Consolidated Communications Holdings Inc (CNSL) 2006 Q1 法說會逐字稿

Welcome to the Consolidated Communications first quarter earnings call.

[OPERATOR INSTRUCTIONS]

I would now like to turn the call over to Steve Jones, Vice President of Investor Relations. Mr. Jones, please go ahead.

Thank you, Allison, and good morning. And thank you to everyone for joining us today for Consolidated Communications first quarter 2006 earnings conference call. As Allison mentioned, I'm Steve Jones, Vice President, Investor Relations, and with us on the call today are Bob Curry, President and Chief Executive Officer, Steve Childers, Chief Financial Officer and other members of the senior team. After the prepared remarks, we will conduct a question and answer session.

I will now review the Safe Harbor provisions of this call, then turn it over to Bob. This call may contain forward looking statements within the context of the Federal Securities laws. Such forward looking statements reflect, among other things, management's current expectations, plans and strategies and anticipated financial results, all of which are subject to known unknown risks, uncertainties and factors that may cause the actual results to differ materially from those expressed or implied by these forward looking statements.

Many of these risks are beyond our ability to control or predict. Please see the risk factors section of our annual report on Form 10-K previously filed with the Securities and Exchange Commission for greater detail. Because of these risks, uncertainties and assumptions, you should not place undue reliance on these forward looking statements. Furthermore, forward looking statements speak only as of the date they are made. Consolidated Communications does not undertake any obligation to update or review any such forward looking information whether as a result of new information, future events or otherwise.

In addition, during this call we will discuss adjusted EBITDA, adjusted EBITDA margin, adjusted net income per share and cash available for paid dividends, all of which are non-GAAP financial measures. Our earnings release for this quarter's results, which has been posted in the Investor Relations section of our website, contains a reconciliation of these measures to their nearest GAAP equivalent.

I will now turn the call over to Bob.

Thank you, Steve. And thank you everyone for joining us today. I'm excited to talk with you about our first quarter results and very pleased to report we continue to execute our plan across the board. Our focus is on providing high quality broadband and voice services and generating strong cash flows. Our strategies for long term success are growing revenue per customer, improving the operating efficiency, maintaining our discipline CapEx philosophy and selectively pursuing acquisitions.

I'll summarize our financial success and our operational execution, and then turn it over to Steve Childers, our CFO, who will provide greater detail on our financial performance.

Revenue was strong at $79.4 million in the first quarter. Adjusted EBITDA grew 5% to $34.3 million, compared to the first quarter of 2005. Excluding costs associated with billing integration, severance and Sarbanes-Oxley, adjusted EBITDA would have grown by 7% to $34.8 million.

Cash available to pay dividends was a solid $16.2 million. This represents a 71% pay out ratio, which is in line with our expectations.

Now, let me talk just a bit about some of our operational objectives and achievements. Our goal is to be the telecommunications provider of choice in the markets we serve, with a focus on increasing total connections. We are achieving this by leading with our very strong broadband offering and a bundle of superior voice and data products in all of our markets and IPTV in selected Illinois markets, all of which are supported with outstanding customer service.

In terms of results, I'm very pleased to report that we continue to grow total connections. We ended the quarter with over 288,000 total connections, demonstrating an increase of 4,800 subscribers, up 1.7% since the fourth quarter of 2005. We ended the quarter with 240,959 access lines, which are down versus year end 2005 by only 1,065 lines, or .04%. Even though the first quarter is historically a low access line loss quarter, we are pleased with these results.

On a year over year basis, after adjusting for the loss of the 5,380 access lines access associated with the previously announced MCI metro [inaudible], the decline would have been 3.3%.

Driving broadband penetration continues to be a strategic focus for us. We drive that penetration through widespread availability, targeted promotions, delivering a range of broadband speeds that meet our customer's budgets and applications needs and providing exceptional customer service. Also, enabled by our quality network, we have been successful in layering additional services over the existing broadband connection, like IPTV. This focus, coupled with our bundling initiatives, has delivered value to both the customer and Consolidated alike.

Regarding DSL, we had a phenomenal quarter. We ended with 43,713 subscribers, which represent an 11.5% sequential increase and almost 42% increase year over year. We gained over 4,500 net new subscribers during the quarter, the largest net add quarter in our history, and we have an 18.1% penetration of total lines and more importantly, a 24.9% penetration of primary residential lines. As with access lines, there is a seasonality impact. The first quarter is usually strong, with slower growth in the second quarter. However, we remain bullish on the demand outlook.

