ATN International Inc (ATNI) 2011 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 be given at that time.

(Operator Instructions)

As a reminder today's conference is being recorded. I'd now like to turn the conference over to your host Mr. Justin Benincasa, Chief Financial Officer. Please go ahead.

Thanks operator. Good morning everyone and thank you for joining us on our call to review fourth quarter and full-year 2011 results. With me here is Michael Prior, ATN's president and Chief Executive Officer. As usual, during the call 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 call over to Michael for his comments, I'd just like to point out that this call and our press release contain forward-looking statements concerning our current expectations, objectives and underlying assumptions regarding our future operating results 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 and for further information regarding the factors that may affect our future operating results, please refer to our earnings release on our website at ATNI.com or to the 8- K filing provided to the SEC. With that, I would like to turn the call over to Michael for his comments.

Thank you Justin. Good morning everyone. Let me first give you an overall view of the quarter and then I will get into the metrics and other details from operations before turning it back to Justin. As we said in our press release, we were pleased with our overall results for the fourth quarter and the year. Although much work remains to be done, it was nice to see the growth in consolidated EBITDA over 2010 and we were glad to have come through in good shape from a challenging year with one large integration project often talked about, the acquired Alltel business complete, and one smaller integration project, the Bermuda merger off to a strong start. As a result of those projects, we have exited 2011 with better earnings and cash flow potential and the fourth quarter appears to show the beginning of that potential being realized. Of course there is further progress to be made and challenges to overcome, but we have a good list of priorities to focus on in 2012. Those are stabilization of our US Wireless subscriber base, reducing expenses and improving operating efficiency in US Wireless, and, as always, exploring opportunities for growth, both domestically and internationally.

Now let me get into some operating details, first on US Wireless. On the retail side, subscriber metrics improved over a tough third quarter. To start with, postpaid and overall subscriber churn declined significantly. As you can see in the release, postpaid churn for the quarter was 2.55%, down from 2.97% in the third quarter and 3.18% in the fourth quarter of 2010. Blended subscriber churn was also down at 3.25%; it was down from 4.05% for the third quarter and 4.48% a year ago.

We believe the decrease in churn was largely the result of the completion of most conversion-related activities in the third quarter. And ARPU also declined for the quarter. Postpaid ARPU was $54.43 and that's up from $52.68 in the third quarter and $53.71 in the fourth quarter. I should say that's $54.43. Blended subscriber ARPU showed even greater improvement from $47.51 in the prior quarter and $45.88 a year ago to $48.46 in the current quarter.

The increase in ARPU over the third quarter was mainly due to the reinstatement of certain usage billing, which was suspended for the better part of three months as part of our billing system conversion. ARPU was also helped by continued adoption of smartphones and data plans. Going forward, however, we may stay at these levels for some time, as our new best value plans tend to replace higher-priced feature and smartphone plans with lower-priced plans. Gross additions were up from the third quarter, mainly due to growth in prepaid additions. Coupled with the lower churn, this caused net subscriber losses to drop dramatically from 46,000 in the prior quarter and nearly 49,000 a year ago to 10,000 for this quarter. However, we were still a little bit disappointed to experience overall subscriber losses for the quarter and we are heavily focused on stopping that decline in 2012.

On the prepaid side, we launched our new best value plans in October. $45 unlimited talk and text and the offerings found favor quickly and contributed to the modest net growth in prepaid subscribers in the fourth quarter. We launched a similar best value plan for postpaid just before Thanksgiving, so a little later in the quarter. But, it's always more of a challenge to get the message out as quickly to the postpaid segment. We hope to do better as 2012 progresses in that area because we believe the value proposition is very strong and it's really a question of getting the message into the market. On the wholesale US Wireless revenue front the roaming revenues were down, as expected from the seasonally high third quarter. We are higher than we had projected for both the quarter and the year. This is largely due to the very rapid growth of data volumes, as experienced by most other operators.

