ATN International Inc (ATNI) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Atlantic Tele-Network second-quarter 2011 earnings conference call. (Operator Instructions). As a reminder, this is being recorded.

I would now like to introduce Mr. Justin Benincasa, Chief Financial Officer. You may begin.

Thank you, operator. Good morning, everyone, and thank you for joining us on our quarterly call as we review our second-quarter 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 and operational data, and Michael will be providing an update on the business.

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 containing forward-looking statements concerning our goals, beliefs, expectations, strategies, plans, future operating results and underlying assumptions 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 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 comments on the quarter.

Thank you, Justin. Good morning, everyone. First, I will just give you a few overall thoughts on the quarter, and then I will go into some further detail on a lot of those items.

First of all, thanks to excellent work and dedication by many members of our team, we made great progress on our Alltel systems transition in the quarter and actually resulted -- this resulted in the end to our transition services agreement and final systems conversion in late July, so the current quarter.

As anticipated, the second quarter was burdened by heavy duplicate expenses as we near the end of this transition period. Overall, however, our results were a bit better than we expected due to a variety of smaller revenue and cost improvements.

We had also expected some pressure this quarter on wholesale revenue in our roam only markets out West as a result of AT&T's entry into those areas through acquisition, and we talked about that on several of the last earnings calls. And that did, indeed, occur. We saw a decline in revenue in a number of key markets, although overall wholesale volume growth, driven in part by seasonal factors that typically continue in the third quarter, minimize the negative impact in the quarter.

Lastly, we had a positive development in the quarter when we completed the merger of our Bermuda Wireless business, CellOne, with the wireless operations of the incumbent Bermuda telephone company.

So now let me first give you a few more details on the Alltel transition. As I said, we completed the last and most complex stage of the transition, the systems conversion, about 10 days ago, and shortly thereafter the Transition Services Agreement with Verizon came to an end. While there have been, of course, a few bumps along the way, in general, the conversion went very well and better than we had expected. We are pleased with the overall quality of the experience for our customers and partners, and we are looking forward to continuing to refine and improve that experience now that we are fully onto our own systems.

Now this process would have had a very different result if not for the very hard and smart work of a lot of people across all departments and disciplines at ATN and in many different locations. The information systems and network leaders and personnel were at the center of much of these efforts, but there was tremendous work coming from all areas, including customer care, distribution, marketing and finance.

We have more to do. We have a number of much more minor wrap-up activities going on for the next month or so, but much more important we are looking forward to seeing what we can do now that we have both hands on the wheel to strengthen and enhance our revenue base, margins and customer metrics in the coming quarters.

So with that, let me turn to the US Wireless metrics for the second quarter. As anticipated for all the reasons we have highlighted in previous quarters, mainly the contract expiration bubble and the loss of a major pre-paid channel, we continue to experience net attrition of our subscriber base through the transition period, particularly to the pre-paid subscriber base.

The latter factor, the loss of a major indirect channel, is well represented in the significant decline in pre-paid gross adds, while post-paid gross adds have remained relatively level.

On the other hand, we did see further improvement in churn. The sequential improvement in postpaid subscriber churn from 2.93% down to 2.4% and on overall subscriber churn from 4.3% down to 3.7% was largely caused by the same factors that pushed churn down in the first quarter. And just as a quick review, in this quarter was mainly improvement to voluntary churn, and that is due to the decline in the number of customers coming off contract and most importantly the decline of those recently coming off contract. Involuntary churn, which had improved significantly in the first quarter, showed further but less dramatic improvement in this quarter, and that was an achievement given today's economic environment, which we think is still pretty tight for many of our customers.

With billing and related systems, as well as customer care now directly under our control and the intensive transition activities behind us, we hope to use increased focus and systems flexibility to drive further improvement to our submetrics and, in particular, to end net sublosses.

We also have given you smartphone information in the past. I could tell you that smartphones were over 50% of postpaid handset sales and upgrades in the quarter, and we ended the quarter with approximately 36% of our overall postpaid base on smartphones. I think Justin may have some comparisons for you, too, in his remarks. If not, I can tell you I think it was 34% in the quarter before, so it is up a tick.

