ATN International Inc (ATNI) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to Atlantic Tele-Network first-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 with instructions following at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

Now I will turn it over to your host, Chief Financial Officer Justin Benincasa. Please begin.

Thank you, Tyrone. Good morning, everyone. Thank you for joining us on our call to review our first-quarter 2013 results. As usual, with me here is Michael 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.

I would like to now turn the call over to Michael.

All right. Thank you, Justin. Good morning, everyone. Before I get into the details, I will sum up the quarter first.

The results overall showed trends that are consistent with what we have experienced over the last several quarters. We have been able to continue to maintain our U.S. Wireless Retail subscriber base, thanks to another strong showing in prepaid, and a full quarter of iPhone sales going forward should help reduce postpaid attrition in the second quarter.

We had stable performance in ATM legacy wholesale wireless after accounting for the Midwest asset sale late last year. Island Wireless is doing well across our entire portfolio. And U.S. Wireline is also relatively stable, although International Wireline had some weakness this quarter.

We continue to evaluate potential investments in our existing assets as well as options to diversify revenue sources. As always, our approach is to remain disciplined but opportunistic, such that we are prepared to act quickly for the right opportunity.

So with that, let's turn now to some specifics, starting with U.S. Wireless Retail. As I noted in the overview, the Retail side more or less repeated the trends, both positive and negative from the most recent quarter. The overall subscriber base is stable and up modestly, but postpaid subscribers are still declining.

To put that in terms of the specific facts and figures, we had about 47,000 prepaid subscriber gross additions and over 14,000 prepaid net adds, both of which are up from the fourth quarter and the prior year. Postpaid gross adds were about 26,000 for the quarter, resulting in a decline in the postpaid subscriber base of around 12,500 subscribers.

Postpaid subscriber churn was approximately 3.1%. That is up from 2.9% in the fourth quarter and down from -- and also up from 2.6% a year ago.

We are still in a period of higher contract expirations. We talked about that last quarter; and that will continue for the second quarter as well. And that, obviously, affects subscriber churn. Overall, the blended subscriber churn for the first quarter was 3.8%, up from 3.7% in the fourth quarter and 2.4% a year ago.

Postpaid ARPU was flat at $54.49 for the quarter, compared to $54.44 in the fourth quarter and $54.15 a year ago. Overall subscriber ARPU was $45.34, compared to $46.67 in the fourth quarter and $49.36 a year ago. And the decline in overall ARPU year-on-year, just as we saw in the fourth quarter, was primarily driven by the shift in mix to a higher concentration of prepaid subscribers in 2012 -- actually in this quarter, as well as last quarter.

The launch of the iPhone late in the first quarter and other device line-up improvements should improve churn going forward and may provide a modest benefit on postpaid additions as well. On smartphone adoption overall, we ended the quarter with nearly 42.5% of our postpaid base on smartphones.

About 64.1% of total postpaid device sales in the quarter were smartphones, and that compares to 53.9% a year ago and 64.2% in the fourth quarter; so about the same as the fourth quarter. A little over 7.4% of the postpaid subscriber base upgraded in the first quarter.

Moving onto the wholesale side of U.S. Wireless, as reported, U.S. wholesale roaming revenues were down 15% year-on-year. The main cause for this decline was expected and discussed in the last quarter, and it was the sale of the fourth quarter of our cell sites and spectrum in the Midwest. If you exclude that impact, the performance of our legacy wholesale business was stable year-on-year.

At the same time, however, we saw significant decline in roaming revenue in the Alltel markets, as a major roaming partner moved significant traffic off of our network. While both of these factors will also impact wholesale revenue comparisons moving forward, we should see some positive offset for our legacy wholesale business, particularly in the second half of the year as we expand coverage and data capabilities in certain areas throughout the year.

In our International operations, International wireless revenues showed solid gains year-on-year due to subscriber growth of 6% overall. This subscriber growth was spread across several island markets and Guyana.

