ATN International Inc (ATNI) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Atlantic Tele-Network third-quarter earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session with instructions following at that time. (Operator Instructions). As a reminder, this conference is being recorded. Now I will turn the conference over to your host, Chief Financial Officer, Justin Benincasa. Please begin.

Good morning, everyone, and thank you for joining us on our call to review our third-quarter 2013 results. With me here is Michael Prior, ATN's President and Chief Executive Officer. During this 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 reconciliation 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 the 8-K filing provided to the SEC.

And I will now turn the call over to Michael.

All right, thank you, Justin. Good morning, everyone, and thank you for participating in today's call.

Looking at the strategic highlights first for the third quarter and the first nine months of 2013, first we closed on the sale of our domestic Alltel assets for proceeds of about $804 million. That is subject to a final working capital adjustments, and it represents a net gain of $504 million pretax. This is as transformational a transaction for ATN as was the purchase of the Alltel assets in April 2010, and it gives us the resources to take advantage of market opportunities to build upon the substantial value created by the investment.

Importantly, our remaining operations are performing well. Our domestic wholesale business is benefiting from higher traffic volumes. Our international wireless business is growing revenues and benefiting from additional scale and our wireline business is finishing up a major expansion of a middle-mile fiber network in the rural northeastern US.

And there are several areas within our existing footprint where we see potential for future growth and revenues and/or operating profitability, and we are making the requisite investments to cash in those opportunities. Whether we are reinvesting in our existing businesses or evaluating acquisitions or new ventures, you can be sure that we will remain disciplined in our criteria, but flexible in the structuring and timing of potential transactions. We are always actively looking for ways to grow.

So moving on to a closer look at the performance of our continuing operations, I will start with our domestic wireless business. As reported, US wholesale roaming revenues were up 13% year on year to nearly $33 million in the third quarter, which is typically a seasonally strong operating period for this business, and we don't see any exception this year. But even more important, we estimate that revenues were up about 25% year on year if we exclude the results from the Midwestern properties we sold late last year. This is clearly excellent performance.

To illustrate, last year at this time, we had about 659 -- well, we had exactly 659 base stations in service compared to 579 this year following the sale. So to absorb the loss of revenue from all those base stations and still grow at a double-digit rate is quite an achievement.

Our domestic wholesale business is benefiting from increased data volumes and to meet the growing data demand and generate increased revenue, we are continuing to expand capacity, coverage and capabilities in certain areas. In particular, we are in the midst of taking a number of remote 2G sites and upgrading them to 3G technologies.

So keep in mind that the growth in volume is not all to our benefit. We have lowered unit prices on data traffic and are committed to further reductions going forward. This will clearly offset some of the benefit of the volume growth, but we still expect to see overall reasonable returns for our recent and ongoing network investments to handle that growth.

Also, just to mention, we launched a very small retail wireless business in the US a year ago in areas served by our network where there is typically little or no retail presence from other carriers. This is a nascent, no-frills business with appropriately low costs, but our folks have done a very good job providing an excellent product to the underserved segments in these very sparsely populated markets.

Moving on to international wireless, the revenues there continued to increase, posting 9% year-over-year growth for the third quarter and 10% growth in the first nine months of this year. Each of our international wireless operating units achieved solid year-over-year revenue gains due to a mix of growing market share and increased ARPU due to data growth. At the same time, profitability is benefiting from the increased scale of these operations and are focused on cost containment. But we still have more to do in many of the individual markets with some markets underperforming and others performing at a very high level. Across the board in this area, we continue to look for ways to add scale to these operations to boost growth and improve margins.

In wireline operations, as reported, total wireline revenues increased 1% to $21.5 million, benefiting from the continued growth of our domestic wholesale long-distance voice services and higher broadband revenue in Guyana.

More specifically, in the US our traditional facilities-based business in the Northeast had no overall revenue growth. While wholesale wireline revenue such as carrier backhaul showed strength, there has been heavy pricing erosion in the enterprise market. But revenues from this business should get a boost in 2014 with our expanded fiber network coming online.

