ATN International Inc (ATNI) 2009 Q3 法說會逐字稿

Good day, everyone, and welcome to the Atlantic Tele-Network's third quarter earnings conference call. Today's call is being recorded.

At this time, I'd like to turn the call over to Mr. Justin Benincasa. Please go ahead, sir.

Great. Thank you, Operator.

Good morning, everyone, and thank you for joining us on our quarterly investor call as we review our third quarter results. As usual, with me here is Michael Prior, ATN's President and Chief Executive Officer. During this call I'll be covering the relevant financial information for the quarter, and Michael will 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 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 we issued last night and those described in item 1A, risk factors, in our Form 10-K for the year ended December 31, 2008 and in our other SEC filings.

We undertake no obligation to update the information contained in this call to reflect subsequently occurring events or circumstances.

Now, I'd like to talk about the financial performance of the quarter. The third quarter was a good quarter for us. We saw year-over-year revenue, operating income, and net income growth. Although the third quarter is seasonally one of our best quarters, we were pleased, very pleased with the performance of our U.S. wireless business as we continued to see strong MOU and data revenue growth from this business.

We were also very pleased to see a continued positive trend of modest growth in our Guyana wireless operations, however, that's still -- is still overshadowed by a decline in our international long distance.

During the third quarter we generated total revenue of $65.9 million, up $10 million or 18% from the same quarter in 2008. Wireless revenue totaled $42.9 million for the quarter, up $12.5 million or approximately 41% compared to Q3 2008. Local telephone and data revenue totaled $13.9 million, which was an increase of $1.1 million or 9%, and international long distance revenue was $9.1 million compared to $11.8 million in 2008, which is a 23% decline.

Operating income for the quarter totaled $23.1 million, up $2.7 million or 13% from the same quarter in 2008. As we noted in our earnings release, we incurred approximately $2 million this quarter and $2.4 million year-to-date of transactional costs related to our Alltel acquisition, which accounting rules now required us to record the expense through the P&L.

We expect the fourth quarter transaction cost to be higher, and substantially higher in the quarter we closed the transaction due to the expensing of bankers fees and other fees that are contingent on the closing.

Noncash stock based compensation expense for the quarter was $364,000. Net income from the quarter increased from $10.1 million in the third quarter of 2008 to $11.9 million this quarter, giving us earnings per share of $0.78 compared to $0.67 in 2008.

Capital expenditures totaled approximately $12.7 million for the quarter. ComNet accounted for slightly more than half of this amount, 27 base stations into service in the quarter, and Guyana, excuse me, and our wireless business operations accounted for most of the remainder.

Looking at our balance sheet, in September we had cash, a cash balance of $95 million. Our long-term, our term loan, I should say, continues to be the only debt we had outstanding, leaving us with a net cash position of approximately $22 million.

As I mentioned on the second quarter call, we're working to expand our bank facility, we were working or are working to expand our bank facility in anticipation of closing the Alltel deal and have now received bank commitments for an additional $150 million term loan, for a total bank facility of $300 million. We're currently working to finalize loan documents, and anticipate closing this facility in the next four to six weeks.

Lastly, I wanted to provide some supplemental segment information in advance of our 10-Q filing. Segment revenue and operating results for the quarter were as follows -- the world wireless segment had revenues of $31.8 million and operating income of $18.8 million, which included $3.8 million of depreciation and amortization.

International integrated telephony generated revenue of $22.7 million and produced operating income of $8.6 million, which included $4.2 million of depreciation and amortization. Our Island wireless segment, which includes Bermuda and Turks & Caicos, had revenues of $5.5 million, operating income of $349,000, and depreciation expense of $922,000.

The domestic telephony segment had revenue of $4.8 million, operating income of $85,000, and depreciation and amortization expense of $567,000. Wireless data revenue is $1.1 million, and had an operating loss of $449,000, which included depreciation expense of $209,000.

And, with that, I'd like to turn the call over to Michael to give an update on the operations.

Thank you, Justin. Good morning, everybody.

