Hawaiian Telcom Holdco's (HCOM) CEO Scott Barber on Q2 2016 Results - Earnings Call Transcript

| About: Hawaiian Telcom (HCOM)

Hawaiian Telcom Holdco, Inc. (NASDAQ:HCOM)

Q2 2016 Earnings Conference Call

August 01, 2016, 03:00 P.M. ET


Ngoc Nguyen - Manager of Investor Relations.

Scott Barber - Chief Executive Officer

Dan Bessey - Chief Financial Officer


Barry McCarver - Stephens Inc.

Steve O'Hara - Sidoti & Company

Barry Sine - Drexel Hamilton


Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Q2 2016 Hawaiian Telcom Holdco, Inc. Earnings Conference Call. [Operator Instructions] I would now like to hand the presentation over to Ngoc Nguyen, Manager of Investor Relations. Ma’am you have the floor.

Ngoc Nguyen

Thank you, Bryan. Aloha, everyone, and welcome to our second quarter 2016 earnings conference call and webcast. Joining me on the call today are, Scott Barber, Chief Executive Officer; and Dan Bessey, Chief Financial Officer, who will be making prepared remarks about the quarter and participating in the Q&A portion of the call.

Before we get started, let me remind you that our earnings release and financial statements are available on the Investor Relations section of our website at hawaiiantel.com. In addition, you'll find a slide presentation for today's call, which we will be referencing throughout our remarks.

Now, I'd like to draw your attention to Slide 3 and our Safe Harbor statement and remind everyone that some of the information provided on this conference call constitutes forward looking statements that are based on currently available information and are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those that may be expressed or implied by such forward-looking statements. These risks factors are described in the company's most recent Annual Report filing with the Securities and Exchange Commission, which is available on the Hawaiian Telcom’s and SEC website.

Also, our discussion may contain certain non-GAAP financial measures. These non-GAAP financial measures are defined and reconciled in the tables attached to their earnings press release, which are also available for review in the Investor Relations section of the Hawaiian Telcom website.

With that, I would like to turn the call over to Scott Barber, Chief Executive Officer of Hawaiian Telcom. Scott?

Scott Barber

Thanks, Ngoc. Aloha, everyone, and welcome to our second quarter 2016 earnings conference call. Overall, I’m very pleased with our second quarter results as we continue to make good progress executing on our strategic plan.

Let me begin on Slide 5 with some second-quarter highlights. Revenue for the second quarter increased a solid 3.5% year-over-year to $99.5 million, driven by strong revenue growth in our strategic services, including broadband data services, video, and data center and cloud services. Adjusted EBITDA for the quarter totaled $30.8 million, up 3.3% compared to the prior year, and we generated net income of $1.4 million. Business revenue grew 9.7% year-over-year to $46.7 million in the second quarter.

Strong growth from next-generation services, primarily driven by 40.2% year-over-year increase and broadband data services revenue and a 15.3% increase in data center services. Consumer revenue totaled $36 million, compared to $36.5 million in the same period a year ago. Hawaiian Telcom TV revenue grew 20.7% year-over-year in the second quarter and along with revenue from higher bandwidth Internet services, it nearly offset the year-over-year revenue decline in consumer legacy voice and low bandwidth Internet services. Overall, our strategic growth services delivered strong results in the quarter.

Now moving onto the next slide, let’s take a look at how the performance of these strategic services has transformed over the last two years. If you look at the chart on the left, which shows our revenue performance over the last 12 months by channel, you can see that our business channel made up about 45% of our total revenue. The top chart on the right looks deeper into our business channel performance over the last two years.

It shows that there the growth driver of business is strategic services, which include data services and data center services. Driven by increasing customer demand for higher bandwidth IP-based data services and integrated communication solutions our business strategic revenue rose 35.4% year-over-year and now represents 42% of total reported business revenue, compared to 34% in the same period a year ago and 31% in the same period just two years ago.

Likewise, in our consumer channel, which represents 37% of our total revenue over the last 12 months strategic services, which include video and Internet group 5.2% year-over-year and now represents 48% of total consumer revenue, up from 45% in the same period a year ago and 37% in the same period two years ago. Hawaiian Telcom's sole focus and rich history in the islands and critical fiber infrastructure, including our 24/7 locally based state-of-the-art network operations center and our solid positioning as Hawai‘i’s technology leader continues to provide a concrete foundation for organic growth and future cash flow.

