ATN International Inc (ATNI) 2007 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Atlantic Tele-Network's second-quarter results conference call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded Tuesday, July 31, 2007.

I would now like to turn the conference over to Justin Benincasa, Chief Financial Officer. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and thank you for joining us on our quarterly investor call as we review our second-quarter 2007 results. With me here is Michael Prior, ATN's President and Chief Executive Officer. During this call I will be covering the relevant financial information for the quarter and Michael will be providing operational updates.

Let me first start off with the cautionary language concerning forward-looking statements. This call may contain forward-looking statements concerning our goals, beliefs, expectations, strategies, objectives, plans, future operating results, and underlying assumptions, and other statements that are not of historical facts.

Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors including the factors referenced in the earnings press release issued yesterday and those described in Item 1a, risk factors, and our Form 10-K for the year ended December 31, 2006 and our other SEC filings. We undertake no obligation to update the information contained in this call to reflect subsequently occurring events or circumstances.

With that out of the way, I would like to talk about the financial performance for the quarter.

The second quarter was another excellent quarter for us with all revenue categories particularly our wireless category delivering strong year-on-year growth. During the first quarter, we generated total revenue of $44.2 million, which was up $6.7 million or 18% for the same quarter in 2006. Wireless revenue was $19.1 million for the quarter, up $4.9 million or approximately 35% compared to Q2 of 2006. Local telephone and data revenue totaled $11.7 million, which was an increase of about $800,000 or 7% and international long distance revenue was $12.3 million compared to $11.5 million in 2006, which was also up about 7%.

While it is difficult to really determine how much revenue we may have lost in our Guyana operations due to the Americas II undersea cable outage in May, we believe the impact was immaterial. ILD is down from Q1 by about $600,000, but keep in mind that Q1 included approximately $1 million of roaming revenue from the World Cricket Cup matches and the Rio Group Summit that took place during the quarter, that quarter.

Operating income for the quarter totaled $15 million, up $3 million or 25% from the same quarter in 2006. Non-cash expenses were consistent with past quarters, with depreciation and amortization expense of $6.7 million and $204,000 of non-cash stock-based compensation.

Net income for the quarter was up 84% from $4.9 million in the first quarter of 2006 to $9 million this quarter giving us earnings per share of $0.59 compared to $0.39 in 2006. As we noted in our earnings release, the quarter did include two onetime items that positively impacted other income by $2.25 million and net income by about $1 million. Backing out the impact of those items, net income would have grown 63% this quarter over last year and earnings per share would have been approximately $0.53.

Capital expenditures for the quarter totaled approximately $9.4 million, consistent with previous quarters. The majority of this money was spent on the continued expansion of our GSM and CDMA Networks at Commnet and our GSM Network in Guyana. Guyana spent more than half of the $9.4 million with the majority these expenditures increasing capacity and coverage on our GSM Network. The bulk of the remaining capital expenditures was spent on additional GSM and CDMA base stations and cell sites in our rural wireless business.

While we came out of the first quarter feeling a bit behind in our build program, at Commnet we made some good progress in the second quarter turning up new sites. We added 34 new GSM and CDMA base stations and decommissioned three old TDMA analog base stations, ending the quarter with a total of 309 base stations and 213 cell sites.

Turning to the balance sheet, not much has changed from the previous quarters. As of June 30, we have cash balance of $60.9 million and our outstanding debt remains at $50 million, leaving us with a net cash position of a little over $10 million. Our cash balances are up about $4 million from the first quarter and flat year-to-date as we continue to invest the majority of our free cash flow back into expanding our networks, as previously discussed.

Lastly, I wanted to provide some supplemental segment information in advance of the 10-Q filing. Keep in mind that the following numbers are before taxes and minority interest. Segment revenues and operating results for the quarter, which I've adjusted for intercompany eliminations of depreciation and management fees, were as follows.

Our rural wireless segment had revenues of $12.9 million and operating income of $5.5 million, which included $1.7 million of depreciation and amortization. International integrated telephony generated revenues of $25.4 million and produced operating income of $11.4 million, which included $3.9 million of depreciation and amortization. The domestic telephony segment had revenue of $3.7 million, operating income of $497,000 and depreciation and amortization expense of $431,000. Wireless television and data revenue was $2.2 million and had operating loss of $283,000, which included depreciation expense of $539,000.

