ATN International Inc (ATNI) 2016 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the ATNI second-quarter earnings 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 follow at that time. (Operator Instructions). As a reminder, this conference is being recorded.

I would like to introduce your host for today's conference, Mr. Michael Prior, CEO. Sir, you may begin.

Actually this is Justin here. Michael will be talking shortly. But good morning, everyone, and thanks for joining us on our call to review our second-quarter results. As the operator just indicated, with me here is Michael Prior, ATN's President and Chief Executive Officer. And as usual, during the call, I will be covering the relevant financial information and Michael will be providing an update on the business.

Before I turn the call over to Michael, let me just get through the Safe Harbor stuff. 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 with that, I'll turn the call over to Michael for his comments.

Thank you Justin. Good morning all on the call. First, as usual, I'll start with some highlights for the quarter.

Most importantly, we were able to significantly advance our strategic growth plan in the second quarter, closing the Bermuda deal in early May, and winning regulatory approval for the Virgin Islands transaction in late June, leading to the July 1 close. We also were able to make further progress on repricing our major carrier customers in US telecom and to do so in line with the guidance previously given for the segment for the full-year 2016. Lastly, we began to build out the first projects in the India solar pipeline we acquired in the first quarter with the operational team fully staffed and additional land and customers acquired.

Unfortunately, all of the strategic activities that are putting our balance sheet to use had a negative effect on our reported results in the current quarter. We've tried to highlight the impact in the line items for ease of analysis by investors. In particular, the accounting for the India deal required us to include a large piece of purchase price, or at least what we thought of in colloquial terms as the purchase price, in operating expense, as Justin previewed last quarter, and he will also cover in a little more detail again after I speak.

The good news is that though these items depressed reported operating and net income this quarter, the second half of the year, particularly the fourth quarter, should see significantly lower transaction expense and also benefit from the addition of cash flows from those acquired and growing operations. Justin will also cover that in more detail and comment on restructuring expenses looking forward.

Most of the deal and restructuring costs are of course real expenses that we incur from time to time and are necessary to accomplish our objectives. On the international telecom deal side, we have begun work on these objectives, which include improving the customer experience wherever we can, looking for opportunities for growth, and improving the efficiency, including cost efficiency, of the combined businesses. So it's early days, but overall we believe we are on track to meet our investment goals and we are looking to see early evidence of that over the next two to four quarters.

With that, I'll turn to some more specifics, starting with the US telecom segment. Here we made, as I noted, we made substantial further progress in moving our carrier customers onto new contracts and terms, and in fact, the initial phase of this is largely complete with pricing in line with our expectations.

The next phase is a little trickier, and it's to develop ways to expand our business with our major customers. We have said before that we think our value proposition is strong, and we still do, but it is most appealing to the forward-thinking financial and strategy side of the carrier customer, and expanding the relationship is likely to be a lengthy effort.

Operationally, the trends are similar to past quarters. Data volumes have grown substantially but are more than offset by price reductions, both under new contracts and existing contract step-downs. As we have commented in the past, we think unit pricing flattens out by the end of this year, and any growth in domestic wholesale wireless revenues will be largely dependent on launching new coverage or new services. If we don't find those opportunities, capital expenditures in this segment should come down markedly from recent years.

At the same time, we are working on a number of initiatives to further trim costs in this business. And while the impacts are modest, we've seen good progress in some areas this past quarter, and more on the way. These efforts should be more evident in the P&L a couple of quarters from now.

And this segment's results were both negatively impacted by the impairment of some of our domestic wireline assets. What that means in layman's terms is we haven't succeeded with growing that business the way we had hoped.

In international telecom, as noted, this past quarter saw the close of the Bermuda Cayman deal, and final regulatory approval of the Innovative transaction, which closed on July 1, in line with our original expectations.

We are happy to move on to the operational stage and we have a number of initiatives already underway in both businesses on improving customer experience, finding areas of growth and capturing in-market scale efficiencies. In the early going, these activities will be most apparent to investors in increased restructuring and integration costs, but we would expect to start seeing benefits flowing through before the end of 2016 and more pronounced in 2017. At the same time, we are working hard on integrating these operations and positioning them for long-term success. The competitive and technological environments don't sit still while you wait closing, hence the (technical difficulty) had a little bit of a head start on this as we talked about in the previous quarter.