In Wireline operations, total Wireline revenue was down by 5% as reported. But as with the most recent quarter, there were a number of differing trends beneath that number, all of which were present in the fourth quarter and I went through in some detail there.

But just as a quick review, this time the wholesale Wireless revenues such as carrier backhaul showed plenty of strength and continued to grow, while legacy Wireline revenues both in the US and internationally faced continued pressure. In the US, repricing has hurt our enterprise voice and data service revenues despite strong unit growth. In Guyana, local and long-distance voice declined at the same time our broadband unit growth continues to impress.

So in summary, it was a good quarter overall with most operating trends following the pattern of recent quarters. We continue to operate efficiently. Operating cash flow -- I am sure Justin will touch on it -- but increased over 18% year-on-year, and we have a lot of financial flexibility even before the completion of the Alltel asset sale.

And with respect to the timing of that sale, to anticipate the question, we won't change our previous statement that we expect to close in second half of this year. I should note, however, that the waiting period under Hart Scott Rodino has passed, and so the main regulatory approval left is of course the FCC approval.

So with that, I would like to turn the call over to Justin for a more detailed financial review.

Great. Thank you, Michael. So, to cover some of the numbers for the quarter, revenues for the quarter totaled $172.9 million, 6% below the same quarter in 2012. Total Wireless revenues for the quarter were $143 million or 83% of total revenues; and our U.S. Wireless service revenues were $121.6 million or 70% of total revenues.

As Michael noted earlier, despite modest growth in the overall subscriber base over the last several quarters, U.S. Retail Wireless revenues declined from the comparable period year primarily because of the continued postpaid subscriber attrition. As he mentioned also, we saw a marked decline in wholesale revenues in our Alltel market this quarter and expect continued declines into next quarter, while our legacy wholesale business remains stable after adjusting for the Midwest asset sale.

Adjusted EBITDA was relatively stable at $43.3 million, down $1.1 million or 4% over the same period last year; and our adjusted EBITDA margin was 25%. Included in this quarter's operating expenses of $155 million was non-cash stock-based compensation expense of $844,000.

The quarter also included a $1.1 million gain on the sale of spectrum and related assets in our US wholesale Wireless business to one of our roaming customers. Our U.S. Wireless segment accounted for 75% of adjusted EBITDA totals and had margins also of 25%, which speaks to all of our U.S. Wireless teams' continued focus on effectively managing the operating costs of their businesses.

Interest expense for the quarter is down over 40% from a year ago as we continue to deleverage the Company and lower our borrowing costs.

Moving down to net income, earnings for the quarter were $8.8 million or $0.56 per share, compared to $9.3 million or $0.60 per share reported in the first quarter of last year. Our effective tax rate for the quarter was 39% compared to 43% a year ago, which reflects stronger pretax earnings in our lower tax jurisdictions, specifically our Bermuda operations.

Turning to the balance sheet, as of December 31 we had cash balances of $140.8 million and total debt outstanding of $272 million, which leaves us with a leverage multiple of less than 1 times on a net debt basis. Net cash provided by operating activities was $25 million in the quarter.

Capital expenditures totaled $20.9 million for the quarter, of which approximately $10 million was incurred by our U.S. Wireless segment; $4 million by our International Telephony segment; and $5 million at our U.S. Wireline segment in conjunction with our fiber network builds in the Northeast. For full-year 2013 we still expect capital expenditures to range between $95 million and $105 million.

Some additional operating data for the quarter. We ended the quarter with 694 base stations and 566 base stations in our legacy territories. In our wholesale business, MOUs within the legacy wholesale properties were down 9% from both last quarter and from Q1 2012. However, data traffic was up 45% from the same quarter last year and up 22% from last quarter.

In our Alltel markets, MOUs were down 17% from last quarter and down 39% from Q1 2012. Data traffic was down 12% from last quarter but up 5% from Q1 2012.

In the U.S. Wireline segment, business lines increased 53% from a year ago and 21% from last quarter, ending the quarter at approximately 89,700 access line equivalents. Internationally, access lines remained relatively flat at approximately 150,000 lines.

