ATN International Inc (ATNI) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Atlantic Tele-Network Q1 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator instructions).

As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Mr. Justin Benincasa. You may begin.

Thank you, Operator.

Good morning, everyone, and thank you for joining us on our quarterly investor call as we review our first-quarter results.

With me here as usual is Michael Prior, ATN's President and Chief Executive Officer. During the call, I'll be covering the relevant financial information for the quarter, and Michael will be providing our operational update.

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, in our Form 10-K for the year ended December 31, 2009 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.

So with that out of the way, let me talk a little bit about the financial performance of the quarter.

As we noted in the press release, our results for the quarter were impacted by two major factors.

First, we saw a sharp decline this quarter in our international long distance revenue which was predominantly driven by the continued decline in inbound traffic.

Also contributing to this decline, but to a lesser extent, was a promotional offering we initiated at the beginning of the quarter lowering outbound rates. I think Michael's going to talk a little bit more about that in his piece.

The other negative impact for the quarter was an additional $5.7 million of acquisition and personnel-related costs that we incurred in advance of the Alltel acquisition. We will have additional costs into the second and possibly in the third quarter for expenses incurred in April prior to the close and costs associated with the actual closing.

As I mentioned earlier, we completed the purchase of the Alltel assets in late April. We still expect the run rate annual service revenues will be between $475 million to $500 million in the first [four] quarters. However, these estimates are somewhat fluid as we get more access to information and work through transitional issues dealing with the complexities of physically separating the networks and information.

Just on a related note, too, we do anticipate filing our Form 8-KA for the transaction shortly, which will include the 2009 pro forma combined financial statements.

Specifically to the results we reported this quarter -- or specific to the results, we generated revenue of $54.7 million, which was down from the $56 million from the same quarter in 2009.

Wireless revenue was $33.1 million for the quarter, up approximately 4% compared to Q1 2009.

Local telephone and data revenue totaled $13.7 million, which was an increase of about 5%, and international long distance revenue was $7.9 million compared to $10.4 million in 2009, which was a decline of 24%.

Operating income for the quarter totaled $7.4 million, down from the $16.8 million in the same quarter 2009. However, as I noted earlier, these results included acquisition-related charges of $5.7 million, and operating income pro forma for this expense would be $13.1 million.

Non-cash stock-based compensation expense was $356,000 for the quarter.

Reported net income for the quarter declined by approximately 55% from $8.8 million in the first quarter of 2009 to $4 million this quarter, giving us earnings per share of $0.26 compared to $0.58 in 2009. Excluding the acquisition-related charges, earnings per share would be $0.48 per share.

Turning to the balance sheet, as of May 31, we had cash balances of approximately $81.4 million, which includes $2.4 million of cash which is escrowed for payments of Guyana's undersea cable project and closing the Alltel transaction, which included the purchase of approximately $23 million of net positive working capital. We used approximately $33 million of the cash on hand and borrowed $190 million under our bank facility.

Capital expenditures totaled approximately $16.9 million for the quarter. As we mentioned in our earnings release, this includes $4.4 million in our US wholesale wireless business, $4.3 million in the undersea cable in Guyana, and $4.4 million on a wireless network build-out in the US Virgin Islands.

Looking ahead for the remainder of 2010, we anticipate capital expenditures to be in the range of $125 million to $135 million. That's for the full year. This includes our preliminary estimates of Alltel's capital expenditures planned of $60 million to $80 million, which consists primarily of one-time costs related to network migration in systems and IT expenditures. However, we're still evaluating numerous capital projects that we inherited from the [trust] that could impact that number.

Lastly, I wanted to provide you with some supplemental segment information in advance of our 10-Q filing.

Segment revenue and operating results for the quarter were as follows --

Our US rural wireless segment had revenues of $22.9 million and operating income of $10 million, which includes $4.1 million of depreciation and amortization.

International integrated telephony generated revenues of $21.2 million and produced operating income of $7.5 million, which included $4.3 million of depreciation and amortization.