On the wholesale US Wireless revenue front, in previous quarters we have also talked ad nauseum I think about the wholesale roaming revenues at risk from the AT&T Alltel deal and network conversion.

As I noted earlier, this factor did make negatively impact our results for the second quarter, despite high overall volumes driven by seasonality and some modest network growth. The precise amount and rates of decline from this factor going forward are very hard to forecast. Mainly that is because they are subject to many factors outside of our control. Nonetheless, we estimate that we have lost a bit less than half of the estimated quarterly revenue at risk, and at the current time, we expect the remaining balance to bleed off more slowly over the next year or more.

Also noteworthy on the wholesale side is the data roaming revenue volumes continue to grow. That is a common story, I guess, throughout the industry with data volumes and rates. At the same time, data roaming rates have trended down quite a bit over the last year or so.

In our international operations, in international wireless, our wireless subscribers, including some fixed wireless broadband subscribers, increased by nearly 12%. This was due to the Bermuda merger mainly, but also due to rapid growth in our smaller new island markets and also some gains in Guyana's largely pre-paid subscriber base.

With respect to the Bermuda Wireless merger, integration activities are off to a strong start, including revised look to our brand and the launch of a new larger retail flagship in Hamilton. We are the largest wireless carrier in Bermuda now, and we are intently focused on continuing to deliver the highest quality customer experience.

So, in summary, before I turn it over to Justin for some further financial details, we are very glad to have the Alltel transition behind us needless to say and even more happy that it was accomplished with very few hiccups.

We are also delighted by the merger of our Bermuda Wireless business with M3 Wireless, which was completed in May, and we now expect that to be accretive before the end of this year thanks to strong customer response and efficiencies achieved to date. And while third-quarter results will still be somewhat burdened by July's overlapping expenses, we expect US Wireless segment margins and subscriber metrics to progressively improve in the second half of this year.

So, with that, I will turn it back to Justin.

Great. Thank you, Michael. Our operating revenues for the quarter totaled $193.8 million, which was an increase of $29.1 million over the same quarter 2010. This year-on-year increase was primarily the result of the inclusion of a full quarter of Alltel operations this quarter as compared to approximately two months in the second quarter of 2010. Total wireless revenues for the quarter were $166 million or 86% of total revenues, and our US Wireless service revenues were $147.3 million or 76% of total revenues.

US retail operations generated $122.7 million of service revenues and $5.8 million of equipment and other revenues. Operating expenses for the quarter totaled $187.5 million, and adjusted EBITDA was $32 million. Included in operating expenses was non-cash stock-based compensation of $812,000 and $317,000 of acquisition-related expenses incurred in connection with the merger in Bermuda that Michael mentioned previously that closed in early May.

Our US Wireless segment accounted for $146.7 million of the $187.5 million of operating expenses and $23.9 million of the adjusted EBITDA total.

As we noted in our press release, we incurred $14.8 million of duplicate transition-related expenses and the net of other one-time items. And, as Michael mentioned, the final systems conversion took place in late July. So, as a result, we expect third-quarter operating expenses to be negatively impacted by approximately $5 million to $6 million of transition-related expenses.

Reported net income for the quarter was $1.8 million, resulting in earnings-per-share of $0.12. Our effective tax rate was 44% this quarter, reflecting our current mix of taxable income and losses in various tax jurisdictions.

Turning to the balance sheet, as of June 30, we had cash balances of $46.8 million and total debt outstanding of $307.5 million, which includes $17.8 million of current debt and $6.6 million of debt we assumed in the Bermuda merger. Capital expenditures totaled $29.2 million for the quarter, of which approximately $19.8 million was incurred by our US Wireless segment and $6 million by our international telephony segment. We still anticipate full-year capital expenditures to be in the range of $105 million to $120 million with our US Wireless segment spending between $70 million and $80 million of that total.

Some additional operating data for the quarter. We ended the quarter with 770 roam only base stations, which include 128 from our Alltel acquisition and 642 in our legacy markets. In our legacy wholesale markets, MOUs were up 3% from Q1 and down 12% from Q2 2010. Data traffic, however, was up 17% from Q1 and 72% from the same period last year.

