ATN International Inc (ATNI) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Atlantic Tele-Network third quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session with instructions following at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

And, now, I'd like to turn the call over to Justin Benincasa, Chief Financial Officer. Please begin.

Thank you, Operator. Good morning, everyone. And thank you for joining us on our quarterly call as we go through our third quarter results. With me here is Michael Prior, ATN's President and Chief Executive Officer. During the call, as usual, I'll be covering the relevant financial information and certain 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 the 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 those 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.

And with that, I'll turn the call over to Michael for his comments on the quarter.

Thank you, Justin. Good morning, everyone.

First, I'll start out with an overall view on the quarter as we talked about. Then, I will do the last session on our conversion transition activities on the US retail wireless. And then, I'll get into some discussion about some of the metrics and movements in those businesses.

To start out with, we were very pleased with our overall results for the third quarter. We think the results show the earnings and cash flow potential of our expanded company, now that we are through the transition period. As previously announced, the transition of the acquired Alltel Wireless properties was completed in late July, meaning that two-thirds of the quarter was largely free of the added expense of running parallel capabilities and the similar transition expense.

Our results for the quarter also benefited from seasonally high wholesale roaming revenue, the successful merger of our Bermuda operations with another wireless player and some smaller one-time positive items that Justin will cover in more detail in his remarks.

On the less positive side, we had expected to do better with our US wireless subscriber net add despite the distraction of the final phase of the conversion. And I'll get into a little more detail in a minute on how we are tackling that issue for the current quarter and beyond.

But, first, let me cover the transition and conversion related items. And as I probably implied before, I'm very glad to not have to spend time on this subject next quarter. This has been an important process and a successful one in the end, but it's been a major ordeal and a fairly big distraction.

So, the conversion, as I said, happened in late July. And while we had plenty of the minor bumps we anticipated, our team did a great job attacking those customer-facing issues that did emerge. And some of the techniques we used to deal with them, such as turning off certain usage billing during the conversion period and maintaining extraordinarily high call center staffing levels, led to some added expense or lost revenue. But our goal was to minimize customer impact wherever possible, as we thought that best puts us in the best position over the longer term. And I think the vast majority of our customer base benefited from that approach and saw little or no impact. But I expect that there will continue to be some hiccups and other issues cropping up as we keep ramping on our new systems.

The important takeaway, I believe, is that we have stood up a completely new set of systems, operating platform and customer care centers in the space of just over 1 year and transitioned customers to these systems and platforms. In this quarter, we've been able to give investors at least an early view of the economics of operating on our own platforms.

So, with that said, let me turn to the wireless metrics for the quarter. As I said in the release, many of our retail wireless subscriber metrics were disappointing. Despite the transition activities, we had expected to do better on gross subscriber additions for the quarter. We had anticipated continued attrition in the third quarter, but thought it would be lower than the second quarter. In fact, as you know, we saw net attrition of around 46,000 subs, which was higher than the 35,000 sub loss of the second quarter, mainly because of an increase in postpaid subscriber losses. We believe that the subscriber losses resulted from many of the same factors we have discussed in previous calls, such as the carryover of the one-year contract decision. But we had expected to do better on new customer acquisitions in postpaid. And we ended up with what can only be described as lackluster sales.

So here is a little bit more information on how we plan to go about fixing that. First, you have to make sure you understand the problem. So some of the problem does result in the conversion, although I don't think it's an excuse we're giving each other. We have to look at that. So some of the wrinkles around converting our commissions and tracking systems in the third quarter, for example, we think resulted in lower than normal sales productivity in multiple sales channels. More foreseeable was that conversion activities would impact sales through the customer service channel, as those representatives were heavily focused on dealing with all the wrinkles of conversion and were getting up to speed on real-world use of the new systems.

