitions, and I was wondering what your intent is as far as deploying that spectrum?

Craig Knock

I'll take the first part of it. We haven't broken out Sherburne because it's not a material acquisition, but if you look back at some of the filings that we had previously, I think you'll see that the trailing revenues they had were roughly $29 million and trailing EBITDA was just a little over $11 million. So that's some form of guidance.

Again, we just closed in July and we started, as Alan indicated, integration activities and system changes and so forth. So we haven't realized as much synergies yet as we'd like or will over time, but nonetheless, we're starting on that process.

Alan L. Wells

As far as the 700 megahertz that we obtained as part of the Sherburne transaction, they had some 700 megahertz spectrum around their service areas and around Saint Cloud which we acquired as part of that deal, and have no immediate plans, much like our 700 megahertz spectrum and [800] spectrum that we have in Iowa. We're kind of waiting to see how the market evolves for that, but at this point, have no immediate deployment plans.


Your next question comes from Frank Louthan – Raymond James.

Frank Louthan – Raymond James

So just looking at the revenue and margin shifts after Sherburne, is this kind of the run rate we should be looking at going forward? And can you give us an idea on the revenue and margin opportunities in the areas you identified as some places where you could get some additional revenue, like the Shell Network and expanding CP and CLEC operations? How should we think about that sort of upside opportunity going forward?

Craig Knock

As to the margins, and again, we don't necessarily comment forward-looking, but as I just said to David that we believe that there's an incremental synergy opportunities that will come as we combine the operations of Bishop and Sherburne up in Minnesota, so we expect some incremental savings there from overall synergies. And Alan will touch on the Shell opportunities.

Alan L. Wells

As far as the CLEC operations in Minnesota, I think Sherburne had a small CLEC and obviously Bishop Communications had a fairly small CLEC as well. I think until we have thoroughly combined those and probably see we can expand our CLEC operations. As you know, we've been fairly successful in expanding our CLEC in Iowa and see some of the same opportunities in Minnesota as we go forward, but we're pretty early in that process. We just know there's opportunity for us to grow that.

And as far as Shell goes, as we mentioned we didn't close that until kind of late September, so I think we're fairly early in the process of expanding our business there, but just see opportunity to grow other wholesale and transport business with that network now that we're the full owners.


Your next question comes from Christopher King – Stifel Nicolaus & Company.

Christopher King – Stifel Nicolaus & Company

Two quick questions for you. First of all, probably a little early to talk about consolidated 2010 CapEx budgets, but just wanted to get your sense in terms of the recently acquired assets, specifically Sherburne and Shell, whether or not those will be a significant contributor to CapEx numbers in 2010.

And then secondly, following these acquisitions, I know you guys have done a lot of work over the last year or two on your pension expenses going forward. I just was wondering if you could give us an update in terms of the cash outlays that you guys foresee for pension and post-retirement expense looking forward.

Craig Knock

Again, as you know, we've done a fair bit in the pension area and over a couple of different amendments with the union and curtailment relative to certain other salaried folks that we've mitigated that expense over time. And our actual funding obligations are, I believe, disclosed in the 10-Ks and so forth, but I think it's about $750,000 a year which is fairly close to where our expense is.

Christopher King – Stifel Nicolaus & Company

And that's not going to change materially with the latest acquisitions?

Craig Knock

No. No, there were no pension obligations there, and as far as OPEB, I think in the second quarter we've mitigated some future cost on that. So that's one area that we'll continue to focus on to, you know, keep it in as small of box as possible.

Alan L. Wells

As far as the CapEx goes, I think, as you know our CapEx for this year included a full year's CapEx for Bishop, and we don't see a sizeable change in CapEx going forward as a result of the Sherburne acquisition. We had Sherburne CapEx this last quarter. We'll have it this coming quarter as well, so we'll have half a year's CapEx for Sherburne in the 2009 results. But both these systems were very high quality. We don't see a lot of a need for additional CapEx to bring it up speed. They're good assets.


Your next question comes from Michael Nelson – Soleil – Nelson Alpha Research.