For example, in each of Bermuda, the Virgin Islands and Cayman, there is both a need and an opportunity to invest in the networks. In Bermuda and Cayman, that includes substantial expansion of the fiber plant with the emphasis in Bermuda on a significant improvement in speed and quality throughout the covered area, and the emphasis in Cayman on increasing the number of homes passed by fiber to capture growth.

In the Virgin Islands, the recent wireline investments by the previous owner were fairly comprehensive with smaller dollar work to be done on tuning and improving performance in certain areas. However, we do plan on a substantial upgrade and expansion of our wireless network in the territory, utilizing our broad and deep spectrum holdings to offer an extensive and advanced solution across the island. And that work will start this year. We also have work to do on strategic positioning and costs and other operating efficiencies with the newly combined businesses, as I noted earlier, and we are already at work on that front as well.

Lastly, as is apparent from this quarter's numbers, we still have not seen the broad pickup we expected in Guyana, so we think the second half of this year has the potential to produce better year-on-year comparisons than the first in terms of both margin and revenue.

Moving on to renewable energy, revenue from existing production facilities and the associated costs continue to perform at or better than our expectations and on a very consistent basis. That is somewhat to be expected with this sector, but still happy to see it. As we have explained before, growth in this segment is highly transactional, either through investing in new projects or acquiring existing facilities or development pipeline. We think we may -- that makes this business a good fit for our strategy and strengths, but of course it also means that there will be periods of higher expense, and we've just reported our third quarter in a row of high transaction expense. Justin will talk, again, as I noted before, more of that, but I will say that, absent a large, unexpected deal, those expenses should be substantially lower in the second half the year.

Our vibrant energy business in India had a very busy quarter with the local team fully fleshed out and a rapid execution on the pipeline. We signed five letters of intent and power purchase agreements related to more than 40 megawatts BC of solar facilities, and we've begun construction on the first 11 megawatt facility.

You will see that operating expenses increased in this segment from last year and that of course is predominantly related to the operational launch in India. We still expect revenue from our Phase I projects to start in the fourth quarter, but it will be sometime in the early part of 2017 before the revenue generation exceeds expenses, given the large number of projects and development activity we have underway in the market.

So, in summary, a lot of noise in the quarter, but we are quite happy with the strategic accomplishments and what they promise us for the future. We are putting our balance sheet to work and we have the capacity to do quite a bit more. At the same time, it is not enjoyable (technical difficulty) operating income and net income weighed down by all of the transactional and restructuring activity. While those expenses are real and we will continue to incur them periodically, as we have in the past, I confess that I will be relieved to see a quarter reflect more of the return of those investments than the cost. I think the second half of this year holds that promise.

And with that, I turn it back over to you.

Thank you Michael. For the quarter, total consolidated revenues were up 11% to $100 million while consolidated adjusted EBITDA declined 15% to $34.3 million at a margin of 34%. These results were largely anticipated and reflected a confluence of events across our telecom segment.

First, our US telecom revenues declined 7% and adjusted EBITDA was down 17% year-on-year due to the impact of finalizing the new contracts at lower wholesale rates, as Michael touched upon, an impact that was partially offset by higher roaming traffic volumes.

As we noted in the release, with the completion of the new wholesale wireless contract terms, we reiterated our earlier guidance with the US telecom segment of between $165 million and $175 million of revenue and the adjusted EBITDA margin to be in the mid-40s% for the full-year 2016. Conversely, international telecom revenues increased 34%, or approximately $13 million, and that was primarily as a result of our acquisition of KeyTech that closed in early May. That's the Bermuda acquisition. Although the addition of KeyTech was accretive to the international telecom segment EBITDA for the quarter, adjusted EBITDA for the segment declined 8% to $15.4 million. This negative comparison was due to several factors.

First, we incurred higher than normal sales and marketing related expenses in Guyana around the country's 50-year independence celebrations. And we're also comparing against an unusually strong EBITDA quarter in 2015 for Guyana. Also impacting that, we continue to be affected by the trends towards lower roaming revenue in most of our international markets that we have mentioned in previous quarters.

