ATN International Inc (ATNI) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Atlantic Tele-Network second-quarter earnings conference call and webcast. (Operator Instructions). As a reminder, this conference is being recorded.

I will now introduce your host for today's conference. Justin Benincasa, Chief Financial Officer. You may begin.

Great. Thank you, Ashley. Good morning, everyone, and thank you for joining us on our call to review our second-quarter and six-month results. With me here is Michael Prior, ATN's President and Chief Executive Officer.

During this call, I'll be covering the relevant financial information and certain operational data, and Michael as usual 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 the 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 of these measures and reconciliations to comparable GAAP measures and for further information regarding these factors that may affect our future operating results, please refer to our earnings release and our website at ATNI.com or the 8-K filing provided to the SEC.

And so I will turn the call over to Michael.

Thank you, Justin. You all can tell that Justin really enjoys reading that Safe Harbor language every time. You know it gets the blood going. I will start with some highlights for the quarter, which I am happy to say was another excellent one, resulting in strong year-on-year comparisons for both the second quarter and for the first half of 2014. And, of course, as you saw in our release, this is really US wireless had a tremendous quarter, and it was significantly better than we thought it would be. The primary reason for the continued growth of this business was the same as in the first quarter. Ongoing expansion of our network coverage, capacity and technical capabilities helped produce impressive data volume growth.

And, as I stated in the release, we are also encouraged by the potential to further enhance the value and relevance of this business by working more closely with our major customers on their longer-term needs.

Outside of this, our largest and most important business, the quarter was mixed with some successes and some areas that require additional work.

All right. With that, I will turn to some specifics starting with US wireless. US wireless generated 41% revenue growth in the quarter. And, as I alluded to earlier, the driver of this increase was markedly higher data traffic volumes, and that is really to break it down in slightly more detail, it is really three factors. It is upgrading our data capacities and 3G capabilities. It is expanding our coverage and number of sites and service, and it is also, of course, the general industry trend of higher data usage per customer.

And to put some hard numbers to that, megabytes build expanded by about 151% year on year, and we increased our 3G base stations and service from approximately 40 last year to 260 this year. Our US wholesale base stations overall grew from 572 to 654, which is about a 14% increase. And voice minutes were flat.

So those are all largely positive factors, but as we noted in our press release, we do not expect to sustain this rate of revenue growth over the second half as declining rates, which by that I mean prices particularly for data traffic come into effect. These anticipated rate declines largely come from existing and newly negotiated contracts.

In addition, we are actively involved in other discussions that may trade longer-term opportunities for us for lower rates for our customers today where it makes sense for both us and the customers.

Net net, we think we are likely to see modest year-on-year revenue growth in the second half of this year for this segment based on our current traffic forecast and anticipated rate declines. There are few moving parts, however, as you saw from this last quarter, as well as ongoing discussions. So it is particularly hard at the moment to forecast the precise timing and level of any such changes to these revenue growth rates.

Looking further out, we were optimistic that we can continue to improve upon the value proposition for our customers while at the same time growing this business. To achieve that, though, we will need to look a lot further ahead to next quarter.

Moving on to international wireless, revenues there were up 3% over last year. Subscriber results were mixed. In our smaller island markets, we continued to take share and showed healthy subscriber gains. In Guyana, revenues increased, but subscriber numbers were down, and we believe there is much work to be done to improve our competitive positioning and customer experience there.

In Bermuda, results were largely flat in comparison to a very strong quarter last year, but we continue to slowly expand our subscriber levels and believe we are the clear leader in the market.

In wireline operations, the revenues were up slightly as well. As with the previous quarter, this is largely the case of the shifting mix with US wholesale and enterprise fiber transport and on net data services growing strongly, albeit from smaller numbers, and international broadband revenue also continuing its growth rate.

On the other side of the coin, we have some expense control issues in Guyana that go beyond the decline of higher-margin voice services, although we think that is correctable in the near term.

In the US wireline area, we have the increased expenses associated with bringing our major fiber network expansion into service, and at the same time, we have tightening margins in our legacy CLEC services over leased copper lines. We expect margins in this business to improve over time as our on net fiber-related revenues ramp.

So, kind of strategically, we always know that that question is going to come up with our balance sheet. There is really nothing new to add on external strategic investment opportunities. We still see fairly full values in most areas, maybe overvalued, and have found more interesting potential for the moment in the area of organic investments and existing businesses such as we have talked about in domestic wholesale wireless, such as some smaller opportunities perhaps in domestic fiber.