Our island segment, which includes Bermuda and Turks & Caicos, had approximately -- had revenues, I should say, of $4.6 million, operating losses of $445,000, and depreciation of $745,000.

The domestic telephony segment had revenues of $4.9 million, an operating loss of $115,000, and depreciation and amortization expense of $699,000.

Wireless data revenue was $1 million and had an operating loss of $554,000, which included depreciation expense of $230,000.

And I'd like to now turn it over to Michael.

Thank you, Justin. Good morning, everyone.

As usual, I will add some additional operating information and analysis before we take questions. However, before I do that, I'd like to say a few words about the quarter overall.

The quarter, as with the last few quarters, was hit with substantial but foreseen acquisition-related charges and overlapping expenses, as detailed in our press release and in Justin's comments.

In addition, we saw a continued decline in our legacy international long distance revenue. As Justin mentioned, some of this was caused by our lowering of outbound calling rates, for which we've been trying to win regulatory approval for over a year, and some of this was somewhat unexpected in that we had hoped the rate of this decline would slow.

The other impact, which I'll discuss in more detail in a moment, was that the growth in our US wireless -- our existing US wireless business was reduced by rate declines, which we think were necessary given the rapid growth in overall data roaming volumes. So it was particularly data -- declines in the data rates we were charging carriers.

Now, the important point from our vantage point is that none of these items really changes our fundamental outlook. Because of the Alltel acquisition and a number of other smaller investments we have made recently and we are continuing, we expect to see a significant growth in profits in 2011 and beyond and a significant growth in revenue in 2010 but with a more choppy profit picture in 2010 as we continue to expand businesses and to integrate the Alltel assets.

All right, now I'm going to on to the operating information and metrics.

I'll start with US wholesale wireless. In that business, we generated about 154 million wholesale MOUs, minutes of use, in the US for the quarter. That compares to about 145 million the first quarter last year, about a 7% increase. However, data volumes, measured in megabytes, increased by nearly 120% over the same period.

Data represented 22% of this wholesale wireless revenue stream compared to 17% a year earlier. Now, that number is somewhat -- the 22%, I think, is about the same as we saw in the fourth quarter, so on a consecutive quarter basis, data revenue didn't rise, and that is due to the fact I alluded to before, that we reduced the megabyte prices for three major customers over the past six months.

Had we not done that, revenue obviously would've grown by more, and we still think it could -- as the impacts have made and as we go through the year, we expect to show higher consecutive quarter growth over the remainder of 2010 if the growth in data volume continues, which we expect.

And then the only offset would be any overbuild losses, such as the potential for overbuild towards the end of the year from an AT&T Alltel acquisition.

On a consecutive quarter basis, minute volumes declined by about 4%. This drop reflects the loss of Verizon traffic and legacy Alltel markets they acquired, which stood up for most of last year, and so we really started to feel the impact of that loss in the fourth quarter and really the complete absence of it in the first quarter of this year.

To a lesser extent, we also had normal seasonal reduction from fourth quarter to first quarter due to the harsh weather in many of our operating areas.

We ended the quarter with 586 base stations compared to 484 a year ago, and that's a 21% expansion over the year, but we added only a half-dozen base stations since December of 2009, and that's again really not unusual given the operating environment. It's difficult to put up new base stations in much of our area in the winter months. So we expect the number of new sites coming online to pick up significantly in the second quarter.

Moving to Bermuda and the islands, wireless subscribers there ended the quarter at 20,600, up 2% on a year-on-year basis but essentially flat on a consecutive quarter basis.

In Guyana, wireless subscribers increased 13% over the year earlier, contributing to wireless revenue growth, but subscribers were also flat on a consecutive quarter basis.

While this wireless subscriber and revenue growth in Guyana is positive, the major development out of that market, of course, was the decline in the legacy ILB revenue that Justin outlined.

I'll give you now some updated operational metrics to put a little more detail to that.