A recent initiative of ours that I alluded to before is to service more of our long-distance traffic internally and to leverage this capability by offering it on a wholesale basis to customers. And this added substantially to U.S. Wireline revenues and also provided a small boost to overall profitability. It's not a large addition at this point to the operating profit because, like all those businesses, it operates at fairly thin margins. But it's a pretty nice example again of a successful but somewhat contrarian initiative by our team.

In Guyana, our investment in our data capabilities is paying off with steady broadband revenue and customer growth. DSL subscribers grew over 30% annually. On the other hand, the voice side of the business in that market, both local calls and international calls, remains on a downward slope. Local minutes of use in Guyana have fallen 30% year on year. We believe that once there is a new regulatory regime in that country, our long-distance revenues are likely to take an additional hit with the loss of so-called exclusivity, but we would hope to see an increase in local calling revenues at the same time.

So to sum up, this was another there he good quarter overall and one in which the rate of operating profit growth significantly outpaced revenue gains. And this performance, I think, reflects our ability to work within our existing cost structure as we look for ways to grow our domestic wholesale and international wireless revenues.

You also heard me refer to two nascent businesses within our current organization, a small retail operation out West and a small wholesale operation in the Northeast. Neither is likely to move the needle in the short term, but they are implemented of the innovative, can-do approach we have within our Company.

In terms of the use of funds following the ALLTEL closing, we are actively looking at several opportunities and we are working hard to remain tuned into developments and emerging trends in our broad industry category, both domestically and internationally.

And lastly, I don't want to lose sight of the successful closing of the ALLTEL transaction near the end of the quarter. There was a lot of work involved in obtaining regulatory approval and completing the other closing requirements. And both our corporate team here and the leadership group in Little Rock performed at a very high level to bring about the close and prepare for a smooth handoff of customers, networks, systems and employees. That is much appreciated.

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

Thank you, Michael. As you can see in our financial statements, this quarter has several unusual items primarily related to the sale of our ALLTEL business that Michael mentioned closed in late September. I will try to call out each of the relevant areas as I move through each section of the financial statements.

Also, note that we posted our results from continuing operations for each quarter of 2012 and the first two quarters of 2013 on our website. These are unaudited figures so they are subject to slight reclassifications, but we thought the information would be helpful.

Looking first at continuing operations, as Michael noted, the drivers of the third-quarter results were similar to those of the second quarter. Revenues for the period were $79.4 million, up 8% from the same quarter in 2012, keeping in mind that this is traditionally the seasonally strongest quarter for our wholesale roaming business. Adjusted EBITDA was $35 million, up 22% over the same period last year, resulting in an adjusted EBITDA margin of approximately 44%, and that's up from 39% in 2012.

Moving down the income statement, this quarter's operating income from continuing operations was $20 million, up 24% year on year, which included $2.6 million in transaction-related charges and $926,000 of non-cash stock-based compensation expense. Interest expense for the quarter was $7.1 million, inclusive of a one-time $4.7 million write-off of deferred financing costs associated with the extinguishment of our outstanding term loan debt with the sale of the ALLTEL -- with the ALLTEL sale proceeds.

In the quarter, we also recognized a $5.7 million loss on our outstanding interest hedge contracts as they were no longer considered effective hedges with the payoff of all our outstanding debt. We subsequently terminated those contracts for a similar cash expense in October.

Earnings from continuing operations for the quarter were $4.5 million or $0.10 per share compared to $9.1 million or $0.48 per share reported in the third quarter of last year. Our effective tax rate was 35% for the quarter and 38% year-to-date, which continues to reflect strong pretax earnings in our lower tax jurisdictions such as Bermuda.

Below reported income from continuing operations is the loss on discontinued operations, and that reflects all the operations of the ALLTEL business for the quarter collapsed into one line and then the gain on sale recognized on the ALLTEL sale. The gross gain on the sale, as Michael mentioned, was $503.6 million and is recorded net of a tax expense of $198.4 million.

Turning to the balance sheet, as of September 30 we ended the quarter with cash and cash equivalents of $594.3 million plus an additional $78 million of restricted cash being held in an indemnity escrow account as part of the ALLTEL sale agreement, for total cash balances of approximately $672 million. Assuming no claims against the escrow are made, this restricted cash would come back to ATN at 25% after 180 days, 25% after 360 days and the remaining 50% after 18 months. The 50% after the 18 months, or $39 million, is recorded as long-term restricted cash. As we noted in our press release, we anticipate a tax payment related to the gain on the ALLTEL sale of approximately $250 million along with distribution to minority stockholders of that business of $28.7 million. The tax payment is expected to be made by the end of 2013. And needless to say, we feel that we are doing our part to eliminate the nation's debt.