Moving onto international operations, in international wireless our wireless subscribers, including some fixed wireless broadband subscribers, were down 3% versus Q4 2010 and Q3 2011. Gains in Bermuda were offset by the loss of mainly very low ARPU, in fact probably unprofitable 2G data customers in Guyana as we shifted our pricing and our data offering. The overall result was a 44% growth in revenue year on year although we saw a 5% decrease in the third quarter partly due to seasonality and we continue to be pleased with the progress in the Bermuda merger integration activities and the work that we've done so far to harness synergies. Lastly, our Wireline operations, both internationally and domestically, had a 9% revenue increase this quarter year on year. This was driven by a number of smaller factors, including increased international broadband revenue.

So in summary, this was a quarter of solid EBITDA performance, particularly when you consider the seasonality factors associated with retail wireless. Our domestic subscriber metrics are going in the right direction. We are seeing growth in our international wireless business. And, as I noted earlier, we are now in a better position to explore growth opportunities both domestically and internationally. The object of this game, of course, is to increase cash flows over time. As Justin will get into a little more detail in his remarks, I think this 2011 showed we are still doing just that.

Lastly, more important really than returns, is some of the things that real life interjects into our business. For that reason I thought I'd just take a minute to address the tornadoes that tore through parts of the Midwest this week. One of the towns particularly hard hit was Harrisburg, Illinois, which is a community we serve. Our store was destroyed, but we are very fortunate that it struck before business hours and that none of our employees were hurt. Unfortunately, as you probably know from the news stories, there were a number of fatalities and injuries in the area, as well as the extensive properties destruction. I wanted to say that all of our thoughts are with the people of Harrisburg, particularly those who lost loved ones. So with that, I'd like to turn it back to Justin to provide some financial information for the fourth quarter.

Thanks Michael. Jumping right into it. Revenues for the quarter totaled $182.9 million, which was a decrease of $11.8 million or 6% from the same quarter in 2010. This resulted primarily from a decline in our US Wireless retail revenues, due to subscriber attrition in 2011, which was partially offset by an increase in our wholesale and international wireless revenues. Total wireless revenues for the quarter were $153.9 million, or 84% of total revenues and our US Wireless service revenues were $134.4 million or 73% of total revenues. Adjusted EBITDA for the quarter was $40.7 million, up $9.4 million or 30% over the same period last year. Included in this quarter's operating expenses of $172 million was non-cash stock-based compensation expense of $617,000; $107,000 of acquisition related expenses; and a non-cash $2.4 million goodwill impairment charge on one of our smaller Island Wireless properties.

Our US Wireless segment accounted for 78% of adjusted EBITDA and 74% of operating expenses. Moving down to net income, earnings for the quarter were $4.1 million or $0.27 per share, which included a $0.16 per share charge representing the goodwill impairment I just mentioned. Our effective tax rate for the quarter was 57%, compared to 48% for the year overall. Since the goodwill impairment was in a zero income tax jurisdiction, there is no tax benefit associated with it and thus it impacted our effective tax rate by 11% for the quarter and 2% for the year.

Turning to the balance sheet, as of December 31, we had cash balances of $48.7 million and total debt outstanding of $282.2 million which leaves us with a leverage multiple of 1.75 times and 1.5 times on a net debt basis. This compares to 2.2 times and 1.9 times respectively at the end of 2010. I think it's noteworthy that while we reduced leverage in 2011, at the same time we increased our cash dividend payments by 9%, which is our 13th consecutive year of dividend increases. Net cash provided by operating activities was $47.9 million in the quarter and $132 million for the full year 2011. Capital expenditures totaled $35.5 million for the quarter, of which approximately $24 million was incurred by our US Wireless segment, and $7 million by our International Telephony segment.