So, despite that yet, we will still have substantial capacity to invest in other areas, and we are, despite our sense of the values, we are actively reviewing a number of opportunities. But I just think we have to be aware we may have to wait until asset values come down a bit to more reasonable levels.

So we -- and I would just say to put that in context, we have learned through both our successes and failures on the investment side that patience is a long-term competitive advantage in the infrastructure investment business.

So, in summary, for ATN overall, this was another very strong quarter, and we believe there are many areas to improve upon in our existing businesses that will enable us to continue to achieve profitable growth.

So with that, I will turn it back over to Justin.

Great. Thank you, Michael. So for both the quarter and the six-month year to date, total Company revenues were up 16% to $83.3 million and $158.4 million respectively, which, as Michael noted, reflected the strong year-on-year growth of the US wireless segment. Revenues in Guyana were down slightly this quarter as growth in data revenues were offset by a continued decline in our local and long-distance revenues. Revenues also in Guyana were negatively impacted in the quarter by approximately $450,000 due to a roughly 2.5% devaluation in the local currency, and that is over in comparison to a year ago quarter.

Adjusted EBITDA for the quarter increased 24% to $34.9 million, giving us an adjusted EBITDA margin of 42%. For the six months ended June, EBITDA growth and margins were consistent with those of the second quarter as adjusted EBITDA increased 23% to $63.1 million and the EBITDA margin was 40%.

Moving down the income statement, this quarter's operating income was $21.6 million, up 36% from the same quarter in 2013, outpacing revenue growth by more than twice. This strong performance was driven by a 75% increase in operating income from our domestic wholesale wireless business. Island wireless posted 11% growth in operating income, benefiting from revenue growth and market share gains, particularly in our small island markets.

Lower operating income in our international telephony segment in the second quarter was due to increased expenses in Guyana and, as Michael mentioned, where our attention will be on balancing cost reduction efforts with upgrading our competitive positioning.

Operating expenses this quarter included $1.3 million of non-cash stock-based compensation expense, and that compares to $1.2 million in last year's second quarter. Net income from continuing operations for the quarter was $11.5 million or $0.72 per share. That is up 80% compared to $0.40 per share reported in the second quarter of last year, and year-to-date net income totaled $19.4 million or $1.21 per share, up 70% from last year.

Looking at the balance sheet, we ended the quarter with cash and cash equivalents of approximately $408 million, and that includes $58.8 million of restricted cash primarily related to an indemnity escrow account as part of the Alltel sale agreement.

Capital expenditures totaled $16.4 million for the quarter and $25.1 million year to date. Of the $25.1 million year to date, approximately $14.8 million or almost 60% was incurred by our US wireless wholesale business and $6.1 million or 24% was incurred by our international telephony segment. There's always factors outside our control that could impact the timing of our capital spending within a fiscal year, but we expect capital expenditures for the full year 2014 to be between $60 million and $65 million. And consistent with past guidance, we still expect 50% to 60% of that total to be allocated to our domestic wholesale roaming business.

As we mentioned in our press release, we are pleased to see that the eight investments made in the wholesale roaming business over the last 18 months have shown strong early returns, and we remain confident that we will continue to see solid returns over the long term. Some additional operating data that for the quarter, some of this repeats what Michael already said, but I will give the number. We ended the quarter with 654 wholesale base stations in our US wireless territories up from 605 last quarter and 572 a year ago.

International wireless subscribers totaled 320,600 at the end of the quarter, down from 333,300 a year ago. In our US wireline segment, business customers decreased 6% from the year ago quarter to approximately 2600 customers, and business lines increased 62% from 97,600 to 158,000.

Internationally, fixed lines ended the quarter at approximately 158,000 excess lines, and DSL subscribers ended at 41,000, up 28% from 32,000 a year ago.

And with that, operator, we would like to turn back the call for questions.

Ric Prentiss, Raymond James.

Thanks. Good morning, guys. A couple of questions, if I could.

First, obviously the increasing number of base stations on the US wireless business really was one of the components that helped drive big year-over-year revenue growth. When you think about your CapEx guidance, I think it came down $5 million, but Michael, you also said you like spending money on organic investments. Just trying to square what you were kind of saying to us there.

Yes, I mean most of that down on $5 million was outside of US wireless. So that number is fairly consistent. In fact, probably is up a little in total. Most of the stuff is just other small changes in some of our island properties in Guyana.

Okay. And when you think about continuing to add the base stations, you have got the 654 in the quarter, any target that you wouldn't get to the year because you mentioned also some of these upgrading to 3G versus just adding base station. Just trying to think what else might help that modest year-over-year revenue growth given the CapEx spend.

