ATN International Inc (ATNI) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Atlantic Tele-Network Q4 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 is being recorded. I would now like to introduce your host for today's conference, Mr. Justin Benincasa. Sir, you may proceed.

Thank you, operator. Good morning everyone and thank you for joining us on our quarterly call as we review our fourth-quarter results. With me here as usual is Michael Prior, ATN's President and Chief Executive Officer.

During the call I will be covering the relevant financial information and operational data for the quarter, and Michael will be providing an update on the business activities.

Before I turn the call over to Michael for his comments, I would like to point out that statements in this call and in our press release contain forward-looking statements concerning our goals, beliefs, expectations, strategies, objectives, plans, future operating results and underlying assumptions, and are subject to risks and uncertainties that could cause actual results to differ materially from those described.

Also, in an effort to provide useful information to investors, our comments today include non-GAAP financial measures. For details on these measures and reconciliations to comparable GAAP measures, please refer to our earnings release on our website at www.atni.com or to the 8-K filing provided to the SEC.

With that said, I would like to turn the call over to Michael for his comments.

Thank you, Justin. Good morning everybody. I'm going to start with a few comments on an overall assessment of the quarter and then I will walk through a lot of the things we did last quarter in terms of the transition, and particular attention to the U.S. Retail Wireless segment.

Overall I think the fourth quarter represented another important step in the transition of our newly acquired U.S. Retail Wireless assets. And it also was marked by the continued expansion of our smaller international operations.

Our performance in the quarter was very much in line with our expectations, and like much of 2010, was marked of course by the Alltel assets transition. As in the third quarter this resulted in thinner operating margins, mainly due to duplicate transition expenses and usually high sales and marketing expense.

Another attribute of this transition was the continued attrition of the acquired subscriber base. I will address both of those aspects in a little more detail shortly.

But first let me talk about the transition process itself. We are continuing to make good progress on two of our most important transition items, systems and network. Indeed, I shouldn't say by that that we are not making good progress on the other transition items as well. But as we have talked about before, those are the most sensitive areas, systems and network, because they most directly affect customer experience and they are the most complex.

On the systems conversion we have recently begun user acceptance testing of our new billing system, and although it is early going, we are very pleased with the results so far.

We currently expect the major live transitioning of subscribers to begin early in the second quarter and to conclude by the end of the quarter. As we believe that our systems conversion will benefit from a slight expansion in the original project plan.

Of course, in any transition of this magnitude there are likely to be some glitches and bumps and we are trying to ensure that our processes are robust enough to identify and correct those quickly.

As to the dynamics in the U.S. Retail Wireless market, in our earnings release we highlighted an estimated marketing expenses that we -- they were above normalized levels. These costs primarily relate to the commissions and device subsidies connected with upgrades and contract renewals. And that -- therefore that is reflected in two lines, in both the sales and marketing expense and in our equipment costs.

As previously discussed, because of trust practices on converting to one-year contracts we have faced an unusually high number of customers coming off contract, and we have been aggressive in our contract renewal and extension efforts.

Those renewal efforts should continue to be well above normal levels for some time, although we have gotten through a substantial portion of the largest bubble, and therefore, we expect the impact of this anomaly on costs as well as on subscriber churn to diminish significantly in the second half of the year and to start to show some modest improvement in the second quarter this year.

Another metric that is above the norm in this transition period is our customer churn. In the past we have noted that we have been experiencing very high levels of involuntary churn, much of it related to past credit and sales practices. This continued in the fourth quarter as was apparent in the numbers we released. But we are starting to see real improvement early in 2011 and we expect that will continue throughout the year.

On the voluntary side of churn we believe that we have addressed most of the network separation issues, together with the expected -- and together with the expected reduction in the contract expiration bubble we think we should -- we are expecting improvement in our voluntary churn numbers as the year progresses.

Gross additions in the fourth quarter were also constrained, as some have noted, by -- and this was by the anticipated reduction in indirect points of distribution that happened in October, particularly with respect to our decision to eliminate some channels that were generating unprofitable customers, as well as the noted phase out of our prepaid product by a large national retailer.

We are, however, encouraged on this front by recent strengthening of gross adds within existing distribution channels, as well as some promising opportunities to enhance our distribution within our footprint.

