ATN International Inc (ATNI) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Atlantic Tele-Network Q4 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions)

I would now like to turn the conference over to our host of today's call, Mr. Justin Benincasa. You may begin.

Thank you, Tanya. Good morning everyone and thank you for joining us on our call to review our fourth quarter and full year 2014 results. 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 an 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 detail on these measures and reconciliations to comparable GAAP measures and for further information regarding the factors that may affect our future operating results, please refer to our earnings release on our website at atni.com or to the 8-K filing provided to the SEC.

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

Thank you, Justin. Good morning, everyone. I'll start with some highlights for the quarter and for the year. First, starting with the quarter, the fourth quarter was a fitting end to a very strong year, and the trends behind the results were consistent with what we've seen in previous quarters. The main story, of course, was the growth in US wireless revenue and EBITDA following a number of quarters of network expansion and upgrades. It is always rewarding to see investments pay off as forecast, but there was a lot of hard work behind that success and we appreciate the efforts of our team and the trust placed in us by customers.

The US wireless business is our largest in terms of revenue and even more so in terms of profits, because of our 100% equity interest. So the strong year in that segment more than compensated for relatively stable operating revenues in our other businesses in the aggregate. That is not to say there were not successes in other areas. Bermuda managed to hold steady and turn in another strong year following an excellent 2013. Broadband revenues in Guyana increased and US wireline completed its major fiber builds with strong momentum and bringing in new revenue and customers.

While growth rates in some operations are expected to recede, we see 2015 as a year with great potential for enhancing value, both through improving profitability in a number of our operations and in enhancing the long-term prospects and strategic value of others. Furthermore, we look forward to investing more of our substantial balance sheet capacity and opportunities that we believe have a good chance of delivering attractive risk-adjusted returns on our capital. That is a good position to be in.

In other areas, we ended the year of active review of a number of external investment opportunities after our $103 million initial investment in the renewable space with the purchase of 46 megawatts of solar distributed generation systems. We have retained a talented team to run the business and look for further investment opportunities in the space.

Let's turn now to some specifics for the fourth quarter, starting with US wireless. This segment delivered another very strong quarter of growth, particularly when you factor in that as the year went along, we began to see an anticipated decline in prices. While we expected growth for the year overall in this segment, we thought the rates of growth would decline faster than they did. And we're very pleased to report fourth quarter revenue for this segment up 57% against the fourth quarter last year.

The drivers of this growth are consistent with past periods. The biggest factors were an increase in the number of 3G base stations and service, including both upgrades to existing sites and new sites built with 3G capabilities. Growth in usage was also a significant contributing factor. To illustrate the trends, megabytes billed more than doubled, while voice minutes, which continue to decline on a per base station basis, were up about 7%. For 2015, we expect to see continued expansion of data volumes, although not at the same rate as 2014, because while we continue to add cell sites and upgrade others, the ratio of newly upgraded sites to existing upgraded sites will be much lower than in the 2014 to 2013 comparisons.

More significant to understanding the direction and value of this business is the trend in pricing and other contract terms with our customers. As noted in our earnings release, we are working on finalizing a new multi-year contract for a major carrier customer that will include a substantial reduction in rates, offset by a six-year term and strategic considerations, including access to spectrum and other accommodations. Our goal is to be the long-term network provider for multiple carriers in the truly rural areas of the country and we think we are on our way to achieving that.

Customers expect coverage virtually everywhere and they expect quality similar to their home areas. So carriers need to cover these areas, but they need to do it in a cost effective way, given capital needs for much more strategic and high revenue areas. For our part, we must ensure that we can deliver the quality they want with economics that are favorable to their alternative build and operate costs. We have deep experience in these areas and we can use that expertise and know-how to deliver on those requirements, while still earning attractive returns on a very capital-intensive business.

So, even though we expect this development and trend to reduce the current year revenue and cash flow in our US wireless segment, we look at the trend towards longer-term, more strategic relationships with more attractive economics and operating elements for our carrier customers to be the proverbial win-win, and we see it as an enhancement to the value of this business. At the end of the day, we think this business has the same rationale and many of the same features as the third-party fiber backhaul business. And we are excited about the opportunity to drive it forward on that basis.