Yes, I mean we have already -- when we talked about that expectation, we are taking into account, of course, our plan, and for at least -- you know, we already into the third quarter of builds, of course. So we have some pretty good visibility on the build side. As you go further out in the second half, things could move a little bit. But I think the bigger issue than the overall number of base stations is the increase of 3G base stations and the use of those. So I think that was probably what you are referring to. And that program, you know, we will continue to that wherever and whenever we can.

But when we say -- there is kind of a separation of the short term and the longer term. I mean in the short term we have a plan, we have talked about it, and that is in that guidance. I think in the longer term, we still see opportunities to deliver a very good value proposition for the big carriers. And we are looking at those, but it is hard to handicap how exactly they will come in over time. But if we can find opportunities like that to expand this business, we like that.

One of the large carriers out there has got what they called the white space program to try and increase 4G LTE but probably also 3G in some more rural settings. Any thoughts about embracing some of those type programs? Are you on the list to talk with those guys?

Yes, and I don't want to talk about discussions with any individual carriers, but I think we are -- you know, we talked to all the carriers. We have at times one carrier may be looking more statistically than another, but we really believe in the model of shared infrastructure in these really sparsely populated remote areas that we think it is a -- there is a really great value proposition for the big carriers, but they have to embrace it, and they have to fit in with other plans. So that is not exactly a straight line. I don't know if that answers your question.

Yes, yes, it does. And then on the expense side, GTT, addressing the cost side, obviously revenues were fairly consistent with what we were looking for, but the EBITDA came in lower on GTT. When you say addressing them in the near term, do you think that is something you could get fixed within the third quarter, or is that something that might slide into 4Q?

Yes, I think that is going to slide into 4Q. I mean there are some things we can do quickly but other things there are going to take some time. An example of that would be postage is up dramatically in the country, and so we are trying to move towards e-billing, if you will. So that is just going to take some time to get adoptions, customers to adopt that practice.

Okay. And final question for you and then I will let others in there, is, the corporate, kind of the overhead or EBITDA drag was a little bit higher than what we were looking for in 2Q. It was certainly up quarter to quarter quite a bit and up a little bit sequentially. Any thoughts about what the corporate costs might be doing or whether there are any unusual items in there?

Yes, I mean I think some of that is our engineering group in the US wireless business used to be a shared -- more of a shared cost with the Alltel property. So we probably pulled in more of that than not in the past. Do you know what I mean? In other words, we have got more cost on the books of that. But there is also a lot of shared service costs. So it is not -- I don't think that it's going to be something that is going to change much moving forward.

Right. So use 2Q more as of kind of the more normal rate?

I believe so, yes.

Okay. Great. Thanks, guys. Busy day so I know some others have got questions, too.

Barry McCarver, Stephens Inc.

Hey. Good morning, guys. Good quarter and thanks for taking my questions. So I guess a couple of things.

On GTT again, you mentioned what is happening with the subscriber base here and the need for you to improve services. I guess, first off, what is the consumer spending look like in that market? I mean economically how is that country holding up? And then secondly, anything specific that you can point to that you guys are looking at to improve the service there?

Yes, the economics -- economically to answer the first part of that question, I think Guyana has been growing. I think the consumer spend has not suffered recently. In fact, I would say it is improving. It is not dramatic, and we are starting from smaller numbers. But that is not really hurting us, and it may be helping us.

Ultimately, I think there is more to come because I think there is a greater -- there is a demand, there is a latent demand there for advanced services. And so for us, that is an important thing for the longer term is to roll out more advanced mobile services as well.

But in terms of the near term, it is really the whole customer experience, we think, is not as competitive as it should be. And so that is everything from the retail experience and how effective those channels are to aspects of the -- broader aspects of the customer care envelope. So it is blocking and tackling, but I think there is room for improvement, and we will be working hard at it.

Okay. And then on the US wireless business, you know you had a great first quarter, and you suggested then that you wouldn't be able to maintain this type of growth. And now we have done it again in the second quarter.

In terms of the volume offset by price breaks, it sounds to me like you're -- either you have seen some contract renegotiations or maybe you are in the middle of those right now. Is that fair?

I think most of what drives our expectations has already been agreed to, and it is a little tricky in terms of timing of how some of these things roll out, and we got that wrong in trying to figure out the second quarter obviously. And there is also always ongoing discussions about bigger things, way to expand the relationship, which can lead to lower prices because it is a very simple equation for us. These are remote areas, and if we are going to invest more or do more, there has to be some kind of revenue tie-in to a high capital expense business. But if we can get volumes up, we can certainly lower rates, and we need to because I think that is what the customers expect.

