Consolidated Communications Holdings Inc (CNSL) 2006 Q4 法說會逐字稿

Welcome to the Consolidated Communications Fourth Quarter Earnings Conference Call.

[OPERATOR INSTRUCTIONS]

I would now like to turn the call over to Kirsten Chapman.

Please go ahead, ma'am.

Thank you, Molly.

This is Steve Jones.

I'm Vice President of Investor Relations at Consolidated.

And thank you to everyone for joining us this morning.

With us today on the call is Bob Currey, President and Chief Executive Officer and Steve Childers, Chief Financial Officer.

After the prepared remarks, we will have -- we will conduct a question-and-answer session.

I will now review the Safe Harbor provisions of this call and 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 and unknown risks, uncertainties and factors that may cause actual results to differ materially from those expressed or implied by the forward-looking statements.

Please see our public filings with the Securities and Exchange Commission for more information about forward-looking statements and related risk factors.

In addition, during this call, we will discuss certain non-GAAP financial measures.

Our earnings release for this quarter's results, which has been posted to the Investor Relations section of our Web site, contains reconciliations of these measures to their nearest GAAP equivalent.

I will now turn the call over to Bob.

Thank you, Steve, and thank all of you for joining us today.

Once again, Steve Childers and I are excited to report to you on both our operational and financial results.

We will go through the details in a minute, but overall, I am very pleased with how the business performed and the results we achieved in our first full year as a public company.

Our goal continues to be providing high quality broadband and voice services, generating strong, sustainable cash flow to support the dividend.

We have and will continue to focus on growing revenue per customer, improving our operating efficiency, maintaining our disciplined capital expenditure philosophy, while selectively pursuing acquisitions.

Before commenting on our operational execution, let me provide a brief financial overview, which Steve will go into in greater detail a bit later.

Overall, we are very pleased that we delivered strong financial results for both the quarter and the full year.

Revenue was solid at $82 million for the quarter and $321 million for the year.

We're pleased that we were able to stabilize line loss at prior-year levels and maintain revenue.

We continue to drive cost out of the business.

Adjusted EBITDA was strong at almost $36 million for the quarter and $140 million for the year.

The dividend payout ratio, exclusive of one-time asset sales, was 70.2% for the quarter and 76.6% for the full year.

Including this quarter's results, we've generated cumulative available cash under our credit agreement of over $25 million.

Now, let me talk a little bit about some of our operational achievements.

We grew total connections sequentially by almost 2,400 in the quarter, and we were up over 10,000 for the year.

The key to this growth was our success in increasing broadband connections.

In 2006, broadband connections, or what we call DSL-plus IPTV, grew by over 18,000, while access lines' climb was just over 8,000.

DSL and IPTV will continue to help the top line by generating incremental revenue and improving customer retention.

In terms of DSL, we had a phenomenal quarter, adding almost 3,400 new subscribers, surpassing our fourth quarter performance from both 2004 and 2005.

This brings the total subscriber count to over 52,000 and represents a 35% increase year-over-year.

For 2006, we had our best year ever from a subscriber-growth perspective and added just over 13,000 new DSL subs.

This product continues to perform well for us and our customers, and we believe subscriber growth will continue.

Regarding IPTV, we are seeing nice progress in both Texas and Illinois.

We added over 1,300 subs in the quarter, bringing the total subscriber count to almost 7,000.

We passed an additional 17,000 homes in the quarter, primarily in our Conroe, Texas market, bringing total homes passed across both states to approximately 90,000.

Now, let me talk a bit about the individual states.

First, in Illinois, we added over 800 customers, bringing the total subscriber count to over 6,300.

We're pleased with how the product is performing in the market.

Penetration of homes passed in the three original markets we launched in 2005 now tops 26%.

Customer perception is positive.

The network is performing well.

And our triple-play offering continues to be well received.

Of particular significance, 90% of our IPTV customers have taken our triple-play offering.

In Texas, as you are aware, we launched the product in our Conroe and Katy markets at the end of the third quarter.

So this was our first full quarter of operation.

As I mentioned on our last quarter's call and consistent with what we did in Illinois, we are doing a controlled launch to ensure that the network and back office processes are in place.

Overall, the rollout is going as expected.

The product is performing well.

And subscriber growth is consistent with what we experienced in Illinois at this point in the rollout cycle.

Also, word-of-mouth advertising is building, and I am confident it will be a key component of our success in Texas, just as it has been in Illinois.

At the end of the quarter, the subscriber count in Texas was roughly 600 and we passed over 54,000 homes.

Now, just a brief update on the product itself.

First, I'm excited to report that we just made IPTV service available in Lufkin, Texas.

We've been testing the service in Lufkin for the last 60 days and the product has performed well.

While service was recently made available, we plan to initiate our marketing programs next month.

