ATN International Inc (ATNI) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Atlantic Tele-Network 2014 Q1 Earning 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 be given at that time. (Operator Instructions.) As a reminder, this conference call is being recorded.

I would now like to turn the call over to Justin Benincasa, Chief Financial Officer. Sir, you may begin.

Great. Thank you, operator. Good morning everyone and thank you for joining us on our call to review our first quarter 2014 results.

With me here is Michael Prior, ATN's President and Chief Executive Officer. And as usual 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 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 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 I'll turn the call over to Michael for his comments on the quarter.

Thank you, Justin. Good morning everyone. As usual, I will start with some highlights for what proved to be an excellent quarter for ATN starting with U.S. Wireless. U.S. Wireless had a very strong quarter showing promising returns on the capital we have spent over the past year in order to expand our mobile broadband coverage and capacity.

That being said, as we noted in the press release, we used the word exceptional deliberately. We don't expect to see year-on-year growth rates in this segment at anywhere near these levels in subsequent quarters this year.

And there are other areas of strength as well, improving margins and revenue growth at a number of our smaller wireless properties and revenue growth in U.S. Wireline.

So let me get into a few more specifics after that, starting again with U.S. Wireless. U.S. Wireless generated 34% revenue growth in the quarter. The driver of this increase as we noted was markedly higher data traffic volumes. And digging a little deeper into that, the growth in data volumes was due to a combination of three factors. First, upgrading our capacities and 3G capabilities. Two, expanding our coverage and number of sites and service. And third, the general industry trend of higher usage per customer, data usage that is.

Let's put some hard numbers to that. Megabytes billed expanded by about 115% year-on-year and we increased our 3G base stations and service from approximately 20 last year to 220 this year.

On the other end of the spectrum, sorry for that pun, voice minutes declined by 7% from a year ago. And as we said, we expect the data traffic increase to be largely offset in coming quarters due to expected declines in the rates we received from carriers per megabyte. And therefore we expect the next couple quarters to be flat to slightly positive year-on-year. So despite likely continued expansion of the data traffic volumes, we would expect year-on-year wholesale revenue growth then to be reduced.

And these rate reductions, going back to the pricing reductions, the thing I would note there is they're to be expected and in fact they're an important part of how we manage our relationship with our biggest customers and our value proposition. As they put more volume on our network, we can continue to lower rates so that our solution remains one that fits their strategic outlook and internal cost benefit analysis.

Our offering is essentially a lease versus own solution in areas where owning confers no strategic benefit to the carrier and certainly should rank well below in returns and positioning compared to other potential uses of their capital.

So moving on to international wireless, revenues there also grew nicely, up 8% over last year. And revenue growth was a function of both subscriber and [RPU] growth across most of those markets.

Operating margins in our Island Wireless business also improved as a result of growing economies of scale in each of these markets. On the other hand, there's still more work to be done in order to bring all of these operations to solid sustainable profits and cash flows.

In wireline operations, total wireline revenues were up as well following a number of flat quarters, so that was good to see. And I think it was largely the case of a shifting mix with some of the areas of strength such as U.S. wholesale wireline revenues and international broadband revenue growing in comparison to the areas of weakness and decline, such as international voice and legacy CLEC revenue.

So last, as you may have noticed, we are still sitting here with substantial balance sheet capacity. We continue to be very active in the market but have run into a few disconnects between seller's expectations and ours. That can be frustrating, but it's part of the deal world and it doesn't concern me unduly. And I would also add that we remain confident that we will uncover the right opportunities if we stay patient and are creative in our approach.

In summary, for ATN overall this was a very strong quarter and one that demonstrates the solid performance that we can achieve with our existing businesses. While it'll be hard to replicate the first quarter growth levels as the year goes on, we are investing in areas that build out our footprint and leverage our existing infrastructure as we look for other more strategic opportunities to expand.