Moving to Slide 7, let me provide an update on each of our channels starting with the business channel. Our second-quarter business results demonstrate solid execution of our strategic plan. We continue to prove that we are a trusted strategic partner and go to collaborator with the right mix of products and services to help our customers achieve their desired business outcomes.

For our micro, as well as our small and medium-size customers we're focused on offering cost-effective voice and higher speed Internet bundles to more customers. In the second quarter using fiber GPON technology to further leverage our existing fiber build out, we have fiber enabled 1700 small business addresses providing them with access to our market leading one gigabit Internet service. This brings our total enabled business addresses to 5000 and of this total nearly 2000 were enabled in the first half of this year.

We continue to actively engage in the marketing and sales process, including prospecting, campaigning, direct mailing and outbound calling from our local call centers. We believe that high-speed broadband is the foundation for us to layer on additional services such as security, mobility, IP support, and cloud services helping our customers solve their technology needs now and into the future.

In the SMB space, our focus continues to be on customer education and flexible bundling of services and applications to help our customers transition and succeed in a digital age. Business all-in-one, our hosted voice over IP and broadband Internet bundle is our lead offer in the SMB market and it continues to perform well in the second quarter. We saw a 14% year-over-year increase in a number of voice-over-IP customers and 17% increase in the number of VoIP lines from this product.

This increase is from either brand-new customers, adding their service or existing legacy voice customers migrating to hosted voice and attaching high-speed Internet, which moves them from month-to-month to 1 to 3 year contracts. Customer migrations to hosted VOIP, partially offset the decline in business legacy voice access line. We also continue to see solid growth in our dedicated Internet service, due to our consistent broadband delivery and performance.

Further, sales of Microsoft Office 365 to the SMB market continues to gain traction. We doubled the number of units sold in the second quarter and successfully pulled through other services. As an example in the second quarter, we sold and helped one of the largest health and human service agencies and the state migrate to the Microsoft Office 365 product suite.

The client was so pleased with the entire experience he decided to expand their partnership with us by purchasing IT as a service, which includes the management of their desktop services, and other devices in the network. These incremental pull through services they ended up spending more three times the monthly amount they'd originally planned to spend with us. In the enterprise and government space, we continue to see good growth and opportunities.

Our focus on effectively meeting our customers technology needs is helping us develop trusted long-term relationships with our customers. And as our client’s trusted business partner, we were able to successfully shepherd them through everything from completely upgrading and modernizing there IT systems to increasing broadband capacity or enhancing their cloud applications to increase flexibility and mobility.

In the second quarter, we received orders from two different state agencies to begin their transition from legacy voice services for our hosted voice cloud offering. And part of this project will include data infrastructure upgrades, which will provide them with more flexibility and scalability, as well as position them for advanced communications capabilities such as unified communications.

Our ubiquitous fiber optic network, a local presence, and having the island’s only state-of-the-art network operations center is our competitive advantage in the business space. This is why a large Hawaii-based chain of convenience stores chose to provide there managed security services for all of their locations, which we started delivering in the second quarter. We continue to see growth in security and managed services not only as one-time professional services, but also recurring network monitoring.

Now let’s turn to Slide 8 and review our consumer channel. In the consumer channel, we continue to make progress with TV in the second quarter, fiber enabling an additional 3,000 homes, while at the same time increasing our TV penetration to 19.5%. We continue to execute in our bulk MDU strategy and sold through additional double play bulk contracts in the quarter totaling nearly 600 units.

We now have a total of 64 TV bulk MDU buildings under contract, compared to 50 buildings a year ago, and 39 buildings two years ago. We continue to see growth in multifamily units as supported by Hawaii's construction boom, particularly in the Kakaako area in Honolulu were about a dozen high risers have sprung up in the last few years. 70% of these Greenfield high-rise buildings opted for our TV and Internet service, due to numerous advantages that our fiber network provides.

Our current bulk MDU contracts total more than 11,000 units of which over 9000 have been installed and the remaining 2000 will be installed over the next 12 months. The majority of the remaining installations are double play, TV, and Internet packages. TV is an important part of our consumer strategy as it continues to pull through Internet at a very high rate and allows us to provide triple play service.