Now, to fixing the problem -- our first truly new service offerings are coming out this quarter. We were well aware that we had fallen out of market on the prepaid side and we launched a new prepaid offering in mid-October. The centerpiece of this is a $45 unlimited talk-and-text plan. We'll also be expanding our portfolio of prepaid data services within the next 30 days. And we think these offerings will be exciting to the market and should generate some momentum on the prepaid side.

On the postpaid side of the business, which is the core of our customer base, we will be attacking the market aggressively for the holiday season. We have an attractive and significantly improved device lineup. And we will launch new customer plans as well that we believe will resonate in our markets. If successful, of course, this may negatively impact operating margins in the short term, as most of you are familiar with in this business, due to heavier net equipment margin expense and some customer base ARPU migration we may see to the more attractive new plans.

So moving on from gross adds, let's talk a little bit about the disconnect side of the equation. First, postpaid subscriber churn, that came back up to 2.97%, which while it's below the numbers of 2010 and similar to the first quarter this year, it was up significantly from 2.42% in the second quarter. And overall, our blended subscriber churn was up from 3.7% to 4.1%. We believe the increase in churn was largely the result of conversion activities, particularly the impact on customers who are on the edge of our markets, as we worked through post-transition handoffs and roaming issues. We have tackled and fixed most of the issues within our control, but we do believe that the separation still caused a number of affected customers to switch providers.

We continue to increase the percentage of our postpaid base under contract. And we expect that will also help to bring the churn number back down in the fourth quarter. We believe the stability in our platforms as well, aligned with more attractive offers aimed at new and existing customers, will help us drive continued improvement in that metric beyond that. The postpaid subscriber ARPUs also dropped this quarter. But we believe this is almost entirely related to conversion activities, as we did not bill for certain usage charges for the post-transition period, as we talked about in our press release. We've turned that back on for the fourth quarter. And so we expect a return to historical ARPU levels by the first quarter with some improvement in the fourth quarter.

And I will note also that we continue to see an uptake of higher ARPU smartphone plans, which is accreted to ARPU. But we do expect that to be offset over the coming quarters as some of our newer offers will have lower price points. So on total subscriber ARPU remained flat, but that would've better reflected the drop in postpaid ARPU were it not for the one-time benefit related to out-of-period USF revenues, or ETC revenues as some people term it. And Justin's going to touch on that a little bit.

So another statistic we also look at is the smartphones in the handset sales and in our base. And they represented over 47% of postpaid handset sales and upgrades in the quarter, which is down slightly from the second quarter. And we ended the quarter with approximately 36% of our overall postpaid base on smartphones, which is essentially the same level as the second quarter.

And moving on to the wholesale side of U.S. Wireless, wholesale roaming revenues exceeded our expectations for the quarter. And we believe it largely reflects the continued rapid growth in data volumes, as well as some small increase in the areas we cover. As investors who have followed us for some time know, though, the third quarter, with the summertime activities particularly out west, has typically been by far the strongest quarter for us in terms of roaming volumes. So we expect to see those revenues come down a bit in the fourth quarter.

In our international operations and international wireless, our wireless subscribers, including some fixed wireless broadband subscribers increased by just over 4% year-on-year. This was due almost entirely to the Bermuda merger and so had a strong impact on international wireless revenue, which was up 47%. And that's really because of the much higher ARPUs in the Bermuda market when compared to our Caribbean operations. We're very pleased with the progress of the Bermuda merger transition activities, as we said in the release. Our team is off to a good start in harnessing synergies, while at the same time launching an integrated brand and retail offering and otherwise further enhancing the customer experience.

Lastly, our wireline operations, both internationally and domestically, showed some modest growth, a little over 4% this quarter. This was driven by a number of smaller factors, including increased broadband revenue in Guyana as we continue to add customers to our expanded high-speed data network.

So, in summary, we're pleased with our financial results for the quarter. Quite obviously, it's a strong EBITDA number. And we're even happier to have the Alltel systems conversion behind us. The key now for us is to show what we can do on our own systems. I think everyone joins me on our team to say that we have no excuses. We just have to perform in that area in the coming quarters, and by that I really mean customer acquisitions.