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

Okay. Thank you, Michael. For the quarter, total Company revenues were up 15% to $75.2 million which reflects year-over-year growth across most of our businesses. Revenues in Guyana were reduced by approximately $450,000 due to a roughly 2.5% devaluation in the local currency which is the first since 2004.

Adjusted EBITDA for the quarter increased 23% to $28.2 million and our adjusted EBITDA margin was 38%. In addition to the strong performance of our domestic wholesale business, overall margins have been helped by our Island Wireless segment, which has continued to post margin expansion over the last several quarters as we have grown subscribers and revenues.

Moving down the income statement, this quarter's operating income was $16.2 million, up 35% from the same quarter in 2013. Operating expenses this quarter included $1.1 million of non-cash stock-based compensation expense compared to $0.8 million in last year's first quarter. Net income from continuing operations for the quarter was $7.8 million or $0.49 per share compared to $0.31 per share reported in the first quarter of last year.

Looking at the balance sheet, at March 31 we ended the quarter with cash and cash equivalents of $411 million, which includes almost $59 million of restricted cash which is primarily related to the indemnity escrow account as part of the Alltel sale agreement. This quarter's cash -- ending cash balances now fully reflects all the tax payments related to the Alltel sale.

Capital expenditures for the quarter totaled $8.7 million of which approximately $5.3 million was incurred by our U.S. Wireless wholesale business and $2.2 million was incurred by our International Telephony segment. We expect capital expenditures for the full year 2014 to be similar to 2013 levels at $65 million to $70 million and roughly half that total will be allocated to our domestic wholesale roaming business, again comparable to what we spent in 2013. As we've previously mentioned, we've been investing in both technology and network expansion in this segment and remain confident that we'll continue to see solid returns on our investments.

Some additional operating data for the quarter. We ended the quarter with 605 wholesale-only base stations in our U.S. Wireless territories. We believe the wholesale-only number is a better metric for this business as it doesn't include any base stations related to the small retail operations within the segment. The 605 reported this quarter compares to 599 wholesale-only base stations at the end of last quarter and 567 a year ago.

International wireless subscribers totaled 323,000 at the end of the quarter. And our U.S. Wireless segment business customers decreased 8% from a year ago to approximately 2,600 customers.

Internationally, fixed lines ended 2013 at approximately 157,000 access lines and DSL subscribers ended at 38,000, which is up 20% from a year ago.

And with that, operator, I'd like to turn the call back to you for questions.

(Operator Instructions.) Our first question comes from the line of Ric Prentiss of Raymond James. Your line is open.

Thanks. Good morning guys. I had a couple of questions. First, obviously pretty impressive margin expansion in the Islands. Historically I think the seasonality though could be even higher in the next two quarters and come back down in the higher seasonal selling quarter, fourth quarter. Are you expecting to see a traditional kind of -- with the margins up in 1Q that they could go up in 2Q, 3Q with seasonality?

I think most of the seasonality, Ric, is really in the quarter we just ended.

Okay.

Right? But I do think though as we've grown revenues, I think we still could see margin expansion in the sense that we've kind of now, as we grow revenues we're able to convert those down into profits at a much faster pace just because we've kind of gotten over the fixed cost hurdles.

Yeah, because if you look back like at '13, obviously it's a mixture of different islands at different stages of their life cycle, I think last year on a service revenue basis Islands went from like 29.5% to 33% to 38% down to 27% throughout the year, so I was just thinking we might see some tick up in 2Q, 3Q.

Well, I mean one aspect it's true. The fourth quarter is generally -- that has more of the negative seasonality. So what you have is there's a mix. Bermuda is an example of one where the second and third quarter tend to be stronger and that's a bigger one. But then in some of the other markets, the first quarter's stronger.

So as the mix shifts as we grow revenues in some of those other markets, it will mute that seasonality a little I think.

Okay. And then the second question, you mentioned the wholesale-only base stations. As you think through the budget for this year, FX budget, how much of the base station purchasing, the CapEx, and (inaudible) is going to the wholesale business working for the small retail business?