In the second quarter, we drew the number of triple play customers by 13%, compared to the same period a year ago and 45%, compared to the same period two years ago. We continue to explore enhancements to our TV offerings and technologies to improve our video service and increase Internet speeds in penetration, especially outside our fiber footprint. Total residential Internet subscribers on Oahu where we have our NGN foot print or next generation footprint and offer IPTV service, those subscribers grew by 1.5% year-over-year in a second quarter.

Across our total Internet subscriber base adoption of higher-speed offerings continues to increase. Approximately 45% of our total residential Internet customers are on 21 Meg to 1 gigabit speeds today compared to 35% in the same period year ago 25% the same period just two years ago. One other area where we continue to slightly differentiate ourselves from our competitors is customer service.

We recently lost Wi-Fi plus, an exclusive white glove program offered to our high-speed Internet customers who order speeds of 50 Meg or higher. With Wi-Fi plus our technicians will customize the best Wi-Fi solution for the customer's particular in-home environment.

And take into account how many connected devices are being used and the layout of the customers home to recommend the best location for the wireless router and may possibly offer a Wi-Fi extender to boost the customers Wi-Fi signal. As a local company with a singular focus on Hawaii, our employees are dedicated to providing exceptional customer service, a meaningful differentiator in this market.

Turning to Slide 9, in the wholesale channel our focus was on leveraging our fiber network to continue to increase Ethernet to our wire line and wireless customers and be the provider of choice for the wireless carriers and expand services and solutions for the trans-Pacific market. On the wireless side, as of the end of the second quarter, we have completed the backhaul build to 469 fiber to tower sale sites and we have another 56 sites under contract.

Because of our extensive fiber NGN network we have built over the last five years, the average cost for us to connect a cell site is significantly less than what is used to be. Today approximately 86% of our existing cell sites are 100 megabits or higher compared to 80% a year ago and a growing number of sites are being upgraded to 200 megabits and higher. These upgrades increase ARPU and help to mitigate revenue pressures from disconnects of legacy TDM circuits, which were typically lower bandwidth and on month-to-month rate.

When our wholesale customers both wireline and wireless required high-capacity bandwidth, we still migrate them to more efficient and more cost-effective fiber-based Ethernet circuits on multiyear contracts. Second-quarter wholesale Ethernet revenue grew 24% year-over-year and 75% over the last two years. We expect Ethernet to continue to grow and provide a more predictable wholesale revenue stream.

As for the progress on the trans-Pacific undersea cable build, everything continues to track nicely according to plan and we expect the system to be ready for service in the mid-2017 timeframe. In the meantime, we continue to actively sell the remaining capacity that we have on this system.

So, overall, we had a great quarter and continue to make steady progress on our strategic plan. We remain focused on delivering revenue growth, managing costs, generating cash flow and increasing value for our shareholders.

With that, I'll turn the call over to Dan to review the details of our second quarter operating and financial results.

Dan Bessey

Thank you, Scott, and again thank you everyone for joining us on the call today. I’ll move directly to Slide 11 and we can review the second quarter financial results in more detail.

Revenue for the second quarter was $99.5 million, up 3.5% year-over-year, compared to $96.2 million in the second quarter of 2015. Revenue growth in the quarter was mainly driven by strong growth in our strategic services, which is key to our sustainable cash flow generation. Adjusted EBITDA was $30.8 million for the quarter, an increase of $1 million year-over-year, primarily related to the increase in revenue.

Net income for the quarter was $1.14 million or $0.13 per diluted share, compared to $0.5 million or $0.04 per diluted share in the second quarter of 2015. As a reminder, net income for the second quarter of last year was impacted by $1.4 million non-cash pension settlement loss related to a large number of employee retirements during the quarter.

Let's now move to Slide 12 and walkthrough more details on the quarter results beginning with the business channel. Business performance continued to be strong in the second quarter with revenue totaling $46.7 million, up 9.7% from the same period a year ago.

Data service revenue, which consists of business data, Internet and VoIP revenue increased 40.2% year-over-year driven by $2.9 million in nonrecurring revenue from the large government agency multi-location contract we won in June 2015. The nonrecurring revenue from the contract was too fully cover the capital cost to connect nearly 250 customer sites state-wide, which we completed at the end of the second quarter of this year. If we exclude the $2.9 million nonrecurring revenue recognized in the quarter, data service revenue would have increased a solid 13.2% year-over-year driven by growth in Internet, IP VPN, dedicated Internet access and BVoIP.