Okay. That is very helpful. Thanks, guys.

Hamed Khorsand, BWS Financial.

Good morning. Just to build on those US wireless questions you have been getting, how much of the data growth was coming from 3G base stations, and can you decipher how much of it was coming from the base stations you added during the quarter?

We cannot break it out in more detail, but I think what I said earlier on it is definitely I think that the expansion of 2G to 3G had a bigger impact than the overall increase in base station numbers.

And then given that we are still in a warm climate right now, I would imagine you are trying to add as many base stations as possible during this quarter. So is there a potential where you are going to see a lot more traffic on the network than you are really expecting right now?

Look, we baked into what we said all the considerations like that. So could it be different than we are forecasting it? It could be, but I think certain math like applying rate decreases against the volume is fairly -- you know, that leads to big part of our forecast, right? So that shouldn't change. Volumes are harder to grasp, you're right.

Okay. And then the other question I had was, given with the climate for acquiring assets being already expensive as to your comments, what is going to happen now with price expectations from sellers given that Windstream is looking at a REIT situation where valuations could actually increase even further? What does that do to you what you guys are looking for investment wise?

Well, we were in the market for Windstream. But joking aside, I think if you are looking at those assets, some of them may have an opportunity to do that arbitrage and the tax improvement, although I think there are many where that would be a lot harder to pull off and not as big of a benefit as it seems to have been, at least in the stock price for Windstream. So I don't -- right now I am not sure that has a major impact on things we are looking at.

Okay. Thank you.

Colin King, Kirr, Marbach & Co.

Hey, guys. Thanks for taking the question. Just curious on the wrap-up of that fiber expansion, would you guys expect that US wireline business to be a positive contributor to operating income sometime over the next few quarters?

It might be tough over the next few quarters, but I think moving into 2015 I think it is more likely. It is just that right now we really got all the infrastructure -- once we turned those networks off, I think I have said in the past we have got all of the cost of supporting infrastructure on that network, and we are still ramping up revenue. But the ramp-up in revenue is going to take quarters, not a quarter. So I think it is going to take a little bit of time where it has a benefit to operating income.

Okay. Great. That makes sense. And then one question on the M&A. I completely understand your comments on the being patient aspect. Love to hear that. I am just curious, is there a point where, say, maybe 12 to 18 months out where you think, hey, you know, we are sitting on half our market cap in cash and it has been too long and acquisition prices aren't coming down, would you start to evaluate other uses of that buyback dividend, what have you? Just curious if there is a timing aspect to that?

It is a consideration I think the Board has to go through periodically is the best answer. You can't ever dismiss it and say, we will never, ever do it. I think right now we have indicated that is not something we are looking to do or expect to do, and for special dividend, for example, there are some significant tax inefficiencies there. And more broadly, I think we think that being patient is also beneficial to be able to move quickly when the right opportunity dries up. So it is hard to say exactly when that period is where you just conclude this is not going to change for a long time. We are not going to find anything. We are definitely not at that place right now. I just can't say we could never be. I guess it is theoretically possible.

Yes, yes. Great. That is helpful. Thanks, guys.

(Operator Instructions). [Shun Huget], GSM Capital.

Hi, guys. Congratulations on a good quarter. Most of my questions have been covered by now, specifically to the REIT that Windstream is setting up and the dividend possibility and the timeline of acquisitions, which was good.

So I will just -- just got one then. You know you have been prepping the markets for the modest increase in year-over-year growth in US wireless. Is modest between 10% and 20%, or is it single digits? Compared to 40% growth, there is a big range of modest growth in there. Could you comment on that?

I am not going to quantify further, partly because, look, we were off of our expectations this quarter. So we want to be careful about indicating a degree of science to it that we might not have. I would say for me, though, it is fair to say that I would think if you took that middle ground of 10%, 20% growth, 15% growth, I would not call modest in this business. I would say that that is pretty good. It is not what we saw this quarter, which was almost torrid. But so if that helps, I can tell you that. But part of what you should take from it, too, in terms of using a word rather than a number is that it is a little hard to get precisely right.

Okay. Fair enough. Thanks a lot, guys. I look forward to the next call.

Okay.

Thank you. I am not showing any further questions in queue. I would like to turn the call back over to management for any further remarks.

No further remarks, operator. Thank you, everyone, and we will talk to you in another quarter. Take care.

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