For 2012, we anticipate capital expenditures to be between $90 million and $110 million with our US Wireless segment accounting for between $50 million and $65 million of that total. Some additional operating data for the quarter, we ended the quarter with 778 roam-only base stations, which include 128 from the Alltel acquisition and 650 in our legacy markets. In our legacy wholesale markets, MLUs were down 19% from Q3, which is historically our highest quarter due to seasonality and down 15% from Q4 2010. Data traffic was down 10% from Q3, but up 50% from the same period last year. In International Wireless we ended the quarter with a total of 321,700 subscribers, of which 272,500 were from Guyana and 49,200 were in the islands. In our US Wireless segment, business lines increased 12% from a year ago 6% from the third quarter, ending the quarter at 56,700 lines. Internationally, we ended the quarter with 152,300 access lines. With that, operator, we'd like to turn the call over to questions.

(Operator Instructions)

Ric Prentiss, Raymond James.

Good morning. A couple of questions. Obviously nice to have the Business through the transition period for the full quarter. When you look at the margins in the fourth quarter, nice margins, historically fourth quarter would be a lower margin season because of the big holiday selling season. As a look into 2012 what are your thoughts on the US Wireless margins, given what you achieved in the fourth quarter?

I think that you are absolutely right that the fourth quarter, on the retail side, definitely hits margins a bit. With our Business, it's interesting, because you do have to take into account that the wholesale side of the US Wireless business tends to increase margins, particularly in the third quarter. But, I think overall, we think that the US Wireless margins should go up from the fourth quarter a little bit. Not dramatically, because of that combination of circumstances.

Sure. And so the thoughts of getting into that kind of mid-20s margin is still very much achievable, it sounds like.

Yes. Yes we look at it as the whole US Wireless segment and our third quarters always are seasonally high. We will be a little bit north of that, and fourth quarter will be a little bit south of that.

Second question is, on your CapEx guidance, you mentioned the US Wireless [IV], $50 milliion to $65 million. A lot of discussion on LTE from a lot of different carriers. Even the other day when Intellus reported, they mentioned that they're not going to launch LTE commercially in '12 but it sure signaled that they were probably spending some LTE money in '12 to be ready for a commercial launch in '13. What are your thoughts on LTE? How much do you think it will cost to upgrade your network with an overlay, I assume, on it?

I think that -- we haven't made any definitive decision or announcement to launch LTE at a particular time, but as we talked about before, we are certainly looking at it very closely. I really think every carrier is. We are no different than Intellus in that respect. I looked at their numbers and their broad thoughts on the cost of that are consistent with what were seeing.

So, the other thing to keep in mind, is that if we don't go LTE by a certain time frame, you could have not a big disparity in costs, just because of the cost of continuing to add data capacity and some other related costs. You don't see it as a huge one-time event in capital spending when we do go that direction. We think it's likely we will.

But there's nothing explicitly in the 2012 guidance for it?

Yes. No. We definitely have a placeholder in there for it. As Michael said, you either have to do data capacity expansion on the network or start moving in that direction. But there's definitely a placeholder that guidance for moving in that direction.

Not explicit, but implicit in there?

Right. I think what we're saying is that the numbers wouldn't be so big as to swing it. So, we haven't committed to go LTE so we don't have a definite cost, so there's always room for some change. But we're not seeing the pricing or the cost really drive us out of that range of guidance we've given.

As far as an outer region strategy for LTE, is that important? Are you already working on it?

It's very important. I think it's very important because there are a couple of reasons to do LTE. Probably the primary reason for a lot of carriers, including ourselves, is capacity management, having a more efficient use of your spectrum and your network. But, you obviously have the marketing side, as well.

If you are going to offer LTE devices, it's a lot more attractive if your customers have the ability to use them out of territory. So, it's a long way of saying, all of the regional carriers that I'm aware of, we're all looking at, what's our national plan, how do we go about that.

What options are looking attractive or being considered?

We'll I think there's been -- we are considering all options you can imagine, probably read, I don't want to tilt towards any one at this time. But there are a number of possibilities out there that are being talked about. You also have the potential, which is less attractive, but you have the potential to not necessarily roam in a 4G situation. You have got the drop-down potential. And if you look at experiences for a lot of carriers, even the very biggest, that's often your experience.

Great, thanks.

Sure.

Barry McCarver, Stevens.

Good morning. Nice improvement in those wireless operating metrics.