Most of it's going to the wholesale business predominantly. If you -- we've kind of talked about it in the past. I think if you'd taken that $65 million to $70 million, you call it half of that is related to wholesale. The lion's share of that half is then really focused on the wholesale business.

The retail -- you mean U.S. Wireless not just wholesale?

U.S. Wireless wholesale. Yes.

So the retail business is a nice add-on but not a lot of capital investment.

Okay. And then final question on the U.S. wholesale business. You mentioned that obviously strong in the first quarter but price cuts coming so that the future quarters should be flat to slightly positive year-over-year growth rate on the revenue line. What should we think about on the cost line because you have been adding more base stations probably more backhaul than the 3G?

Yeah. I mean I think you're right. The costs are higher. The operating costs are higher with -- related to data traffic then voice for the reasons you've said. It's mainly backhaul. That's the main difference. And there can be increased tower rents too as you add more up on the tower.

I mean you can see that somewhat already in the year-over-year termination and access charges.

And is the expectation that the 220 3G base stations now out of 605 wholesale, that that number will continue to go up as part of the CapEx spending, is it continuing not just adding sites but increasing the amount of 3G?

Yes. Absolutely, Ric. That's our expectation.

Okay. Very good. Thanks guys.

Thank you. And our next question comes from the line of Barry McCarver of Stephens Incorporated. Your line is open.

Hey, good morning guys. Good quarter, and thanks for taking my question. Following along the lines on the U.S. Wireless business, can you give us a little more color on how the rest of the year's going to roll out and trying to be a little bit more specific on the pricing that you're talking about in order to remain competitive and keep those carrier relationships? Are we nearing break points is that something that you just kind of have to wait for it to come?

Well, you know we're obviously not going to give out specific pricing, but I think that it's -- we definitely see some areas of significant price declines because otherwise you wouldn't be offsetting growth rates at 34%. You wouldn't -- it'd be hard to put a big dent in that without fairly significant price declines.

And I think that really from there it really depends on volumes. So if volumes continue to grow, we'll have to continue to figure out ways to lower prices.

But nothing (technical difficulty) quarter, just roll out through the year?

Nothing -- well, I think we think it will probably impact the next two quarters and then there could be some countering in terms of the continued build benefiting by the fourth quarter.

Okay. That's helpful. And then on the international wireless business, we've seen pretty nice sequential revenue, very steady growth up until this quarter of pullback a bit. Can you talk about what's going on there on the revenue line?

Say that again, Barry? I missed the very first part.

For international wireless, sequentially revenue was down. That's been up for eight quarters in a row, pretty steady slow growth. Why was it down in 1Q?

I think some of that might have been related to the fourth quarter had kind of a blip in the Guyana market too. So I think if you looking at it compared to the fourth quarter Guyana, that was kind of a one-time event in the fourth quarter that we had. So that's probably -- I think other than that it's been fairly steady.

Yeah, and I think the year-on-year trend is more accurate.

Oh, okay. That's what it was. All right. Thanks a lot.

Yeah. Yeah. Last quarter, yeah, it had the one-time event.

Okay. Thanks a lot guys.

Thank you. Our next question comes from the line of Hamed Khorsand of BWS Financial. Your line is open.

Hi, good morning. Just want to ask, what I'm trying to understand here on the Island side is sequentially revenue was only up about $600,000. So what's the scale or what's driving the profit margin because it seems out of proportion with the revenue increase?

It's just, as Justin said earlier, it's a couple things. So over the fourth quarter you do have a benefit of the seasonality of roaming, which will boost profit margin. So when you're comparing first to fourth, that's a factor in those markets.

And then the other point though as Justin noted is that in a number of these areas we're kind of cresting above fixed cost, so we've got some smaller operations there where we're really starting to go above that line where every dollar of revenue kind of disproportionally falls to EBITDA. And that's really what's doing it overall. That's the trend overall.

