ATN International Inc (ATNI) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Atlantic Tele-Network Q2 earnings conference call. (Operator Instructions) I would now like to introduce your host for today's conference, Justin Benincasa, CFO. Sir, you may begin.

Thank you, operator. Good morning, everyone, and thank you for joining us on our call to review our second quarter 2013 results. As usual, with me here is Michael Prior, ATN's President and Chief Executive Officer. During the call, I'll be covering the relevant financial information and certain operational data, and Michael will be providing update on the business.

Before I turn the call over to Michael for his comments, I'd like to point out that this call and our press release contains 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 the 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 of 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 www.atni.com, or to the 8-K filing provided at the SEC.

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

Thank you, Justin. Good morning, everyone. Before I get into the details, just first, a brief summary of the quarter. Second quarter results show trends that are consistent with what we've experienced over the last several quarters, with our non-Alltel businesses performing well overall and, in many cases, better than expected. We had very solid performance in ATN wholesale wireless outside the Alltel markets despite the effects of the Midwest asset sale late last year. Island Wireless is doing well across our entire portfolio, thanks to cost controls and some nice subscriber gains. And we continue to evaluate potential investments in new and existing businesses.

Our capital investments in existing businesses increased this quarter, mainly because of expansion and upgrades to our US wholesale wireless business. As always, we were prepared to act quickly for the right strategic -- we are prepared to act quickly for the right strategic opportunity. And as to Alltel, we've been able to continue to maintain our US wireless retail subscriber base, and I've been impressed by the continued focus of our US retail wireless team. Despite distraction of the pending transaction, the team has not lost sight of its priorities, running a customer-centric business in a very competitive marketplace.

So turning now to the specifics, in view of the pending sale, I'm going to start with the wholesale side in US Wireless, the larger part of which involves networks we operate outside of the Alltel markets. So as reported, US wholesale roaming revenues were down 18% year-on-year. As we noted in the release, this decline was driven by decreases in the Alltel markets as the major roaming partner has moved significant traffic off of our network.

On the other hand, we were pleased to see stable year-on-year revenue in our other roaming markets, despite the sale of the Midwest assets. That sale, just to give you some perspective, involves about 15% of our base stations and service. So to close the revenue gap in less than two quarters was not easy, and it was a good upside surprise. This business is benefiting from increased data volumes. And to meet the rising data demand, we are continuing to expand coverage capacity and capabilities in certain areas, and therefore expect modest growth in this business in the short term, excluding of typical seasonal effects.

On the retail side of US Wireless, it more or less repeated the trends both positive and negative from the past few quarters. The overall subscriber base is stable. In fact, we added a little. So that's a nice run we've had there. But on the other side, postpaid subscribers are still declining. The rate of that decline did moderate, however, with net postpaid subscriber losses of around 3,800 on gross additions of 28,000.

On the prepaid side, we had a little less than 43,000 prepaid subscriber gross adds, and nearly 5,000 prepaid net adds. Prepaid net adds, while positive, were down from the rate of additions in 2012, and in the first quarter this year. Postpaid subscriber churn was approximately 2.6%. While still high, that's down from 3.1% in the first quarter, and it's up from 2.2% a year ago. And the reason for that, we believe, is mainly the benefit of a better device lineup, which includes the iPhone, which I think we added in late -- the third -- first quarter in March.

So the other thing impacting it is we're beginning to emerge from a higher rate of contract expirations during the quarter, which reduced voluntary disconnects and that will continue into the third quarter.

Blended subscriber churn for the first quarter was nearly 4%, down slightly from the first quarter. Postpaid ARPU was up slightly, $55.18 for the quarter, compared to $54.49 in the first quarter, and $53.96 a year ago. Overall, subscriber ARPU was $44.77, compared to $45.34 in the first quarter, and $47.63 a year ago. And not surprising, the reasons for those changes are similar to what you've been seeing. The postpaid ARPU is up because of a higher percentage of smartphones in the base; and the overall subscriber ARPU was down because of shift in the mix to more prepaid in terms of the total percentage of subs.

And on the smartphone adoption, we ended the quarter with around 44% of our postpaid base on smartphones. About 65% of total postpaid device sales in the first -- sorry, in the quarter, second quarter were smartphones, compared to 55% a year ago, and 64% in the first quarter. Approximately 6% of the postpaid sub base upgraded in the quarter.

So in international operations, International Wireless revenues repeated the performance of the first quarter, once again showing solid gains year-on-year, due to steady subscriber growth in the island markets. Even better, this modest but steady overall subscriber growth of 2% year-on-year was accompanied by good cost containment and reduction in most of the markets we serve. These markets are for the most part quite mature from a subscriber perspective and short-term subscriber movements are only part of the picture. We have to continue to work to make the businesses more efficient in order to deliver acceptable operating margins in a capital-intensive business. So we were happy to see the work on the cost side with that background.