Thank you.

Going back to the prepaid gross adds in the fourth quarter were up very strong. Can we talk about a little bit more detail on the value plans that you implemented there to help on that front?

Yes. I think we think that our plans, both prepaid and postpaid now, look very good in comparison to the competition. On the prepaid side there probably are some even deeper value plans out there from some of the [MDNOs], in particular. It really closed the gap significantly for us, and it's been well received. We really weren't playing very strongly in prepaid for our pretransition time period. So, that was one of the things we wanted to get back after.

I think the other thing that's probably significant is, unlike many other carriers, and indeed what Alltel has done in the past, our best value plans for prepaid and postpaid are very closely aligned. So, we really designed it so that somebody coming in, who can't really qualify for postpaid has a very easy path into prepaid, that it is easy to compare on an apples-to-apples basis, easy for the salesperson to help them with and vice versa, on the prepaid side going the other direction. So, if they want to sell off and buy up a little more features and ability and a cheaper handset, there's an easy path into postpaid.

I think you mentioned that the value plans for the postpaid side were implemented a little bit later in 4Q and you were a little earlier on the prepaid. If that's right, now that we're a couple of months into 2012, do you have any idea of what the result is? Are you seeing that nice improvement on the postpaid, as well, like you did last quarter on the pre?

Yes. We don't tend to comment it too much about the current quarter, but at least what I can say is that it is definitely a lag in postpaid to get people to understand, and we're not ready to declare that that's arrived. I'd just repeat, we have a very strong offering. We haven't yet seen it resonate to the level we think it should. We are hopeful that we can change that going forward.

Okay. That's helpful. Just lastly, I think at the end of the your prepared comments you talked about looking again at growth opportunities, both domestically and internationally. Justin talked about the low leverage on the balance sheet. With the Alltel transition complete and integration there, are you back in acquisition mode?

I think we're in acquisition mode in the sense that we actively look at opportunities. As people follow us, well, that could mean we don't do anything for a long time though if nothing meets our criteria. I will say it does seem like there is a lot going on in our industry right now, both bad and good.

There's some dislocation; it feels fairly dynamic in one sense. And, I think that often can present opportunity on the M&A side. On the flipside the world has been consolidating in our space for a while, which means the overall number of opportunities is down.

Okay. Thanks a lot guys.

Chris King, Stifel Nicholas.

Good morning guys. Just wanted to follow up to get your broad sense on the current M&A environment. We've obviously had a couple of transactions at least rumored here over the last really couple of weeks or so. Several related to smaller niche-type players, which you guys have historically, at least, had some interest in.

Just was wondering if I could get your take on the general M&A environment that's out there right now, whether you've seen a change over the last three to six months or so, in terms of activity picking up and how you guys view that going forward.

Yes, I think it's obvious that the activity is picking up. I agree with that Chris, it does seem that way. I think there's a couple things going on. I wouldn't want to comment on any one transaction, because we don't really have any insight to motives on any side.

It looks like there is a continued, because of the rapid, rapid growth in demand for mobile data, that's caused a lot of carriers to rethink their future plans. That sometimes leads you to strategic solutions. Sometimes it's partnerships, sometimes it's acquisitions, sometimes it's sales. But I think, I'm not saying anything that you probably don't all know but that seems to be what's driving it.

I think it does help that the economy has moved onto another stage and so there's a little more, the capital markets are a little more open. People are willing to be a little more aggressive. But, I would say it's probably the former reason that striving more of it, particularly in the US.

So, just to repeat what I said earlier, and response to Barry McCarver's question, is I think that we like activity and a dynamic market because that tends to create opportunity. It doesn't always, but we like that situation better than the very quiet situation we had before.

Thank you.

Sure.

Hamed Khorsand, BWS Financial.

Good morning. First off I wanted to ask you, is Guyana Wireless profitable? The subscription levels are now at the lowest in more than two years.