With the launch of this market, we will provide -- we will be providing service in all of our major markets and will pass just over 100,000 homes.

Second, we expect to launch high definition service in the second quarter in Texas and early in the third quarter in Illinois.

In both states, we will launch with a robust channel offering, including local stations, ESPN, Discovery and a number of other tier-one channels.

Although HD is important in both Illinois and Texas, the product matches itself particularly well with the Texas market demographics.

As you can tell, we are excited about this product.

It's a very compelling offer, has lots of consumer appeal, contributes to the top line and, by adding to the attractiveness of the bundle, has made a positive impact on customer retention.

Both DSL and IPTV, along with our other products, have been key drivers of our success with bundling.

As a matter of fact, service bundles have increased approximately 18% year-over-year.

We are confident the value provided by the bundled offering, coupled with superior customer service will continue to drive revenue and increase customer satisfaction and retention.

Along with growing revenue per customer, we continue to improve our cost structure.

As a result of multiple initiatives in 2006, such as our billing integration and call center consolation, just to name a couple, we were able to reduce the headcount by over 100.

The team is not only focused on rolling out new products like IPTV, but also on improving the effectiveness and quality of our service delivery.

On the competitive front, I really have nothing new to report.

As we previously mentioned, Mediacom launched its voice product in the eastern part of our Illinois territory late in the second quarter of last year.

Across the remainder of our markets, we have yet to see the cable competition launch a voice product.

On the M&A front, we all recognize there's been a lot of activity in this sector recently, and we continue to evaluate acquisition opportunities.

If we found an opportunity that made sense for consolidated, we would pursue it.

Before I turn it over to Steve, though, let me make a couple comments about 2007.

We're very excited about the upcoming year.

I believe that, given our markets, our products, our financial strengths and our people, that we are well positioned to take advantage of our opportunities in 2007.

Our focus for the year, consistent with prior years, is to increase broadband connections, drive revenue per customer with bundling and new offerings and continue to improve our cost structure.

This will allow us to continue to generate strong, sustainable cash flow and support our dividend.

I will now turn the call over to Steve Childers, our CFO, for the financial review.

Thanks, Bob, and good morning to everyone.

As Bob mentioned, we are very pleased with both our fourth-quarter and full-year financial results.

This morning, I will review our quarterly financial results and then provide our 2007 guidance.

Revenue for the quarter was $81.7 million, which reflects a $500,000 increase, compared to $81.2 million in the fourth quarter of 2005.

This was primarily due to a $1.8 million increase in data and Internet services revenue driven by growth in both DSL and IPTV subscribers.

In addition, network access services increased by $400,000, primarily driven by an increase in switched access rates.

These increases were partially offset by declines in subsidies and long distance.

The $800,000 decrease in subsidies was due to lower universal service fund draws, driven by changes in national average loop costs and lower recoverable expense levels.

This decline was partially offset by $500,000 prior period subsidy receipt.

Long distance declined by $400,000.

Although our LD penetration is approximately 56%, we continue to experience a decline in our average rate per minute, driven by our unlimited long distance product and general industry trends.

Total operating expenses for the fourth quarter of 2006 were $76.9 million, which reflects a $10.7 million increase, compared to $66.2 million in the fourth quarter of 2005.

Impacting the fourth quarter was an $11.2 million impairment charge.

This reflects a $10.1 million charge to our operator services business and a $1.1 million charge in our telemarketing fulfillment business.

In both cases, the impairment is related to a write down of the carrying valueassociated with customer list.

The impairment is non-cash and is associated with two of our non-core businesses and does not impact our ability to pay the dividend.

Exclusive of the impairment, expenses were down $600,000 for the quarter.

Net interest expense for the fourth quarter was $11.6 million, compared to $10.6 million for the same period last year.

The increase is primarily due to increased borrowings associated with the Providence share repurchase that was completed in the third quarter of 2006.

Income tax expense for the fourth quarter of 2006 reflects a tax benefit of $3.3 million, compared to an expense of $7.2 million for the same period last year.

The decrease in tax expense is attributable primarily to the following items.

First, in the fourth quarter of 2006, we had the impact of the impairment on pre-tax income and the resulting effect the impairment had on deferred taxes.

Second, in the fourth quarter of 2005, we reflected the tax impact of the IPO reorganization plan.

These items, along with the difference in pre-tax book income make up the majority of the period-over-period difference.

Accordingly, net loss for the fourth quarter of 2006 was $521,000, compared to a loss of $2.1 million for the same period last year.

Net loss per common share for the fourth quarter of 2006 was $0.02 per share.

However, we believe it is appropriate to look at the fourth quarter income per share on an adjusted basis, as detailed on the adjusted net income per share schedule in the earnings released, our adjusted number was a positive $0.21 per share.