International traffic was down 22% for the quarter, so that's year on year. Well, this is slightly less than the 24% year-on-year decline we saw in the fourth quarter. The reduction in outbound rates that we noted last earnings call shifted the inbound/outbound volume mix from the historical ratio of 4 to 1 to about 3 to 1. What we believe that means is that the 50% increase in outbound traffic for the period came partly at the expense of inbound traffic, which fell 33%.

Since we dropped many key outbound rates by approximately 50%, net-net, we added to our loss in revenue by this move. We think it was necessary, however, to ensure strong market share over the long term, and in fact, as we noted, had been seeking to lower those rates for some time.

Also contributing to the decline again, of course, was the continuation of various types of bypass activity. To some extent, of course, the international long distance revenue effect will become less and less important. I also believe that investors have anticipated a significant drop in this business for some time because of the government's stated desire to seek an early end to our exclusivity rights and our oft-repeated willingness to negotiate a change in those rights.

I think this drop-off -- while we can't see the future, but I think that this drop-off has at least partially occurred already because the effect of bypass and the rate reduction is similar to what we expect to see when exclusivity ends, which is reduction in rates and share.

So moving on to the local aspect, in Guyana, we had access lines of 148,000 at the end of the quarter. That compared to 140,000 access lines a year ago. That's a 6% annual increase. And I know we've talked before about seeing this slope off. I think we really are hitting the build limit for the local access lines there. That's partly because how far we've penetrated the more dense areas. We've even penetrated many not-so-dense areas.

But without a local rate increase or the establishment of some sort of universal service fund or access deficit regime under the proposed -- the potential, I should say, because it's not officially proposed -- but the potential new regulatory regime, I don't see us expanding the access line builds that will go by wireline network.

Moving on to the local -- the wire-line network in the Northeastern US, we ended the quarter with about 45,000 business lines. That's a roughly 20% increase year on year and a 7% increase on a consecutive quarter basis.

And, lastly, I just wanted to mention a few words about the very large US wireless expansion and to give it some context.

We expect US wireless revenue to be roughly 85% of total revenue for the first full quarter of an integrated company, so that would be third quarter of this year. We expect total wireless revenue for that quarter to be roughly 90% of total revenue.

And as we communicated earlier, the transition phase from here to mid-2011 will have thinner margins, and that's because we are going to have overlapping expenses.

As we build up certain elements of operations, we will still be paying for those operations through a transition service agreement for a period of time with Verizon, and so the length of time we have that overlap before we step off particular services will influence heavily what our operating margins are during the period. And we're going to -- as we've noted before, we're going to be conservative on that approach because the name of the game here is retention of value, retention of customers, making -- ensuring a very smooth transition for the customer base and for the employees.

So, again, we're very excited about what this investment means. We're also excited about some of our other smaller investments, and we expect them to expand our overall sources of cash flow and grow.

And with that, I think we'll take questions, Operator.

Thank you. (Operator instructions)

Our first question comes from [Barry Carver] from Stephens. Your line is open.

Hey, good morning, guys.

Morning, Barry.

So I guess in light on your comments regarding the thinner margins, I understand that we're going to get some pro forma numbers in the 8-K, but that's probably not going to be indicative of exactly what you're speaking of. Can you give us an idea of what the EBITDA margin contribution will be from Alltel, at least as a starting point here to help with our 2010 expectations?

Well, what we've said before is we said 20% to 30% post-transition, and we said below that pre-transition. And the reason we can't be more precise than that, Barry, is it really depends on the timing of a number of things, as I just talked about.

So if we build up a capacity, say, a customer service capacity, and we go off that aspect of the transition service agreement, right when we build it, you'd have fatter margins, but that's not the reality of what will happen. We'll build it up and the length of time we'll have the overlap and the level of that cost is very hard to be sure of, particularly if you're going to focus on testing it and making sure everything is perfect.

And then there's other aspects that we knew there were some operating approaches and sales and marketing approaches and pricing that the operating trust had done that some of it we're not sure works and we're working through that. Again, we're going to be conservative and we're going to make sure to keep -- be very thoughtful about impacts on customers, but there are a number of moving parts there.