Lastly, worth mentioning in US wireless is the growth in our small, very rural retail wireless business that fills in gaps where there is limited or no availability from the national carriers. We launched service on tribal lands this past year and the team has rapidly gained subscribers and market share. While it's not a large business for us, we've been pleased by the progress and enjoy bringing advanced technologies, extended coverage and better value to communities that suffered under poor alternatives for many years.

Moving on to international wireless, in international wireless revenues, we posted a significant decline, as you saw in the release in the fourth quarter compared to 2013. And as we noted, there were two main factors driving the poor results; a decline in the Guyana market, which also benefited from a one-time gain last year and lower roaming revenue across the Caribbean and Bermuda. The roaming revenue in the region is unlikely to come back up. Carriers have negotiated lower rates, but there is little elasticity in this area, because they had continued to charge their subscribers extremely high rates and have been thoroughly conditioning all, but the most price insensitive travelers to avoid using their device while traveling. Much like the once over-priced hotel phone, this is a sure way to irrelevance as subscribers try to restrict all of their usage to WiFi or use local SIM cards or phones. On the other hand, the market share loss is something we can try to fix. We are making investments in marketing programs and we will be watching for signs of improvement as the year progresses.

The Island markets were also down slightly as a group, with Bermuda flat and the others a mixed bag. We do think we can improve profitability in the smaller markets in 2015, although Bermuda itself will be more challenging because of significantly higher regulatory fees and lower roaming revenue. Nonetheless, across the board, we added subscribers and gained market share in these smaller markets.

In wireline operations, as reported, total revenues were down slightly with legacy voice-dominated services and decline in newer data-related services like high speed Internet for both residential and businesses increasing. The Vermont business in particular showed good signs emerging from its recent fiber builds with a rapid ramp up of on-net fiber sales to government and enterprise, especially the colleges and others in the educational segment of the market.

In other developments, as I mentioned at the outset, we closed on our first investment in the renewable energy space in late December. We are excited about the opportunity to put our balance sheet to work in a segment that we think has the ability to deliver solid returns to our shareholders for a long time to come. We see these opportunities as coming in both organic form, that is capital expenditures towards building new solar PV generation facilities and in inorganic form, acquiring existing renewable energy production facilities. We're still getting a feel for where the best opportunities lie in terms of risk and reward and our team is casting a wide net at the moment. As the year goes on, I hope we will be able to give investors a better sense of where we see the most attractive investments in this space. Meanwhile, we are still actively looking at ways to expand our telecom investments and to use our balance sheet to improve returns and prospects for some of our existing properties.

So, in summary, after a year of exceptional growth in US wireless, we are expecting to enter into an extended term agreement that positions ATN in the category of a long-term shared infrastructure solutions provider, a business model that we believe will further increase the value of our wholesale business. This agreement should result in lower US wireless revenues, likely beginning in this year's second quarter because of more favorable volume comparisons in the current quarter. The impact will be partially offset in all quarters by continued growth in our wholesale network capabilities, reach and capacity, as well as the expansion of some of our other businesses. Additionally, 2015 results will benefit from the accretive impact on revenue and EBITDA of the Ahana acquisition. And overall, we think there is an opportunity to take significant positive strides strategically in 2015 in our mix of businesses and deployment of capital. With that, I'll turn the call back over to Justin.

Great, thank you, Michael. Total Company revenues for the quarter were $88.5 million and for the full year $336.3 million, up 15% for both periods from 2013. And as Michael had commented earlier, growth this quarter had continued to be driven by our US wireless segment. Revenues in Guyana were down this quarter compared to a year ago, as growth in broadband revenues was offset by revenue declines in our wireless and local and long distance voice operations. Also impacting this comparison in Guyana was an out-of-period adjustment recorded in the fourth quarter of 2013 and local currency devaluation, which amounted to approximately $1.4 million for the full year.

Similar to last quarter, our Island wireless segment's roaming revenues declined this quarter, due to overall lower wholesale roaming rates and a new retail roaming offering in Bermuda. Adjusted EBITDA for the quarter was increased 26% to $35.7 million and our adjusted EBITDA margin was 40%. For the full year, adjusted EBITDA increased 22% to $139.8 million and our adjusted EBITDA margin was 42%.