For the quarter, capital expenditures from continuing operations were $15.5 million, of which approximately $4.4 million was incurred by our US wireless wholesale business, $3 million was by our international telephony segment and $4.5 million at our U.S. wireline segment as we continue to near completion of our fiber network builds in the Northeast. Nine months capital expenditures were $55.2 million, and for the full year 2013 we expect capital expenditures from continuing operations to be between $70 million and $80 million with roughly half of that being incurred by our domestic wholesale roaming business.

And just some additional operating data for the quarter -- Michael already pointed this out, but we ended the quarter at 579 base stations in our US wholesale wireless territory. MOUs within those markets, adjusted for the Midwest sale, were up 15% from last quarter but down 8% from Q3 2012. Data traffic was up 37% from last quarter and up 92% from the same quarter last year.

In the US wireline segment, business lines increased 61% from a year ago and 9% from last quarter, ending the quarter at approximately at 160,400 access line equivalents. And then internationally, access lines remained consistent at about 150,000 lines.

So to sum up, our continuing operations continue to perform well. And pro forma, the ALLTEL tax bill in the minority distribution, we have over $390 million of cash and no debt, which leaves us, we feel, with a significant amount of financial flexibility as we move forward.

And now, operator, we would like to open the call up for questions.

(Operator Instructions) Ric Prentiss, Raymond James.

A couple of questions. First, congrats on the ALLTEL transaction, nice victory lap on that one. I had one closing question on that one. Nice to see the FCC was able to get back to work and get the deal approved and closed. It did take a little longer than people might have first thought, but there were no divestitures, no spectrum divestitures, no subscriber divestitures. What kind of market share did you have in the area? Just trying to gauge what the FCC is comfortable with these days.

Yes. I don't have that off the top of my head. I'm not sure whether we can provide that, but maybe --

Maybe not to the decimal point, but was it greater than 20%, in the teens, in the single digits? Just kind of give an order of magnitude anecdotal kind of thought.

I think the way to answer that from an anecdotal standpoint is that in those markets, overall Verizon was much larger than us. But more importantly, AT&T typically had a very small market share. And in some of the more interior markets, they had virtually no presence. And so that's why this is an unusual transaction, and it really filled a hole nicely for them in terms of network and retail presence.

And so we felt that that's why it always should get approval and would make sense. So I think the facts were different than some of the other transactions you would see out there, or at least potential transactions.

Sure, that makes sense. And then you mentioned that you are starting to do that 2G to 3G upgrade at some of the Commnet sites. Are you putting in multimodal base stations? And why not go ahead and add 4G LTE if you have the spectrum available in those markets?

Well, I think the 4G LTE, in some cases it would be a relatively easy upgrade for us, although in some cases you are right that to put it in now without the traffic on it wouldn't make any sense and we don't always have excess spectrum to do so. But in some cases, the upgrade will be fairly easy when the demand is there, and in some cases it will be harder.

But right now, our partners are not necessarily looking to create 4G capabilities in those markets. They are just really remote markets. We do have -- we have deployed -- we do have a 4G and LTE core and have deployed that in one of the stimulus-funded projects we are doing, a small-scale project where we are using it more as a broadband to the home product. But the core is there and so the capability is there to expand.

And just as we have been listening to the carriers report, we have seen, particularly on Verizon, north of 30% on the LTE customer base already. So it seems like it is ramping up quickly, the 4G LTE sub base.

Right. And it's just a decision for the carriers to make in these areas to what extent they want to do that for customers. And I think it will get there, but these areas tend to lag. And a good example of that is in a lot of these areas, we are just adding 3G. Right? And for them, it's they want to provide the customer experience there, but they don't want to incur extra cost and they think that 3G capability is adequate for these markets.

I think in some cases, they probably should do it, but it's just -- we are really driven by their priorities.