We don't separate that out. But we think that business is healthier than it's been in two years. I would say the revenue has been growing. Remember, that is almost completely prepaid market. As I alluded to in the comments, most of that subscriber change was the fact that we had for years allowed customers to use GPRS data virtually free.

It really was very little cost to us. It was almost a marketing expense. The demand for data is no different there than anywhere else. We moved up the data capacities and the devices that we were selling. We launched Blackberries, and we needed to change the way we were treating data when we went to more of the smartphone world in that market. So, I think it's very important there to follow the revenue line a lot more closely than the subscriber line.

All right. How much of an impact does smartphone subsidies have on operating numbers this year in the US Wireless?

I think overall, smartphones, you subsidize more on a smartphone, so it's definitely going to impact margins. I don't know have the specifics of how much that did to margins, but it definitely does have an impact.

Yes, as smartphones, we are like every other carrier, as the smartphones as a percentage of sales continue to be at a high level, that definitely impacts margin.

Okay. And the last thing I want to touch on was, what is your expectation for the Roaming business this year given the increase in base stations. And then the other part was would the revenue increase mean higher EBITDA margin?

I'll take the first one, Justin. I don't think we think there's anything driven by number of base stations in the 2012 roaming. I think that the dynamics there will really be more about to what level data traffic in particular goes, what happens to voice at the same time.

Then, we always have some over-build risk in all of our roaming areas and to what extent that occurs. I don't think the factors have changed and certainly we don't see it as a growth year for that wholesale revenue.

Okay. Thank you.

Sure.

Anil Gupta, Imperial Capital.

Good morning. Thanks for taking my questions. I just wanted to see what kind of insight you're having into your consumers. Obviously, the improvement in the subscriber losses is very encouraging.

Wanted to see what sort of impact you feel that the economy is having, or do you think that the overall improvement in subscriber loss is mostly driven by these revised pricing plans? Any sort of trend or any sort of commentary you can provide on what you are seeing so far in one quarter, just in terms of your markets and economies there.

Sure. I think that while the economy is better, I don't think we believe that really any of that movement was related to macroeconomic changes. The areas we are in were pretty hard hit by the recession. We are talking about very rural areas for the most part, small towns. There's always exceptions, there is always some towns and communities that are doing better and some that are worse. But, I don't think anybody feels like its rocking and rolling now.

I think those areas tend to trail a lot of the metro areas in rebounding. So, for that reason -- then the last thing I'd say is that if you think about where our offerings went, we are really chasing value conscious customers. That's what we think we've tapped into. So, if anything, that might be a sign that people are still really hurting in terms of the plans they've chosen.

Okay. Thanks. In terms of the current handset lineup, what's your percentage of handset options that are currently smartphones and are you seeing any sort of major trends in what people are picking up. I think, historically, you've usually disclosed a portion of new sales that were smartphones, and sorry if I missed that earlier.

I think the percent of new sales is consistent with what we've said in the past quarters. We're roughly in the upgrades, and the adds are 50%.

I think we ended the year at 36% of the base market.

Right. So are still moving upward there.

An answer to estimate on the lineup, I think we have a very competitive lineup. We do not have the lineup of the top couple of carriers, but we tend to get almost every device they have or very similar devices, within in a quarter or two. I think we feel -- we don't carry the iPhone as we've talked about before -- but other than that, I think we have a very competitive lineup.

I think what happened is people often, we have found, come in for a lower-end, entry-level smartphone, still a solid device, and that sort of advertisement tends to draw them in, but then they often buy up when they come in and they look at all the -- and they'll get a much more advanced android device, for example.

Okay thanks very much.

(Operator Instructions)

Ric Prentiss, Raymond James.

I wanted to ask a couple of follow-ups, now that everyone else is through. First, is there any exposure to the USF access reform that's been going on at the FCC at the state level, either on the US Wireless side, any of the stuff going on at Sovereign. I'm just trying to think what might happen there.

Yes. We have some exposure, but it's very small. Our high-cost DSF, which is what is being affected by this, I think there's a 20% a year phaseout from your end-of-year 2011 levels. So, that part we certainly share with everybody else some impact. But again, for us, it's not very big. We had about $1.3 million in total USF revenues in the quarter.