We expect U.S. Retail Wireless margins to improve in the second half of 2011. Initially we think it likely that it will be in the lower end of our previous projected range of 20% to 30% as we eliminate duplicate expenses, reduce roaming expense, and solidify our overall cost structure. Any such improvement, of course, will have a significant positive impact on U.S. Wireless margins and our overall consolidated operating margins.

I should note as well that we did not receive any significant USF contributions for the Alltel properties in 2010, and that is a situation we expect to rectify in 2011.

We also continue to expect that, assuming a relatively timely and smooth transition, the rate of subscriber losses will diminish as 2011 progresses. But we do expect subscriber levels to continue to fall throughout the year, particularly prepaid.

So in summary on the retail wireless front, as expected, the transition and integration is a laborious and complex process. But we are very happy and proud of the work our team has done. And with each passing quarter we are closer to building a sustainable retail wireless business with the capacity to significantly increase our overall profitability.

Moving onto other fronts on the wholesale revenue front, in our earnings release we made an effort to quantify the upper range of wholesale roaming revenues at risk from the AT&T's Alltel deal and network conversion. We believe that ultimately we will lose all of that revenue stream, which we estimate amounted to approximately $14 million in 2010. We think it likely that the biggest impact will be felt in the first half of 2011, probably second quarter.

On the international operations front, we continued to strengthen the team, and that represents our continued commitment to those markets and our belief that over the longer term there is still very good growth opportunities for ATN in the region.

Within that segment, or those segments, are Island Wireless segment continues to add subs, and we expect to see more growth in 2011. Obviously, that is relatively small in the overall scheme of things.

We are also still trying to work with the government in Guyana towards its goal of an end to our exclusivity right in concert with establishing a new regulatory framework and opening up additional sectors of telecom to competition.

Also, our stimulus-funded projects in the US involving middle mile fiber in the Northeast and wireless broadband in the Southwest should be see major network build activity throughout 2011.

So just to sum up before I give it over to Justin, I think the domestic retail wireless business is a work in progress, but it goes -- it is going to according to plan and we believe the results will be worth waiting for.

While we work through the last six months of the transition we continue to explore ways to round out our footprint in certain domestic retail markets, leverage our positions in our international businesses, and achieve operating efficiencies across our entire asset portfolio.

So with that I will turn it to Justin.

Thank you, Michael. I'll just recap some of the financial data and talk a little bit more about CapEx as well. But our operating revenues for the quarter totaled $194.7 million, which was an increase of $135 million over the same quarter in 2009. This increase was primarily the result of the Alltel acquisition, which generated $124.4 million of the service revenues and $10 million of equipment and other revenues.

Our total wireless service revenues for the quarter were $164.2 million or 84% of total revenues. And our U.S. Wireless service revenues were $150.2 million or 77% of total revenue this quarter.

Operating expenses for the quarter totaled $185.4 million and adjusted EBITDA was $31.3 million. Included within the $31.3 million was nonstock -- non-cash stock-based compensation expense of $507,000 and a credit of $2.1 million of acquisition-related expenses reflecting a final settlement of estimated cost expensed earlier this year.

Our U.S. Wireless segment accounted for $151 million of the $185.4 million of operating expenses, and $26.3 million of adjusted EBITDA total. As we noted in the press release, this included approximately $15 million of duplicate transition-related expenses and additional equipment costs and sales commissions due to accelerated customer renewals and extensions.

Reported net income for the quarter was $3.3 million, giving us earnings-per-share of $0.21. Our effective tax rate for the quarter was high at 61%, reflecting our current mix of taxable income and losses within the various tax jurisdictions we operate. This includes tax rates higher than the US and Guyana, and no offsetting benefit from losses in zero tax jurisdictions such as Bermuda and Turks and Caicos.

Just looking quickly at the balance sheet, we have cash balances of approximately $37 million and total debt outstanding of $288 million. Capital expenditures totaled approximately $43.9 million for the quarter, with U.S. Wireless comprising $34.3 million of the total and international telephony of $5.8 million.

For the year -- for the full year 2010 capital expenditures totaled $135.7 million. Included in this total is approximately $53 million of capital expenditures related to Alltel transition expenses, including IT, back office, billing and point-of-sale systems, cell site re-homing and core network equipment.