And then my other question is, you mentioned you are actively looking at several opportunities, domestic and international. Obviously not appropriate to tell us too much, I would expect. But can you just help us a little bit about what sectors, regions are interesting, cable, data centers, fiber, long-distance, just kind of macro thinking? Given where valuations have gone also, there has been some high prices out there on some deals. Where is there potential interest?

I think a number of the areas you mentioned are of interest to us. So fiber is an interest to us. We are obviously in that business, can evaluate it, can bring some value add. And we are doing some of that organically, obviously.

But I also have seen what you talk about, too, that some opportunities look awfully pricey. We have looked in areas tangentially, just talking about market segments as opposed to geographies for now. We looked at some areas that are slightly tangential, like some of the cloud services, cloud infrastructure type things. And for the most part, we haven't been able to get our heads around valuations. And that doesn't mean the valuations are too high, necessarily; it could just mean we don't know enough. But we have found that area harder but keep looking.

We like the concept of adding that capability to areas we are in and we are intrigued by the idea of providing more services to large carriers, infrastructure-related services. So we are always looking at that.

And in terms of more retail, that starts to be more geographically driven. And I would say there's -- we continue to look in the broad US, rural US and in the Caribbean. We have entertained things further afield but haven't found something compelling enough to make us do a really deep dive. And I think that the retail opportunities are few and far between, just to build network and want to be a retail player. There are just not many geographies where there aren't very large players, consolidators already in them and where it just doesn't seem like the competitive environment fits our requirements.

So I don't want to leave with that to say we don't see any opportunity out there. I think there always are opportunities. You've just got to stay disciplined and keep looking until something fits your target. And I feel fairly bullish about us finding something before too long. But as we've said many times about this, you can get very close in certain things and walk away because it doesn't meet your criteria at the end. So it's very hard to predict the timing.

Sure, great, thanks.

Barry McCarver, Stephens.

First off, on the Commnet business, I know you talked about the upgrades. But just more broadly, any plans on expanding the base stations in the 4Q or early next year? Is any of that CapEx dedicated towards projects that might be coming up?

There is. We had said that roughly half of the guidance we are giving is related to that business. And there has been -- a large piece of that in growth CapEx, if you will, which are additional base stations and -- as well as we talked about, the technology upgrades.

And are any of those projects generating revenue in 4Q, or is it probably 2014?

I think they will start to come on -- some will start to come on in 4Q, yes. The good thing about those is it's not all -- we can turn them on as we go.

Secondly, switching over to the international business, broadband revenues in Guyana -- it seems like every quarter we see some improvement there. Can you give us a little color on what penetration is like for you in that market and what is the remaining potential upside in the near-term for that business?

There is not great data in that market on households, like you would get in the US. I guess I would estimate that we are somewhere around 20%, 25% of households broadband penetration. But I don't think the penetration rates will approach US, obviously. That may seem very obvious to say, but just to make it clear, I don't think they are going to get anywhere close to the US in terms of fixed broadband.

I think there will be more penetration with mobile broadband over time, which is very limited in that market at this point, chiefly because there's not -- the government hasn't released spectrum to us or a competitor, really, to do that.

Okay, and just lastly, would you remind me what are the covenants around the restricted cash from the ALLTEL deal?

25% of it comes in 180 days, another 25% at 360 and then the last 50% at 18 months.

But is it an earn-out or is it --

No, it's a typical escrow to back up reps and warranties in the agreement.

Okay, that's what I thought, thank you.

Hamed Khorsand, BWS Financial.

I just wanted to get an explanation here as far as the strategy goes, given where you guys are operationally in the businesses you have. Are you guys going to let these just put in minimal CapEx and let them grow out? Are you going to use the cash balance to build out what you have? Can you go into a little bit more detail there?

Well, I am not sure what more I can say, but let me try this. We are, as we referenced, investing in a number of our existing businesses, and we are looking at other possibilities there. To date, I wouldn't say that those are going to wildly exceed the cash produced collectively by those businesses. So in order to deploy more -- and eventually, of course, it's always nice to use the benefit of your balance sheet and have some leverage as well. So I think our ultimate capability is larger than the cash on hand.

