ATN International Inc (ATNI) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the ATN International First Quarter 2018 Earnings Conference Call. (Operator Instructions) As a remainder, today's conference is being recorded. I would like to introduce your host for today's conference, Mr. Justin Benincasa, Chief Financial Officer. Sir, please go ahead.

Thank you, Michel. Good morning, everyone, and thank you for joining us on our call to review our first quarter 2018 results. With me here is Michael Prior, ATN's, President and Chief Executive Officer. And during the call, I'll cover the relevant financial information and Michael will be providing an update on the business and outlook.

Before I turn the call over to Michael, 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 the 8-K filing provided to the SEC.

And I'll turn the call over to Michael.

Thanks, Justin. Well, overall results for the quarter were as expected down substantially from the comparable period last year. The 2 main factors, of course, were the loss of revenue in the Virgin Islands, due to the destruction of our wireline network and it should be said a lot of the other infrastructure in the territory during the 2 massive September's 2017 hurricanes and the much discussed reduction in U.S. wireless wholesale revenue, resulting from contract changes that went into effect in 2017.

Both of those factors will continue to negatively impact year-on-year comparisons throughout 2018, though we expect to see sequential quarterly improvement in the international telecom segment throughout the year, as our wireline network build in the VI nears completion and customers are reconnected. Also on the good news side of the fence, I was happy to see performance improvements in several areas, notably, including nonhurricane-affected markets and international telecom and Indian solar. I'll talk more about those in a few minutes.

From a capital allocation standpoint, looking forward a bit, we are feeling fairly positive about the ability to grow free cash flow from the mix of operations we have today. And at the same time, we are actively looking at opportunities to invest our balance sheet capacity and future growth. So with that, I'll turn to more the segment details, starting with International [Telecom]. So there, I'll try to keep it shorter than last time, but so much attention is on the post-hurricane environment. And there the rebuilding of wires -- wireline network in the Virgin Islands is the main focus of much of our team today. Certainly, of course, the wire team but a lot of support from ATN and partners. And at the end of the first quarter, less than 1/3 of wires of residential customers are reconnected. We had hoped to be quite a bit further along by this date. I think it's hard from the outside to understand, but what we're talking about in the Virgin Islands is essentially a complete rebuild of the entire wireline network outside the main switching network management elements to use some older nomenclature. Another way of looking at it is, it's virtually all of the outside [plant]. Adds that the fact that our operations are spread over 3 main islands in the middle of the ocean that typically rely on Puerto Rico for most supplies and the fact that the power grid was only substantially restored in February and you get a picture of the difficulties the team has been facing. It took us a while to get the necessary trucks and crews on the island and since that point we've been hindered by shortages and delays in shipping some critical supplies. However, the pace is picking up and we are bringing more customers online and into building every day and every week. As mentioned in the press release, we are awaiting action at the FCC on some support that we and others have been discussing with them for some time. In early March, the FCC Chairman announced a proposal of the direct almost $1 billion to restore and expand networks in Puerto Rico and the Virgin Islands that were damaged and destroyed during this 2017 hurricane season. We know that it isn't easy to get the details of these relief proposals done and worked out and we appreciate the motives are good but we are eagerly awaiting actions, so we can efficiently and speedily work more resilience into our rebuild and ensure that we can provide services soon to the more difficult areas.

So once through this lengthy rebuild, we expect to see healthy numbers for the segment as a whole, and that should include a very substantial reduction in the capital expenditure requirements in 2019 and beyond. Part of our optimism has to do with the performance improvements we've seen in multiple areas. In some, we've seen speedier and smarter execution in general, and in others, we have seen faster build out and provisioning of new fiber customers, and in others, we've seen progress on improving margins. There will be continued revenue pressure and legacy voice and video services and undoubtedly competition may be more competition for data revenues, but right now we are seeing a good trend of increased high-speed data customers on the back of previous and ongoing network investments.

Looking more specifically at the subscriber levels and focusing on sequential movements given the hurricanes and the sales from smaller markets, for wireless subscribers in the segment, they were up slightly at about 311,000 from 307,000 at the end of last year. Data subscribers continue to rise, roughly 106,000 from 105,000 at the end of the fourth quarter. Conversely, voice access lines dropped from a little over 171,000 to below 170,000 and we lost roughly 1,000 net video subscribers as well. People will note that those loss rates looks better actually than where -- what is prevailing in a lot of places, but I would caution you that we've kept the Virgin Islands numbers static because as long as they are in our billing system and we're issuing credits that we kept it static and as we've said before, we don't expect on reconnect that we will reconnect the full level of the subscribers we had before the storms.