In the wireline operations, as reported, total wireline was down by about 1%, as declines in voice-driven revenue were largely offset by continued growth in data revenue as well as some added wholesale voice services. More specifically, in the US, wholesale wireline revenues, such as carrier backhaul, showed continued strength. And a recent initiative to service more of our long-distance traffic internally provided a small additional boost to wireline revenues and overall profits.

In Guyana, local and long-distance voice declines were partly offset by broadband growth. Wireline revenues, we believe, are likely to remain flat to down in that market, unless and until there is regulatory reforms. In that event, our long distance revenues, which we account for as part of wireline, are likely to take an additional hit with the loss of so-called exclusivity, but at the same time, there is the possibility of an increase in local calling revenues due to rate changes.

In summary, this was a good quarter overall with most operating trends following the pattern of recent quarters. Strategically, I recognize the questions that investors have with respect to the use of funds following the Alltel closing. It's obviously very important consideration. We are actively looking at opportunities, I can assure you, but we really always are actively looking at opportunities just perhaps that more in our wallet right now. And I don't think we're going to change, we don't intend to change our approach of being disciplined in looking for those investments, and making those investments.

And at the same time, while everyone would like to hear more details, I think we're going to continue with our policy of waiting until we have hard news to announce rather than speculating on what we might do. But keep in mind, again, we'll be long-term focused and we'll try to stick with the disciplined approach. It served us well in the past, it's helped us create value, and so we will continue.

And lastly, to maybe save your question on the call, we do not have further news on the regulatory approvals necessary to close the Alltel deal. We are still confident of receiving those approvals and of closing in 2013. As some have noted in the press, the FCC has recently quoted a few more complex deals such as the Alaska deal, and that may be good news for some of the smaller deals like ours that are awaiting further review.

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

Great. Thank you, Michael. As noted in our release, the drivers of the second quarter performance were similar to those in the first quarter, as Michael spoke about. Revenues for the quarter were $175 million, 5% below the same quarter in 2012; and adjusted EBITDA was $45.9 million, down 8% over the same period last year, resulting in an adjusted EBITDA margin of approximately 26%. However, the trends are more positive.

Non-Alltel revenues, adjusted for the Midwest sale, totaled $71.6 million in the second quarter, and are up over last year by approximately 8%. Adjusted EBITDA for these businesses were also up over last year at $28.1 million, which is a 39% margin in one of our seasonally strong quarters.

As Michael noted, revenue growth in our legacy wholesale markets was primarily driven by increased data traffic and our comparisons to last year in our Island Wireless operations are benefiting from positive operating leverage, as we continue to grow our subscriber base in those markets.

Moving down the income statement, the quarter's total operating expenses of $154.9 million included non-cash stock-based compensation expense of $1.2 million. Interest expense for the quarter is down 30% from a year ago, as we continued to deleverage the business and lower our borrowing cost.

Earnings for the quarter were $8.9 million or $0.56 per share compared to $10.5 million or $0.67 per share reported in the second quarter of last year. Our effective tax rate for the quarter was [34%], which reflects stronger pre-tax earnings in our lower-tax jurisdictions, particularly in our Bermuda operations. We do anticipate that this rate will move back into the low 40s post the Alltel sale.

Turning to the balance sheet, as of June 30, we had -- we ended the quarter with $111 million of cash, and total debt outstanding of $263 million. Net cash provided by operating activities was $10.5 million in the quarter. Cash is down sequentially from the first quarter due to timing, a timing shift in several working capital accounts, and the acceleration of capital expenditures in our legacy wholesale markets, as we build the coverage and technology expansions Michael mentioned.

For the quarter, total capital expenditures were $31.3 million, of which approximately $25.8 million was incurred by our US Wireless segment, $2 million in our international Telephony segment, and $1.5 million in our US Wireless segment, as we continue with our fiber network build in the Northeast.

US Wireline.

US Wireline, sorry. For the full-year 2013, we now expect capital expenditures to be between $80 million and $90 million, which is down from earlier estimates, mainly due to the timing of some of our network projects in Guyana, which are likely to move into 2014.

Some operational data for the quarter, we ended the quarter with 572 base stations in our legacy wholesale territories. In our wholesale wireless business, MOUs within the legacy markets, adjusted for the Midwest sale were up 12% from last quarter, and down 12% from the first quarter 2012.