With that, I'd like to turn the call over to Michael now to give some update on operations.

Thank you, Justin. Good morning, everybody. Thanks for joining us. As Justin said, and I think we said in our press release, we're happy to use the adjective excellent for this quarter, very happy with the overall results particularly of course the earnings growth. As usual, I will give you a little detail, though, on each of the individual revenue lines and operations.

First I will start off with wireless, our rural wireless business in the United States. We handled this quarter about 82.1 million minutes of use. That is quite a large number, up about one-third over the same quarter last year and more than 10% on a consecutive quarter basis as well. The growth in minute volumes is still being driven by a combination of network expansion and same site minutes growth.

We are still working on adding a large number of sites in the Southwest throughout the remainder of the year and Justin talked a little bit about the CapEx there. So that should help to continue to drive minute growth and traffic growth here.

Also in the quarter you may have noticed on the other income items as noted in the press release we had a small gain. We exited a smaller market in California and that contributed a nice gain to earnings. We owned about 50% -- we own 50% of that small network and so therefore, the impact on the bottom line was a lot less than in the other income line.

In Guyana in the wireless business, we're still seeing strong competition for subscribers with the other national provider. We continue to add coverage and capacity to our network. And as noted in our release, although our overall subscribers fell slightly from 310,000 at the end of the first quarter to 305,000 at the end of the second quarter, the GSM subscribers ended the quarter at about 274,000, which is up from 260,000 from the previous quarter and those numbers compare to 253,000 overall and 155,000 GSM for a year earlier.

As we have cautioned in the past, however, when the numbers, the subscriber numbers were going up, this is a prepaid market. I mean 90-some% prepaid market. So the better focus we believe all along is revenue. There you know we are also happy to see that wireless revenues in Guyana are up strongly year-on-year. And despite the very high level of activity in Guyana in the first quarter with major launches and a lot of activity and people in country for various things including the run-up to cricket and the Rio Summit, we're down only marginally on a consecutive quarter basis. So we thought that was good to see.

There was some benefit in this quarter, I will say, because the cricket matches that were played in Guyana were played in the first week of April. We expect to continue to compete vigorously here. Obviously there is a lot of attention on this and revenue growth will continue to be a challenge as the year progresses, but as we noted in the release, we are happy with a number of the things we have done there in the competitive environment.

Expenses are also part of the story too on the competitive front and just to touch on that, the operating margins for the quarter were helped by a reduction in the marketing promotions and expenditures from the first quarter in our retail wireless business in Guyana. They are still well ahead of last year. They are likely to stay well ahead of last year. But we will continue to be very careful and targeted in how we spend and spend that money.

While we are on Guyana, I'll cover also local and international. Local, we have had some nice, healthy line growth, modest as usual but still growing. So we had about 124,000 access lines at the end of the quarter versus about 115,000 a year ago. So we continue to expand our digital wireline network to support additional communities, and that is the main driver of the growth.

Also the data side continues to grow. Again it's starting from small numbers, but we expect that to continue to follow other markets and expect data as a proportion of local revenue to continue to rise. Some of that will be new additive revenue and some of that of course will be direct and indirect cannibalization of voice.

International revenue was a very present pleasant surprise. As Justin noted, it maintained healthy levels. This is particularly notable considering that we did not expect to maintain the extraordinary traffic volumes we experienced in the first quarter because of the onetime events. And even more so because we were afflicted in the most recent quarter by a very significant outage in the undersea cable that we and the neighboring countries of the other two Guyanas, as they say, rely upon for most of our international traffic.

On the expense side, though, the cable cuts did lead to increase in expense because of the costs of securing extra satellite connectivity while the cable was out and it was out for a number of days.

For our local and data business in New England, similar story to last quarter. There's nothing remarkable here. We're pleased with the growth in sales to small businesses. We continue to have very, very low churn amongst business customers. But we are still battling the dial-up decline, which hits both revenue and profits because the incremental hit of losing a dial-up sub goes pretty far down the line to operating income.