Beside the items detailed in the schedule, our fourth quarter results reflected a year-end true-up relating to the equity income associated with one of our [sale] partnerships.

This item was worth approximately $0.03 per share.

Adjusted EBITDA was $35.7 million for the quarter, compared to $35.6 million for the same period last year.

This was our strongest quarter for the year, and results were in line with our expectations.

As noted in the earnings release, I am pleased to announce that we completed a re-pricing of our term loan facility on February 26, 2007.

We reduced the interest rate on our $464 million term debt by 25 basis points to a coupon rate of 175 basis points plus LIBOR.

This will save approximately $1.2 million in annual cash interest expense going forward.

We also executed $150 million in interest rate swaps in the fourth quarter.

After giving effect to the swap arrangement, over 86% of our term debt will be fixed.

For the 12 months ended December 31, 2006, revenue was $320.8 million, compared to $321.4 million in the same period last year.

Adjusted EBITDA for the full year was $139.8 million, compared to $136.8 million for the full year 2005.

Net cash provided by operating activities was $84.6 million, compared to $79.3 million for the same period a year ago.

Capital expenditures were $8.4 million for the fourth quarter of 2006, and $33.4 million for the full year.

We ended the quarter with $26.7 million in cash and cash equivalents, and our $30 million revolving credit facility remains fully available to us.

For the fourth quarter of 2006, our total net leverage ratio, as calculated in our earnings release, was 4.1 times to 1.

All of our coverage ratios were well within compliance levels of our credit facility.

Cash available to pay dividends, or CAPD, was $14.3 million in the fourth quarter of 2006, yielding a 70.2% dividend payout ratio.

Now, I'd like to provide our 2007 guidance.

As mentioned in our earnings release, capital expenditures are expected to be in the range of $32 million to $34 million.

Annual cash interest is expected to be in the range of $43.5 million to $45 million.

And cash income taxes are projected to be in the range of $12 million to $14 million.

And finally, with respect to our dividends, our board of directors has taken the following actions.

First, our board has declared the next quarterly dividend of approximately $0.39 per common share, payable on May 1, 2007, to shareholders of record on April 15, 2007.

Second, our board has also indicted its intention to continue paying the quarterly dividend at its current level throughout 2007.

Now, I'll turn the call back over to Bob.

Thank you, Steve.

In summary, we are very pleased with our performance in 2006.

We did exactly what we set out to do.

We completed our IP backbone network and launched our IPTV product in Texas.

We successfully completed phase two of billing integration.

We grew broadband connections, repurchased 3.8 million shares in a cash-accretive transaction, generated almost $140 million in adjusted EBITDA, and exclusive of asset sales, our payout ratio was approximately 77%.

All in all, a very strong year.

And, as I said earlier, we're looking forward to 2007.

With that, Molly, I'd like to open it up for questions.

[OPERATOR INSTRUCTIONS]

Our first question comes from Tom Seitz, with Lehman Brothers.

Yes, good morning.

Thanks for taking the question.

This is going to be, I'm sure, answered with giggles, but can you comment at all on your thoughts regarding the FairPoint-Verizon transaction?

And Bob, I've heard you talk a little bit about the Illinois lines before.

Can you just sort of give us a little perspective on your history with those and what you might be thinking?

Yes.

Good morning, Tom, no giggles.

I'm pleased for Gene and FairPoint.

And we'll see over time.

They -- a little bit like the dog that caught the car.

Now, he's got to do something with it.

And that's exciting for him.

Regarding Illinois lines, is that question about the Verizon lines in Illinois?

Yes.

Is that where you're going?

Yes.

Yes, sorry.

Okay.

I assumed that's where it was.

We have a little knowledge of those lines.

Obviously, we've looked at Verizon lines in other places.

But at this point, we don't have any discussions going on with them.

We have certainly entertained looking at those lines, if they were to be made available on the market, as we would AT&T lines in Illinois or in Texas.

Okay.

That's fair.

Thank you very much.

Our next question comes from Gray Powell from Wachovia Securities.

Please go ahead with your question.

Good morning, everyone.

Thanks for taking the question.

I was just wondering if you could break out of your CapEx guidance how much of your spending is related to IPTV.

And then, if you could, just give us an idea as to the timing of when we should start to see the sub growth ramp in your Texas market.

The -- yes.

Thank you, Gray, and good morning.

The CapEx is approximately $6 million -- $6 million, $7 million -- for IPTV.

And as far as the ramp, you should -- we're -- as I said on the call, we're ready to launch Lufkin.

We'll launch the marketing programs.

And that puts us in all three markets in Texas.

So we've pretty well been through the processes -- a little more to go on in Lufkin, Conroe and Katy already.

So you should expect to see some growth in the next quarter.

Okay.

Thank you very much.

Our next question comes from Jonathan Chaplin, with JPMorgan.