It's not a significant, and there's a chance that the mobility fund broadband connect, or whatever its called, will be more enticing to us than it seems right now. Right now, we are skeptical as to its value. We think what it probably means is we will not be going into some of the more remote areas that we used to do, and some of the more rural areas. We'll have to be careful there. In terms of downside from where we are, there's not a big impact.

When you look at the CapEx for 2012, it looks like the non-US has gotten a pretty good chunk in it. Any particular large projects, or a little more focus on where you are spending that money, and what kind of returns you expect to get?

Probably the biggest chunk of that is in Guyana. There are several initiatives down there in terms of data upgrades on their networks and fiber, stuff like that. But there all pretty good returns. I will say I'm watching that real careful. They all make a lot of sense. We feel good about what's going on down there in terms of data growth, broadband substance, et cetera.

I would add that we don't -- we are very cautious -- about how far forward we commit. We try to look at these things quarterly, and we see something change in the regulatory environment or the consumer environment that changes our assumptions we try to make an adjustment very quickly.

The other thing to, I should point out, is that in that number there's about $15 million of stimulus project that we've talked about in the past. Some of those we thought we'd have more complete in '11 that are moving into '12, but that's also a big piece of it.

That's what I was wondering. I thought Guyana would have some, but the stimulus I thought would have a little bit more. What's the reimbursement flow to that, and how do you book it?

You book it -- it's a net. It's pretty fast. If we're organized and doing what we are supposed to do, they reimburse us, they actually pay. We're not out of pocket and then get reimbursed, which is the good news. Then, you really just book it as a net CapEx.

So, $15 million is a net number?

Yes. That's a net number; that's our piece.

And then you'd expect there should be some revenue coming from building out $15 million of net CapEx.

There is. It probably moves more -- we're building a lot in the year, so we will see some towards the latter half of the year, but probably more significantly into 2013.

Okay. Now Ric, the returns on that continue to look pretty good. I don't want to use the word, boffo, but I will just because it wouldn't have qualified for stimulus. But it's solid return.

It is like all those fiber capacity, wholesale capacity, which is largely what it is, business in that it ramps over time. Part of the value in the return is that you get great margin expansion as revenue ramps. It feels like very secure, very stable revenue. So, it's a combination of those two things.

One of the other areas of future spending might be spectrum. A lot of options going on, a lot of discussions swirling around. What are your thoughts about your current spectrum position and what may be attractive either to buy spectrum or to work wholesale with somebody.

It's interesting. There's a lot going on there, both bad and good. I would say from a carrier's perspective, more bad than good. The government is making a lot of noises about trying to help there in various ways.

We are in a pretty good position, in most areas, with the spectrum we have because of the fact that we are in such rural areas and such low population density. While our spectrum, which is a minimum of 25 megahertz, might be very thin holding in a suburban or urban environment, in our areas it's a pretty good amount of spectrum.

That said, at some level of cost, more spectrum will reduce other capital costs, operating costs, and improve customer experience. We're always on the lookout for it both in territory and sometimes out of territory, particularly if it's adjacent. The only problem is that some of the spectrum on the market still suffers from a question as to what -- will the band be heavily supported?

What goes in the devices, what the big equipment manufacturers are rolling out first in supporting, it really drives a lot of decisions. For smaller carriers like ourselves, we have to look to larger carriers and what they're doing, and either partner with them or follow them.

So is there a thought that any spectrum activity by you guys in '12 or is it more a '13 or '14 event?

I think we'll be continue to be optimistic about spectrum, Ric. There doesn't feel like vast amounts out there in 2012. I think that probably will require government action. But, there might be some smaller opportunities where the price is reasonable for what our need is.

Thanks.

I'm showing no further questions at this time and would like to turn the conference back over to Management for any closing remarks.

Thank you everybody. We will talk to you again in another quarter. Take care.

Ladies and gentlemen this does conclude today's conference. You may all disconnect and have a wonderful day.