We delivered good results in the SMB market as demand for business all-in-one, our hosted voice and Internet bundle continued showing momentum. In the second quarter, the number of BVoIP lines grew 17% year-over-year to approximately 18,100 lines offsetting nearly half of total legacy voice access line decline. The data pull through from these bundles and new fiber Internet subscribers contributed to the year-over-year increase in overall data lines and ARPU, which drove increases in business Internet revenue.

Revenue from system metrics was up 15.3% year-over-year driven by network services and hardware sales, which we believe will pull through cloud and other services over time. Revenue from equipment and managed services increased 8.3% year-over-year, partly driven by the installation of customer premise equipment for the large hospitality customer we mentioned last quarter. Revenue from equipment sales usually varies from quarter to quarter based on the volume of large installation projects.

All these increases in the quarter more than offset the impact from a year-over-year decline in business voice lines. We believe that we have the opportunities and the right portfolio of business offerings to continue to transform our growth profile, grow our business revenue and generate sustainable cash flow from this channel.

Moving to Slide 13, second quarter consumer revenue totaled $36 million, $0.5 million lower compared to the same period a year ago. Video revenue increased $1.7 million or 20.7% year-over-year driven by expanded reach and deeper penetration into our next-generation fiber network.

In five years, we've now built our video business into a $41 million annualized revenue stream and growing. Of the 1,485 video net adds during the quarter, 850 were higher ARPU, non-bulk, single family home subscribers and 635 were bulk MDU subscribers that are locked into multiyear contracts. Approximately, two-thirds of these bulk subscribers are on double play contracts with Internet.

Of our approximately 38,600 total video subscribers at the end of the second quarter, 76% are non-bulk, single family home subscribers and 24% are bulk MDU subscribers. Approximately 76% of the video subscriber gross adds this quarter were brand-new or win-back customers. And as Scott mentioned earlier, the Internet attach rate across all our video subscribers continues to be high at approximately 94%.

So as we continue to increase the penetration of our enabled footprint, Hawaiian Telcom TV will continue to be critical in helping us drive market share gain in the Internet. Consumer Internet revenue for the quarter decreased $900,000 or 10.5% year-over-year due to 1.6% year-over-year decline in Internet lines and lower year-over-year ARPU from promotional activities and a higher percentage of subscribers being in the bulk MDU category. We ended the second quarter with approximately 91,800 Internet subscribers.

As Scott discussed earlier on Oahu, where three quarters of our consumer internet subscribers are located and where the focus of our next-generation fiber network investment has been, we have consistently seen positive internet subscriber net adds and increasing customer adoption of our higher speed offerings. In the second quarter, the number of customers on 21-megabit or 1-gigabit speeds increased 25% compared to last year's second quarter and 80% over the last two years.

Revenue increases from video and high-bandwidth Internet services were more than offset by revenue declines relating to the year-over-year drop in consumer voice lines and low-bandwidth Internet services. The majority of our consumer legacy line loss continues to be attributable to voice competition and wireless substitution, which is similar to the rest of the industry.

As we have said before, we believe this highlights the importance of investing in our fiber network, which serves as a foundation for us to capitalize on growth opportunities across all of our revenue channels, improve overall revenue performance and produce sustainable cash flow.

Moving to Slide 14, let me touch on the wholesale channel. Second quarter wholesale revenue totaled $13.2 million, down $600,000, compared to the same period a year ago. The revenue decline was primarily due to certain wholesale customers migrating from legacy TDM circuits on month-to-month rates and moving to more efficient higher bandwidth fiber-based Ethernet circuits on multiyear contracts as Scott discussed earlier. We expect this channel to be a stable and predictable source of cash flow with a high rate of return as our wholesale customers upgrade or purchase additional Ethernet capacity, we deploy fiber to more cell sites, and start recognizing trans-Pacific revenue.

Moving to Slide 15, let me now turn to operating expenses. Our second quarter total operating expenses increased $1.7 million year-over-year to $92.7 million. If we exclude non-cash and nonrecurring items, our second quarter operating expenses totaled $68.8 million, up $2.4 million when compared to the same period a year ago.

