ATN International Inc (ATNI) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Atlantic Tele-Network third-quarter earnings conference call and webcast. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Justin Benincasa, Chief Financial Officer. Sir, you may begin.

Thank you, Operator. Good morning, everyone, and thank you for joining us on our call to review our third-quarter results. As usual with me here is Micheal Prior, ATN's President and Chief Executive Officer. During the call I will 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 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. And that said I will turn the call over to Michael for his comments.

Thank you, Justin. Good morning, everybody. Well, this was another very strong quarter for ATN, very -- also very similar characteristics and trends to the second quarter of this year. And once again we experienced strong profitability and cash flows with significant year-on-year gains, a stable US overall US wireless subscriber base, solid profitability and subscriber growth in the Island Wireless piece of international operations and a decrease in net debt on an already strong balance sheet.

And the most significant drivers of the positive financial results remain post-transition cost controls and subscriber stabilization in the US and improved profitability in Bermuda following the merger in 2011. Other operations were largely stable or improving. So let's turn now to those specific operations.

First, U.S. Wireless on the retail side -- to reiterate my comments in the press release, we were certainly pleased and a little surprised to see mildly positive net subscriber additions once again. This was driven again by improved distribution breadth and depth in the prepaid segment offset in part by continued erosion in postpaid subscribers.

Prepaid numbers were fairly strong with 40,779 gross adds and 11,656 net adds given the fact that the quarter -- third-quarter is typically one of the weaker ones for prepaid sales in the industry.

On the postpaid side we had a net decline in the subscriber base of nearly 10,000 on gross additions of 25,760. While expected due to the high number of contract expirations during the period we would have hoped to do a little better.

We've worked hard at expanding distribution and getting out our message in innovative and lower cost ways, but we are still hamstrung a bit by a device lineup that is missing some of the most sought-after smartphones. And that competitive disadvantage will continue to impact us in the fourth quarter, although we hope to make up some ground in 2013.

With respect to customer churn, postpaid subscriber churn was 2.7%, up from 2.18% in the second quarter and down from 2.97% a year ago. Again, this was expected, as discussed on last quarter's call, due to the bubble in contract expirations. While we clearly need to move that number down, we think it will be well into 2013 before we can expect to see significant improvement. Blended subscriber churn was a similar story at 3.7%, up from 2.9% in the second quarter and down from 4.05% a year ago.

ARPU largely held steady; postpaid ARPU was $54.52 compared to $53.96 -- those are dollars -- 54 in dollars and 52 cents I should say -- in the second quarter and $52.68 a year ago. Overall subscriber ARPU was $46.87 compared to $47.63 in the second quarter and $47.51 a year ago. Postpaid ARPU's modest rise is mainly due to the upward migration by existing customers from older smaller usage voice plans to unlimited voice and text plans.

Year-on-year postpaid and overall ARPU also benefited by comparison to the transition period when we did not bill for certain usage overages. And the slight decline in blended ARPU was mainly due to the shift in the mix of overall subscribers towards prepaid plans which have lower ARPU.

Additionally, ARPU is hurt by the reduction of ETC funds as the high cost programs start to be phased out. That put about $0.22 of downward pressure on ARPU for the quarter. Increasing ARPU significantly from these levels will likely require an improved smartphone lineup.

Speaking of smartphones, on the adoption rate we ended the quarter with nearly 40% of our postpaid base on smartphones and this was with about 55% of total postpaid device sales, new customers and upgrades being smartphones. And these metrics are consistent with what we've seen the rest of this year; they are not climbing as some are in the industry and I think, again, that goes back to the same issue which is our device lineup.

On the wholesale US wireless front, roaming revenues, while up from the second quarter on somewhat stronger than expected seasonal factors, were down from a year ago. Overall we expect that trend to continue in the fourth quarter.