Just some quick data points. We had at end of the quarter about 29,700 business lines. That was another 8% increase on a consecutive quarter basis. Residential, voice and broadband, however, were down by a similar percent and that is somewhat of the equalizing effect that we talked about. We ended up with about 4400 of those residential, voice and broadband customers.

Sovernet also is involved along with a number of other New England CLECs, probably all of them. In working with Fairpoint and the regulators, the state regulators, on what things will look like when and if Fairpoint takes over the Verizon lines and assets there. So obviously all the CLECs that rely on copper for the last mile are seeking assurances as to how that will be done going forward.

In Bermuda, subscribers ended the quarter about 20,700. That is down about 1000 subscribers from a year earlier. As in the first quarter, however, this is a result of losses in the prepaid subscriber base. It is not unimportant, but it is less important than postpaid and postpaid subscribers actually grew slightly to the second quarter in a row.

Going forward, we expect continued growth in data subs due to our Rev A launch. That was launched publicly in a number of ways in the second quarter. And the push-to-talk, which we launched in the end of the first quarter, has also helped subscriber additions.

In the Virgin Islands business, the data and video business, we had some more nice developments there. As we noted in the press release, the broadband sales are continuing to really drive it and also we have added some nice contracts for high-capacity links to government and business and so on.

TV also continued its growth, although it has tapered somewhat recently. We also in the end of the quarter put through a price increase on our TV, our basic TV package, which we'll probably see some small benefit from that in the coming quarters.

Overall the main thing in the Virgin Islands is we are excited. We're kind of sitting there on the sidelines with a small wireless broadband business in a very good spectrum position in the 2.5 band; are kind of excited about the overall developments in the WiMAX markets, the Clearwire/Sprint link-up and the most recent announcement with Google. I think these things are all positives for us, especially considering the very large number of visitors to the Virgin Islands.

Okay, now I think we are ready for questions. Operator, you could queue those up.

Thank you. (OPERATOR INSTRUCTIONS) Gaurav Jaitly, UBS.

Just a couple of questions. First in Guyana with the international cable outage there was a lot of reports in the press, a lot of back and forth between the government and GT&T over there. It is hard to filter out the politics from the realities. Have you seen any change in the tone or any new initiatives from them to get you to sit down and discuss the whole exclusivity agreement there?

Secondly, on the Commnet Wireless business, we have seen your two biggest competitors both make acquisitions to expand their footprint in the rural wireless space. Maybe talk about how you see that longer-term impacting your growth, although you have been growing really nicely in the Commnet business. Any overlapping you might have at Dobson or rural SARA in those markets? That would be great. Thanks.

Okay, the Guyana license, it really -- it does not probably do any good to every quarter kind of speculate on the tea leaves. I just would say there is really no significant developments to report on in terms of the license issues.

The only thing that I can think of to report on was -- I think some people did put releases out on and we talked about briefly in our last 10-Q was when there was a cable outage, the government gave a temporary license to our competitor to handle international traffic on their own. Obviously there is no significant or material effect on our financials from that and it was short term. It was temporary. It is no longer outstanding. Other than that, there is really nothing to report on.

I think the loss was filed, I think you filed a loss that had been settled had been withdrawn? (multiple speakers)

No, I do not think it has been withdrawn, but I am not certain on that. There have been no significant developments on the lawsuit front. That I am sure of.

Great, thanks. And on the Commnet?

Of the Commnet side, in terms of the recent acquisitions, obviously some of these are new. Dobson by AT&T is a little older, so we have had more time to analyze that. I would say that in neither case do we think there is any immediate adverse impact on us. And in fact I would say that going forward we think both deals offer us more opportunity than risk. Any change brings some risks with it, but I think we see more opportunity there than risk. There is no direct overlap with the areas where we are operating and handling a lot of traffic for the big carriers.

Great, thanks. If I may just follow up with one more question, just on the marketing spend, it seemed to have dropped pretty dramatically sequentially and obviously you had the promotions with the digital launch in the first quarter. But is that -- do you think that is a sustainable level of spend in the market?