Moving down to the income statement, this quarter's operating income, adjusted for transaction-related charges, was $22.2 million, up 38% from the same quarter last year and $88.5 million, up 33% over 2013 for the full year. This strong performance was driven by an over 95% increase in operating income from our US wireless business this quarter, which more than offset the lower operating income comparisons in our other businesses. As noted in our press release, we entered into the distributed generation solar business late in the fourth quarter and show the stub period results of approximately 8 days of operations from that acquisition in the Renewable Energy segment. The operating income for that segment was negatively impacted by approximately $2.5 million of transaction cost.

Operating expenses [this quarter] included $1 million of non-cash stock-based compensation expense. Net income from continuing operations for the quarter was $11.5 million or $0.72 per share, and this compares to [$16.2 million] or $1.02 per share reported in the fourth quarter of last year. I should note that 2013 was positively impacted by a one-time $8.4 million income tax benefit recorded in the fourth quarter of last year. 2014 net income totaled $48.2 million or $3.01 per share.

Looking at the balance sheet, at December the 31, our cash balances totaled $371 million, which includes $39 million of restricted cash related to an indemnity escrow account as part of the Alltel sale agreement, which we expect to be released by the end of this year's first quarter. And in the statement of cash flows, cash generated by operating activities was $82 million for the full year of 2014. Capital expenditures totaled $16.6 million for the quarter and $58.3 million for the full year. Of the $58.3 million year-to-date, approximately $33.5 million was incurred by our US wireless business and $10.6 million was incurred by our International Telephony segment. In our earnings release, we forecast capital expenditures for the full year 2015, excluding any spending in the Renewable Energy segment, to be between $65 million and $75 million, of which our US wireless segment is expected to spend at similar levels to the past two years, or above 50% of that total.

Projected capital expenditure for 2015, as I said, do not include anything related to the Renewable Energy segment, which as Michael noted, are difficult to predict. However, for planning purposes, we are using an estimate of approximately $30 million this year, but that number could change depending on the investment opportunities.

Some additional operational data for the quarter. We ended the quarter with 764 base stations in our US wireless territory, up from 716 at the end of last quarter and 598 a year ago. International wireless subscribers totaled 323,900 at the end of the quarter, which was essentially flat to the 324,800 a year ago. In our US wireless segment, the number of business -- our US wireline segment, I should say, the number of business customers decreased 10% from the year ago to approximately 2,400, but business lines increased 60% from 119,700 to 191,500. Internationally, fixed lines ended the quarter at approximately 159,700 and DSL subscribers ended at 33,500, up 14% from 29,500 a year ago. I should note that the DSL sub counts reflect an adjustment from past quarters, as we redefined our definition of an active subscriber, limiting the length of period that someone can be inactive or without continued service.

And with that, Tanya, we will open the call up for questions.

(Operator Instructions) Ric Prentiss, Raymond James.

I want to bore down a little bit more on the Comnet US wireless business. I'm just trying to frame the guidance or the thoughts. So it sounds like first quarter 2015 the contract, maybe, will be fully effect. So you'll see continuing good volumes, not as much price cuts, but then starting in 2Q, revenues down year-over-year. If we kind of look at where levels were in 2013 versus 2014, are we going back towards 2013 levels, are we going in between 2013 and 2014 levels? Just trying to get a sense of where the re-calibration is. I know you're getting long-term contract and you want to earn a return on that, but just trying to gauge what we're looking at.

I don't think we're not talking about going back to 2013 levels, but the answer on the first part of what you're saying is, it's not necessary when the pricing is taking effect, it's that in the first quarter there are bigger comparisons from the point of view of network reach and upgrades, so translated collectively into volumes. So I think the offset to the price decline is much more pronounced in the first quarter, we expect, than in the next three quarters. And so that's why we see it happening in that direction.

And then in past quarters you've told us how much of your base stations were already with 3G. Where are you as far as -- of those 764, how many are 3G?

We're about 75% 3G now, Ric.

And we were just on the call with Entelos, a regional operator in the Virginia area and they were -- some of them owning the fact they were late with 4G LTE, even in their more rural environs in West Virginia. Where are you guys at as far as deploying 4G? Every carrier we talk to is just talking about how fast 4G is ramping and how important to customers 4G is. So, as you look at the long term six-year contract with a customer, is there LTE commitments in it? Could that help longer term revenues as well?