Also keep in mind that we have a pending sale of spectrum and cell sites in the Midwest to one of our roaming partners for just under $16 million that may take place in this year's fourth quarter. And to put this in context for you, for the first nine months of this year we generated $12 million in revenues from these assets.

Moving to international operations, international wireless revenues were up again with subscribers and revenue both up in all of our island markets despite challenging economic conditions in many of those markets. In Guyana wireless subscribers were largely flat from the second quarter and down 4% from a year ago, although wireless revenue increased slightly from that period as the loss was mainly of inactive very low usage subscribers.

In wireline operations, wireline revenue is basically flat with a decline in international revenue in Guyana offset by high-speed data revenue growth in that market and growth in the US market. In the US our stimulus driven fiber builds in New York State and Vermont continued at a rapid pace.

I was recently in Vermont, in fact, to see one of the many anchor tenants of the Sovernet fiber network, a public school system in Hartford, Vermont get connected to our fiber network.

And if anybody -- if any on the call are familiar with this, this is there is really a trend in education, particularly in smaller districts, to go to more eLearning to enhance the curriculum and there are various tools including tablets and the like that teachers are using to try to generate more excitement and enhance the curriculum. So it was really nice to be part of that and we are very happy to see our builds both in New York State and Vermont continue at the pace they are going.

So overall in summary, as I said, this was another very solid quarter with strong profit and cash flow performance. These are of course the most important metrics to this management team. But we do pay attention to revenue and subscriber levels as well and this quarter indicates that while we are executing very well on our plan overall we do have some work to do to strengthen the foundation for future profit performance.

Taking all this into consideration, we were very pleased to raise our quarterly dividend by almost 9% to $0.25 a share and there is something nice about getting to an annual rate of $1 per share, certainly makes the math easy. And it was also the 14th consecutive year of dividend increases. So with that I will turn the call back over to Justin.

Great, thank you, Michael. Just to cover some of the relative financial information, revenues for the quarter totaled $188.8 million which was a decrease of $5.5 million or 3% from the same quarter in 2011, but up 2% sequentially. Similar to the second quarter, this year-over-year decline resulted primarily from a reduction in the U.S. Wireless retail revenues due to subscriber attrition over the last 12 months.

Total wireless revenues for the quarter were $159.2 million or 84% of total revenues and our U.S. Wireless service revenues were $138.2 million or 73% of total revenues.

Adjusted EBITDA was $55.7 million, up $3.6 million or 7% over the same period last year and the adjusted EBITDA margin was 29.5%, the highest level in our over two and a half years since we acquired the Alltel assets.

Included in this quarter's operating expenses of $159.2 million was non-cash stock-based compensation expense of $0.8 million, our U.S. Wireless segment accounted for 83% of adjusted EBITDA and 73% of operating expenses. Interest expense declined by over $1.2 million over the same period last year as a result of our amended credit facility pricing and our continued deleveraging.

Moving down to net income, earnings for the quarter were $15.97 million or $1.03 per share compared to $11.3 million or $0.70 per share reported in the third quarter of last year. Our effective tax rate for the quarter was 35% compared to 46% a year ago reflecting the change in the mix of income among our various tax jurisdictions as well as a one-time benefit related to R&D credits claim for 2010 and 2011 that positively impacted our rate by approximately 570 basis points.

Turning to the balance sheet, as of September 30, we had cash balances of over $111 million and total debt outstanding of $276 million which leaves us with a leverage multiple of approximately 1.4 times and less than 1 times on a net debt basis. Net cash provided by operating activities was $57.9 million in the quarter and $137.5 million for the first nine months of the year.

Capital expenditures totaled $18.2 million for the quarter and $50.5 million year to date. For the quarter approximately $9 million was incurred by our U.S. Wireless segment, $3.2 million by our international telephony segment and $3.7 million in our U.S. Wireline segment in conjunction with our fiber network builds in the Northeast.