And I should also note we're also happy with the continued strength of our legacy businesses, such as the international operations in Bermuda and Guyana and the hard work it has taken to maintain those cash flows and continue to innovate and enhance our offerings and competitive position in those markets.

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

Great. Thank you, Michael.

Our operating revenues for the quarter totaled $194.3 million, which was a decrease of $10.7 million from the same quarter of 2010. This year-on-year variation was primarily the result of the decline in our U.S. Wireless retail revenues due to lower subscriber levels, as Michael talked about. That was partially offset by an increase in our wholesale and International Wireless revenues. Total wireless revenues for the quarter were $166.7 million or 86% of total revenues. And our U.S. Wireless service revenues were $146.2 million or 75% of total revenues.

Operating expenses for the quarter totaled $166.7 million and adjusted EBITDA was $52 million, up $14.2 million or 38% over the same period last year. Included in this quarter's operating expenses was noncash stock-based compensation of $770,000 and approximately $98 million of acquisition-related expenses. Our U.S. Wireless segment accounted for $123.9 million or 74.3% of the $166.7 million of operating expenses and $42.9 million or 82% of the $52 million adjusted EBITDA.

Operating expenses were reduced this quarter by a $2.4 million gain on the sale of five of our wholesale roaming sites in Florida. Also, as we noted in our press release, we incurred $4.9 million of duplicate transition-related expenses early in the quarter related to the final phase of the Alltel transition. However, that was partially offset by $3.6 million of out-of-period items that mainly were comprised of ETC revenues and USF expense adjustments. As Michael mentioned earlier, retail revenues and subscriber ARPU were reduced this quarter by our decision to forego the billing of approximately $2.3 million of certain usage revenues following the system conversion.

Moving down to net income, earnings for the quarter were $11.3 million or $0.74 per share. And our effective tax rate was 46% this quarter. On the balance sheet, we had cash balances of $52.1 million and total debt outstanding of $294.7 million.

Capital expenditures totaled $20.4 million for the quarter, of which approximately $12.8 million was incurred by U.S. Wireless segment and $4.5 million by our International Telephony segment. We're lowering our full-year capital expenditures guidance range to be between $95 million and $105 million with our U.S. Wireless segment spending between $65 million and $70 million of that total. Most of this change merely reflects expenditures that we believe will slip into early 2012.

Some additional operating data for the quarter, we ended the quarter with 769 roam-only base stations, which included 128 from our Alltel acquisition and 641 in our legacy markets. In the legacy markets, MOUs were up 11% from Q2 and down 15% from Q3 last year. Data traffic was up 29% from Q2 and up 61% from the same period last year.

In International Wireless, we ended the quarter with a total of 331,800 subscribers, of which 283,500 were in Guyana and 48,300 were in the islands. In our U.S. Wireline segment, business lines increased 10% from a year ago, but we're down 2% from the second quarter, ending the quarter at 53,500 lines. And then, internationally, we ended the quarter with 152,000 access lines.

And with that, Operator, we'd like to turn the call over to questions.

Thank you. (Operator Instructions) First question is from Ric Prentiss of Raymond James. Your line is open.

A couple of questions to start with. First, on the roaming business, obviously much stronger than we thought. Yes, a seasonally strong period. Do you get the sense that growth in data volumes for this year, looking into next year as well, are going to more than offset the AT&T overbill?

I think the growth in data has already offset the AT&T overbill. I think we've seen the majority of the AT&T overbill already impact us this quarter.

As we look forward, obviously seasonal drop, but no other big shoe to fall on AT&T?

No, not that we see.

You mentioned the $2.3 million worth of usage that was foregone. Can you give us a little more color on what that is? And then, Michael, I think you said you put it back in play, so you'll capture some of that back in the fourth quarter and have it full back on in first quarter.