So our focus in the next three to four quarters is really on getting that transition right, and there's just a number of very large expense items that we can't be certain the level of overlap and we can't be certain about how quickly we will change some practices of the operating trust that we disagree with and we think were less advantageous for the business.

I know people struggle with that, but that's, I think, really the way we look at it is the revenue potential and the earnings potential from there. We could see very -- we could have a quarter where the margins are sub-10%. We could have a quarter where they're 15% to 20%, 10% to 15%. It's just hard for us to be more precise.

But I think, too, Barry, I would -- you brought up a good point. When we file the 8-KA that had the pro formas, they're not -- the historical financial statements are a good representation of probably revenues, but after that, I would caution because it's even their carve-out with an enormous amount of just allocations from Verizon, as well.

Okay. And then, I guess, secondly, in terms of the employees that you inherited or you brought over with the acquisition, can you give us an idea of what you have out in the exact markets? I can see where having the right people on the ground in that footprint makes all the difference.

Yes, look, I mean I think we acquired a great group of employees. We were excited about that, and as you know, we hired -- our executive team, the leadership team for this was very familiar with a lot of those people. And so we feel very good about it. We've had -- there's been a lot of work already since closing between the headquarters in Little Rock there and out in the field. I would say we've got a lot of good people. I think the reports I'm getting is morale is high.

So we think we're set in the field. We're getting about 500, give or take, employees out in the markets, and I think that's a pretty full complement, but we'll continue to need to hire more people in Little Rock, in particular.

Okay, and then just last question. You just touched on it in your comments, but the wholesale wireless revenues in the US that you've lost because of the acquisition by the other parties involved, can you kind of go over how much of that was already in 1Q numbers and how much more might be coming in future quarters as that gets wrapped up?

Well, what you saw in the first quarter was obviously entirely areas where we had been providing CDMA roaming to Verizon subscribers and Alltel existed in the area but Verizon was roaming on us. That, obviously, Verizon switched to roam on what they now own in the Alltel properties. That is just about fully flushed through in the first quarter.

The AT&T overlap, if that deal gets approved, will be larger, and that's why we've talked about it for some time. What we don't know, as we didn't with the Verizon, is the pace at which that overlay will occur, the pace of which it will impact our traffic, what technologies they'll deploy. They may choose to go straight to 3G technologies in those areas, where that would mean that we would have potential for continued roaming traffic for 2G devices. So we think it would be more significant certainly than what just flushed through on the Verizon side, but we don't -- the timing and the amount are still somewhat soft.

Do you still think year-over-year -- or I should say full-year revenue is basically flat with last year?

We still expect that if -- the problem is we don't know when that will be approved. We're assuming it will be approved, and we don't know the pace -- how AT&T will conduct the overlay. But if that were to happen in the middle of this year, for example, maybe mid-third quarter, yes, we would probably -- our current expectation would be flat if we didn't -- if we don't expand our rate of build in other areas. And we'd have to do that pretty soon to have an impact on 2010.

Okay, great. Thanks, guys.

Yes.

Thanks, Barry.

Thank you. Our next question comes from Hamed Khorsand of BWS Financial. Your line is open.

Hi, Hamed. Good morning.

Justin, could you walk me through the Alltel acquisition as far as what you guys are expecting from operating costs in the first few quarters? I mean specifically 2010 related to how should we see the costs come down as the year progresses?

I guess what I would say to that is there's costs where -- as Michael said, there's costs where we're paying for the transition services right now for Verizon, which will be duplicate to the extent that we are putting those services into place ourselves. But you can't -- the way that that deal is set up is you can't just cherry-pick stuff off in little bits. You kind of have to say we're either using the service or we're not using the service. So until we're fully up and operational and ready to take it on ourselves, we've got personnel costs and related to other costs to kind of get ourselves ready.

That's why we said it will be choppy --

Right.

-- because you will have an overlap in a particular service where we're just about at full capacity to do it ourselves and we're still planning for the service. And then you will take that bucket of services and terminate them and you now have a reduction in that expense, but meanwhile, you might be doing that with something else.