To sum up, Q1 was a reasonable start for the year. As Mike said, the year-on-year progress we are making in International wireless as well as domestic legacy wholesale is somewhat masked by less favorable Q1-to-Q1 comparisons from the Alltel assets. However, we are pleased with the cost management side of our operations and look forward to providing a further update with our second-quarter results.

Now, Tyrone, I would like open it up to questions.

(Operator Instructions) Ric Prentiss, Raymond James.

Thanks. Morning, guys. A couple questions. First, on the iPhone side, can you talk us through a little bit about your decision to start carrying the iPhone? Was it already in progress before you made the sale to AT&T?

Yes, it was. Our approach is largely business as usual with Alltel, and that was the case even during discussions and negotiations. So, obviously, when you are talking about bringing on that device and -- the time period is fairly lengthy preceding it.

Was there a commitment to get the iPhone?

Yes, there is always -- there is typically a commitment. We are under confidentiality restrictions in talking about it, though.

You mean the commitment to get it as part of the sale transaction?

Actually, both sides. Commitment to Apple and I guess that would transfer over to AT&T; but also from an AT&T side, what commitments are there in the deal structure to sell them Alltel?

There are no commitments with respect to devices in the deal structure, if that's -- if I am understanding your question. And there were commitments with respect to Apple.

Right, and do those transfer over to AT&T, that commitment?

Yes, they do.

That makes sense. But on the AT&T side, more particularly what I was wondering is -- is there a commitment to EBITDA, subscribers, CapEx? What kind of commitment language is there in the deal with AT&T?

There are no commitments with respect to those operating metrics.

The only -- there is a commitment to CapEx, though, a minimum spend on CapEx, and as well as like a marketing spend. But no EBITDA commitments.

And no subscriber commitment?

And no subscriber commitments.

Great. I will come back in for some questions at the end. Thanks, guys.

Barry McCarver, Stephens Inc.

Hey, good morning, guys. I guess a couple of questions. First, on the postpaid churn, I know you are indicating you'd probably continue at a higher level going into the second quarter. Can you give us a little color as to -- number of contracts coming up for renewal about the same as it was in 1Q? Is that a little higher going into 2Q? A little bit lower? Any real changes there?

And then on the wholesale revenue side, it sounds like this was one particular roaming partner and one contract that changed. Is that the case?

And if I understand what your guidance is or your prepared remarks about the future, it is that that revenue is out and that is a done deal. You will feel the full effect throughout the rest of the year, but there is not necessarily more to move. Is that the way to think about that? Thanks.

Barry, I'll answer the first one and I may ask you to re-clarify the second one. On the first front -- wait; now I have forgotten your first question.

Churn and contract expiration.

Thank you. That's right. I am not sure of the exact differential between the first and second quarters, so I don't want to guess. I don't think there is a significant difference, but I am not certain.

Okay. Then my second question was really in terms of the wholesale revenue. You said this roaming partner moved some traffic elsewhere. Is there more to come in 2Q? Is this a good base level that we saw in 1Q to think about going forward, plus any additional capacity you guys might bring online? How do I think about that?

I think it could be -- it should be worse in the second quarter a bit, because the major movement happened kind of midway through the quarter. So if you think about it that way, that'd probably give you a reasonable guess, in our best guess.

So if we think about the effect of the asset sale you had in 4Q, we had some expectations for wholesale revenue in 1Q. It came in a little bit below that.

Is that half of it? 25% of it? Just give us an idea of what the revenue loss could look like.

It could be -- Justin, do you want to --?

It's probably -- well, the legacy stuff is still pretty stable. So it is on the -- the wholesale loss is in the Alltel markets, right? That is probably -- I think if you look at -- you can kind of figure that out; it is probably down about 4.5. There is probably another half of that amount to come into the second quarter.

Okay. That's what we needed. Thanks a lot, guys.

(Operator Instructions) Hamed Khorsand, BWS Financial.