Okay. And then on the U.S. wholesale side, do you still think there's enough opportunity to expand that business further?

Yeah. I think we think that there is opportunity in the near term. And as we said at the end of the year, we talked about this year going forward we saw opportunities we didn't -- didn't expect quite the jump we saw this quarter. And as we talked about, we had some -- there's always a little bit of lumpiness in this business, a little bit of step function with the way pricing works, but we're continuing to build and we wouldn't be building if we didn't think there was opportunity.

Yeah, I mean we did not build that much in 2010 and 2011, and then last year and this year we see good opportunity.

Okay. And as far as the build schedule, when should we see the biggest amount of CapEx spend there? Or is it just going to be --?

It's lumpy. I don't know if you can -- it's just lumpy. It's going to be -- traditionally this quarter is always a slow start, but it's usually the next couple of quarters and in the fourth quarter. So as the weather picks up, et cetera.

Yeah. To be more specific, I think second and third quarter should be significant at least in that segment.

Okay. My last question, was there any update on your two stimulus projects for the U.S.?

No. I mean we have no specific update there.

Okay. Great. Thank you.

(Operator Instructions.) Our next question comes from Ric Prentiss of Raymond James. Your line is open.

Hey guys. A couple of follow-up questions if I could? We've got auctions are all in the news these days with both the AWS-3 auction coming up this year and then the broadcast auction some time middle maybe slipping to fall of '15. What are your current spectrum positions and what are your thoughts about participating in those auctions, particularly as the FCC is trying to I think take care of smaller operators in those auctions?

Yeah. I think we've been very involved and at least active observers of that process and involved as well. In some of the really rural areas we are in, I think we provide a very good industry-wide shared infrastructure service. And to continue to do that we definitely need to augment spectrum over time. So we're very interested in that.

So we have enough spectrum to do what we're doing today but no carrier feels that that's adequate given the growth in data. And these areas are so sparse that techniques such as cell splitting, which for those on the call who don't know what that means, it just means splitting the traffic between multiple sites, adding additional sites because you don't have the spectrum capacity. That's harder to justify in most of these areas. It just could turn the model upside down.

So getting spectrum is definitely important to us. And we've picked up spectrum here and there over the years, but we look at these auctions very carefully to see if there's opportunity for us.

And also safe to say the broadcast auction being low frequency might be more of interest than the AWS given that it's mid-frequency bands?

Well, yes. I mean the low frequency is better in these very broad and sparsely-populated areas. It's generally better, but I wouldn't discount the value of AWS too. I mean that also has value.

Okay. And then (inaudible) from (inaudible) was at the CCA meetings not that long ago and talking about how he wants to work with regional carriers and smaller carriers kind of to fill in his white space. But some of that also implies need to spend on 4G. Can you just update us on what the CCA is looking at? I know you're very involved there and what it might mean for you guys?

Well, I mean I think there are -- different carriers have different positions there and I don't want to speak to anything really specific or private to Sprint, but I think the kind of natural view there is if you look at Sprint, they're looking at their coverage, particularly in rural areas, and seeing significant gaps. And so I think they're talking to a lot of the carriers there about solutions.

So CCA is really just trying to I think as an organization help -- have members help each other where it makes sense and kind of put people together. And I don't think it's -- if you look at what's out there, there's people. Verizon I guess has done the plan they did with some of the carriers in rural LTE. AT&T has done some stuff with carriers. I mean I think a lot of -- so it makes sense to me that Sprint would look to do that at some point.

And they're not a very large customer of you guys today I don't think?

No, they're not.

But could get bigger over the next couple of years then? I'm just trying to gauge -- it did seem like when we were meeting with Sprint yesterday at their New York event, and they definitely are interested in looking at that roaming cost and the roaming provision in the white space as they call it.