Regarding IPTV, it was another great quarter. We ended with 3,514 subs in Illinois, an increase of over 1,300 versus the fourth quarter of 2005. We have passed approximately 22,500 homes, equating to a 15.5% penetration rate. The product continues to perform well and customer feedback has been very positive.

We will continue to enhance the offering with new products and features. In the second quarter, we plan to add six new channels, a user-friendly remote control and enhanced video-on-demand service with over 1,000 of content. Of the 35,000 plus customers that have signed up for our IPT service, 91% have taken our triple play offering, which includes IPTV, DSL and voice products. This attractive packaging demonstrates consumer attraction to Consolidated's bundled solution.

We closed this quarter with over 39,000 total bundles, up over 6,500 from a year ago. Customers are recognizing both the overall value of the bundle and proven services of Consolidated, while we benefit from efficiencies from multiple product delivery, higher overall [inaudible] strong, deep customer relationships.

We continue to study the positive results from Illinois and the overall opportunity in Texas. We are excited about these possibilities and we'll let you know when a final decision is made.

In addition to growing revenue per customer, we continued to drive operating efficiencies. For the first quarter, our total company adjusted EBITDA margin was 43.2%. Excluding the cost associated with billing integration, severance and [inaudible], our adjusted EBITDA would have been 43.8%. This represents an almost 300 basis point increase, versus the 40.9% in the first quarter of 2005. Then in terms of our billing integration project, I am happy to say we remain on schedule and on budget.

Regarding capital expenditures, we spent $8.5 million in the first quarter. This is in line with our expectations for the quarter and consistent with our 31 to 34 million annual guidance. Our network continues to be a competitive advantage for us. It positions us with lower cost, better quality and a flexible platform which enables for development and delivery of new broadband applications for our customers. As a matter of fact, Cisco Systems recently named Consolidated Communications the IP innovator of the year at Telecom Net. The award recognizes the world-class design of our network and its advantages for our company and customers.

Lastly, we continue to monitor acquisition opportunities and have nothing new to report at this time. I will now turn the call over to Steve, our CFO, for the financial review.

Thanks, Bob. As Bob mentioned, we are very pleased with our first quarter 2006 financial results. In order to sustain and grow our free cash flow, we continue to be focused on average revenue per user and driving costs out of the business. I'll highlight some of these items and then provide the first quarter financial review.

Our [inaudible] telephone operations remain strong at approximately $96.00 per access line. On the cost side, we have reduced our headcount by 85 over the last 12 months. Additionally, we continue to realize cost improvements and savings from our earlier efforts to align our benefit plans and by closing the Irving, Texas office. For the first quarter, we generated $16.2 million cash available pay dividends resulting in a strong 71% payout ratio. This is in line with our expectations. Revenue for the first quarter of 2006 were $79.4 million, compared to $79.8 million for the same period last year.

Now, let me provide some detail on the major revenue line items. First, regarding local calling service, the year over year revenue decline of $1.1 million was driven by the reduction of local access lines. Subsidy revenue declined by $1.5 million, primarily driven by the recognition of $1.1 million prior period receipts in the first quarter of 2005.

Access revenue grew by $700,000, mostly due to increased demand for special access circuits. Also, we experienced an increased in data and internet revenue driven by exceptionally strong DSL and IPTV sales. And lastly, the $1.3 million increase in other operations revenue was driven by increased billings in our market response and prism systems business units, as well as increased sales of customer premise equipment.

Total operating expenses for the first quarter of 2006 was $64.3 million, compared to $67.4 million for the same period last year, for a decrease of $3.1 million. The decrease was driven by the overall cost structure improvements, a reduction in integration costs and the elimination of our obligation not pay professional fees, which terminated upon completion of our IPO. As a result, income from operations was $15.2 million for the first quarter of 2006, compared to $12.3 million for the same period last year, reflecting an increase of $2.9 million.

Net interest expense was $10 million for the first quarter 2006, compared to $11.4 million for the same period last year. The decline was primarily driven by lower interest costs, resulting from the redemption of $70 million of our senior notes during 2005. For 2006, the reaffirmed guidance of the cash interest will be in the $37 million to $38 million range.