Good morning, guys. First off, on the Island side, was there any seasonal benefit there from -- on the EBITDA and the operating metrics? And can we see that continue, if there was no seasonal impact?

Yes, there is usually a seasonal -- it wouldn't impact us, but there is a seasonal increase in roaming activity and roaming revenue which helps EBITDA in some of the Island markets in the first quarter. But in not all of them. Bermuda, for example, that is a very low visitor activity quarter.

And in the Guyana markets, it is not really relevant. There is not a high tourism trade.

Okay. But I mean your Island revenue really was flat, but you saw a nice pickup in other operating metrics, even though you are saying there is some seasonal impact there. How does that happen?

I am not sure I understand your question. We saw an increase in subscribers in the islands. So that doesn't -- that is not particularly a seasonal thing.

I thought you were talking about roaming revenue. But that's -- there is nothing particularly seasonal to that.

Some of the operating -- some of the comparisons against last year, though, on the operating cost side was the M3 merger in Bermuda that we completed. So you are seeing the full integration of that now, the synergies.

Okay, got it. Then what was the activity that sparked the increase in business lines this past quarter?

It's -- we've always -- we have been doing a fairly heavy increase in lines. So there is -- the sales continue to be good, but you have to remember it is access line equivalents.

So people are -- customers are ordering greater quantities in terms of access line equivalents. And the same dynamic we talked about late last year is, while that is encouraging and that is positive, the price pressure pretty much overcomes it in that legacy business.

Okay. When do you start seeing some benefits from the fiber outlay you are going through right now, on the CapEx side?

Both of the major projects will be completed this year. We expect middle to late second, third quarter.

And then you have got to bring the customers online. So it won't happen instantaneously, but I think in 2014 you will start to see the benefits in comparison to 2013.

Okay. That's it for me. Thank you.

Michael Trica, Oakum Capital.

Morning, guys. I wanted to touch upon the broadband buildout, the ION project and the Sovernet, and specifically as that relates to the grant that was issued by the Commerce Department. Can you touch upon the economics of the CapEx spend in grant versus and the monies that were paid by ATNI for the ION project and the Sovernet project?

Yes, I can't -- I don't have exact figures. I don't know that we would get into that, for that size of a thing. But I mean, I think that both of those projects we felt were worth doing, but would not have done them without the subsidy. They've would have been truly underwater without some subsidy to do it.

So I think -- and if you know that in the New York -- it's principally New York, there is a little Pennsylvania. But in the New York project, it is an 80% funded through the federal grants and 20% through our own capital. And in Vermont, the one that is largely in Vermont, it is 70% government and 30% ours.

But I think for the type of project they are, I think we're -- I think we -- we believe -- we will see, but we believe the returns will be reasonable. But that is about all I can say to answer that.

Just a follow-up on that. In terms of ownership of the network, the infrastructure, after the projects are completed, are they 100% owned by ATNI going forward? Or is there a partnership revenue share with any other entities?

We have a 25% ownership in the New York State operating unit, with a number of independent local exchange companies from New York. So we own effectively 75% of that.

And we own virtually 100% of the Sovernet. And there are no partner ownerships in the builds.

And that is generally -- those networks are in what is widely known as in middle-mile?

That's right. That is probably the best way to characterize it, yes.

So in terms of interconnectivity to ultimately the last-mile buildout, is that something that was looked at in terms of the decision to go ahead and initiate the projects? The opportunity set ultimately for the interconnectivity with the last mile?

Yes, it was looked at, but for the most part, we are -- those projects -- so there's two components. One, these are BTOP projects and there are a number of anchor tenants that we are connecting directly to -- a number of schools, libraries, clinics, that sort of thing in these rural areas. And we are connecting also to a number of tower sites as well, which help support those areas through wireless services and wireless broadband.

And then we are also providing transport services, wholesale services, and backhaul to other last-mile providers, or expect to. So there, the project was looked at from the -- not from the standpoint of a last-mile integration outside those BTOP anchor tenants, as they call them.