Looking ahead to 2011, we currently anticipate capital expenditures to be in the range of $105 million to $120 million, which is down from 2010, but still higher than what we would want normally expecting due to continued Alltel transition expenses.

We estimate capital expenditures of between $70 million and $80 million for the U.S. Wireless segment in this total. Included in this amount is an additional $30 million for Alltel transition expenses that, together with the $53 million incurred in 2010, total approximately $83 million in conversion and integration capital expenditures.

Also included in 2010 is approximately $10 million of capital costs, reflecting our contribution to the stimulus grant projects that Michael noted earlier and we announced in 2010.

Some additional operational data for the quarter. MOUs in our legacy wholesale markets were $168 million, which is down 19% from Q3, which is traditionally our highest seasonal quarter, and up 5% from Q4 2009.

On the other hand, data traffic was flat from Q3 and up 123% from the same period last year. In international wireless we ended the quarter with 305 subscribers in Guyana and 26,000 subscribers in the Islands, up from 289,000 a year ago in Guyana and 20,500, or 27%, in the Islands.

With that I would like to turn it back to the operator for questions.

(Operator Instructions). Ric Prentiss, Raymond James.

A couple of questions for you, if I may. First, I appreciate the extra color on the duplicate costs and the contract work. Can you split that into the $15 million -- how much do you think was duplicate costs and how much was working on fixing the trust one-year contract practice?

It is about -- the trust -- the duplicate cost is about -- a little less than half.

And then the other side --?

Then the marketing and handsets, the balance.

Sure, okay. Then what are the major trends this year, particularly on this season? Conference calls has been selling of smartphones causing pressure for a lot of people on sales and marketing and CPGA. What percentage of your base or what percentage of sales were on smartphones, and how has that been affecting you?

On the smartphones about -- almost 50% of fourth-quarter postpaid handset sales, including upgrades, were smartphones. So we have a little bit less than one-third of our base has smartphones right now.

And that is on a postpaid base as well?

Yes, that is on postpaid.

Then just looking on the margin question, obviously you mentioned it would be thin as you finish through the transition, and that you might in second half see it go up into maybe the low end of your 20% to 30% range. As you look out there what gives you confident that you can balance up into the 20%s it sounds, given the pressure we are seeing on handset CPGA?

I think a lot of it is that the issue that we talked about at length, and again did in the remarks, which is the contract level. The out of -- the people just coming off contract obviously is -- you want that statistic to be as low as possible in the industry, and we were facing above -- well above normal. So there is a lot -- that means that our expenses, both commissions and handset subsidies and so on, are higher than normal to deal with that. So I think that is one area we will see a benefit from that and from churn levels coming down.

The other thing is there are a number of expenses that are just duplicate, but there are things like roaming expenses that we see improving, particularly in the second half of the year.

And, lastly, there are some smaller items too that end up helping, like USF revenue. Although that is not as significant for us as some rural carriers, it still helps.

That is pretty nice margins.

Yes, that's right.

Alright, thanks guys.

Barry McCarver, Stephens.

Looking at just gross adds in the U.S. Wireless subscriber base, quite a bit of fluctuation in 4Q versus 3Q. Can you give us just a little bit more color on what is causing that fluctuation and what we might expect a baseline to be in future quarters?

I think rather than give you a prediction for future quarters let me answer the first part of the question. We tried to highlight earlier is -- you remember we talked about last quarter that we were losing a major prepaid channel. So that was one large impact that you saw, obviously, in the prepaid numbers. So that absolutely hit the overall gross adds.

The second one we also talked about in previous quarters was that there were some channels on the postpaid side that were -- that we inherited that were selling through with really bad churn characteristics. And so we tried to work on those channels. We weren't -- end up -- we weren't able to get them to where we like them, so we just stopped selling through those channels. So that hit gross adds. That really took effect in the fourth quarter.

So both of those things -- those are probably the two most significant factors in the fourth quarter. Normally, of course, you would expect to see fourth-quarter gross adds above your third quarter, and that is why that looked anomalous this year.

Then just two quick follow-ups. Number one, on the $15 million in duplicate costs in 4Q would you expect that to increase in 1Q before it starts back down, or is that a decent kind of range for the next quarter?