And we don't -- we have a pretty detailed plan about how we will transition all those things, but again, we can't -- we hesitate to predict the exact timing because we're going to test and check and double-check everything, and really again, we are not concerned with the short-term profit margin. We think the big value is in transitioning this customer base well.

Okay, and on that comment, do you have some sort of expectation as far as how much of a customer base you expect to be lost?

No, I think what I said in response to Barry before is about as precise as we can be at this time.

Okay. And then as far as the Q1 [com], it looked like EBITDA margin was around 61%, 61.6%. Going into Q2 and Q3, when it's your peak period for that segment, do you foresee EBITDA margin expanding?

I think that that's a hard one to answer. It depends on the mix of revenues, but I think it's within the range we kind of came out in the first quarter.

I mean it's a relatively high fixed cost and capital cost business, as you all know, so when we -- generally, if we have volume increases, that will expand margins, and the only thing that crosses in that, and that's what you saw in the first quarter, was the pace of rate decline. So if volumes expand, as they usually do, in the second and third quarters, there should be some expansion in that margin.

Okay, and the last question. Could you give us the number as to what the expenses would be finalizing the deal in Q2?

You know, it's still open. There's still a couple of -- I think why I'm hesitant to do that because there's still a couple open costs that we are trying to work through, and so I don't want to give a number that could be materially different, and so I'd hate to do that. I think that -- it's just hard to tell at this point.

Yes, I mean the only thing I could add to that is even though we will have -- we won't have nearly as much overlapping G&A expense, these sort of internal personnel aspects of it, we -- even though we'll have a month of it, we'll have, I hope to God, a lot lower legal fees. But we will have had in -- the anchor fees at closing will show up in the second quarter. So it may not drop substantially from the first quarter. It could be some items that bring it up.

Okay, thank you.

Thank you. Our next question comes from Ric Prentiss of Raymond James. Your line is open.

Thanks. I think my phone ran out of energy over the last two days.

I wanted to go back. I appreciate that extra color on the fees. Is the banking fee, is that typical kind of 2%, 3% fee, just so we can get kind of a sense of what that lump sum might be coming in at?

It's lower than that. It's probably half that.

Okay.

The open -- the wildcard has been some professional fees that we're still trying to work through.

That's right, and you said there could be some slop-over to third quarter, too, if I remember your prepared remarks, also?

I don't think -- in the third quarter, Justin, did you say --

I'm sorry, Ric. Say that again.

He's saying you expect acquisition expense to fall over into the third quarter, as well, he's asking.

Yes, it could. It could depending on how the professional fee issue works out.

Okay. Just wanted to make sure we had it in the model.

Now, on the Alltel information we'll be getting shortly, does that mean today we'll be getting it? I wasn't sure what "short" means.

Yes, I -- well, it could be. It could be today. It could be today. I'm hesitant a little bit, but we're trying to get it filed today.

Okay. And just to keep hitting that issue, will it give us a lot of information on revenue? Will it break out like postpaid, prepaid subs? Will it give us data ARPU, churn? I am just trying to get a sense of how much detail we'll have to (multiple speakers).

No, it's your standard audited financial report, so it's just the audited financials. So it'll have -- it has service revenues, and it'll have '07, '08, and '09.

So what kind of like operating metrics? Will we be able to bore into understanding customers and post and pre and churn?

I doubt it. I doubt it.

Yes, Ric, it's a carve-out set of condensed financial statements.

Sure.

Ric, but we will be providing that information, but it may not be until the second-quarter result. And the reason for that, Ric, is so we digressed and mentioned before because this is a piece of the whole, we have found some bits and pieces of information that have had to be corrected and then have changed, and so we're just hesitant to release until we really have scrubbed it and owned it and know those numbers.

So I think that is -- I know everybody would like to see those numbers, but we're hesitating to put out numbers we don't completely trust until we've really scrubbed them.

Okay. And then on Commnet, can you talk a little bit about what kind of rate cuts you were seeing on the data side, and do you anticipate any further rate cuts coming in 2010?