In international wireless, we ended the quarter with a total of 344,300 subscribers with 297,000 subscribers in Guyana and 47,300 subscribers in the islands, and this includes approximately 18,000 additional subs from our Bermuda merger. In our US Wireless segment, business lines increased 18% from a year ago and 1% from the first quarter, ending the quarter at 54,400 lines. And in international, we ended the quarter with 150,000 access lines.

With that, operator, I would like to turn the call over for questions at this point.

(Operator Instructions). Ric Prentiss, Raymond James.

Congrats on getting both hands on the wheels, guys. It must be feel pretty good. In that regard, Michael, I think you mentioned targeting positive ads. What do you think it takes and how long do you think it takes to head towards that, particularly on the postpaid side?

I mean I think -- I don't feel that we are that far away on the postpaid side. I think we would hope to see that happen in the fourth quarter, but clearly we have been working hard on the disconnect side. I think we think there is room to improve there, particularly on pre-paid, but -- and there is room to improve on postpaid. But to really have a big effect, we are going to have to move the gross additions number up. So I think now having the systems under our control is obviously one factor. It gives us a lot more flexibility and speed to market.

The other factor and perhaps bigger one is it is impossible not to be distracted when you are in this transition process, and that was absolutely mission one for us.

So I guess that is an intangible rather than a tangible, but I think it is a pretty big one. And when I put those two together, I think we have a chance to certainly stop the net attrition. A lot of that, as you remember, are subs that is almost artificially inflated at the time we acquired it. A very big portion where subs it just -- we are not ever going to hold on to. They were not profitable. They were brought under various methods. So we had that issue.

Keep in mind, too, that from the time we signed the deal and the time we closed the deal, they grew subs by 95,000 subscribers. So you have to --

That is a good indication of the quality, low quality largely. So anyway -- but I think we still -- we have got our work cut out for us. It is a competitive environment, and we have got our work cut out to bring up the gross additions.

On the smartphone side -- I appreciate the information -- 50% of postpaid sales upgrades. It looks like it is about 36% of postpaid base. As you think about the next generation, a lot of discussion on LTE, a lot of discussion from a good partner of yours, Sprint, speculation on vision, what they are doing with network vision and rolling out, can you update us as far as what you think your timeline would be to look at LTE and what you might consider as far as options to do it?

Well, I think we are hardly alone in that we are already seriously looking at it. I think you have to look very hard at that whether or not you are going to move quickly so that you really understand what your options are and have a good time to reach an informed decision.

So certainly looking about it, thinking about it, I think I said before when we first signed this deal, I would have put LTE farther out than I would now. Clearly the data use and the industry as a whole has accelerated that time period. We are not ready to say when we would do it, but it does not feel like an [if] at this point, it feels like a win.

And I think if your second part of that question, all the regional carriers also have to consider in that mix how are you going to support your out of territory experience for your customers? How are you going to do that? And you have also got to think about spectrum. I think we have enough spectrum to do it, but you are always looking for more. It certainly makes -- can improve the economics and improve the efficiencies.

Okay. So stay tuned?

Yes.

Sanford Lee, Canaccord Genuity.

I was wondering if you could give me a little bit of color at least to the ARPU growth on the postpaid side coming up 1.2. What are you seeing in terms of the voice? Because that is a higher-margin type of revenue stream.

I think we are seeing -- we are definitely seeing an uptick in the recurring revenue. In that space, it was just due to a higher adoption of bundled plans, which is driving a large piece of it.

Okay. And then just a clarification. You mentioned the wireless subscribers, 297,000. That is in Guyana, correct?

Correct.

So that is implying a contraction of 6000 subs. Can you tell us what is going on? Because that is the second quarter in a row that we have seen contraction.

Well, are you talking about contraction in the subs?

Sequential net additions, yes, quarter over quarter. For example, I have Q1 2011 down 2000 --

Right. Okay. I just wanted to make sure you said subscribers. I think it is really sifting through that customer base there are some, which you remember it is almost all prepaid. So there can be small movements either up or down that are not necessarily really indicative of where the revenue trend is going.