For full year 2012 we have lowered our guidance for capital expenditures to be between $65 million and $85 million and this is primarily the result of the delay in certain capital projects which have shifted some of our forecasted expenditures to 2013. Of the revised forecast amount the U.S. Wireless segment is expected to account for $35 million to $50 million.

Some additional operating data for the quarter -- we ended the quarter with 787 [roam only base] stations. In the wholesale business, consistent with industry trends, MOUs were down 2% from last quarter and 22% from Q3 of last year. Conversely, data traffic was up 7% from Q2 and 14% from the same period last year. In international wireless we ended the quarter with a total of approximately 324,000 subscribers of which 284,000 or 88% were prepaid.

In the U.S. Wireline segment business lines increased 23% from a year ago and 4% from last quarter, ending the quarter at approximately 66,000 lines. Internationally access lines remain relatively flat at approximately 150,000 access lines.

To sum up, we ended the first nine months of the year with earnings per share of $2.31, solid operating cash flow generation and a very strong balance sheet. Now, Kate, operator, I would like to open the call up for questions.

(Operator Instructions). Ric Prentiss, Raymond James.

Hopefully you guys have weathered Sandy okay. I know it's a crazy couple of days for those in the Northeast.

Not so bad in Massachusetts as New York and New Jersey.

Yes. First question I have got for you guys is on traction on the postpaid side. You mentioned it is obviously a key priority. It seems like several of the messages in your comments, Michael, have addressed maybe an iconic device.

As you think about the algebra of carrying expensive devices on the subsidy side but then the benefit on ARPU and the benefit on churn, how do you look at that equation and what kind of time frame might some decision be made if one were?

Yes, I think -- I can't speak to timing on specific devices. But I guess we do think that we have to improve our lineup. We want every device that our customers want to be in our stores. We do have to weigh that against the cost of getting the device and whether it's -- the manufacturers are even ready to supply it to us. And there are several devices that fit into that category.

I mean best of all for carriers would be if we weren't subsidizing devices so heavily. But to remain competitive you certainly need to look at it. And if you have the right churn metrics, if the lifetime or the average contract or length of that customer with you is long enough and under certain other assumptions on the frequency of upgrades it should be positive, it just is not as positive as it used to be when you added a customer.

What percent of your base upgraded in the quarter on the postpaid side?

About -- it was a little less than -- a little less than 9% -- high 8%'s.

Okay.

Which is up, I mean sequentially from past quarters.

Right. And as you think about that -- one, is LTE required or important to carry with these different devices? What are the plans for LTE? And can you tell us what your current handset lineup is from a smartphone standpoint as you look into the holiday season?

Yes, I think -- I'm not going to announce the very latest for the holiday season just because it is premature, but I think we were -- we will be behind on a couple of the most sought after devices, the very latest versions.

So going to the second question on LTE, I mean I think LTE is important, it has become important to consumers and therefore it is important to us. We have not made a commitment; our story really is the same, as we discussed the last couple quarters, which is we think we will have to go LTE in order to stay competitive and to efficiently use the spectrum we have. But we don't have any specific announcement on that at this time.

And lastly, I would add that in a lot of our markets LTE is advertised but not really available. But it -- we expect it to be increasing available by competitors. So that does put pressure on us.

Okay, I'll come back in for some more questions at the end.

Barry McCarver, Stephens Inc.

Good quarter. So, on the traction on the prepaid side, could you try to quantify the effects of getting those pre-paid devices back in the Walmart stores? I know that I believe started up during the quarter.

Yes, I don't have a quantification at my fingertips, I'm not sure we would give by precise channels anyway down to that detail, Barry. But there is no doubt it was the main driver of the improvement in prepay. So I think that is probably safe to say.

And while -- before you go on to any other questions, I was reminded earlier that I overstated the situation slightly in my remarks on the Island Wireless side. The subscribers and revenue and subscriber revenue did not actually grow in Bermuda while it grew in other Island properties -- it was down slightly in Bermuda, almost flat. So sorry, Barry, go on. I just wanted to (multiple speakers).