The renewable energy segment revenue increased 7% while adjusted EBITDA declined 2% to $3.8 million. The negative comparison was due to the operating costs incurred this year related to our India investment as we work to bring those facilities online in early 2017, as Michael mentioned.

Our operating loss for the quarter was $5.4 million, and included several special charges totaling $23.2 million. First, we incurred $10.4 million of acquisition related transaction costs, which was above the high end of our forecast. While the total transaction costs were in the overall range, as anticipated, some of the costs expected to fall into the third quarter were accelerated into the second quarter as we worked hard to close the USVI transaction on July 1.

As we noted in the release, a majority of the $10.4 million of charges relates to the purchase accounting treatment of our vibrant energy India platform acquisition that we closed early in the quarter. And this required part of the consideration to be expensed rather than capitalized on the balance sheet as is typical for most acquisitions. While we know that these costs are expected to be an active part of the M&A environment, we are looking forward, as Michael noted, to having the bulk of these large costs behind us for now, but we still estimate we will incur between $1 million to $2 million of transaction costs in the third quarter.

The next item impacting operating income was restructuring charges of $1.8 million through various one-time in nature integration expenses following the closing of the KeyTech acquisition. Also related to the KeyTech acquisition and benefiting operating income was a $7.3 million bargain purchase gain. While unusual to most transactions, this gain represents the fair market value of the acquired net asset over the purchase consideration. More than offsetting that bargain purchase gain was the $11.1 million impairment charge on our US wireline operations as we evaluate and review our strategic alternatives given the recent consolidation and change in the market's competitive environment.

Included in operating expense for the quarter was non-cash stock-based compensation expense of $1.9 million, and that compares to $1.5 million in the first quarter of last year. I should note that our effective tax rate for the quarter is unusually high due to several special charges I just mentioned that are not tax affected for GAAP purposes. We expect the year-to-date effective rate that is now approximately 46% to be in the range for the full year. As a result of all the special charges, we incurred a net loss for the quarter of $3.1 million, or $0.19 per share.

Now looking at the balance sheet, at June, we ended the quarter with cash and cash equivalents of $352 million after using approximately $42 million of cash to close the KeyTech Bermuda transaction. For the quarter, cash flow from operations was $50.7 million and total debt outstanding was $63.5 million, which includes the addition of approximately $33.7 million from the KeyTech combination.

Capital expenditures for the quarter totaled $26.2 million, of which approximately $8.9 million was incurred by our US telecom operations and $14.5 million by our international telecom segment. We slightly lowered the capital expenditure estimates on our existing telecom properties from last quarter, but are adding in an estimate of $20 million to $25 million for postacquisition network investments in Bermuda, the Cayman Islands, and the USVI. This puts the total telecom capital expenditure estimate at between $80 million and $95 million for the year. Our estimated 2006 (sic - "2016") build spend in the renewable energy segment remains at approximately $40 million to $50 million.

As part of my financial summary, I usually provide some additional operating days for the quarter. However, since we've added Bermuda in Q2 and the USVI market in Q3, our plan is to provide combined international operating data beginning in the third quarter.

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

(Operator Instructions). Ric Prentiss, Raymond James.

Good morning guys. Obviously a lot of moving parts. I'll ask a couple of questions then come back in queue probably later. The first question on -- so KeyTech in the quarter I think you said added $14 million in revenue. How much EBITDA came in from KeyTech in the quarter?

It was about $3 million.

About $3 million? Okay. So kind of on a margin basis still looking in that 20%. I think, originally, when you had announced both transactions, KeyTech and Innovative, the thought was combining the combination of those two would add about $180 million to $200 million revenue in the first 12 months at 25% to 30% margins. Is that still the thought for the first 12 months of owning them, and how did the margins play out over the timeline given what you were talking about, Michael?

I'll take that one. I think the revenue ranges are still the number. What we originally had said, that the EBITDA margins are more in the lower 20% range, but we want to get them up into that higher range. So it will take a little bit of time for us to move them up into that range on the acquired piece. So I think they will come on more in the lower 20s% and then move up over time as we kind of get efficiencies in place. But it will take a little bit of time to do that.