It probably -- it will require some new opportunities. We really can't see today a way to deploy that in our existing operations on an attractive level; maybe some piece of it, but certainly not the bulk of it. So it's what we have done before and we can go quite long periods without finding something that fits our requirements, and then we can go through a flurry where we find a few things or have a very large opportunity. And part of it is, you can't make the market come to you -- go where you want it to go. You have to be patient if there is an area you like but you don't like the values. You just have to wait and look elsewhere.

So in answer to Ric Prentiss before, there are some areas that certainly on a piece of paper, say those are attractive businesses. But then we look at values and we say seems pretty fully valued, not sure if we can get the returns that we would want.

Isn't it cheaper just to consider building out what you want, in some cases?

In some cases, yes, there may be markets, and we do look at opportunities. We always look at opportunities for greenfields. I think they are much more limited these days in the classic area. But as noted, we have done some of that in our existing businesses and are in the midst of it. So when you do a greenfield in a completely new area, it just requires more work. We like to go into new areas with people who understand the segment or understand the geography or have some skin in the game related to it. That's our preferred way to do those things. And we look at those opportunities.

Okay, and just from the island business itself, do you think the scale that you have reached in Q3 is sustainable, or was it just seasonally impacted by just being the summer time?

I think there is some seasonality to that. I think each of those islands has a different market. I think Bermuda probably had a little bit more seasonality to help it. But I think we feel it's somewhat sustainable.

Okay, and then on the U.S. wireline business, you were talking about wholesale being the contributor to the sequential growth there. Is that a profitable business for you yet?

U.S. wireless wholesale?

No, the U.S. wireline.

Yes, it's marginally, but it's not a big number but it is profitable.

And my last question is, just going forward, your expected tax rate, in the 35%-40%, is that what I should look at?

Yes, I think I would use the year-to-date number more, like the 38%-40% kind of range. And I think I've said in the past that a good modeling number is probably 40%, and I think I still will stand by that.

Our goal is to get Apple's tax rate, but I don't know that we will get there.

All right, perfect, thank you guys.

(Operator Instructions) Sergey Dluzhevskiy, Gabelli & Co.

I had one more question on your M&A philosophy and investment opportunities that you are looking at. As you evaluate various options, what are your thoughts on investing in cable either in the US or internationally, maybe in the Caribbean or Latin America? Obviously, in the US here we've had some telecom companies diversified into cable, and in Latin and Central America, we have seen Millicom trying to buy cable companies. So what are your thoughts on cable in general?

And second question, maybe you could provide more color around the small retail business that you are building and what kind of scale you are targeting initially.

On cable -- so by cable, I'm guessing from that you mean video plus broadband and so on.

Right.

Typical triple-play cable. We have looked at that occasionally, and what I think, though, is that in developed markets, our size means we have a real competitive disadvantage on gross margin, just because of programming costs, because it's very hard to get those deals if you have any kind of competition that has a larger scale. So that has made us wary of it in the past.

And then in a lot of the areas where we have wireless businesses, even where there looks like the competition is not significant in terms of large-scale operators, you have the problem of small competitors who pay very small rates for programming because they are basically not licensing a lot of it. So it's very hard to compete with free, as someone famously said, but it also eradicates any potential cost advantage we might have.

So we have had a hard time finding it. And I would say also it's partly that we are cautious about it because we are not -- we don't have a lot of expertise in the video area. So it hasn't been something that we have pursued hard.

And I would say the last thing to add is where it has some combination with the wireless opportunity as well, that made it more attractive if it's part of a really big bundle.

And then your second question on the small retail business in the US -- we really didn't have any goal of what size we wanted it to be. It really was an initiative from our guys out in the field who said, look, there's a real -- there's a segment here that is just not being served, so maybe we can address that need.

And we have already got network up.

Right. And we were somewhat skeptical, to be honest, here that it would be worth it. And so we put a very tight cost filter on it and it has performed very well. So we are just riding it to say, if there is a need there, they will come as long as we keep a very close eye on not getting ahead of ourselves in terms of cost structure, I think we will just see where it goes.

I don't think it's going to be, on an overall basis for ATN, a big business. But it's a nice business and I am very proud of the people executing on it. So it's a very -- I like the spirit.

Thanks.

I'm showing no further questions at this time. I would like to turn the call over to management for any closing remarks.

Thank you, everyone. We will talk again in a couple of months. Take care.

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