Income tax expense was $2.9 million for the first quarter of 2006, compared to $600,000 for the same period last year. This was primarily driven by increased pre-tax earnings. Accordingly, net income for the first quarter of 2006 increased to $3.5 million, compared to $700,000 for the same period last year. Net income per common share for the first quarter of 2006 was $.12 per common share. After adjusting for the effect of non-cashed out compensation charges, earnings per common share would be $.14 per share. We provide adjusted EBITDA, which is referred to bank EBITDA on our IPO prospectus, as well as adjusted EBITDA margin, cash available to pay dividends and adjusted net income per share, as management believes these metrics are useful as a means to evaluate our ability to pay estimated cash needs, including our dividend. In addition, adjusted EBITDA is a component of our bank covenants.

Adjusted EBITDA was $34.3 million for the first quarter of 2006, compared to $32.7 million for the same period last year. Excluding costs associated with billing integration, severance and startup costs for Sarbanes-Oxley, adjusted EBITDA would have been $34.8 million for the quarter, reflecting an increase of $2.1 million. Historically, these costs would have been added back to our adjusted EBITDA for purposes of our credit agreement. To help facilitate period over period comparisons, we have separately identified these costs in the EBITDA schedule included with our earnings release, and we believe it is appropriate to add these costs back when evaluating our financial performance.

The $2.1 million period over period increase in adjusted EBITDA was primarily driven by operating efficiency improvement and incremental cash distributions from our cellular partnership investments. These gains were partially offset by lower prior period subsidy receipts.

Capital expenditures were $8.5 million for the first quarter of 2006, compared to $5.5 million for the same period last year. This increase was driven by the timing of projects, and as Bob mentioned, this was consistent with expectations and consistent with our 31 to 34 million CapEx guidance.

We ended the quarter with $25.7 million of cash on the balance sheet, and our $30 million revolving credit facility remains fully available to us as well. For the first quarter of 2006, total net leverage ratio as calculated in our press release was 3.82 times to 1, and all coverage ratios were well within compliance levels of our credit facility.

And with that I will turn the call back to Bob.

Thank you, Steve. In summary, Consolidated is the telecommunications leader in the markets we serve in both Illinois and Texas, with award-winning technology and a robust product set bundle to benefit both the consumer and the company. We continue to focus on providing the high quality broadband and voice services, while generating strong cash flow. I am very pleased with the results of the quarter.

And with that, Allison, I'd like to open it up for questions.

[OPERATOR INSTRUCTIONS]

Your first question is from Tom Sykes with Lehman Brothers.

I understand you may have signed non-disclosures, but can you give us any sort of general update on the progress being made by the forums in which you participate for intercarrier comp? And then second question, any movement on the competitive front, any requests for interconnection agreements from the cable guys or their back hall carrier partners? And then finally, any additional response yet on Mediacom on the video offering thus far? Thank you very much.

Let's take those in reverse and see if I've got them all. On the Mediacom, again, for those who may be joining for the first time, Mediacom covers about 60% of the access lines in Illinois, or about 16% of our overall access lines. There has been no change there. We continue to expect them to enter the market, but they have not entered any of our markets yet selling a voice product.

And that's why their video response has been sort of almost like a dumbed down version on price alone?

That's correct. Offering from short term win backs, our price cut for the first 90 days, take a bundle try to remove some of the upselling that they've done over the years that have pushed the [inaudible] higher, they try to lower the customer's bill. But very pragmatic, no real price war, and still trying to maintain the price on the broadband product.

Regarding intercarrier comp - was the question intercarrier comp, Tom?

Well, once again, I had a bunch. Yes, it was intercarrier comp and then, again, anything going on down in Texas on interconnection agreements?

In Texas, we've had a request for a spring interconnection agreement. We continue to negotiate with them. They're pursuing that we suspect in order to provide Time Warner with voice services. While we haven't reached an agreement yet because there are some differences in similar agreements that we have and some that we're aware of that Time Warner has, we do expect to come to an agreement with Sprint or Time Warner on the rates for traffic exchange in the near term. We remain willing and would prefer to deal direct with Time Warner instead of a middleman, and we expect the Texas Public Utility Commission to hear the debate and decide on this in the next quarter or two.

Okay. And then the final one was any update on the forums that you're participating in with respect to intercarrier comp?

On the intercarrier comp, we are participating, as you know, in a number of them. Our position has been in lobbying with the SEC, we think that phantom traffic is a big issue, and if that is resolved, it removes some of the hurdles or impediments to solving intercarrier comp. And we think we're very close to getting something through the commission on that particular issue.