Then the second follow-up is just, for the Island Wireless another quarter of an EBITDA loss. What is the breakeven point on revenue for that segment?

On the first question I think the -- yes, I think you'll see some additional -- the duplicate transition costs will probably ramp up a little bit more in the fourth quarter before they come down, just because we are getting closer and closer to cutting over. So as we talked about in the past, we just have to fully staff before we disconnect from the transition from Verizon on the items. So I think you will see some increased costs on there.

On the Island, yes, it is -- I think that you've probably got to get up into the $10 million a quarter range to start to see that.

Well, what it is, is there are two of the three markets that are in that are early stage. They are recently launched. So it is not -- so we are growing both of those and that is what is contributing to the losses. We are obviously seeing -- we are not seeing losses in our more mature markets like Bermuda.

Okay, great. Thanks, guys.

Chris King, Stifel Nicolaus.

Just a very high-level question for you. I just was wondering if you could talk a little bit more about how you guys weigh EBITDA margins and improvements in the margins over time versus subscriber growth in the long run?

We have obviously seen several regional wireless carriers over the last couple years struggle to try to grow subscribers, certainly while maintaining their margins. You guys obviously are looking to expand those margins certainly over the course of the next several years, even if you get -- even as you get off of the transition services arrangement in the second half of the year from the low 20% range.

I just was wondering how you think about the trade-off, both in the near term and the long term, of subscriber growth versus margins and how you see that playing out?

Well, I think that the -- I think you're identifying -- that is a fair comment. I think -- what we care about is cash flow and free cash flow, and we care about growing that in the Company overall.

So it is hard to grow subscribers within a small and static footprint. I think we have ways to round out the footprint that should help, but I still think it is difficult. And I think you are seeing that throughout the industry.

If you have a reasonably strong competitor or competitors in your market it has been more static. And I think that is the case for us. So I think it is going to be hard to grow subscribers significantly. I think it is going to be easier to grow margins and perhaps ARPU to grow revenue. So I think that is fair as long as the coverage footprint remains the same.

Thanks for that color, I appreciate it.

(Operator Instructions). Erik Keener, River Road Asset Management.

Thanks for taking the call. A couple questions for you, the first one on the transition services contract. Can you first break me out the year-to-date duplicate expense number, and then talk about what portion of that is the transition services versus handsets and customer service?

Yes, the year-to-date, I think we gave some color on the second quarter, so you can probably get a good idea from that as well. I think we had said $10 million in sales and marketing costs in the second quarter.

But I think generally the second quarter was similar to this quarter. I'm sorry, third quarter was similar to this quarter. And I think, as I mentioned earlier, it is a little -- I think the handset cost were a little as than one-half, about $7 million of it. Then the other transition -- duplicate transition costs was the balance.

Was there any in Q2?

I am sure there was. We didn't break it out, but I think probably safe to use a pretty much pro rata number as well. We didn't own the assets for the whole quarter.

Then can you guys do a little bit of a walk for me on the sales and marketing costs and services line between Q4 and Q3? So I saw about $50 million in Q3 and was surprised to see it decline to about $32 million quarter-on-quarter.

You know, I think we actually in our third quarter had some handset costs in that sales and marketing, so it got broken out in the fourth quarter or moved up into equipment. So look at the year-to-date number as probably the better way to go. So it is a re-class, if you will.

Okay, then on churn expectations, churn was anticipated, but post-paid churn is a little bit higher than you guys expected. Is that really from decreasing those channel partners that were problematic?

Well, no, postpaid churn -- and first, I am not sure it was higher than we expected. It may have been higher than some others expected. But I think --

I am just going off of what was in the release. Involuntary churn, which has remained higher than expected throughout the transition.

Oh, involuntary churn. Thank you. Okay. Involuntary churn in the past quarters in particular we thought that there was some maybe economic effect that was higher than we really expected. It was a little stubborn in that regard. But as I said in the opening remarks, I think we started to see real improvement in that going in -- early in 2011.

Okay, so looking at quarter-on-quarter development with churn we were north of 4% going into Q3, and then right around 5% on the postpaid in Q4. Do you see it -- so you are saying you see it improving from there, but to what degree? Does it get more normalized by the time you guys get to the anniversary of taking over the asset, or can you give us more color on that?