So moving on to U.S. Telecom, results for this segment were as expected. The team has been focused on rightsizing operational and capital expenditures for the changed business environment and we did see a reasonable percentage of the loss revenue offset by lower capital spending. We believe there are more efficiencies defined, but at the same time, we are having conversations about expanding services in certain areas and considering other strategic opportunities in this segment. So we have to be careful and balance our natural in patients with implementing improvements with the need for patients as we continue to deal with the fluctuating environment. We could see more near-term pressure on revenue and margins before any success in developing new opportunities materializes, but we are working diligently on solutions.

Renewable energy, not much has change in the segment since our call in late February. We are making progress on restructuring the India business and examining our existing pipeline against current market dynamics in the stage of our business. We did see a good increase in revenue year-on-year as more power is produced and sold in India. Thanks to more plants receiving final regulatory approval. We had some more to come in terms of plants coming online, but we are moving slowly on further expansion for the time being, as we evaluate our position and strategy and continue conversations with lenders and other potential funding partners.

So in summary, this was a period of tough year-on-year comparisons for a number of expected understandable reasons, but our sequential performance was in line with what we anticipated. Trends in U.S. wireless are somewhat soft, but we continue to closely monitor the situation and are evaluating longer-term projects to provide growth potential. Conversely, International Telecom is positioned for progressive growth.

And so that's all from me, Justin, back to you.

Thank you, Michael. Given the impact of the 2017 specific items on a year-on-year comparison, namely the hurricanes, the sale of U.S. wireline business and the contractual changes in the U.S. wireless that Michael just covered, I'm thinking comparing consecutive quarters will be more informative, can provide a better baseline to measure future progress. All of the year-on-year comparison, as you know, can be found in our earnings press release.

For the first quarter, total consolidated revenues were $104.5 million, down 3% from the fourth quarter, as revenues increase in the International Telecom segment partially offset by the anticipated decline in U.S. wireless revenue. Actually, without the hurricane impact, we think that our International Telecom operations revenue would have more than offset the drop in domestic telecom. We did see a sequential revenue increase in the U.S. Virgin Islands in the quarter, but as Michael note in his comments, our network rebuild there is behind plan. Much of the first quarter was spent preparing the core of the network, but we've now moved into -- more into the phase of reconnecting customers. Consolidated adjusted EBITDA for the quarter was $26.3 million compared to $30.8 million in the prior quarter and predominantly driven by the reduction in U.S. wireless revenue. The adjusted EBITDA margin was 25% for the quarter.

Looking at some specifics around each of our segments, and starting with the U.S. Telecom, revenues for the quarter were $28.5 million, down from $34.5 million from the fourth quarter and adjusted EBITDA was $12 million, down from $16.8 million last quarter. The majority of revenue is difference related to the new contractual rates and revenue caps that we've discussed previously. We continue to look for opportunities to reduce capital spending that's not specifically tied to revenue growth in the segment and our current budget calls for a 50% reduction in capital expenditures from where we spent on average over the last few years.

In the International Telecom segment, revenues were $70.1 million, that's up 5% from the $66.9 million in the fourth quarter and adjusted EBITDA was $17.8 million, up from $16.8 million. Almost all of the quarter-over-quarter revenue increases came from the network buildout in the Virgin Islands. Even with the pick-up in revenues, we continue to operate with adjusted EBITDA losses in that market, as the nature of the business requires a certain level of fixed cost to be maintained. As we noted in the release, we do expect business in that market to progressively improve as we -- improve as we move through 2018.

In the Renewable Energy segment, revenues were $5.8 million in the quarter, comparable to the $5.9 million reported in 2017 fourth quarter, as we had similar energy production this quarter and India's last quarter. Adjusted EBITDA was steady with the prior quarter at $3.7 million.

For the consolidated company, we incurred a net loss of $5.6 million or $0.35 per share. I should point out that the tax expense and effective rate for the quarter was disproportional to pretax income mainly as a result of the accounting for loss exclusions in the U.S. Virgin Islands.

As we move through the year, we still expect the overall tax rate to be in the mid-30s. Also included in operating income this quarter was $1.6 million of noncash stock-based compensation expense.