The bridge on Slide 15 illustrates that increase in our operating expenses was partly due to increased direct cost of service related to video from rising content costs and increased number of subscribers, higher periodic pension costs on lower estimated pension trust asset returns and higher revenue related variable costs. These increases were partially offset by lower energy costs as a result of lower rates and reduced usage from our internal energy savings initiatives.

Moving on to Slide 16, let me turn to capital expenditures. Reported Capex was $52.9 million for the first half of 2016 consistent with the same period last year. The year-over-year decrease in program Capex was primarily due to lower spending on our next-generation fiber network build. This decrease was partially offset by the year-over-year increase in payments on the trans-Pacific submarine cable system, spending on the fiber-to-the-business and Connect America Fund Phase II build out.

In the first half of 2016, a total of $13.8 million was spent collectively on our next-generation fiber network build and payments on our trans-Pacific cable system both of which are in program Capex as well as cell site backhaul, which is in growth Capex. This is in comparison to a total of $17.6 million spent on these three initiatives in the same period in 2015.

Overall, the level of capital expenditures for 2016 is expected to be in the high $90 million range, which includes additional milestone payments to our trans-Pacific consortium, continuing fiber builds to more business, homes and cell sites, CAF II build on the neighbor islands, and success-based capital to support the growth of our next generation services.

Moving to Slide 17, let me provide some detail on cash flow. For the first half of 2016, our cash flow was negative $4.2 million compared to negative $11.7 million in the same period of 2015. For the first half of 2016, net cash provided by operating activities was approximately $11 million favorable versus the same period a year ago primarily due to improvement in working capital. Net cash provided by financing activities was approximately $4 million unfavorable primarily due to proceeds from cash burn exercises received in the first half of last year.

For the first half of 2016, our levered free cash flow, which we define as adjusted EBITDA minus cash interest expense and capital expenditures, was negative $300,000. As the chart on Slide 17 indicates, our quarterly levered free cash flow will fluctuate due to the level and timing for capital spending.

From a liquidity standpoint, we ended the first quarter with approximately $26 million in cash and cash equivalents and we have access to an undrawn revolving credit facility of $30 million. So we had $56 million in total liquidity at quarter end. We are conservatively capitalized with a net leverage ratio of approximately 2.2 times and an interest coverage ratio of approximately 6.6 times.

So that concludes my comments today. And with that, I'll turn the call back over to Scott for some closing remarks.

Scott Barber

Thanks, Dan. So in closing, we continue to execute against our strategic plan and I look forward to the prospects and opportunities that lie ahead for us to drive long-term value for our shareholders. So that concludes our prepared remarks for today's call. I'll turn the call over to the operator so that we can take your questions. Operator?

Question-and-Answer Session


Thank you. [Operator Instructions] Our first question comes from the line Barry McCarver with Stephens Inc. Your question please.

Barry McCarver

Great. Thanks, guys, and great quarter. I guess, first off, can you give us the backlog for your fiber-to-the tower build out? What do you expect to do in the second half of the year there?

Scott Barber

Yeah, the remaining ones under contract, Barry, those will not get installed this year. It's going to probably take the next year or year and a half. At this point in time, we're waiting on the carrier sites to be ready for service. As they get closer and closer to being ready, we will actually do fiber-to-the-curb, so we will actually take the fiber right out in front of the site and then within about 30 days or so to install and then obviously extend that in. But based on the schedule that we receive from the carriers, it's going to take probably take the next year or so to get them all installed. Now we are hearing from some of the carriers about potential use of small cell technology in some of the high dense areas, i.e. Waikiki, downtown, et cetera. So there could be an opportunity for additional contracts with the carriers if in fact they deploy that technology.

Barry McCarver

Okay. And then you mentioned rising content costs with the video offering in the prepared comments. I’m curious are you finding on the consumer side you are able to push that higher cost through each year or are you feeling any pushback from residents may be thinking about doing something different with their TV?

Scott Barber

We just did, Barry, a price increase about a month ago so we’re able to actually pass along some of our content increases. They don't necessarily match our content increases year-over-year. For example, last year we actually turned off a few channels simply because the cost didn't match the viewership. And so our content increases weren't as much, but we are able to price increases. They are not necessary. And then this year the exact opposite occurred, about 100% of the price increase was passed along. But every year we are able to increase our prices. Of course, the promotional pricing to grab new subscribers pulls down ARPU in the near-term, but long-term we are able to pass those along.