LTE is contemplated in that agreement, and we have LTE. We would expect to be beginning to roll it out more seriously this year. We have some limited deployment now, but that's largely for some of the retail that we talked about. And I think that's a distinction I would draw, is the -- it is clearly very important to retail customers. I think in a lot of the areas we're in, they are truly so remote that the expectations are a little bit different. So it tends always to lag behind them and if you think about when we were deploying 3G, you know, it's many years after most would have done it in a retail environment and it's really driven too, by the customers. It's pretty easy for us to do it, to roll it out when we think our carrier customers would like to see it. So it's really we don't hold back.

And then on the renewable energy side, you guys (inaudible) it's look like an attractive offer towards the end of last year, partly because your ability to act quickly, partly because of your ability with the balance sheet that you are able to have cash ready. Are there other transactions where you're special sauce, which is I got cash, I can close quickly, but I want a good deal, are there other of those deals out there in the renewable energy space?

I hope so. I mean I think right now there is a lot of interest in the space. There is some asset value increase, because of the yield curve phenomenon. And so that kind of trickles down all the way through, they are buying up assets for these yield curves. And much like you've seen in the tower space. But I think that -- I think there will be those opportunities and I think when you look out at the 2016 ITC reduction from 30% to 10% that's contemplated at the end of the year, that's kind of has two effects right now; it has an effect of really a flurry of building, particularly in the utility scale area, so the much larger deployments. And what I also think -- we think will happen is that at some point there is going to be a bit of a crush, where people couldn't quite get in to that time frame, or over-committed and there may be opportunity there. Similarly, I think an increase in the interest rate environment could start to trickle down too, because financing cost is a huge component in this sector.

And as we think about possibly $30 million of -- probably sounds like chunky acquisitions are chunky CapEx. What kind of multiples does that gets you? I know for your Ahana one you paid about 8 times, I think enterprise value to EBITDA. How should we think about what $30 million in CapEx could actually produce in EBITDA, and is that the right way to think about it?

Yeah, it's hard to think about it exactly that way. I mean, of course, we look at those considerations when we do it, but you know you think about -- you can think about what is $30 million of equity by you -- as an overall and you can -- but really you come down to what -- if you take the agreements you're going to get or you're buying the power of purchase agreements, you run the numbers and you look at after-tax levered returns that are really in the low double-digits these days, right. So the low teens, maybe to mid-teens in a lot of the deals. And so there's reasons for that, right. The risks are very low. It's a high-quality asset, high quality off-taker. But at the same time, we think there still may be opportunities to be on the upper end of that and that will tend to be where we'll focus.

Barry McCarver, Stephens, Inc.

I think you got most of them answered, but you're just considering expectations for the US wireless business and then obviously offset by margins from your newly acquired business, kind of directionally, how do you think EBITDA margin shake out for 2015?

I think EBITDA margin -- overall, I'm assuming you're talking, right?

Right.

I think overall, any impact on the US wireless business definitely impacts that margin. So, I think, it overall will come down slightly, but not dramatically, because there is a high margin. I mean, like you said, it's pretty high margin business on the solar business, but somewhat offset by US wireless.

And then just continuing on the question from Ric about the CapEx, is that CapEx spend this year, kind of depending on the level, I know it's a little bit of uncertainty for the renewables business. But does that derive revenue pretty quickly? And what would be kind of maintenance CapEx for that business annually?

They is very little to, if any, maintenance CapEx, if you will. It's a pretty small number. So it's really -- that would be --

You are talking about renewables, Barry?

Yes.

And so, in terms of the CapEx, it depends where that money goes. If you buy the producing project, then it's a media that if something where we're building it from the ground up, it would take more time obviously. So -- to be revenue generating, if that's your question.

The way to think about it maybe is, if it's organic, if it's truly CapEx, probably won't have a significant impact this year. And that's right. But if it's not really CapEx, but it's in the equity part of investments, it would be very quick.

(Operator Instructions) Hamed Khorsand, BWS Financial.

I just want to start off with -- on the US wireless. Last year you were making similar comments about rates declining and you were able to offset it with more base station and increase in traffic. How much do you feel that you could do that this year? Can you add more base stations and tack on more traffic?