Regarding what some would call the Mazula [ph] plan or the plan that came out of [inaudible], we're currently in discussions with our midsize colleagues and the larger companies, again, trying to push the phantom traffic and we are supportive of the Mazula plan, which we think is likely going to happen. And along with that, of course, is the resolution of USF, and we continue to push two points there, one, making sure that the pool of contributors is expanded; and two, that the ETC is reformed, particularly the wireless carriers, so that we're not supporting multiple carriers and that they're using their own costs.

We're very, I would say, optimistic at this point that our issues are well understood in the industry. And again, I don't want to prognosticate, but the industry is clearly moving toward a consensus to resolve this very important issue.

Great. Thanks a lot. And great quarter.

Your next question is from Jonathan Chaplin with JP Morgan.

Nice step up in the margin for the quarter. Can you talk a little bit about the step up in margin; and also can we expect incremental step ups throughout each quarter of '06, or will it all come after the billing system is complete? And then in terms of access lines, they look very solid this quarter; can we expect the same for access lines going forward?

Let me start that, Jonathan, as far as the margin improvement, we continue to mine out costs, particularly a reduction in headcount. We have also gotten the benefits on previous calls. We've talked about the reduction in some of our benefit expenses, and we're starting to see the full benefit of those kick in.

And integration is basically finished, with the exception of Phase 2 and Phase 3 of billing, and Phase 2 of billing we'll complete in August of this year. It will give us some benefits that will allow us to combine some more groups. So we would expect to see incremental improvement in the upcoming quarters. And as you know, we've said in the past, that's our focus, and that's the last remaining piece that would allow us to put some groups together.

Regarding access lines, as I said, first quarter traditionally is a strong quarter on access lines, and I don't expect to see 0.4% loss in the second quarter. I think it will be more around historical averages. I will tell you that we're seeing, as we said, as our second line continues to migrate to DSL, our access line losses are coming down. And in Texas, particularly in some of the growth down there, particularly in business, we're starting to see actually some positive growth in Texas.

But I would tell you that we ran about 3.1% last year, 2.8 or 2.9 the previous year. I would say a good model number while we don't provide guidance on that, we expect it to be - that's probably a good run rate.

[OPERATOR INSTRUCTIONS]

Your next question is from Michael Rollins with Citigroup.

Just a quick question for you, and forgive me if you've described some of this already. But I was just curious, is there a way of tracking the video success to the primary line change in the residential market in Illinois and describing whether selling video actually can help you at some level add lines or just stop the loss of primary lines at some point? Just as we sort of conceptualize what you're doing with your triple play offering. Thanks.

Thanks for joining us today, Michael. First of all, what we have seen is it's a very sticky product. We're seeing little to no churn on that particular product. We have also seen that we have had some win back success. We've had little churn in our DSL product, but there have been some access line losses, whether it was wireless or it was over a broadband issue that we found that that has come back. But clearly, the subscriber is recognizing both the value of the bundled package and it does make it sticky. We've also heard that they do enjoy one stop shopping and a single bill for their telecommunications needs. So both are sticky.

Will we win back some access lines? Yes. Is it going to be a huge growth area for us? I suspect not. We're thrilled that we launched it when we did. We learned a lot of good lessons last year in the trial and over the last six months where we have been more aggressively marketing it, and word of mouth out on the street has been very positive.

Your next question is from George [inaudible] with SWS Financial.

Good morning and congratulations on an excellent quarter. One question, clarification. I noticed your earnings were $.12 a share or $.14 depending on the adjustments. However, as far as your shareholder equity is concerned, it appears as though you increased the accumulated deficit. What caused that?

George, this is Steve Childers. Basically, the deficit, when you see our 10-Q you will be able to look at the reconciliation, but basically, it's just a function of net income for the period minus the dividend and for the quarter the dividend [inaudible] net income. But again, we have tremendous capacity within our restricted payments [inaudible]. We're confident in our ability to continue to generate cash. So I don't think you should be too worried about the accumulated deficit.

I was just a bit confused, but you've certainly explained that well. And we recognize that your philosophy is that dividends are paid out of cash flow.

Yes, sir. Absolutely.

Thank you.

[OPERATOR INSTRUCTIONS]

There are no further questions at this time. Please proceed with your presentation or any closing remarks.

Thank you again for joining us today and your continued interest in our company. We're excited about our current position and our opportunities going forward. We look forward to updating you on that progress. Have a great day.

Ladies and gentlemen, that concludes your conference call for today. We thank you for your participation.