So I think it is mostly that. I don't think there has been really any change in the competitive dynamics there.

Okay. I will jump back in queue.

Barry McCarver, Stephens.

Thanks for all the great detail on the quarter. So first question, going back to your discussion of the redundant costs, if I look at 3Q and just see addition of -- additional $5 million to $6 million in redundant costs, that is going to suggest that margin, EBITDA margin for that segment is going to improve pretty significantly from the 15.6 range up to a little over 22% and then obviously even more so in 4Q. Is that -- all things being equal, does that math makes sense?

That math does make sense, yes.

Okay. And then back to your discussion on the wholesale side and trying to understand the seasonality there because there was a big swing in this quarter, can you put your hands around a dollar amount for us on what did come off from the AT&T so we understand what the bleedout could look like over the next several quarters?

Well, without giving you a precise dollar amount, we would say somewhat less than half. So 40% plus range came off in order, and if you took that and carried it through four quarters, you would get -- you can do to the map as to where that comes out on an annualized basis.

So you're saying taken the annual number you gave us before, break it out into a quarterly run-rate, take 40% of that?

And you would be rough remembering that this is somewhat soft, right, because you are measuring what you think you saw an impact from this while you still are having traffic in a lot of these areas. So there is a little bit of a fungibility issue. But that is our best guess of it.

Okay. That is good information. So then just lastly, you commented on the after full integration of the Island Wireless merger there, that could be accretive by year-end. Can that entire segment be a net income contributor by the end of the year? Is that possible?

I don't know if it would be net income by the end of the year. It is probably close. We would have to see how much of those synergies we can push into the year. But it will have a big impact on moving it in the right direction.

(Operator Instructions). Anil Gupta, Imperial Capital.

I think you mentioned that the loss of the prepaid channel has obviously impacted the subscriber growth. I was just wondering is that channel something you are looking to replace near-term? Are you guys actively out there looking for new channels?

Yes, we are. I mean I don't think it will be easy -- I will not sit here and say we are expecting to completely replace that channel in the short-term, but we are actively working it.

Okay. And then the other question I had was just to clarify. So you said in the results that the quarterly results are better than your expectations based on revenue upside and some cost adjustments. So is it mostly that the costs were coming out from the international wireless portion or the Island Wireless portion? Are those the costs that you think were better than expected?

No, I think it was more probably across a couple of the segments, some of it just the US Wireless. It is just a matter of how much we are going to have to have duplicate costs. So our initial thinking might have been that might have been a little heavier than what it turned out to be.

Chris King, Stifel Nicolaus.

A couple of quick questions for you just on the US Wireless side of the business. First of all, we have generally seen some spotty results at best, particularly on the lower end of the US Wireless industry from other operators. Yet you guys certainly on the postpaid side put up a nice reduction in churn, very solid postpaid ARPUs. I was just wondering if you saw any dramatic change in the overall competitive dynamic in the quarter with the various promotions from some of the larger carriers that were taking place during the quarter?

And then secondly, just to talk about the loss of the prepaid channel for a second, I just was wondering if you could give us a rough ballpark sense as to the margin or profitability differential that you guys have right now from an average prepaid subscriber to one of your average postpaid subs?

Sure. Well, let's take the first question. If I understand it correctly, first I would say that remember in our markets far and away our number one competitor is Verizon. So a lot of the national players have a relatively small presence in the markets that we are in. And especially -- that is especially true of the national all-you-can-eat where there is very little overlap at all.

So there are -- with that said, there is nothing that I think that is fundamentally changed. It is a tough competitive environment, and our competition is always launching new promotions. But there is nothing that we felt that fundamentally changed. I do think on the prepaid side there is, of course, we deal with some of the [NV&Os] in our territory, and they are definitely formidable in a certain category of the customers on the prepaid side. And I think the economic situation helps those carriers and hurts those with a little more traditional approach.

So I think that is -- I don't know if that is what you are looking for, Chris, but if I understand your question, that is the answer I have. Justin, do you want to touch on the latter point on prepaid? I think you are asking about prepaid profitability. I mean I don't think we don't break that out. Clearly less valuable subscribers than postpaid.