Just lastly, is there any view as to the proceeds from the Alltel sale as it relates to further BTOP projects?

Well, I think we think in the right place fiber is a good investment. It is like most network investments. It is a good one where there is the right balance between supply and demand; and it is a very bad one if there is the wrong balance, because you've got to put all the cost up front.

So having that caveat, we certainly are familiar with it and think we know how to analyze those opportunities and would look at them.

Okay, great. Thanks very much.

Ric Prentiss, Raymond James.

Back on the iPhone question, guys, what was your calculus on the iPhone? Is it that you think it will help churn?

If so, any thoughts on what the churn effect could be in the first year or so after carrying iPhone? Is it ARPU related, trying to upsell people to a smartphone? Just trying to understand the calculus of, obviously, a pretty expensive iconic device that you have eat on the subsidy side; but how it played out or would play out in the model.

Yes, I think it is simply this, Ric, which is -- if you don't have a device line-up that includes one of the more popular devices, you are going to suffer. You're going to suffer in terms of your customers when they come off contract and they are looking to upgrade and you don't have the device they want. And you are going to suffer in attracting new customers.

But I think that in looking at other regional carriers at this stage, I think it is our understanding that it has been -- had more of a positive impact on retention than new customer acquisition.

And the way we look at it isn't really any different than any device. Our device lineup does not include the full lineup of the competition, and that is not just the iPhone. So anything you can do to address that, you do.

So that is really how we do it. And then you look at the economics, as with any device, of what the amount of the subsidy will be and what the lifetime value you think of the customer will be. And we judged that to be positive at the time we made the decision.

Then on the roaming business, on the legacy side in particular since that will be the remaining business after you close the sale, on the legacy business you have mentioned stable a couple of times. Is that stable year-over-year? Is that stable quarter-to-quarter?

Historically, your markets have seen in the legacy business some uptick in seasonality and revenue in the second and third quarters. So I was just trying to gauge what the thought is there.

Yes, I think it is stable in the sense of quarter over last year's quarter. But we have no reason to not expect seasonality upticks again in I guess the second and third quarter as well. Does that answer your question?

Yes, it did. Just wanted to make sure that we are not thinking it is stable 1Q to 2.

No, no. Yes, no. Stable versus year-over-year when you peel out the Midwest assets.

Right, right. So what we saw 1Q '12 to 1Q '13 might be a similar effect 2Q '12 to 2Q '13, given that Midwest peel out?

Right.

Okay. Then on the Wal-Mart side, seems like still some success there. Can you talk a little bit about what is happening in that channel? Product has been there for a while.

You know, I don't really -- I don't know if I have much more color than to repeat what your observation is. It continues to be successful. I think it is a good product for Wal-Mart customers.

It is part of being best local. We think it is a very high-quality, appealing product. And for us it is a very strong distribution channel. It is a very important channel to be in.

And post Alltel sale to AT&T, what happens to that product?

We are not selling the U Prepaid brand. So I don't want to talk too much of things that are being discussed separately, but I think we hope to see that product continue and that plan continue.

Okay. Then final question. Justin, you mentioned that -- putting some of the CapEx to work this year in Commnet, the legacy wholesale business. If I caught the number right on the base stations, base stations in legacy this 1Q '13 was, say, 572? Or no, you said --

566.

566? Now, was that down quarter-to-quarter?

It is down a little because we sold a handful of them in some remote areas to one of the partners there in the quarter. And I mentioned that; that was the $1.1 million gain we booked. So it is down a few, but I think you will see that number start to come up as we move through the year.

Okay.

Because we've got some CapEx allocated to that business as we have talked about.

That makes sense. And one point of clarification. I missed the number. You said smartphones were what percent of the base in 1Q?

About -- just looking, sorry; about 42.5%.

42.5%? And 64% --

Of postpaid. Of postpaid base, yes.

42.5% of postpaid, 64% of sales?

That's correct.

Okay. Thanks, guys.

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

We're all set. Thank you, operator. Thanks, everybody. We will see you in a couple of months.

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