Yeah, we didn't get it right last year and part of that is timing of some things we saw and part of it was we did such a big build the year before in that year that the added volume was bigger than we had forecast. And that's always a tricky thing to do. I think this year, there are fewer moving parts and much more clear movement on prices. So I think the opportunity to be wrong to the upside by the degree which we were last year seems very slim this year. But, again, I think this is -- I think this is a good thing, because as you get the rates down to a certain level, I think it just makes this really a nice long-term business, because it just makes the long-term economics, not just the short-term economics, attractive to the carrier customers.

What kind of impact will this have on the EBITDA margin for the segment?

We haven't given a number there, but when we lose revenue because of pricing, we still have a lot of the same cost. So it definitely will reduce EBITDA margins.

No, that was obvious, but I was just trying to figure out how much of an impact that we're talking about when the business used to run around 60% or 70% EBITDA margins. Are we looking at half that rate or just slightly lower rate on the EBITDA margin line?

We just haven't given a precise number there, Hamed.

And then as far as on the Island side, were you talking about the roaming business going away. Are you looking at opportunities as far as revenue and opportunities in that area maybe from WiFi service or anything like that?

Yes, we have done some of that, but the convenience factor is different. And a lot of the WiFi that tourists will see in those -- in the kind of more tourist-driven markets will be driven by hotels and from a business user it can be businesses and hotels. So the opportunities don't equate to traffic that used to be there and it's just -- I just don't think -- I think at this point it's gone on so long, it's a hard trend to reverse, because as I said, customers have been -- had their behavior conditioned.

Ric Prentiss, Raymond James.

Couple of quick follow-ups, if I could. On the Comnet business, you talked about also how it makes sense for you guys. I think [John Stan] long ago called it -- be the Switzerland of roaming, so where you can provide network for multiple people and be agnostic. Where are you at, as far as your revenue mix across the big four carrier customers? Because it would seem as LTE becomes more prevalent, rolled out, possibly you could see a growing number of carriers come to you. So just trying to gauge how many really carrier customers do you have at your different sites?

We will more strive to typically have all the national carriers, but the big two to date have been a disproportionate share of it, not just because of size, but because they seem to be more strategic about -- thinking that's a worthwhile expense. I think there is opportunity to increase that and that helps us make it attractive for all.

Because when you think about Sprint repurposing the 800 [IDN] frequencies. Do you have access with spectrum agreements with carriers that could help. T-Mobile is rolling out 700, Sprint is rolling out 800 and TELUS talked about rolling out 800. So, I am just trying to think -- you talked a little bit about how do you are going to lock in some spectrum with the long-term contract, but do you have enough spectrum also to handle these multiple carriers and the right bands?

Yes, I think that the -- without speaking about any specific carriers, I think that there is -- spectrum should not be the problem. It's always a very important consideration and we have to make sure to secure it. But I think there are ways to achieve that, because the reality is there is a lot of available spectrum in terms of not being utilized in these areas there. I mean they're just so sparsely populated. It is a very different situation than you have in the more dense areas where subscribers live. And I think the other point there is that you don't have to tailor it quite so perfectly on the spectrum for carriers, because most customers out there have multiband devices that have some common elements across all four.

And then minor question. There was a little bump up in the Corporate costs in the fourth quarter. Was that somewhat related to the transaction, and should we expect that to come back down in 2015?

Yeah, that was kind of a just -- a lot of the items in there were more kind of one-time in nature for the quarter, including legal expense.

So Corporate back down to a more normal level in 2015 versus [2014]?

Yes.

Lawyers and taxes, Ric, you can't avoid them.

Yeah, although hopefully the lawyers lead to an M&A environment that we can see that balance sheet put to work. It sounds like you're optimistic about 2015, being able to put some of that in. And is the target leverage still something that you'd like to get back to positive to maybe one to two times?

Oh yeah, for sure. I mean we know it's a very inefficient balance sheet, but as you pointed out, it also allows us to be very opportunistic. So, there is some strategic value to it, but it's surely not optimal.

I'm showing no further questions at this time, I'd now like to turn the conference back over to management.

No further comments. Everybody, thank you, and we'll talk to you shortly on first quarter. Take care.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.