(multiple speakers) It is a lower ARPU than postpaid.

But, that being said, Chris, we still very much would like to improve our prepaid numbers too. I mean we are not just focused on postpaid, and that is where we have taken most of the pain in terms of attrition.

So just as a quick follow-up -- and that was helpful regarding the overall state of the industry -- but on the prepaid side, it looks like we are talking about doing the rough math, fairly low ARPUs on the prepaid side combined with the margin, even as it is expanding over the next couple of quarters. Is the prepaid segment profitable for you guys on an EBITDA or a free cash flow basis at this point? I'm just trying to get a sense as to how important those lost channels ultimately are to you from a profitability standpoint.

Sure. The answer is they are less valuable, but they are still valuable. I think if we don't do -- as an integrated offering, we don't do a complete segmentation that way. But we would not be looking to sell if we did not think the lifetime value of the average prepaid customer exceeded our costs to add them, our incremental costs to add them, and that those kind of metrics are things we certainly look at.

But you are right. I would say it may be true for other carriers as well, but I would say that the growth in data usage and in bundled plans perhaps has increased the gap, ARPU gap between prepaid and postpaid. I think that is something we are seeing a bit of. So you could say that the relative values have shifted, too, but recall that the data plans have some high CPGA to make up with the more expensive devices.

Hamed Khorsand, BWS Financial.

Will there be an operating margin offset by focusing on marketing now in the US Wireless segment?

Do you mean -- are you asking do you expect marketing expenses to go up?

Yes and offset some of the savings.

No, I don't think so other than we will have the same seasonality that everybody does in the fourth quarter, marketing and equipment expenses typically higher than other quarters. But no, we are not -- I think it is more attention, more focused. The marketing group has been doing a lot of great stuff. Particularly you can see it a lot on those postpaid numbers. But they have also been heavily involved with the transition as well. So it has certainly not been all hands on deck on customer acquisition and retention.

Is there any timeline before Aruba is a positive contributor to operating income?

Yes, it is a positive contributor. (multiple speakers) It has been a nice market from the start.

I mean it is not a big number in terms of overall ATN, but it is a positive contributor.

Okay. And my last question is, as far as your legacy roaming business goes, with the loss of AT&T, how much of an impact is there on your EBITDA margin?

I think that the way to look at it is, when you -- other than plateaus, as you lose or gain traffic in the roaming side, it is a pretty high margin impact. There are -- there is kind of a step function to that. But within a step, it certainly flows down to EBIT pretty strongly.

(Operator Instructions). Sanford Lee, Canaccord Genuity.

I just wanted a follow-up question on the duplicate costs. You mentioned $14.8 million. Can you segment that into what you have done in the past, sales and marketing versus equipment subsidies? I'm just trying to get a sense of what your equipment subsidies are doing now that you are loading a lot heavier on the smartphone side of things.

It is actually very little equipment subsidies in that number. That is really more just transition TSA costs, and it flows through most of the operating costs. It is not heavily loaded into any one of the lines.

Just to clarify, that is not to say, of course, that we did not have equipment subsidies. When we called it out previously, it was disproportionately high when we went on a heavy attack against the one-year contract bubble.

Right, okay. So then I guess a quick follow-up to that is, can you give us an idea of what percentage of your subs are on two-year contracts now versus when you are just looking at the re-subsidy issue?

We are not at a point where we want to give that information out yet.

Sure. And then one last one on the gross adds. Obviously you are pretty in line with on the postpaid side from the previous quarter. If you take -- I'm looking at the postpaid again -- so the Q2 2010 figure that you reported was 18,300 or so, and that is two months. So if we normalize that for three months, I'm seeing simple math to about 27,500. So we have got a 9% or so reduction in gross adds.

Well, one, is that directly correct that the gross adds are down? But can you attribute any of that to the loss of the -- I know it is primarily a prepaid channel -- the distribution channel that you lost?

I think you said post-paid in the beginning. You are asking about prepaid?