As usual, I will add some additional operating information and analysis, and I'll start with our U.S. wireless business. In this business we generated about 205 million minutes of use for the quarter, and that compares to about 132 million in the second quarter of 2008, and that represents about a 55% increase.

On a consecutive quarter basis, minute volumes increased by about 13%, which mainly reflects the seasonal strength of the third quarter as our network expansion has slowed as the year has progressed. And to illustrate that point, if you look at minutes volume and expansion between the first and second quarter of this year, it expanded about twice that rate.

MOU growth benefitted from the buildout and acquisition of base stations, of course, and we ended the quarter with 564 base stations compared to 396 a year ago, and that's a 46% expansion just by base stations.

As with previous quarters, MOU growth is partly offset by price decreases that went into affect over the past year, and data was about 19% of U.S. wireless revenue, which is pretty similar to what we saw in the second quarter of 2008, but that's up substantially compared to about 10% of revenue a year ago.

We expect, we do expect voice and data volumes to retreat somewhat in the fourth quarter, given the slower expansion, seasonality, as most of you know we have -- we typically see seasonal high volumes in the third quarter. And we also reduced prices at the end of the third quarter in some areas, and that will add to the seasonal reduction between third and fourth, and we don't expect for -- we don't expect the network expansion in between to make up the difference. And, additionally, just more minor, we also expect to see some third-party switching revenue decline over the next three to six months.

In Bermuda subscribers ended the quarter at about 19,900, which is essentially flat on a year-on-year basis, and down slightly on a consecutive quarter basis. Our UMTS HFCA hard launch was delayed until the end of the third quarter because of handset and roaming issues. We are hopeful that we'll see a subscriber pick-up in the fourth quarter now that this at a full launch.

In Guyana wireless subscribers increased 4% on a consecutive quarter basis, that's ending the quarter at about 277,000 subs. Perhaps of more interest, though, is that this level reflects about a 12% increase in subscribers since yearend 2008, and that would lead us to be I would say cautiously optimistic on market share stabilization. I think it's still a relatively short sampling period. It's a heavily prepaid market, which can mean it's easier to have faster swings in market share. And also I think there, while we've made progress and we're proud of a lot of the things the operating team has done, I think there' still more work to do to improve our performance.

Moving on to other elements of our business in Guyana, local and international, the access lines in Guyana ended up about 144,000 versus 136,000 last year, that's about a 6% increase in access lines.

On the international long distance business, as noted in our release and in Justin's comments, traffic continued to decline with a 10% year-on-year, the same factors that we've noted, bypass, and we believe some impact from the recession in the U.S. and Canada drove this decrease.

For our local telephone and data businesses in the northeastern U.S. we ended the quarter with about 40,000 business lines, that's a 14% increase year-on-year, and a 3% increase on a consecutive quarter basis. That's consistent with prior quarters, but impressive to us because there have been, you know, the continued woes of the lack of FairPoint there has made it more difficult to grow the customer base and provision customers. So I think that's particularly impressive in that light.

And FairPoint did, as many of you may have noted, filed for bankruptcy recently. And, again, that is -- we rely on them for the local loop in the Vermont and New Hampshire operating areas. We don't believe we have a significant monetary exposure there, but we are operationally exposed, of course, if their performance doesn't improve. When we provision most new customers we need to use their local loops.

In the Virgin Islands, our wireless broadband subscriber base was essentially flat.

As to our pending acquisitions, nothing significant to report since the last report on this. Of course, we're delighted to have hired the leader of that team, Frank O'Mara, to be CEO of the unit. We think he brings a lot to the table. He's going to be a great fit for our approach to business, and he is going to be essential in building a really talented management team around him.

Really, we're focused on the close and even more focused on the transition planning. We do expect to close, still, we still think we will close and that we will get the approvals needed, but we don't have the approvals yet and our best guess is that we would close in two to three months.

And I think that's it, Operator, for the scripted remarks, and we'll take questions.

(Operator instructions.)

And we'll go first to Chris King with Stifel Nicolaus.

Hi, good morning, and congratulations.

Good morning. Thanks, Chris.