Michael Nelson – Soleil – Nelson Alpha Research

The question is your rate of access line decline in your legacy markets continue to improve during the quarter. I was wondering if you could discuss some of the puts and takes leading to that improvement and if there are any different trends in your legacy markets than in your acquired markets?

And then a second question regarding potential M&A, you've obviously been very active on the M&A front. I'm wondering if you think you have the bandwidth to handle additional acquisitions as you integrate your existing transactions?

Alan L. Wells

As far the access line losses, I think probably our metrics are still under most of our peers throughout country. I think probably one of the things that differs about us a bit is that our primary cable competitor is Mediacom, and they've been in the market now for 18 months or two years, and so you'll see some of the initial losses we had at the cable competition has kind of plateaued a bit. So we think that's probably unique or us.

As far as the M&A bandwidth, I think obviously each transaction takes some time to go through, but once you're through it and once you through the integration, then you have folks who are able to do another one. So we think we have bandwidth. We probably couldn't do 12 at the same time, but I think the pace we've be on some, we can continue.

Michael Nelson – Soleil – Nelson Alpha Research

And then in terms of the access lines and I know with Mediacom and your legacy markets, are there any differences, any different trends within those legacy markets and the acquired properties?

Alan L. Wells

No, not really. I think they have a couple competitors and a couple exchanges they serve, so they don't just have one cable competitor like we really have in the state of Iowa, but I think their trends are very similar to ours.


Your next question comes from Madhu Kodali – Fertilemind Capital.

Madhu Kodali – Fertilemind Capital

I was wondering with the economy what it is and hardware prices going down, are you guys getting some benefit out of CapEx based on what's going on in the market?

Alan L. Wells

I don't think we have had a huge amount of CapEx benefit as a result of the downturn of the economy. I think we've always been able to have pretty good pricing on our CapEx expenditures. We probably have had maybe a little, slight spins for new housing, for example, the way we had a couple of years ago, but I don't think it's been a huge downward push as a result of the economy.

Madhu Kodali – Fertilemind Capital

And relative to that, I'm trying to understand a little more on what's your fiber strategy? Are you going ahead with pair bonding kind of solutions to expand the bandwidth on your last mile, or are you looking at fiber in certain parts of the market. What are you going to see in the next 2 to 3 years timeframe?

Alan L. Wells

I think we've done some pair bonding. I think if you look at our footprint, we are very rural. And I think if you look at our larger companies in our space, that have deployed fiber to the home and fiber to the curb, those don't really make a lot of sense in our rural markets. So I think we'll probably continue to look at fiber as kind of the main core backbone of our network but probably pair bonding with the last customers is the way for us.

Madhu Kodali – Fertilemind Capital

And how far you think based on your results so far on the pair bonding can – what kind of markets are the customer base can you reach based on what you have today?

Alan L. Wells

We currently have about between 75% and 80% of our customers are DSL capable. And the pair bonding might help that slightly but it probably helps improve the speed as much as anything.

Madhu Kodali – Fertilemind Capital

Okay, and one last question on the debt. Your debt, I think you have probably two years time when it matures. Trying to understand if you are looking at refinancing at this point, you're holding off, what strategies in what you're seeing in terms of the credit markets today?

Alan L. Wells

Well obviously the credit markets have improved in the last, just last several months and we're very mindful of our maturity coming in November 2011. So I think we continually look at the market as to what the right time might be for us to think about entering the credit market.

But at this point in time I think we're focused on integrating our most recent acquisitions and illustrating the benefits of those transactions. And probably as we come closer to thinking about maturity we'll probably at the right moment try to enter the credit market then.


(Operator Instructions). Our next question comes from Aram Fuchs – Fertilemind Capital.

Aram Fuchs – Fertilemind Capital

Yes, a couple of questions. Some of the RLECs have spoken of de-levering in terms of leverage ratios and payout ratios. I was wondering if you can comment on that. And then, again, some of the large RLECs have had some initial success in ancillary products like storage, security, tech support, that sort of thing. Do you think those are feasible in your markets? Thank you.