We don't expect rate cuts of that magnitude by any means. There are some -- a lot of our agreements have tiered declines as volume expands, but this was -- these rate cuts on data were not the usual ones we've had in the past but particularly on the voice side that are more gradual. They were -- some carriers just the volume, the data volumes surged and their rates were -- the rates were pretty high, and so we willingly made a change to those rates and that was fairly significant. So I don't think we'll -- we certainly don't expect anything that significant in the remainder of the year.

Okay. And then my final question is on kind of those stimulus items you've been announcing. You've had the Navajo one that was in the press release. What kind of CapEx requirements are there to get at that funding? How does the funding come out? Is it pays or reimburse as you go, and any update to the New York project?

Sure. Justin will talk to you a little bit more about the process of how the capital gets spent and the reimbursement process.

For the piece out West that we just announced, we'll be spending about $2.5 million on that, and that's in the overall CapEx number we gave you. And so that's our portion of that project currently expected.

And just in general, the New York project is moving forward. As we said, it's a three-year build. It's quite an ambitious build, so it'll keep moving forward in chunks, but Justin, maybe you can talk a little bit about the process (multiple speakers).

The process is fairly quick reimbursement. And if we can manage it correctly, I think we can actually put in to have that paid directly. So I don't think it's a long out-of-pocket or a long wait to get reimbursed on it.

The only thing would be in the project out West, where we may have to put up front, some kind of phase-one environmental costs to make sure that that's taken care of in advance, so kind of before they start the fund. But for the most part, it should come fairly quickly.

And would the reimbursement get offset against CapEx or OpEx, wherever it was originally booked, or does it come in as a different line item?

Yes, it's a CapEx offset.

Okay, great. Thanks.

Any other questions, Operator?

(Operator instructions)

Our next question comes from Chris King of Stifel Nicolaus. Your line is open.

Hi. Good morning. Two quick questions for you. First of all, I just was wondering if you could give us a little bit of color regarding the transition process in terms of what benchmarks you guys or investors should be looking for as the clock begins to tick on that in terms of your guys moving off of Verizon systems over the course of the next 12 months or so and how you guys are going to update us, I guess, specifically to that process as we go along?

And then, secondly, obviously, the world seems to have changed here within the last 48 hours but I was just wondering if I could get your broad sense on the current kind of M&A environment that you guys are seeing out there across the telecom landscape, both domestically, as we've seen a couple of deals here in the US, as well as globally?

Sure. Well, the first part, I don't think we've decided for certain how we will talk about the transition. I think major transition items we'll talk to you about.

The biggest one most carriers look at in this kind of deal is the transition of the billing system, and that will really occur in the last part of the transition period. So that will really occur mainly in early 2011, and there will be some testing and so on well before that. And we expect to roll some markets before others as a further test. So that's really the big one.

And I think what we'll be trying to do is each quarter on the calls is we talk about expense structures and where we have overlapped and (inaudible) as we migrate systems and do stuff. I think you should look to our quarterly calls for updates on however the transition is going.

And then beyond that, I think -- you know, I think we all should look at the customer metrics, what happens in the transition quarters with churn and ARPU and net additions or attrition, and we've said some thoughts about that. I mean we think those -- we are expecting and some of it will be part of -- just part of how you have the transition. But we're expecting some higher churns certainly in that transition period and potentially some net attrition.

Oh, sorry, M&A environment. It's interesting. I'm not sure we know any more than anybody else about that. We still think that the environment for a potential investor or buyer is more attractive now than it was in 2006-2008 period. But there are -- there is word that the private equity and the sponsor deals are starting to heat up again. And those can make -- to me, that can make prices unattractive for larger properties because of the degree of leverage they use in those transactions.

But for the kind of things we look at, we still think it's an interesting environment and a better environment than it has been for a while. And we don't have any more visibility than anybody else into Greece or anything like that and how that money affects the capital markets.

Thank you.

Yes.

Thank you. (Operator instructions)

Okay, I'm showing no further questions in the queue.

No questions? If there's no further questions, we'd like to thank everybody and we'll be talking with you shortly.

Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect and have a wonderful day.