Yes, I think it gets -- I think we hope and expect that it will get to normalized levels by the end of the year is a better way to say it. Because there will be a few -- I think it will progress towards that (technical difficulty) is what we currently (technical difficulty), but I don't think it will magically drop as soon as we are at the anniversary date because there are a number of factors in that.

So if we were looking at 5% for the next couple of quarters that is probably too much, but more of a 2% annualized number by the end of the year is probably a better ballpark?

Well, I think you're using a blended number and I don't think a blended number of postpaid and prepaid at 2%, I think that would be low. But I just -- rather than give you precise numbers I would just leave you with I think we will improve by degrees throughout the year, starting in the first quarter. And we think it will be much at more industry normal levels by the end of the year.

Okay. A quick one on Guyana and then a quick housekeeping one on the balance sheet. Now that you guys have the undersea cable run to the country, any comments on your service uptake there? Has that helped wireline at all?

Yes, it has. The data revenues have grown -- well, we don't break that out, but the subscriber additions in terms of broadband subscribers and data revenue, including some larger customers, enterprise customers, has grown nicely. It wasn't fully enough to counter some of the declines in the legacy wireline, which is really mostly long distance. But the take-up has been very good and in line with our expectations when we invested in the cable.

Then two quick ones on the balance sheet. Can you guys give me the minority interest number in the current portion of long-term debt?

Current portion of long-term debt. The minority interest is like $45.3 million and the current portion is $12 million.

That's great. Thanks, guys.

Hamed Khorsand, BWS Financial.

Just a question here. Have you guys started any buildout from that license you purchased in Aruba or is there any plans to in 2011?

Yes, we have built out. We are covering the Island actually quite well. And it is good business. It is actually (technical difficulty) a cash flow neutral position. But it is pretty small in these numbers on it.

I understand. My question is, I saw in the Commnet revenue side your minutes per -- your price per minute actually went up this quarter. Is it going to be as volatile as it has been or is it going to flatten out?

I think it should be more flat. I am not (inaudible).

I think that it has not so much been volatility as that the price -- the rates overall has continued to drop. There are different rates within the mix and there is data, so that can affect it, but the overall experience in the industry, and indeed the context that we have, tend to bring it down over time, and they certainly tend to bring down with volume.

My other question regarding Commnet is that your comments about $14 million being at risk for 2011 revenue, is that -- I take that from your comments that is over the course of the year, but then you said it is going to mostly happen in Q2. Can you provide a little bit more color -- I mean, are we seeing Q2 hypothetically go from $30 million down to $16 million in revenue or (multiple speakers)?

No, it will be throughout the year, but I just think right now if we had to guess, we would think the biggest impact would be in the second quarter. But we do think the revenue loss from that would be throughout the year. And there'll be that -- that is not a prediction of a flat amount -- that revenue at risk. There should be some offsetting revenue, but that is not significant enough to outweigh that.

My last question is regarding the Allied wireless business, you had said that you will see -- you had $15 million this quarter in revenue. Sorry, not in revenue, in expenses that were duplicate costs. What does that look like for the first half of the year? Are we going to see about a $30 million figure for the first half? And is that just going to -- just drop down to almost zero in the second half?

I think that we hope that we will be done with most of those costs by the second half, yes. But it is hard to predict right now. But I think the transition expenses, the mix of it might move a little bit differently throughout the first half of the year, where transition expenses actually increase, and maybe some of the customer stuff comes -- customer costs comes down. So I would leave it at that.

Okay, but am I proper to think that is going to be $30 million the first half of the year?

I hate to -- I don't want to predict it would be, honestly. But I think it is safe to assume that it is going to be sizable still as we move through the first half of the year.

Okay, fair enough. Thank you.

Ric Prentiss, Raymond James.

I want to do a couple will follow-ups, if I could. First, on the Commnet $14 million, that is an annual number at risk, right?

Correct.

So if it is something were to come out in a quarter it would be a quarter's worth of that kind of annualized rate?

Correct.

Right. Right, but it is not -- we don't think it is going to be uniform throughout the year. So what we are saying is it would probably be disproportional in the second quarter.

Right, right. But the at risk amount was an annual calendar year kind of number?