That's all right, that's all right; you've answered my question on the prepaid anyway. And in terms of your caution just on postpaid churn, if you look in the fourth quarter the number of contract expirations you have coming up, is there any reason to think -- I know we are assuming that churn is going to remain lumpy, but should we expect a big swing up or down just kind of given the number of expirations you have in the quarter? Do you have that?

Yes, I think we know -- while we don't think we will see improvement in that number in the fourth quarter, we don't think it's going to get much worse. If we had to guess today we would say essentially flat because we still have the contract expirations. In the fourth quarter you tend to have more gross adds, but you also tend to have more disconnects. So the balance kind of leads us there.

Okay, that's helpful. And then the last question and I will let somebody step in, but in regards to the roaming partner in repurchasing the spectrum, can you give us an idea of what the margin profile on the revenue you were generating from that equipment looks like? Because I -- I guess my concern is that's going to create a little bit of a headwind for EBITDA in 2013 because I expect that is pretty high-margin revenue.

Yes, Barry, when we take off roaming revenue it tends to be very high incremental margin, both add and subtract. A lot of the expense is capital expense. There is of course backhaul and towers and things like that and termination to some extent as an expense that will go away. But I think you can expect a fairly high portion of that is going to impact EBITDA and operating income.

And nothing comes to mind that might be an opportunity to offset that as of yet?

I think we are looking at some potential new builds in next year, unlikely that they will offset much in the first couple quarters and nothing is definitive yet. But I think there is a chance we could have some -- a decent offset by the latter half of the year.

Okay, great. Thanks a lot, guys.

(Operator Instructions). Hamed Khorsand, BWS Financial.

Just a couple of questions here. One is could you just walk us through as far as the operating margin goes? It seems like the mix in the business hasn't changed too much, but profitability has from Q2.

Yes, I mean, I think it is somewhat in the U.S. Wireless segment for the most part. I mean I think that we've definitely increased margins there as well as some of our Island properties with Bermuda kind of hitting the full stride on their synergy. But whenever you get the seasonally kind of high wholesale quarters it helps with the margin.

Okay. So, I mean, with the roaming business going off we could see operating income come down Q4 because of the seasonality, then Q1 because you're selling these assets then?

Yes, I mean, I would think that our Q4 margins would be down -- will be down significantly from Q3. It is just the way it has always kind of tracked in that quarter as well as with the handset subsidies is always a quarter that puts the most pressure on margins.

Okay, then going back to what you were talking about earlier about the smartphone issue, the competitors you are facing in the prepaid area, they are owned by these large carriers so they are basically handing them these nice new smartphones. I mean, could that marginally erode your subscriber base if you guys don't act quickly?

I think it has, I mean I think it has eroded our subscriber base to not have a fully competitive handset lineup. We -- every time we catch up and we are continuing to bring new devices into our stores and to our customers.

But the goalpost on the other side moves as well; our competitors are launching newer devices and so we tend to be a step behind in a lot of, again, the most sought after devices and that will affect the percentage of people that are making decisions. I mean we hope that our service and our other offerings trump that, but it won't for everybody, clearly.

Have you guys quantified what the EBITDA margin impact would be if you adopted any of these new smartphones?

We haven't -- we always look at that. But we haven't released anything. So we look at that with every decision like that we make.

Okay, great. Thank you.

Ric Prentiss, Raymond James.

A couple follow-ups, guys. First, I noticed U.S. Cellular had recently made an announcement they are going to -- Walmart is going to carry their postpaid products, and I think they were with you guys as far as getting the prepaid into the marketplace. Any thoughts on Walmart as a postpaid channel for you?

I mean I think it's is viable, we have nothing to say right now. But I think it is to us at a distance. We understand what U.S. Cellular is doing and there is no reason it can't be a significant postpaid channel. It may not rise to the level of its importance on the prepaid side, but that is not unusual.