Ric, I can help you with that. It's things like with directory assistance, some of the messaging, even voice ratings at the time, where we just had to take the system down and put a patch in and bring it back up. And that made up most of the drop in the postpaid ARPU from quarter to quarter. It was a large piece of the subscriber ARPU drop as well, but that was offset by some of the one-time ETC revenues. But I think we turned it back up in the fourth quarter. But it will take some time to ramp back up. I don't think we'll see it fully come back in the fourth quarter. It's just because even as we reset some of the usage, they have to kind of go over that now. You know what I mean? In other words, that was overages and things like that. So as we reset the buckets, people have to run up the bill and then go over.

And we didn't turn it back on the first day of the fourth quarter. So there's a little of that as well.

And then, final question, on USF, you had the out-of-period correction. Can you update us as far as how much USF you're getting in the different business line items and what your initial read of the changes at the FCC on the whole USF scenario might mean for you?

Yes, I think, Justin, the figure's about $8.5 million annual --

Company-wide, about $8.5 million in high costs.

Right. In high costs, and I think high costs is where the changes really lie. I think what it means for us is we don't think there's a big impact on us. Our number's not very big. It's not going -- we're still analyzing, as everybody is, exactly how it will phase in and how it will play out almost on a state-by-state basis. So it's not all going to suddenly go away. But it certainly looks like with the proposal that it will go down and eventually could go away entirely if you don't replace it with some broadband from the broadband fund monies. And there's a lot of discussion about that with a lot of the wireless carriers.

I would say all of the wireless carriers that are pure wireless carriers, as opposed to the two biggest guys that have heavy wireline, are upset with the way Washington, we believe for political reasons, was not technology neutral. It doesn't make a heck of a lot of sense to us why wireline should get more than wireless when customers actually prefer wireless. And they're clamoring for it to go into these underserved areas. So there's a lot left to go politically, but the best way to think about it for us is it's going to trend down. And it will also impact our opportunity and willingness to build further into underserved areas. I mean, there are some areas that we might have built that now look unattractive to us. So that's really it in the nutshell for us on USF at the moment.

Okay. Thanks.

Sure.

Thank you. Our next question is from Barry McCarver of Stephens. Your line is open.

I guess first off can you give us just a little bit more color on that wholesale revenue? It was a pretty dramatic pop sequentially for wholesale. Do you expect that to have to come back down to kind of where it was running prior to this quarter? Just give me an idea about what 4Q could like there.

There's definitely a seasonality in the third quarter for us.

You can look at last year, for example, Barry, and I think it was down about by 5% from third quarter to fourth quarter last year. It's hard to predict roaming revenue precisely, because there are so many different things that go into it. But certainly, directionally, that would be our best guess as it would follow that pattern again this year.

And the third quarter also similarly goes up from the second quarter, not as much as third goes down to fourth typically, but we have a little different mix of assets. And you've got to -- [overplaying] the seasonality, especially in the second to third quarter.this year, probably was some of this overall growth in smartphones out there and data volumes and data traffic. And you contrast that with every now and then step-down in pricing. So, long-term, we don't look at that roaming revenue as a growth area. We think it's really just kind of a short-term bump.

Okay. And then back to the discussion, you commented just a little bit about what margins could look like next quarter. I've got to think these wholesale margins -- this wholesale revenue carries a pretty significant margin. And then, on top of that, you're discussing the fact that if you ramp back up on the retail side, we could see a little margin pressure there. Does that suggest we could expect a pretty significant decline in EBITDA margin sequentially?

Yes, I think there is definitely some pressure on the margin sequentially, especially if you don't have as the handset -- as much handset costs in there as we might see. Traditionally, the fourth quarter is going to have pressure on it anyway from that. But, yes, and the wholesale does carry a pretty heavy margin, so, the expense of that comes down in the fourth quarter, it should impact it as well.