That's correct.

Second question, you mentioned that -- and it is definitely an industry trend we have seen talked out in many calls this quarter about the increasing ARPU. Data ARPU really is helping carriers. You have the cost of smartphones, but ARPU is going up. You mentioned you were hoping that could help your second-half '11 margin kind of thoughts. What percent of your base is under contract? How are you calculating ARPU in the new exhibit?

In terms of calculating ARPU, I think we have a total -- we have the postpaid, which includes voice and data obviously, and then the customer, which is everything other than wholesale and tower rental. Does that answer your question?

Right. Because in the old days, covering Alltel for many, many years, they would include roaming into some of their ARPU calculations. So I wanted to make sure the wholesale piece, both the old Commnet and the newbies were not included in subscriber ARPU.

That is correct. It is not included.

Okay, good. So it really is kind of what the customer is paying.

Exactly.

Great. That helps. Do you know what data ARPU was?

We have that, but we are not providing it right now. I think it is just one of those -- until we move through the transition we want to be -- we are hesitant to give that because it is somewhat arbitrary in terms of how you split the monthly package apart. And I don't think we want to -- until we come through the other side and we've got full control of the billing system, try to do that.

And it is not just that, it is the question of the quality of it and whether it is apples-to-apples, because of the fact that increasingly people are on bundled plans.

Sure. The allocation process, I understand. Do you know how much of your postpaid base upgraded in the quarter? That is something we have been collecting from a lot of the carriers trying to gauge how sustainable the retention cost, if you will, might be.

We don't have that to hand.

And percent of base under contract or average tenure of contact? I know the trust was doing one-year contracts that you're trying to fix. I assume the new stuff is being sold on two-year contracts or possibly even three. I am just wondering if you have the thought of what your average duration is.

Well, I don't have the average duration right number -- I'm not sure it is a number we would hand out. But maybe it helps to tell you that I would say we are into 90% plus -- 90% to 95% of the new contracts are two-year contracts.

Then switching gears on the CapEx side, can you break it down a little bit for us as far as, you mentioned how much was on the US side, is some of that for roaming business, is that for technology upgrades?

And where is LTE in your thoughts? We have been hearing a lot of faster paced building of LTE than I think anybody thought of a month ago.

Well why don't I -- I will address LTE, then I will let Justin address the other part of the question. We are -- like every carrier, I imagine, we are looking at it seriously. One of the questions with LTE, I think it is a mix of whether it gives you a competitive advantage or disadvantage whether you have it or not from a customer offering. I think it is early for that, particularly in our markets.

Then the second question you look at is capability to handle data loads and whether it improves the overall efficiency of your network and your ability to grow data.

So we are looking at both of those. I think we think in our markets our offering is extremely competitive on the data side today, but you obviously have to do some forward planning.

So then as far as looking at that CapEx guidance, maybe chunk it out a little more understanding what we are buying for that CapEx.

Yes, I think in there -- so we said $70 million to $80 million U.S., but that included $30 million of transition. So that leaves $40 million to $50 million for the other businesses. And that is -- some of that is network expansion on both legacy wholesale as well as on the Alltel assets.

I think when you say US, you meant U.S. Wireless.

U.S. Wireless.

Yes, I'm sorry. Yes. Obviously the biggest chunk of what you guys got.

There is also some cost in there for the NCUA stimulus project as well.

Right. So one would expect the transition CapEx should go away then as a line item, at least, in 2012 thoughts.

Yes.

Correct.

One other thing that we've seen in the history of wireless is clustering really does help sales and churn. Any thoughts about footprint rationalization, either some licenses that you might be interested in adding or some that you might be interested in selling, or when that kind of makes it onto the radar screen for you guys?

I think you have followed us long enough to know that we are always looking at our -- if you think about our asset, our market portfolio and trying to think of ways to optimize. So it is definitely something we look at. And it is something we have talked about from the beginning that the somewhat Island characteristic of these properties definitely results in higher expense in some areas.

So we are looking at that. We are looking at fill-in possibilities. We are looking at a lot of things there. I don't have any great promises to make, but we certainly look at that.

Great, thanks.

I am not showing any further questions at this time.

Okay, I would just like to thank everybody, and we will see you in another quarter.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Thank you and have a great day.