Data traffic was up 38% from last quarter, and up 72% from the same quarter last year, again adjusted for the Midwest sale. In our Alltel markets, MOUs were down 22% from last quarter, and down 52% from Q2 2012 and data traffic was down 11% from last quarter and 23% from the second quarter 2012.

In our US Wireline segment, business lines increased 54% from a year ago, and 9% from last quarter, ending the quarter at approximately 97,600 access line equivalents. And our international access lines remained flat at about 150,000.

To sum up, you can see the year-on-year progress we're making in our international wireless as well as our domestic legacy wholesale business as someone masked by less favorable comparisons from the Alltel markets. However, we're pleased with the cost management side of that operation.

Now, operator, we'd like to open the call up for questions.

(Operator Instructions) Our first question comes from the line of Barry McCarver from Stephens Incorporated. Your line is open.

Hey, good morning, guys, and good quarter.

Good morning.

(multiple speakers).

A couple of questions on your comment business. Can you give us a little more color on what happened in that segment during the quarter, just in terms of anything unusual that drove that higher data revenue? I think you mentioned, you may be making some investments there or looking at some investments in that business. And then, just lastly, the third quarter is usually the strongest quarter of the year for the wholesale business. Given that you had a strong 2Q and obviously the sale that went on last year, any change in that outlook for 3Q13?

Sure. Let's take last part first. The Q2 and Q3 are the two strongest quarters in that business, typically, from a seasonal perspective, and typically Q3 is stronger than Q2, and we certainly expect to see that again this year. We haven't -- have not seen it for many years. So it's reasonable to expect.

On the data side, there's nothing unusual on the data revenues. It's really a -- what's going on overall, and we are adding both capacity and data capabilities. So some really remote sites have been 2G for quite a long time, many of those sites. We're adding 3G capabilities to those places, and we've always said, we will continue to do really what our customers need in those places, and it's really driven by clear demand. And then, we are also adding coverage, although there was very little coverage added in the first half of this year, that will start to creep up in the second half of the year, and that will explain some of the CapEx numbers in this quarter, which relate to adding both coverage and capacity and data capabilities in the second half.

And then, the only other thing to note is we talked I think in the release about, there are some shorter-term revenues, some switching revenues and the like that may -- should continue a little bit into the third quarter, but are not really long term and for probably will not be there in the fourth quarter, for example. And that, Barry, if I'd just preempt that question is about $1.5 million, we would say, of the sort of not long reoccurring revenue.

Okay. And could you share with us in the quarter what the CapEx was in that comment?

The majority, I mean, the US Wireless was -- it was about 25, I believe, it was. What was --?

About 30, 31 for the US.

The majority of that was Commnet or about 6 of it was the Alltel market.

Okay. And just last question, on GT&T, Michael, you mentioned in your prepared remarks the potential for regulatory change and how that could affect your local and long distance business. I think that's probably been the situation for several quarters, as it [didn't] change here into 2Q13, or do you expect any big movement from -- on that issue this year?

It's just become impossible to predict. I mean we keep working on that; we work both with the government, the President, and the rest of the government; and we're working with legislative leaders. We are believing that it makes sense to move on with certain changes to the telecommunications' regulatory environment there, and we're willing participants in that, and we just -- but it's really not in our hands, ultimately the timing of that. And then, of course, we have a contract that needs to be amended to take into account for that. So we are active participants in trying to make it happen. And we keep thinking it is close, but it's not fully in our control.

Fair enough, [that's good].

Hey, Barry, just to go back on the CapEx, just one of those numbers, the total US was like 26. Of that, 19 was the Commnet stuff.

19, okay. Thanks a lot, guys.

Sure.

Our next question comes from the line of Ric Prentiss with Raymond James. Your line is open.

Thanks, guys. Apologize joining you late from another call.

(inaudible).

How are you guys doing? I got a couple of questions, and I apologize if you answered them. In the prepared or in the press release last night, you talked about how Commnet had done obviously very well compared to what we were looking for. But it also mentioned something about short-term service revenue at Commnet. Can you add a little color on what is that?

Yes. We just answered that from the previous caller. It's about -- there was about $1.5 million of revenue in the quarter. It comes from switching and related fees that we see from time-to-time in that business, and they've -- they tend to come and go, and we think it will last into the third quarter, but not for the year. So it's a fairly short-term phenomenon.

And the $1.5 million in the 2Q13 should be a similar level in third quarter maybe?

Could be, could be little less, it's just -- it's hard to predict entirely, right. So we provide infrastructure help to various customers, and then it's up to them when they move off.

Okay. And then, it seems like the corporate/transaction line was a little heavier this time. Have you provided how much [was there]? I assume there were some transaction costs that are hitting you.