Moving to the balance sheet, we ended the year with cash and short-term investments of $206 million. For the quarter, cash from operations was $22.5 million and we ended the quarter with total debt outstanding of a $154.9 million. Capital expenditures for the quarter outside of cost incurred for hurricane network repairs totaled $21 million, of which approximately $15.4 million was incurred in our International Telecom segment, $4.7 million in the U.S. Telecom operations and $0.9 million in Renewable Energy. In addition, we spent approximately $30.9 million in the USVI for hurricane restoration efforts. As we mentioned in the press release, we now estimate that total cost of that network rebuild to be between $60 million and $65 million, some of which will be paid for with the insurance proceeds and any governmental support we receive. And with that operator, we'd like to open the call up for questions.

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

A couple of questions. First, I think you mentioned that you had sold the British Virgin Islands in late '17 and did you call out that that was $1.1 million of revenue out of it when you look at quarter-over-quarter that came out and strength through how many subs that was and what the effect on ARPU was, because I was -- I don't know that you were selling the Virgin Islands or British Virgin Islands?

Yes, that was the revenue number and I think we pro forma-ed the subs in the back to be table to pull out all that from the historical data; we provided Ric.

And it was mid-2017 not late, just to be clear.

So was that -- BVI was out of 4Q as well?

Yes, I think so. And look -- asking these guys.

August.

Yes.

And when you consider that the subscriber growth from 4Q to 1Q of mobile subs going up, I think you said what about 4,000, obviously a nice quarter. Just trying to think of what the competitive dynamics look like out there as far as the International Mobile operations and the ARPU also looks like it came in pretty nicely, although now I guess equipment is included up into revenue.

Yes, we don't have a huge amount of equipment subsidies in that nature of the prepaid business right, because a lot of the subs are coming through Guyana, but we don't want to talk about the competitive.

And well -- I think the point to make there is people bring their own -- more typically in that [market].

So competitive environment -- I mean, just there is some -- there is a difference in different markets, but I would say we've eased that a little share gains in places like Guyana and kind of held their own otherwise. It's -- I wouldn't say it's remarkable, but it's a good trend, I agree.

I mean, some Ric, what I would add to that is, in markets like Guyana where they're typically behind where we've been in the U.S. or -- we are seeing more data traffic now to run the ARPU.

So -- as you thought you could see some continued -- so is this a good ARPU level that it could grow from this level or just trying think through --

I think that the biggest number of subs is in Guyana where we think ARPUs have potential to grow quite a bit from the further data usage and penetration and then from the fact that the economy is already starting to grow in anticipation of oil activity.

And on the CapEx, I think you kind of answered the question. Previously, we were thinking hurricane restoration might be, I think, $35 million to $45 million, now you are thinking $60 million to $65 million, those are gross numbers. And so when you get insurance and maybe government support that would reduce it on a net basis, is that correct?

Yes, that's correct. Maybe in insurance is in there at [$34 million] and some change.

Right, and of course, that doesn't include loss revenue.

And previously you had kind of mentioned what you thought CapEx absent that was going to be for the year, I think, Telecom was $65 million to $80 million. Is there been any change to that I didn't notice an update to that?

We didn't update that and we are probably still around that range. We're seeing a few things on some the -- on some growth initiatives that may bring that number up a little bit as we move forward, but we're still waiting to kind of see how that plays out, but it would be kind of growth CapEx.

And then in the U.S. you've got the upcoming sale of a part of the wholesale network, is that looking like it's still about 100 base stations and just trying to think through, I think, you mentioned that it might close in 2Q, so I'm just trying think through what the impact of the sale of the network looks like not just in 2Q, but the rest of the year.

Yes. I think it is about 100 base stations and what you can't kind of straight line it because it's worked within the context of a larger contracts and so on. So I think the best thing to do is go back to the guidance we have previously given to which encapsulated that event.

And so the guidance -- I mean, I think that was what $110 million to $120 million or $100 million to $120 million of U.S. Telco in '18?

Yes. And as we noted, we're seeing some (inaudible) the question in the release that we're seeing some softness. We're not saying we think we're going to fall outside that guidance at this point, but it might put us at the low end.

Yes, that's where I wanted to get at -- it was kind of with that softness was, you mentioned it could be on the revenue and the margin side.

And our next question comes from the line of Allen Klee with Sidoti & Company.

Starting with U.S. Virgin Islands, can we get any sense of what the profitability -- losses are there and how much surface credits are being given today in the first quarter.