Barry McCarver

Very good. And just one for Dan real quick. Dan, would you share what CAF II was in the Capex number this quarter?

Dan Bessey

Yeah, it was just under $1 million dollars.

Barry McCarver

Under $1 million, okay. All right. Thanks, guys. I will get back in the queue, let somebody else ask questions.


Thank you. Our next question comes from the line of Steve O'Hara with Sidoti & Company. Your question please.

Steve O'Hara

Yeah, hi, good morning.

Scott Barber

Good morning.

Steve O'Hara

I was wondering if you could talk quickly, I mean, I saw the Internet – I want to say the Internet lines was down a little bit. I'm just wondering what's driving that and if you could just talk about that a little bit, maybe discuss it, I’m not sure, but thank you.

Scott Barber

Yeah, so let me sort of just talk about our next generation network, I want to do that, obviously, I talk about TV and HSI. Sales remained strong, in fact if you look at sales in the first half of this year, the first half of last year, it’s almost exact same numbers. Quarter over quarter, we continue to have strong sales. Obviously, pull through of the Internet was outstanding at 94% and churn is still really low, Steve, I mean, industry-leading at 1.6%, 1.7%. Of course that churn is on a bigger base of subscribers every quarter.

And then secondly, if you look at – even though the sales remained strong and you have a little bit bigger churn on a bigger base of customers, a lot of those sales are shifting to MDU sales, so we will sign up sales this quarter, but they don't get installed for the next four quarters, so because the contracts are not quite up. So you have a couple of those dynamics that impact the net adds in the NGN area, but again strong, strong growth and demand for our service in the next generation network as well as now shifting some of that network capabilities to the business channel and doing business GPON there and we’re getting great growth on HSI from that – in the early results of that. So you're going to get the lumpiness from MDUs. Sales are strong. We do have the churn, low churn, but on a bigger base, it affects net adds in general.

On the copper site largely which is our neighbor islands, first of all, let me say one of the point, on Oahu, we actually had an increase in HSI year-over-year. There is about 300,000 homes on a Oahu, 200,000 of which have been NGN enabled for TV and HSI, high-bandwidth HSI and we do have positive year-over-year growth there. But on the copper side, which is largely our neighbor islands and some on a Oahu, we are going to see the benefits going forward, the Connect America Fund that Dan talked about.

We should have about a thousand homes enabled by the end of this year, a little over 3,000 more at the end of next year. So we will being to see the benefits of now extending fiber in the broadband capability on the neighbor islands, a lot of which is on the big island, but still begin to see that. And then we are trailing some new technologies that can greatly increase the performance of copper as it relates to broadband. So again we are a bit bullish on NGN’s strong demand, strong growth, and we have some things in play to offset some of the losses we have on the copper side.

Steve O'Hara

Okay. And then just maybe – I think you mentioned kind of the competitive dynamics there and I'm just wondering, talking about pricing, but I mean are you seeing any more logical behavior as opposed to rational competition there or does it typically in a market get worse as the competitor kind of gains market share? And then where do you see that kind of shaking out where they may be act more logically or more rationally down the road?

Scott Barber

I mean, I think it's obvious that our competitor was recently purchased by another national company. It's probably too early to say if there is going to be any changes. They continue to be aggressive. Certainly, we are hearing some anecdotal things, but it is too early to say. Right now, there a national ads and mailers going out, talking about the transition to the new brand.

So obviously there is a lot of focus with our competitor and obviously integrating the companies together, but the local folks continue to be aggressive, Steve, and so we’re not necessarily seeing much change when it comes to pricing and competitiveness in the market. We believe that we've got a better product and in our next generation network as we continue to take market share from them it’s proving we do with that network, so it's too early to tell if there is any changes with the competition in the market.

Steve O'Hara

Okay, thank you.


Thank you. Our next question comes from the line of Barry Sine with Drexel Hamilton. Your question please.