Just wanted to get actually two questions out. First of all, just was wondering if you could talk about minutes of use, particularly at ComNet? Obviously, as you mentioned, a seasonally strong third quarter, but just was wondering given the economic environment out there if you were seeing any changes from an MOU standpoint?

And then, secondly, with respect to the Verizon assets, just was wondering how much information or how good of a partner I guess Verizon is being during this process? Until closing do you get weekly or monthly or quarterly kind of updates on how those businesses are trending? And are you comfortable with the way that Verizon is running those assets in the interim?

Sure. On the first point, on the MOUs in the U.S. [world] wireless business, I don't think we've, you know, it's hard to measure a reduction in a positive, right? So I can't say for certain that we haven't seen economic affect. But if you look at the fact that we had a 46% expansion in the network footprint and a 55% increase in the MOUs, I can't point my finger and say there's anything significant.

Right.

Plus data, you know, data has grown. I mean I think if you look at the U.S. wireless business, which of course that's what we're serving, the retail wireless business, they continue to (inaudible). It's, you know, growth has been down for some of them compared to what it has been, but overall at least that's my understanding have continued to grow. And data, the data portion of it has continued to grow. So I think now if the overall industry sees a contraction I think that would then be reflected, likely reflected in our numbers.

On the Verizon point, we're working hard. There are a lot of people at Verizon working hard with us. We're not always in agreement, you're not always in agreement with anybody you're doing a transaction with. And there's a lot of -- but a lot of people working hard to have a successful transaction on both sides.

They do not operate the -- when they closed their deal to acquire the Alltel assets, the assets that they had agreed to divest were put in an operating trust. So the operating trust we think is, you know, from the information we see is by and large doing a very good job of operating those assets. We don't, you know, we might not agree on -- we may not necessarily call the same decisions they've made, but I certainly think they're -- that operating trust is very diligent and trying very hard to maintain that business and position it to continue to be a very strong business.

Thank you. Just one more follow-up if I could, on ComNet. Certainly a very impressive EBITDA margins there, north of 71% I guess by our rough calculation. Certainly seasonally strong again, but just was wondering as we layer in the Verizon properties, if those properties were not coming online what, how would you see this ComNet business trending over time? And obviously that's a fairly strong margin to be seeing these days in the U.S. wireless industry.

Right. I mean a couple things. One, we're not going to give -- we don't give per se guidance going forward, but I think I can answer it qualitatively. I mean, number one, remember with those margins that because it's a capital intensive business operating margins are large, but there is significant capital expense with that business, so I think it can be deceiving to just focus on operating margins. And it's just the nature of the business, with no retail sales and marketing [ask backs] you just don't have a lot of the operating costs, the retail wireless business would have, but you are dependent upon network build and network expansion to help deliver growth.

Going forward I think, you know, I mentioned on the call we have some price decreases coming in. I think we do, you know, our whole model there is a shared infrastructure model and where possible we provide other services to other carriers, and that can include switching services and things like that, and we expect some of that to contract a little bit in the short term.

And in the longer term this business would probably simply reflect overall volume growth and penetration growth in the U.S. wireless business in that market and not anything beyond that if we stop expanding the network. Of course, at the same time capital expense would reduce and free cash flow would expand.

But we are opportunistic on the network build. We can predict and we do give an idea of our capital plan for the year and base stations, but beyond that, it really depends a lot on the needs of the large carriers we serve and where, you know, where there are opportunities to put a shared infrastructure play in place.

Thank you.

Yes.

Thank you. We'll go next to Ric Prentiss with Raymond James.

Yes, hi, good morning, guys.

Good morning, Ric.

Hey, a couple questions. Justin, first, you mentioned that you're about four to six weeks away from closing the extended bank facility. Any indicative rates as far as what they're kind of talking about?

On the rate?

Yes.

It's up from where we are now, but we're still working through some of that. But I think it'll be priced decent for where the market is today, but it's certainly above where we're coming out of.

Okay.

Yes, we're not going to do LIBOR plus 125.

Right. Okay.