It really depends on the competitive environment, you know, the competitive response. That is the thing we cannot predict. We are a bottom-line focused company. Anything we spend on anything we want to see results and we look at it carefully, especially when it is a big number. So we've been watching the market expenditures very carefully.

We made a decision in the beginning of the year that we were going to open the pocketbook pretty wide and we thought strategically in the long-term, that was the better move. We still think that was the right move, but if we see that certain things are not effective, we're going to cut it down. We did expect to spend more around the initial big launch of our competitor than we would necessarily see going forward on a regular basis. That is not to say that there might not be some big promotion or thing going on that we decide to do. But I think if you had to guess that this quarter was a little closer to where a normal number than the first quarter. But still early to tell and offer sure predictions.

Ric Prentiss, Raymond James.

A couple of questions. First it looks like the TV Virgin Islands business is now EBITDA positive based on the quickie numbers I did there when you threw them out. Nice to see that inflection point. Any thoughts on what you might do down there? You speculated a little bit on a spectrum. Remind us how much of the 2.5 GHz spectrum do you have and just what your thoughts are as for as timing down there in the Virgin Islands?

I do not have the exact figure to hand on the spectrum position, Ric, but it is the lion's share. We have a very large spectrum position, enough so that there's -- I believe there is very little room for someone else to have a significant position and operate in that band. We do that in combination of ownership and lease, long-term lease.

So I think that there is nothing in the situation that has changed except for as you noted getting it EBITDA positive is a great thing and we hope that the trend continues. I think as I noted in the call, that it is -- the spectrum position and being in the position of having a 3WiMAX business and eventually, hopefully, a WiMAX business there, that's a good position to be in whether we operate it or whether someone feels strategically it is important to them. But we do not -- there is nothing further to report on on that front.

Okay. On the U.S. side, we have seen a lot of the carriers that do provide roaming services starting to see a real tick up in the data roaming. Have you noticed a significant amount of data as well as voice? You gave us I think the minutes of use. But how are the megabytes doing on the data side on the U.S.?

I don't think we report the megabytes on data. Data has been growing. I do not think it is growing for us necessarily at the same level as the retail carriers and maybe some of the roaming where you have more urban environments. But it starts from a very small number, Ric, and it is growing very nicely. But the number is still pretty small compared to voice. That will change as we -- we are adding -- we have added more data sites. So you have both the same site growth and the expansion of the number of sites we have that are data capable -- (multiple speakers) high-speed data capable.

How many of your GSM sites have an EDGE capability on the CDMA side? How many have 1x?

I do not have those numbers to hand, Ric, but it is not -- it has not been a major top-line driver yet. It is a nice -- it has been nice gravy, I would say, but it has not been the primary driver.

Sure, then on the M&A front, obviously some interesting news continues to come out of the U.S. wireless business. Never dull. As you look around with your own balance sheet, looking at potential acquisitions out there, what do you kind of view the environment as? Is it frothy? Is it (technical difficulty)? What is going on as you look at potential acquisitions?

You know, I think that certainly the valuation when I read reports from you and others when it is looking at what used to be pretty healthy multiples anyway and I see those multiples are on 2009 EBITDA or 2009 EBITDA after non-cash, I would say it is pretty richly valued. If you look at some of these acquisitions and you say, gee, but for the acquirer it makes a lot of sense because of the synergies of rolling in when you have a lot of scale, like the Dobson acquisition, for example.

For us what it means is if the smaller things that we might do, get stars in their eyes and they read about Alltel and Dobson and Rural and they think they are worth those multiples, it means we won't be doing deals. If they understand the real value of their business, it means there is opportunity for us. I guess I would say I think those valuations are richer than you would find us doing in most situations, other than something small that has very high synergies that we can just slot right in.

Given your significantly under -- negatively levered balance sheet, how should we think about the timeframe as you look out there to see what's available versus just saying, well, let's find another use of the cash?