Okay. And then a question on CapEx. You mentioned that you've added the $20 million to $25 million for Key and Innovative. What should we be thinking about as we look into 2017? How extensive are the fiber in homes past and the Key and how extensive would the wireless upgrades be in Innovative? I'm trying to gauge forward-thinking 2017 might look like.

I think 2017 -- so if we get what we want to get done, a lot of the upgrades in the USVI, I think a majority of that will fall into 2016, but there will be some remainder. And timing is everything. I think you'll see some of the other markets come down, so I would probably -- it's tough to say in terms of timing, but I think we've got a lot of what we want to do built into that number this year.

I think the tough part is just where the year-end falls. So another way to think about it is the bulk of the bigger spend should be completed in the next three quarters, but not necessarily the next two.

So we should really think about $20 million to $25 million as some kind of annualized (technical difficulty) you keep spending on an ongoing basis?

No, I think certainly not. I think what happens in these small markets is it's much more lumpy than a very big network or market where you are rolling through upgrades and expansions across a very large base. So, it should come down significantly, absent something very unexpected, or particularly in Cayman there could be more depending on how the next expansion of the fiber plant goes and the sell-through on that, there could be incentive to keep that going. But if you think about it in terms of really the base plans that we have today, that should come down a lot.

Okay. And the margins (technical difficulty) so lower 20s% is that really through the first year and you get back up to the 25% and approaching 30% in year two and three? I'm just trying to think of when the improvements might come in.

Look. You hope that you can get the most improvements done within a year of closing. That's generally the hope. It's hard to predict all the piece parts of it, but certainly that's (multiple speakers)

It's just harder on some of these smaller markets to move things too quickly. It's much more public.

Okay. Thanks guys.

Barry McCarver, Stephens Inc.

Good morning and thanks for taking my questions. Following along that line of questions on USVI upgrades, can you give us an idea of what you think the revenue opportunity is for expanding the fiber, just a little color around that? And is it more revenue or more cost efficiencies, the upgrade planning?

I think, in Bermuda, it's more of a competitive environment situation. I think there could be some overall growth in the sector, but I think it's more about improving the basic customer experience. You have to keep up with the speed that people want, and if your competition does the same, that's not necessarily going to result in any real revenue growth. And I think in the wireless expansion in the Virgin Islands, we certainly would hope that would be the other way around, which the hope is that will lead to revenue growth there. And same in Cayman where it's bringing new -- the network is quite new, in pretty good shape in most places. There is some old fixed wireless that need to be fixed and replaced with wireline, but generally is more offensive.

Okay, very good. And sorry that I'm skipping around here a lot, but my second question is really on the Indian solar pipeline. I think, last quarter, you gave kind of a timeline for expected projects, when they would roll out over the course of the next several quarters. Any update there, and with what you've done so far, would you consider that on schedule?

Yes, I think we are on schedule. There's puts and takes as you go, and we are not there yet. But I would say we are pretty much on schedule so that we are still looking in that somewhere around 50 megawatt territory to be completed by sometime in the first quarter next year and be following quickly on that. And so the precise timing of some of the revenue starts could move up, could move back, on particular projects.

Okay, very good. And just last question, you mentioned, in regards to the US wireless, expanding your relationships with the big carriers, and we've certainly seen you've had good success with that in the past. Is that something that's underway, or are we still kind of on the drawing board as to what the next projects could be?

I think we are closer to the drawing board than underway. I think there's -- it's really the next stage is not as much about covering white space, which a lot of it was before. It's more about finding cost efficiencies, operating efficiencies, in areas that are just not strategic to these carriers.

And again, I think, from a financial and strategic standpoint, that's a pretty nice value proposition, but it's different. And these are really big companies and with varying priorities. So it's really hard to be confident in that until you are really moving.

And Michael, do you think those opportunities, there's quite a few of those opportunities, or you really have to hunt pretty, pretty hard to find one?

I think there's quite a few opportunities but, again, I think the hard part is convincing the customer of that.

Yes. Okay, very good. Thanks guys.

Hamed Khorsand, BWS Financial.