Then you also mentioned I think in the prepared -- or in the press release about the fiber in the Northeast and how spending is going but also that the revenue traction might be having some visibility. Can you update us a little bit on that?

Yes, I'd say that in terms of our overall numbers the revenue -- totally immaterial today, it is really more long-term. So we are -- what happens you get the bill going and then under this BTOP program you have a number of anchor tenants who aren't committed to you, although you are committed to go try to serve them.

And we have had a very good run of signing up what we call the anchor tenants, colleges, high schools and school systems and clinics and libraries and towns. And so we are very pleased with the sales progress there on building the backlog. But the real revenue flow is really on the small side right now, there is much to go.

And then you talked a little bit about your leverage getting down pretty low under one times on a net debt to EBITDA basis. Prior quarters you've talked a little bit about the M&A environment. Obviously you've been a flurry of big ones out there in the month of October. Maybe just a little discussion on your leverage level and what you are seeing out there on the M&A front?

Yes, I think there is clearly a lot of activity. In the U.S. Wireless it tends to be more right now the kind of activity that the biggest players are participating in, right, with the consolidation. And there are always opportunities created when the big, big guys are moving. There may be opportunities, dislocations, but it doesn't feel like that necessarily gives us a direct opportunity to use our balance sheet.

Elsewhere, though, I think we continue to look. I mean, we continue to look fairly broadly within the areas we know well. And while I would say we get the value of deploying that balance sheet and always looking we are going to have to stay disciplined and true to our view of the value, which makes it impossible of course to predict, other than we can promise you all we are looking.

And as far as spectrum goes, a lot of these big M&A deals in the US have been centered around getting access to spectrum or being prepared for spectrum. How do you feel about your spectrum position right now and what are your options that you are looking at?

Well, you know we have been -- we have looked at spectrum and in some cases we have been stymied in trying to get there. It's tougher to get spectrum as a small carrier, it is tough to find parcels that work for you and you can bid -- make a compelling offer for.

So that's a challenge and it's not a challenge for us in the very near term, but over the long term we definitely, like all wireless carriers, see it as critical to continue to add spectrum. And it also improves your cost over time. So for two reasons it is important. But for the near term, any kind of near-term plans we have we are okay with what we have.

And near-term means a year or two or --?

Yes, yes. I think in that time frame we are good. I'd do a slight hesitation because everybody in the industry was surprised by the growth in data usage and therefore spectrum demand in the past. But even taking into account what we've seen so far I think I'm still comfortable in that time frame.

And I know that -- look, I know this is an issue that a lot of the smaller carriers have raised quite loudly with the SEC and others in Washington as something they need to look at going forward. And indeed a lot of the larger carriers as well, right, because of the urban area demand for spectrum.

And what kind of usage are you seeing on your smartphones on the network today?

I don't have statistics to hand, Ric, but usage continues to grow fast and furious. I mean it really does. I mean, I don't think you could've found anyone in the industry two years ago who would have seen it where it is today. A year ago they were maybe a little more shell shocked and might have believed it and it still keeps growing.

And from a capital intensity standpoint, I know you are not giving guidance yet for 2013, but you mentioned that several of those projects -- or some of the CapEx reduction from the original guidance to the guidance last quarter to the guidance now is some projects slipping out to 2013.

Is there an order of magnitude we should be thinking about as far as CapEx net year next year or what capital intensity might be or what some of those project slips might be? Just give us a little color on CapEx.

Yes, I think, Ric, where this year -- if you're working in the range of 10% to 15%, we will be somewhat below that range this year. And I think you could probably slide that amount back into next year. So I think you could -- we could be in excess of 15% next year of a percentage of revenues I should say.

Right.

You know, and possibly even up to 20%.

Okay, that helps. Thanks, guys.

(Operator Instructions). I'm not showing any further questions at this time. I would like to turn the call back to management for closing remarks.

Okay, thank you, everyone, and we will see you at the end of the year. Appreciate it.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a wonderful day.