Alan L. Wells

Well on the latter front, yes I think we've already started to explore some of those ancillary products. We talk about advanced data products for example. I think storage and backup service, those sort of things, are things that we've already entered the market in kind of a limited way at this point in the markets that we serve. But we think there is ample upside on those ancillary products that we'll see some benefit as time goes by.

As far as the de-leveraging goes, I think again, right now we're pretty focused on integrating our most recent transactions. We'd like to get those under our belt and then we'll look at our credit facilities once that's complete.

Craig Knock

Yes, and as I indicated, our ratio in accordance with our existing credit again is 4.36 times leverage right now and again, we took off a fair amount of free cash flow and we'll continue to de-lever with that and likewise grow – focus on growing our adjusted EBITDA through this integration.

Aram Fuchs – Fertilemind Capital

And then U.S. Cellular has countered some of the launches in Chicago with more all you can eat plans. I was wondering if you're seeing those in your markets and if so does that impact line loss at all?

Alan L. Wells

I don't know that that type of product would – has changed our line loss out here and I don't know that it's a problem in our market.

Aram Fuchs – Fertilemind Capital

Why do you think that is?

Alan L. Wells

I think we've seen those kind of products in our market for some time. Nothing's really new about that offering and I think we've seen obviously like others, some migrations to wireless, but I don't think that particular product's had much of an impact on us.


Your next question is from Barry McCarver – Stephens Incorporated.

Barry McCarver – Stephens Incorporated

Just a couple of quick housekeeping questions. First off, I was wondering if you could break out on the Sherburne deal, the piece of revenue that was USF subsidies and an intercarrier comp.

And then secondly, I know – I understand you don't want to comment directly on margins, but an acquisition of this size, the typical integration and the time period before we start to see margins kind of move back up, is that kind of two to four quarters? What would you have in mind there for a deal this size?

Craig Knock

On the USF I think we'll have some commentary relative to that in our 10-Q which we'll get filed sometime this morning. But again, overall it's less than 1% of our overall company-wide revenue and so the uptick, if you will, from Sherburne and all that's publicly available data is not, it's not that significant overall.

But to your point of when do you realize the synergies and so forth and just kind of go back in time. Bishop had roughly a 30% EBITDA margin. Sherburne was a little stronger than that, 37%, 38%, EBITDA and again, as Alan said, we're – just migrated the Sherburne systems this quarter.

Unfortunately there were some people that departed at that point, but with severance and what not, the overall incremental gain, if you will, in the quarter was not that material today but as time goes on what we'll start to realize those benefits. So without pinpointing an exact quarter you're not too far off in terms of when you start to realize that additional benefits.


(Operator Instructions). Our next question comes from Simon Flannery – Morgan Stanley.

Edward Cass – Morgan Stanley

Hi this is actually Edward Cass for Simon. Just wanted to talk a little bit more about friends you're seeing in the CLEC right now, if they're still delayed decision making on the part of businesses and it's a line loss I think the organic basis that you saw was more residential or business. I just wanted to get some more color there, thanks.

Craig Knock

Yes, you're exactly on point relative to the line loss we had on those CLEC operations. Again, as we mentioned for several quarters we continue to let the residential customers somewhat churn off and are much more focused on the business customers and now we're well north of a 60% business penetration in terms of our overall CLEC operations.

And as far as them delivering or delaying decisions, again, most of our customers, business customers aren't very, very large enterprise. They're more school districts and smaller corporate operations that are probably below the radar of many others.

Edward Cass – Morgan Stanley

So could we assume that the line loss there was mostly on the residential side?

Craig Knock

Yes, clearly it is.


It appears that we have no further questions at this time. I'll now turn the program back over to our speakers for closing remarks.

Alan L. Wells

Okay, thank you, [Elizabeth]. Thanks again for joining us this morning. We appreciate your time and hope you join us next quarter for our next regularly scheduled call. Thank you.


This concludes today's teleconference; you may now disconnect your lines, thank you and have a great day.

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