Barry Sine

Good afternoon folks. A couple questions just on some of the projects. We start on NGN, could you update us on your thinking on how many homes you will ultimately get to when the major part of that project winds down and what quarter we might see that in and then also on NGN, if you could give us a sense on the cost to install a home, presumably that’s coming down on an average basis because you're picking up a bit more churn and you can reuse equipment for.

Scott Barber

Hi, Barry. The NGN is about 198 now, we will probably do another 3000 to 5000 this year depending on bulk timing and that will pretty much conclude the overbuild speculative next generation network build. Obviously we have CAF going on over the next several years that will increase households, as well as all the bulk MDUs. Greenfield that are being built as we talk about.

So, we think the number is going to be north of 220. It’s hard to gauge of the entitlements that have been given to the developers of how many are actually going to go to fruition, but we have certainly have tracked that and we believe the number ultimately will be above 220, but the amount of Capex that we will be spending in 2017, 2018, 2019, 2020 associated with that will be really, really small because it's going to be success-based and it will be like a few thousand bulk MDU units per year.

So the bulk of it’s concluded this year, we will get some CAF benefit and we will get the Greenfield benefit that will probably take the number between 220 and 230.

I’ll let Dan answer the subscriber question.

Dan Bessey

Barry, historically our cost to add has been north of $600 per sub. That’s come down in this current year. Scott talked about migrating to a lot of MDU activity, which is a more efficient deployment of our network, so we’re down below $600 per sub.

Scott Barber

And that’s the pass to home, Barry so it is pretty much industry-leading when it comes to the cost - obviously we are benefiting from the densities we have. And then of course if there is a subscriber that signs up we have additional Capex to extend the fiber drop and put the equipment in the home.

Barry Sine

Okay. The next area on Capex I want to focus in on, you just probably touched on is CAF II, ultimately how many homes are you committed to pass and by what year and what technology are you putting in with CAF II, I just also confirm on the CAF with that does include – that is included in the 10-K, 20-K lines you talked about.

Dan Bessey

Yes, we’ve committed to install 11,000 homes. The majority of which is about 80% are on the big Island. And we’ve been rewarded about 4.4 million per year for the six-year term for CAF II and we will spend the majority of that. We expect to be able to complete the build and come in a little bit less than that, but that is the projected plan, we will take the full six years and the full capital allocations and Scott may be able to comment on the technology that we’re using.

Scott Barber

Yes, so it’s going to essentially be the fiber to the home network that we are deploying on Oahu Barry. There might be a few areas where it makes more cost effective cents to do fiber to node, but the funding that we’re receiving from the government is enough for us to do fiber to home in those areas and of course the benefit is, as we leave the central offices where there is broadband network available and have to extend that miles away to the areas, to these 11,000 addresses that Dan talks about, we will be able to upgrade our network along the way. So serving businesses and add subscribers along the way as we resource customers, but it's going to be largely fiber to the home technology and by the way the year that it concludes currently is 2021.

Barry Sine

Okay. My last question again on Capex on the fiber build, you talk about mid- 2017, can you be a little more specific, is that 2Q or 3Q and then talk where the fiber laying chips are, is that fiber [indiscernible] laid across the ocean, has it got any California and what stage of the project are they are now?

Scott Barber

Barry, the survey ships have gone by and so they know the exact route. All of the permits have been filed with the cable landing stations and going through their processes for approval, including team telecom. So, environmental assessments and all that stuff has been done. About 30% of the cable has been manufactured and I believe roughly about the same amount on the electronics side, maybe less. So, everything is progressing nicely according to plan in terms of the build.

And the contract is for mid-2017, but they've got about three months of room that the NEC if they run into obstacles before they run into penalties, so technically it could go as far as September. We’ve actually been pushing the contractor to try to get it done early and so there’s actual schedules being developed to find out if there is a way to actually deliver that slightly early. But right now everybody is shooting for the end of second quarter 2017.

Barry Sine

Okay great, thank you gentlemen.


Thank you. There are no further questions in queue. So, I would now like to turn the call back to Ms. Nguyen for closing remarks.

Ngoc Nguyen

Thank you again for joining us today and for your continued interest and support of Hawaiian Telcom. I’m available for any follow-up questions and can be reached in the office at 808-546-3475 or by e-mail.


Ladies and gentlemen, thank you for your participation on today's conference. This does conclude the program and you may all disconnect. Everybody have a wonderful day.

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