I mean, we mentioned in the release, right? We were about -- if you look at year-over-year quarters, it's about a $12 million impact in the quarter for service credits. And on the EBITDA, we've not given out specifics on that, but it's a negative.

And then we did this service credit show up on your -- in your financials?

In revenue -- it's the reduction of revenue.

And if you get to -- if you get everything up and running by the late summer, then post that -- you had said prior to the hurricanes that you thought USVI would have annualized revenue of around $100 million and 20% to 25% operating margins. I know, the economy slowed down a bit there, but is there any reason to think that once it is back and running maybe for a little bit that those numbers still makes sense?

Allen, it is Michael. If you go back -- first of all, we don't break out the individual markets within the segment anymore. We gave what the numbers have been doing pre-deal with kind of the run rate once the people can figure out, had add it. But directionally, as we've said before, it's hard to believe that the revenue will come back right away at the level it was pre-storms. You've got people who haven't maybe -- who have left the island and may not return, you've got some other economic activity that's below where it was, I mean, some of it is catching up. And then you have sort of -- I don't know what the word -- it is [called] inherent -- cord cutting, cord shaving that can occur naturally but can be exacerbated by these sorts of situations when people are waiting for reconnection for a long time. So it's hard to gauge exactly what that will be, but we think it will take some time to get to full steam in a minimum.

Keep in mind until that those are the kind of numbers we gave when we first acquired the property, which included to BVI and St. Maarten. So apples-to-apples going to a little bit off of that number to begin with anyways before impact. Best thing to do is look back and say kind of a high point was second quarter last year. And there's some puts and takes to it and there is some improvement in other markets, but that's kind of a high point that if the Virgin Islands -- we the Virgin Islands to come back pretty full to get back in that territory.

In terms of -- you talked about managing costs in U.S. Telecom -- in terms of where EBITDA margins have been coming in, do you feel that the current run rate is a good one going forward?

On the margin, I mean, I think -- yes, it's hard to say, I think, any additional softness in revenues will put pressure on the margin.

And then just maybe a little more of an update on India in terms of what you're thinking is on getting third-party financing and potential time frame whether may or may not --

I guess our thinking is we'd like it -- not to (inaudible) but I think we're having good conversations. It's a question of churns and acceptability. There is an interest level on both the debt and equity partner's side, serious conversations occurring, but there is also a play of those things, particularly on the equity side against [us] what direction we are going forward and scale and other considerations like that. So it's hard to be more specific than that (inaudible) making progress at some point is only really clear when you actually have something in hand right? So -- but conversations are going on and we are working it.

There are 2 accounting related questions. One, you paid a high relative amount of tax in the quarter compared to your pre-tax income, but you still said you should be in the same range for the year. Could you maybe point to what the impact of the quarter could it have been? Or did you repatriate cash from Guyana, and if you did, what that was? And then also net income contributable to noncontrolling interest was -- while it's relatively steady looking back in time, it was over 100% of pre-tax income. So maybe also just kind of explain what's going on in those 2 things.

Let me take the second one first. The minority distributions, if you will -- that's really driven around the -- kind of the jurisdictional kind of spread of income this quarter, right? So you are going to have markets [where ended -- did well], the minority interests accounting that takes place there and then losses in the Virgin Islands are really what are impacting both of those [skills]. So -- and that's a 100% owned. So that's going to artificially inflate that minority interest piece because there is -- and also the losses in the Virgin Islands are for accounting purposes -- not -- the losses are excluded effect. So you kind of have tax on everything else, but no benefit from the losses in the Virgin Islands.

And on taxes ?

That same thing on taxes as well. The losses in the Virgin Islands are -- you have to exclude, and so you can't tax affect them, which will bring -- ultimately it would have brought the effective tax rate down if you can taxes affect them.

And our next question comes from the line of Hamed Khorsand with BWS.

So first, could you just clarify the guidance you gave for U.S. Telecom -- the commentary you have given earlier, is that -- you were indicating that would end up being closer to lower end of the guidance. Is that because the sale that spending or is that because of just the contract terms of remaining assets?

It could be close to the low end and it's just a combination of things we're seeing, lower traffic and things like that, but -- so it's not the sale, is already included in the guidance that we gave.

And then as far as the Guyana is concerned, how are you able to -- or what's the strategy as far as increasing ARPU, you're talking about data rates rising in that market.