Okay. And then, I guess just two more questions. Number one, your thoughts on gross adds. It certainly sounds like you have a lot of things good going on in terms of new plans and new promotions in 4Q. Can the gross add level get back to where it was I guess on the postpaid side like it was in the first couple of quarters of this year? What's achievable sort of -- what's your team telling you there?

Well, some of it when you miss in a quarter, some of it makes you gun shy. But I think certainly we want to and think we should get back to those levels, yes. And I don't know that we're not going to aim higher. But in terms of thinking about it and trying to be conservative about it given what happened this past quarter, I think that's probably a better target than above it.

Okay. And then, just lastly, Michael, I know you've talked for several quarters about the intense focus of the Alltel guys on building this network and getting the transition over to your own network. And we're pretty far along in that now, about to wrap it up. Beyond 3Q and probably 4Q, your thoughts on either acquisitions or other ways to add new customers to this network. What are your thoughts there?

Well, I think anybody who follows us, and, Barry, you know that we always are out there looking at opportunities. And what I said before still holds true. Whereas we -- with all these platforms and with this size, there are certainly things that could be highly synergistic, but a lot of it depends on what's out there and what the pricing is. So we can't promise, nor do we comment on anything, of course, that we're actually doing. But we will continue to look at ways to maximize the value of our group of businesses, both in the organic things, pushing sales up and looking at costs and all those things, and strategically. We will never stop doing that. So it really depends on what happens, what happens, what opportunities present themselves.

Great. Thanks a lot, guys.

Sure.

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

I just want to start off with a simple question. I missed your comment about Florida. What was that about?

We sold five of the base stations in Florida. It led to a $2.4 million gain that ran through our operating expenses in the quarter.

In spectrum. In spectrum. Right. So we had a very small operation in Florida we've had for a long time. And we sold that during the quarter. So there's nothing left in Florida.

All right. And then, I just want to get an understanding as to your CapEx plans for the legacy roaming business for 2012. Are you guys looking at investing it more or is it just going to [linger] where it is now?

Say that again?

Legacy wholesale.

Oh, legacy wholesale. I think the opportunities for additional investment there, they're not gone, but they're probably offset by areas that are encroaching upon us. So I think net-net, we don't see an opportunity to really grow that business. That could change, of course, the way things happen. But, today, we don't see it.

Okay. What's going on in Guyana? Your wireless subscriber numbers are at a low that -- and you havn't been this low for almost two years now.

Yes, a lot of that was because -- if you look at the overall results internationally and the revenue is doing well there. So it really comes from the fact that we had an old data plan back from GPRS data with a lot of people on that. And at that time, we felt, from a customer standpoint, cost/benefit, we just gave that data for free. And so we've had a process this year of moving people over and getting the market condition to paying for data as we look for opportunities to introduce newer and better technologies. So that's really what it comes from. And that's why it really hasn't affected the revenue line.

Okay. And then my last question is on the Island subscriber numbers. It's up a little bit sequentially. Which operation saw the increase?

Probably the US Virgin Islands was the biggest piece that led to the most increase in there. I think the other islands were fairly stable.

Okay. What's the status on Turks and Caicos? Is that still a drag on operating margins?

Yes, it's still a drag. It's growing. We're adding subs. But it's still in the pre-cash-flow-positive operational mode. And then, obviously, from an earnings, it's even more of a drag.

Okay. Great. Thank you.

Sure.

Thank you. (Operator Instructions) Our next question is from Anil Gupta of Imperial Capital. Your line is open.

So just one real quick question. I'm sure you saw the headlines that C Spire are getting the iPhone. I'm just wondering if that's something of interest to you guys, how that sort of stuff happens or your thoughts on Apple going to a regional carrier distribution model.

I hope it's good for C Spire. I hope it's a good decision for them. And I think it would be exciting for their customers. We won't comment on our own discussions or handset plans or supply plans beyond current. But there's no doubt that's a good competitive device and a very attractive device. So I think for C Spire it's good. I think Apple has hinted for a while that they were looking at other places. And, obviously, Sprint launched as well.