Good morning. My first question is is the international business -- how profitable would it be if you saw a complete reduction to zero of your roaming business?

Pretty profitable. It's a very small part of the business these days.

And will be a much smaller part of the business. It's a very -- on the acquisitions we just closed, it's almost -- it's a minimal amount of any revenue associated with roaming.

Basically, the US carriers are paying very, very little to local carriers in these markets, and still structuring customers quite a lot. And so there's no elasticity. The volumes aren't there because people tend to avoid using their phone while traveling internationally, and what volume there is at low rates.

Okay. On the US telecom side, is there some room to expand as far as base stations go so you can grow beyond the current revenue guidance that you're suggesting?

Say that again? I missed part of that.

Sure. On US telecom, can you add more base stations to grow revenue, or are you predefined as far as how much you can generate from your existing contracts?

I think there's not much of that growth left that we talked about. So really the way to think about it is unless and until we are successful with finding these expansion areas, there won't be that sort of smaller or much in that way of that smaller organic growth. It tends to be -- it should tend to be a flatter business.

Okay, thank you.

(Operator Instructions). Ric Prentiss, Raymond James.

I want to come back to the India project for a little bit. Can you walk us through how kind of the costs come in for each one of the facilities, and then the timing and pricing for the revenue? You mentioned how you had some costs come in this quarter, you expect still kind of costs in 4Q and the revenues will exceed expenses by the time you get to 2017. I'm trying to understand how best to think through modeling as the facilities come online.

Yes, I think, in this business, the big expense is capital expense. So the operating expenses are not huge. And what we are seeing now is I would call the development expense mainly. So that's really putting -- going out and lining up customers, acquiring land, the activities around that, all of the back-office and overhead that you have to put in place anyway. And once you have projects come line that quickly, the revenue should quickly exceed that overhead. It is and should be a fairly high margin business in India just as it is in the US.

I'd add to that the drag on that overhead won't be -- it won't be large going forward. It kind of nicks out or takes the -- we had the growth in the existing properties that would have probably dropped down to the bottom line, it kind of took that away. But it's not going to be a large expense, but it is an expense until we get up and running.

Once you're up and running, any individual project doesn't have very high operating expenses with it. So even in our US market, most of that expense you see is really the developmental platform which is, among other things, also developing in India.

Got you. Okay. And from a CapEx standpoint, how should we think about timing of that as the facilities come online? Any kind of cost per megawatt that is a good ballpark number?

No, I think we'd rather not give that. That's somewhat competitive. But I think -- so we tried to give an overall rough number of megawatts expected and the equity investment. And as we do more on the debt financing side, we will give more clarity on that front as well.

Okay. And the final question for me, obviously large balance sheet capacity left out there. Any update on what you're seeing in the M&A environment by region or by segment?

We missed our chance to buy Yahoo! I guess. But (multiple speakers) I wouldn't bet against them. I bet you they've got a pretty good plan there.

But for us, really, joking aside, I think asset values still are very high in most sectors. And we are very active. We've managed to find what I think are good investments in that environment, but it's hard to promise anything when there's a lot of money chasing, a lot of things with a very optimistic and rosie forecast behind the pricing. That's what we tend to see.

So just patience and discipline and watching the market?

That's right. And I think right now we are feeling pretty good because I think we feel good about our ability to see -- predict returns and things on the investments and the expanding international telecom footprint. And I think we also have a nice path to put capital to work in the renewables side. Even there, there are some really high values in some markets. We've got a little bit of activity domestically, but most of the things in the US are not attractive from a return profile. But I think that is such a fast-moving segment that -- or sector -- that there's more potential for opportunity there.

I'm sorry, say that again? You broke up.

I think that renewables, even though also suffers from the same thing, really cheap debt, people taking yield, bringing up asset values and down returns, it's a lot more fast-moving and fractured. And so I think, if you are patient and creative, there are more likely the opportunities there in this environment. But we keep looking pretty actively in both sectors.

Great. Okay, thanks guys.

(Operator Instructions).

Any further questions operator?

At this time, I'm showing no questions. I would like to turn it back to management for any closing remarks.

No closing remarks. Everyone, thank you, and we will see you in another quarter. Take care.

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