Right, but probably not LIBOR plus 500 either.

No.

The second question is on the Alltel divestiture markets. Can you update us as far as you mentioned how you're staffing up, you've hired O'Mara -- any update as far as billing system, customer care systems, and branding? Kind of just where you're at as far as the logistics of getting those things pulled together?

Yes, I think, Rick, I think you've identified all very big areas, very important areas. I can't -- we don't have anything to update on any of those areas at the time other than on the management side, which is we continue to identify people and fill out the team. And there are, of course, a lot of people that Frank used to work with at Alltel, is one source obviously where, for talent that we're looking at. But on the other three areas, there's really nothing definitive we can say at this time.

Is the interim period after you close, I think what you mentioned previously, there's the transition period and you have the brand, or is it the brand for a year? And is there the ability, is the billing system beyond closing through the transition period for the full period maybe?

Yes, billing, customer care, and brand are all covered in the transition period.

And that's one year from closing?

That's right, that's the -- that's what it is.

Okay, and then any update in Guyana? The government every now and then talks about selling their 20% stake, every few weeks or month we keep hearing something different -- any update on what's going on with Guyana, and also maybe with your negotiations with them on the internet cafe stuff?

Sure. All I can say, you know, I can't give you a definitive because there's nothing -- there's not something definitive to give you. But I can say that we are in discussions with them, they've been on again and off again, but I think we've taken -- we are in discussions, and we are -- we continue to believe there's a potential for a good solution for both our concerns and the government's concerns.

Okay, very good. Thanks, guys.

Sure.

Thank you. (Operator instructions.)

We'll go next to Hamed Khorsand with BWS Financial.

Yes, good morning.

Good morning.

Just wanted to get an understanding, what is your CapEx guidance for next quarter?

For the quarter, next quarter, I mean I think we're gong to probably do -- come in in the mid 50s which includes the cable in Guyana, so we'll probably have CapEx close to what we had this quarter.

Okay, and then much of this year and last year you've been applying CapEx to ComNet. If this transaction closes, what would the percent of the CapEx be on -- towards the Atlantic wireless assets?

I think at this point we're probably, we're not probably ready to give too much guidance on that. I think we're still working through next year's plan.

Okay, and then can you talk about how -- what kind of phones and products Atlantic wireless would be able to have to offer the subscribers?

Well, in the initial transition period, handset procurement is run by the transitions -- it's covered under the transition services arrangement that we have with Verizon, which is essentially a carry on of Alltel's handset procurement. And so that's the initial answer.

I think for the longer term I think we'll be -- we will be in the same position as the other regional carriers. Once you're below the very biggest, below the big four carriers in the U.S. I think you're all in a somewhat similar boat, which is you can, you know, the city carriers, regional carriers that work together to help ensure procurement of the handsets you want and the timing you want. And we are, we will part of that group.

But, and you have bilateral relationships, you try to work with the OEMs to improve upon it, but you are in a handset position that is different than the big guys. You're not going to necessarily drive development of new models and have access to anything they've driven that they get exclusive right for for a period of time.

Okay, and then could you provide some details as to what pricing decline we should expect from ComNet in Q4?

No, I can't give you more details there. It's in one area. I'd just say that, look, if you combine the seasonality and that we certainly wouldn't expect that the network build in between will -- would cause us not to have reductions, so we do expect a reduction in revenue from the third quarter to the fourth quarter because of those factors.

Okay, and a last question, just housekeeping. I missed a number. What was the wireless data revenue?

It was 18% -- I'm sorry, 19% of U.S. wireless revenue.

The revenue breakdown of segments, wireless data? It was $1.2 million?

Oh, oh, oh, you -- I'm sorry, the fixed wireless data, yes. Yes, $1.1, it was $1.1 million.

$1.1 million, okay. Thank you.

Sure.

Thank you. And, with that, we have no further questions. I'd like to turn the program back over to management for any additional or closing comments.

I think that's all we have, everyone. And appreciate you joining the call, and we'll see you in a few months. Take care.

That does conclude today's conference. Thank you for your participation.