Okay. Thanks.

Sure.

Thank you. We have a follow up from Ric Prentiss of Raymond James. Your line is open.

If you think back to your thoughts on EBITDA guidance on the U.S. Wireless business, as you think of all the moving pieces, now that you're done with transition, so you've got that cost coming out, you've got gross add work you're working on, pricing changes. What do think the dynamics are as we should look out to margins in the wireless business as far as what your target would be, what your timeframe to get to that target would be and the seasonality?

Well, I don't think -- I mean, I think that gets into really kind of forward guidance beyond what we've already said. I think it's hard to say more than we've said. I guess you can emphasize the points that you made in your question and others have and we've talked about, which is obviously the movement in wholesale can affect the margins. So that's one side of the equation, some of which we don't directly control.

And then, on the other side, I think we just have to keep moving on our retail margins to keep improving them. And that is definitely -- will be a major focus of ours in the next several quarters and beyond. So I don't think we've changed the general guidance we've given on that any further at this point.

We can see it in writing. I just wanted to see are you still comfortable that you can get it kind of into the 20s and mid-20s over time? Or what are you thinking on margins?

Yes, I think we wouldn't change that, Ric. Exactly. We're still in the same place.

Okay. And then, on the CapEx side, Justin, you mentioned that there's some of the reduction in '11 is really going to slip into '12. Any early indication on kind of overall magnitude of 2012 CapEx versus now the new 2011 number?

It's still a work in progress. So it's hard to kind of nail it. I think that we're feeling like we'll probably be in '12 lower than what we're coming in this year, though.

Okay. And the slippage is something end of '12 might reduce the amount lower it would be.

Right. And then, finally, a lot of discussion LTEs. Sprint had an analyst day back in early October. A lot of people looking at LTE build-outs. Can you update us on your thoughts about when you might do LTE, when you think it might be needed competitively and is there any partnerships you're looking at?

Yes, we're looking hard at LTE. I think every regional carrier I know of is looking hard at LTE. Or anybody who hasn't launched it is looking at it. And you look at it from two perspectives. You look at it -- I would say a lot of us are looking at it first from the point of view of network efficiencies in terms of dealing with customer demands for data and capacity. So if you're continuing to build out more capacity or cell splitting for the same reason to deal with 3G data demands, you have to look hard at is -- this the right direction or am I better off with a more efficient technology?

And, second, of course, you look at the competitive situation. I would say that's at this point definitely, in our markets, a more distant second than it might be in other markets, to the first issue. So the best I can tell you is that's the mix. We're looking at it hard. We don't have any announcements to make on LTE at this time. I think we do feel that we have the ability to go in that direction should it make sense. But we're still evaluating.

And I guess also from the standpoint of the device lineup, it doesn't seem like the devices are really that readily available yet.

Right. That's a consideration clearly. And there's a whole set of issues for -- outside the big two and maybe Sprint, there's a whole set of issues for the rest of us about interoperability. In what band are you going to launch it? What is the device availability going to be? What's the cost of it? Are you going to be able to interoperate, if that's a word, with other carriers when your customers are outside of your territory? So all of those issues are out there, Ric. And I think that's why you see a lot of noise about it. And I think Sprint's obviously in a different position than a smaller carrier like us.

And do you feel you need any extra spectrum to attack the 4G?

We believe, our engineers believe that we can do it with the spectrum we have now, but more spectrum certainly has value. The more spectrum you have -- the right kind of spectrum really reduces your cost of doing it and can improve your capacity and so, therefore, the customer's experience.

Other questions, Operator?

Thank you, sir. There are no further questions at this time. I'd like to turn the call over to management for any closing remarks.

Well, that's all we got. We look forward to talking to everybody in a couple of months. Take care, everyone.

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