Yeah. I think if they get really strategic about it, honestly the big two carriers to my mind have been much more strategic about using roaming as kind of a shared infrastructure solution where, as I said in my remarks, it doesn't really help them strategically to have network in areas where there really are very few subscribers. So if they can spread the cost out across the industry, it makes a lot of sense to spend your money places where it's really going to make changes in market share or drive new revenue stream.

So I view it as -- I mean I think it's a breath of fresh air that Sprint is getting to that point too and they're saying look, we can -- this is -- we've got to have strategic priorities. And that's the way I look at it. Not being privy to their inside thinking, and we would definitely like to be part of the solution. I mean the more we can put on it, the more attractive we can make the solution because then we can find ways to further lower the costs.

And it's the same I talked about earlier. As we're able to get more traffic, we'll find ways to lower the cost and make it even more attractive.

Makes sense. But 4G LTE in your market is still out a couple of years you think, as far as the --?

Well you know, it's hard to predict the exact timing. It could happen faster than we would have thought a short time ago, but it -- as you know and as we've said before, it really depends on the tier one carriers wanting it. When they want it, we will build it.

All right. And final question on the M&A side. As you look at the different possibilities out there, is it possible that an opportunity that would be negative EBITDA but good turn around potential would be of interest to you?

I think we don't look at -- I think yes is the short answer because we're really not that focused on what's the immediate pop from an investment. We're focused on long-term returns. And if we believe we're going to have strong returns on invested capital and to do that we have to have a few -- kind of a trough first, it's really all part of the investment if you think about it that way. So sure, that could work.

Okay. Great. Thanks guys.

Thank you. Our next question comes from Colin King of Kirr, Marbach, & Co. Your line is open.

Hey guys. Thanks for taking the question. Just curious, on the $33 million in cash taxes paid during the quarter, how much of that was tied to the Alltel transaction?

Most of it probably. Probably in the $25 million range.

Okay. Great. Thanks guys. And then just one more. Going back to that fibre expansion in New York and Vermont, did that have any contribution in the quarter? And do you guys have any expectations for that one or two years down the road?

Yes. I think it did have a contribution. It's small overall, but it did contribute. And the fibre business, what's very attractive about it is the long-term earning potential. But the numbers don't jump initially. It's a slow build and it's a long tail one would hope and expect.

So we do have good expectations for it down the line to be a growing contributor.

Yeah. And would I could probably add to that too is that as those networks came on line last quarter, this quarter, so did a lot of the costs of those networks as we're ramping up revenue. So they contributed on the revenue side, but they also contributed to a lot of the costs that are now on line, [poll tax] and [et cetera] costs to run those networks.

Got you. Perfect. Thanks guys. That's all I've got for you.

Thank you. And our last question comes from the line of Sergey Dluzhevskiy of Gabelli & Company. Your line is open.

Good morning guys. Could you update us again on your primary interest areas as far as potential M&A opportunities? And also whether anything changed in those kind of areas of interest, if you have any new sectors that you're interested in based on your discussions and based on the disconnect that you mentioned of sellers?

Yeah, Sergey, it is evolving, and so you're right to ask that that way. So as we look at -- we look at specific opportunities as we get close to, and that may just mean it doesn't work out. We may continue to look at very closely related things in some areas. And in some areas I wouldn't say we're there yet, but we may eventually form the opinion that it's just not a good area for us to invest in at the time. And that's the decision -- that could be because we don't like pricing or as we grow in understanding a sector we start to feel less enamored of the prospects over time.

And so I would say it's evolving. I don't think there's anything significant to update at this point in terms of the areas we're looking at. Same geographies we've talked about before and same types of businesses with an emphasis on infrastructure that we think has nice long-term cash flow and earnings potential.

Okay. Thank you.

Thank you. I'm not showing any further questions. At this time I'd like to turn the call over back to Mr. Benincasa for closing remarks.

No further remarks everyone. Thank you everybody and we'll talk to you in the summer. Take care.

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