Yes, I think we are pretty actively, as we have said before, looking at things. We do not think it is a point where we need to consider other avenues yet. We are not there yet. So if we are not there yet, I cannot tell you we are about to be there. I think there is still a lot of activity, and I think there are a lot of people who are looking for exits and seeing other people get exits, and I think we're just going to have to continue. We will continue to be disciplined. The fact that we do not do a deal does not mean we haven't been looking very hard at some.

Sure, okay. Good luck, guys. Thanks.

Chris King, Stifel Nicolaus.

Congratulations on a nice quarter. A couple of quick questions for you. First of all, with respect to your wireless competitor in Guyana, being a privately held company it is a little difficult to get subscriber information from them. I was just wondering -- they've been out there now for about three months -- where you are in terms of levels of market share. Have you pretty much reached a stasis point at this point as near as you can tell, kind of a month-to-month basis regarding the shares of the wireless market overall or certainly share of the gross or net adds that you're seeing there?

Second quick question on the fiber disruption in and out of Guyana, I assume that you really had no financial impact other than just a straight kind of loss of revenue there that you guys were not responsible for either the CapEx nor do you have a way to go back -- I believe it was France Telecom -- and get their reimbursed for any of those revenues. I just wanted to confirm that with you. Thanks.

Sure, let me take the last one first. Yes, you're right. We have lost revenue and we had some increased expense. We do not know what ship -- this is something like 12 kilometers off the sea off of French Guyana. We do not know which ship tripped the cable. If we could go after that party, maybe there would be something. But no, I don't think there is any recovery there. There was no CapEx for us there, but I am not sure what the costs to the consortium were. We are piece of that consortium. There are many, many carriers in that, but it's certainly nothing material.

The next question you had I think was --.

The market share in the wireless segment.

Right, the market share. We're not -- I think that market share is a very hard thing to estimate there, even when they do announce numbers, because they have an incentive to announce larger numbers then exist, and there is no way to check them. But from looking at activity and everything, up they have certainly gained market share. It has not just been a matter of the market growing.

And we were kind of cautious about predicting where that will go. I think we've -- we think we've held our own pretty well. We think we could do better. There's always ways to do better, but in a duopoly if both operators are strong and capable, you tend to huddle around the middle. And I'm not saying that means we will be 50-50, but you tend to huddle in that band typically. And I don't know any more than you do or anyone on the call about where it will end up, but that would be one way to look at it.

You know, they are having a whole change out of their management team in country. Does that change tactics? I don't know. It is just too soon to tell where it ends up. I think we will fight hard to be -- to remain the larger provider, and that is all I can control.

Thank you.

Hamed Khorsand, DWS Financial.

My first question was, could you clarify the U.S. base station number? There was a different number in the press release.

Okay, Justin will look that up. Do you want to go with your second while he does that?

Yes. The second one was what is your plan for the third-quarter expansion of the U.S. network?

The third-quarter expansion of the wireless network you're talking about, right?

Yes.

As we said, we are continuing -- we expect to add a fair number of sites in the third quarter, so -- third and fourth quarter. So we haven't given precise numbers, but we gave some CapEx numbers before, and I think there is still a lot of sites to go up in the third and fourth quarter.

As far as the base station number goes, the press release just includes the GSM and CDMA, and then in the number I gave includes everything including the TDMA and analog. So this 309 all-in, and that includes the 46 of TDMA and analog. So that's the difference. Same numbers, just two different ways of presenting.

Okay, thank you.

(OPERATOR INSTRUCTIONS) Adam France, Keane Capital.

Sorry, I missed what you said. Could you please repeat your CapEx comments and any ballpark estimates for '07 as a whole?

What I said earlier on the call was that we spent about $9.4 million of CapEx for the quarter, and about half of that or a little more than half of that was spent down in Guyana. Then a large -- the other large percentage of that was spent on Commnet. As far as guidance for the year, we have said between 43 to 47, and I think we're still fairly comfortable with that number at this time.

Timing is everything in terms of how fast base stations -- more the timing probably on the Commnet side, just because of zoning and things, it's not always in their control. So I think at this time, we're still that ballpark, though.

Got you, super. Thank you very much.

Mr. Prior, there are no further questions of this time. I will now turn the conference back to you.

Thank you, everybody, for joining us and have a good day.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day, everyone.