Right. Yes, so what I am saying is that if we normalized the Q2 2010 figure of 18,300, I'm getting a three-month figure of 27,500 on the postpaid (multiple speakers) gross add side.

That is a postpaid number.

Right. So -- but doing that simple math, what that, I guess, implies is approximately 9% year-over-year reduction on the postpaid gross adds. I'm wondering is any of that reduction attributable to the loss of the distribution partner, even though I know that they were primarily the prepaid?

Yes and no. So no, it does not have anything really to do with the loss of that channel that we talked about in these remarks. It does have to do with something we talked about previously. There was another indirect channel with postpaid that when we closed the business had been driving a lot of postpaid sales, and a lot of that jump-up in subscriber number between sign and close that Justin referred to.

And if you remember, to that they were churning off, it was a very low quality add they were churning off very fast. That was one of the contributions to churn in the early days. But we did not completely cut that channel for a few months. We watched it. We watched it. We tried to take everything. We tried to see if we could keep the good and eliminate the bad, and we finally concluded back in October of last year to early fourth quarter that we just could not make it work. So long way of saying, June's numbers did have that factor in it, the last year.

Ric Prentiss, Raymond James.

A couple of quick little follow-ups. Universal Service Fund, can you update us as far as how much you got in the quarter?

We had -- hang on one second. I think that we had some one-time, but not a lot. But one little over $1 million or something like that I think in the quarter on US Wireless.

Yes, right. And so you say one-time, that is still catchup as you get into the normal flow?

Yes. We think it should improve.

We had a little one-time -- we had some one-time in the third quarter. We had a little bit in the fourth quarter -- I'm sorry, in the first quarter and the second quarter. And then it is starting to normalize as we get into the system.

And a normalized run-rate, you think -- was that in your net one-time benefits that you talked to?

The out of period was, was netted against that.

Okay. 10-Q, do you guys know when you are going to be filing the 10-Q with all the details?

Tuesday is what they are telling me here.

Okay. On the economy we have seen some cautionary statements from some other operators as we go through Q2. Michael, you touched on it a little bit, too. Can you update us just what your view is as far as what you are seeing out there?

I don't know that I have any better insight than anyone else, but I guess my sense and what I hear not just internally but from other people in the industry is it is tied out there for a lot of people. It just really tight. I think telecommunications business you are one of the very last things to be cut. But it is definitely -- there is definitely a pretty big segment that has pressure on it. If you think about the areas we operate in, some of them are among the harder hit areas in the country. Rural areas that have high levels of unemployment in the Southeast and Midwest. So that's not a universal. That is a generalization. I don't think it is particular to us, but I do think there is some pressure. And I think even you see that in things like involuntary churn, you see that in some of the ups and downs of some of the channels, too.

And smartphone costs, can you let us know what you're seeing as far as the smartphone costs and maybe the trend line that you have noticed over the last couple of quarters as you take on the full ownership of the channel?

Well, I think we -- you know, I'm not sure this is directly, but I can offer the following. I mean we have negotiated around pricing. There is no real change in pricing as a result of the transition. It is just the actual procurement channel changes, but we don't really expect any change in the economics.

Generally the higher end smartphones are extremely costly. I think every carrier I talked to has an issue with that. The very largest carriers clearly have some price advantage there. But we don't have specific price points to give out, but I hope that answers your question.

And obviously the larger carriers have had iconic devices as well. What are your thoughts about the possibility of an iPhone ever coming down to the non-big two in the US?

Well, look, I think everybody would like to have the broadest portfolio they can, and the iPhone clearly is something that consumers are very interested in. So I tend to think without speaking about us, but just generally I tend to think that you think it is logical that Apple would extend it further into the market and make it available with more consumers through more channels. But they are famously close to the vest on that, and I'm sure they are going to make very sure they like the channel. But it just seems logical that it will expand, to me.

Thank you. I would now like to turn the conference back over to management for any closing remarks.

No further remarks, operator. Thanks, everyone, for the call, and we will see you in a couple of months.

Thank you. Ladies and gentlemen, this does conclude today's conference. You may now disconnect, and have a wonderful day.