Yes, I mean there are -- most of that is the -- I think it's the non-cash, the stock comp too which was $1.2 million in this quarter, which is up from where our typical run rate on that is. And then, yes, we did have some kind of one-time legal cost that flowed through there as well.

Okay. And then, the stock comp should go back down more to normal levels?

No. That actually, probably will stay at about that level, I think, as we go. And some of that is the -- I think we've moved from more of restricted units from -- off of options in that. So we didn't get the price and expense.

And did you talk about the reduction in the CapEx, kind of where it was coming from?

Yes, did. And that is almost all coming out of Guyana, Ric, and is more probably on a timing issue that stuff going to get pushed into 2014.

And what were you -- what's the plan to spend in Guyana? Is it for broadband? Is it anymore with the international side?

The main part is in broadband data network, upgrade network, it's mainly related to wireline, and it can be lumpy, right. So we've -- we are on a -- periodically, we do larger upgrades to the wireline plant, and that's part of what's involved or what was anticipated.

There is also some -- we've been in the process of upgrading billing systems down there from similarly old legacy systems into new stuff that's flowing through there as well.

That makes sense. And then, kind of give us -- I know you probably can't tell us a whole lot about what you want to do with the money when it closes, but obviously a flurry of M&A in the US, actually kind of frantic. What are your thoughts as far as what valuations are looking like, and are there any attractive areas around the world as you look at -- or attractive sectors that might catch your eye as opposed to what you're seeing in the US?

Yes, I think in the US, quickly, I mean a lot of that is clearly spectrum need for the big, the Tier 1 carriers, and some shuffling around obviously with that. And so I -- it looks to me like elements of that will continue and it's not -- there is not really a seat at the table for us, because it's -- we don't have any real synergies with that. And looking around the world, I would say some sectors are more heated, but others are not, right.

So if you look outside the US, there are a lot of the bigger carriers have balance sheet issues, and therefore there look to be some potential opportunities outside the US. And then, in the US, we are investing a lot organically, obviously, both on the fiber side and on the wholesale wireless side, and we will continue to look for (inaudible) like that, that makes sense from a return perspective.

Or did you look around the world, probably still stick to kind of regions you've been in before or is it actually something that you would go further [or build] for?

I think it would have to be quite big, and we'd have to have the right partners to go outside of our historical regions of Caribbean, Bermuda, and the US small areas.

Great. Thanks, guys.

Sure.

(Operator Instructions) Our next question comes from the line of Hamed Khorsand with BWS Financial. Your line is open.

Hey, good morning, guys.

Good morning, Hamed.

First question is what's been going on International Wireless segment for you? It seems that for the last couple of quarters now, subscriber numbers have been flat.

Well, it's actually tale of two things. So International Wireless has been a good story for us. We've been improving revenues and profitability kind of across the board there, and there's a couple components of that. There is increasing subs in a lot of the wireless -- [high-lended] markets. There was the Bermuda integration, and cost improvement, and there is, as Justin mentioned, I think in his remarks, there's a little bit of, kind of, in somebody's markets would kind of tipping the scale now, where we're starting to get operating leverage.

So we're starting to see the cost, the revenue flow at higher margins down to the bottom line to start to improve it. And we've got aways to go there. I don't -- I wouldn't say it's fully rosy. We've got aways to go in a lot of those markets to be where we want to be. But we're -- it's been nice growth.

And then, on the other side, in Guyana, the sub-number, which is a larger sub-number overall, it's been down a little bit, not a lot. It's been down a little bit, but that hasn't really impacted margins, because it's really been weeding out some unprofitable subscribers and practices. And so the -- again, the cost discipline has worked in our favor there. So I would say, we're fairly pleased with International Wireless. There's -- we always would like to see better and hope to do better, but it's been a decent story.

Okay. And what percentage of the CapEx in legacy wholesale is now generating revenue for you?

Well, the CapEx in the second quarter is not really -- very little of that would be generating (multiple speakers).

Yes, probably very little.

So there weren't any like new base stations or anything like that put into place?

Not many.

Oh, yes. We have small uptick in base stations on a large uptick in CapEx. but most of that is work in progress, if you will.

Okay. And when -- are you going to be adding anymore base stations to that segment?

Yes. We expect to add base stations by year-end, maybe into 2014.

Okay. So it's more like a 2014 revenue [momentum]?

Yes, it might start to benefit us a little bit before that, but yes.

Okay, that's it from me. Thank you.

Alright. Sure.

Okay.

I'm not showing any further questions in queue. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect; and everyone, have a great day.

Thank you.

Thanks.