It's just penetration. It's just mobile data penetration, consumers as you've seen in most markets is just a little behind getting used to mobile data, valuing it, using it more, smartphone penetration, believe it or not, still has some impact. So it's the kind of trend other markets have seen. It's just a little bit of a lag time versus more developed economies.

I was just about to ask you, what is the penetration rate for smartphones in Guyana?

We don't provide market by market details, so --

And then are you looking for a third-party investor in [India] or can you grow it out yourself?

We can grow it out on ourselves, I think, but whereas we said we're evaluating the pros and cons, right? Are there broad of cost capital, are returns high enough? What's happening in solar is, there are a lot of -- there is a lot of money coming into the renewable energy in multiple markets that is -- that has got a much lower cost of capital and therefore lower return need than we do. And so we've always contemplated as we build in the segment attracting additional layers of capital and effectively serving as a managing partner, if you will. And that helps the returns to be attractive enough for us and it also provides an outlet for the sort of passive financial money that we're looking for operating investing partners -- to get money into the sector including in Indian solar particular. So it's out there but there is a little bit of the chicken and egg potential too which is we likely need to get bigger to allow people to put enough money to work.

(Operator Instructions) Our follow-up question comes from the line of Ric Prentiss with Raymond James.

Michael, early on, you had talked about capital allocation and that you're fairly positive there could be some free cash flow growth as you manage revenue cost and CapEx. But that also -- obviously, the balance sheet, you're sitting with a ton of cash. Can you elaborate a little bit for us on what types of opportunities or locations of opportunities they might need or they might be? And also, AT&T last night had a very bullish call on their desire to really go fast and furious on the FirstNet project. Is there any opportunities there for you?

Yes. I mean, I don't like talking about individual things, but, yes, I think there's opportunities in that area broadly for us, certainly having conversations with anybody looking to add infrastructure quickly in the world, wireless, in particular and where -- in general, I think, the areas we see, our kind of in the share -- what I would call all in this -- mostly in what I would call the shared infrastructure bucket on communication side. There is a lot of need for the big carriers to manage their network costs, keep their network costs down as they continue to do massive expansion of capacity and capabilities on the data side. And we see opportunities there for us and we see -- there is a bunch of other people doing that as well, but we think it's a good fit for the kinds of things we like our capabilities -- our operational capabilities and our reputation. So I think that's a lot of it particularly in the United States and -- but also in other places, we made a small investment in Australia. We see other markets like that benefiting from it. And then renewable energy, again it's a bit of figuring out the model and there could be some puts and takes of capital moving but we continue to see opportunity there for a player our size to kind of work with those large financial sources in the sector.

And then you referenced a couple times the potential and obviously Chairman pie looking to help Puerto Rico and the U.S. Virgin Islands. Is there some way for us to scale with that potential opportunity might be? Obviously, it's tough to call the timing, but what type of magnitude it might mean?

No, it's pretty hard because most of that is not public. It's easy to look at and say, of course, the bulk of the money going to Puerto Rico given the size of Puerto Rico growth in to the Virgin Islands. But we think it certainly has potential to be material to that business for us. And it's kind of critical to accomplish some of the things that we think make sense to make the Island more resilient and the communications infrastructure more robust. So hard to -- the short answer is, can't really quantify it right now. All that I can say, I think, it could be material to that --

And along the lines will be FCC, obviously you have the CAF-II process going on. Did you guys register for CAF-II or you're interested in doing the CAF-II fiber auction?

We are registered, yes. And I think -- I have -- I forgot to give brief but (inaudible) don't say anything else.

Just, yes.

And what's the timeline? I think you could talk to that -- yes, you are registered and then what your thoughts as far as how the timeline of that plays out?

Well, I believe the auction starts in July, if I remember correctly. So I don't know beyond that in timeline -- I mean, I have an idea, but I don't want to say and get it wrong.

And our next follow-up question comes from the line is Allen Klee with Sidoti & Company.

Just a clarification, you didn't show any equipment sales this quarter, and I was just wondering is that a result of a change of getting rid of some businesses that you really won't be seeing that going forward or is there something else specific to the quarter?

No. That's a change in accounting principle that just took -- affect this quarter. So I think now all the -- it's all included in it. It's all on wireline -- in wireless, sorry.

Thank you and I'm showing no further questions at this time. And I would like to turn the conference back over to Justin Benincasa for any closing remarks.

That's all we've, everybody. Thank you for joining us and we will see you next quarter. Take care.

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