Please go ahead with your question.

Good morning, guys.

Thanks for taking the question.

Based on my calculations and the guidance that you gave for CapEx and interest expense and cash taxes, it seems like the payout ratio will be roughly around 80% for 2007.

I just wanted to confirm that that's correct, and then, just get a perspective from you of where that payout ratio goes after 2007.

And then, in terms of the headcount reduction that you achieved during the course of 2006, are the cost savings from that headcount reduction fully reflected in your fourth-quarter cost base or should there be a reduction in cost from some of the headcount that came out later in the year as you move into 2007, giving you a little lift to EBITDA margins there?

And then, finally, in terms of HD, I'm wondering, from a network perspective, what do you have to do to make HD available -- how much it costs to you, what the CapEx spend for that is -- and to what extent you think you've been held back in the markets up until now because you don't have an HD offering.

Thanks a lot.

Sorry for the multiple questions, by the way.

Hey, Jonathan, we're trying to -- thanks for the questions.

We're deciding who answers here.

I'll take the payout ratio.

And I can't disagree with your math, just maybe kind of review for second, because we came through the IPO and had NOL shields for '05 and quite a bit for '06.

We said our payout ratio would be, roughly 70%.

And then, as we moved to being a full-cash taxpayer, we would get closer to the 80% range.

This year we had some NOL shields in our payout ratios.

As we said on the call, it was roughly 77%.

Next year, we are -- I mean, for 2007, we've obviously guided up on cash interest and cash taxes, and the payout ratio will be close to 80%, which we're very comfortable with, based on the overall characteristics of the business, some discretionary dollars we have in CapEx, et cetera.

The question on 2008 -- we're not prepared to give guidance on 2008 yet, but again, I think the question, maybe, is related more to cash taxes.

And, again, we do have some very small NOL shields for 2007, so our cash-tax burden will probably increase again in 2008.

But again, you've got to remember that going in 2008, all the things we're focused on, driving broadband, video product in both Illinois and Texas is, in the short term, is EBITDA dilutive.

As we add customers, we expect both the markets to be cash flow accretive in 2008.

And so we still expect to be in a very comfortable range going forward.

And regarding your headcount question, Jonathan, we have taken 100 employees out each year the last three years.

And some of those, as you identified -- some of those came later in the year, so you didn't see all of the run rate impact of that reflected in the fourth quarter numbers.

There will be some of that that carries over into the first quarter of '07.

We also, just to recall -- we have phase three -- our final phase three of billing completes in August this year, which also will give us not only some cost reductions, but also some features and functions in Illinois that we don't currently have that we have available in Texas.

Regarding -- I think the last question was HD related.

The Texas head-in was configured with MPEG-4 capability.

So all we have to do in Texas -- the cost -- your question was around CapEx.

The cost in Texas is $20,000 to $25,000 per HD channel.

So when we launch with eight to 10 channels, it will be an incremental $200,000 to $250,000.

And as I said, that will happen in the second quarter.

And then, in Illinois -- we'll launch HD in Illinois in the third quarter.

And the same costs apply there on the -- it's $20,000 to $25,000 per channel.

And we'll launch with eight or 10 up here.

As far as the impact on customers, clearly, both HD and DVR are very attractive services.

We'll launch DVR also in mid-year of '07.

So it does -- there are customers that have been very interested in our product that have not migrated until we get HD and DVR.

So we're excited.

It opens up some more opportunities for us.

And as I also said in my remarks, in Texas -- the demographics of Texas, the high per capita income -- HD is going to be a more important product there, not that it's unimportant in Illinois, but it will have more significance in the Texas market.

I wrote them all down, Jonathan.

If I didn't get them all, come on back.

I think we hit them all.

Yes.

You got them all.

Thanks a lot guys.

That's great.

[OPERATOR INSTRUCTIONS]

Our next question comes from [George Whiteside] with SWS Financial Services Please go ahead with your question.

This Texan wants to congratulate you on a splendid quarter.

My question deals with your '07 guidance relative to cash taxes.

Looking at the balance sheet, you've got -- it appears you've got a rather substantial NOL so, could you give us some color on the reasons for cash being devoted to taxes in '07.

Well, George, it's Steve Childers.

Thank you for your question and for your comment.

The guidance on cash taxes, again, in 2008 and -- or 2006 -- when we had a more substantial NOL shield, we still paid about, roughly, $8 million in taxes.

Probably, $6 million or $7 million of that was on the federal side.

In 2007, we have about $11 million in NOL -- or NOLs -- federal NOLs going forward.

Subject to 382 limitations, we'll probably use about $5 million to $6 million of that in 2007.

And that's really kind of the main difference there -- just the difference in the NOL protection from '06 to '07.

Does that help?

Well, that certainly is logical.

And a follow-up is, there will still be NOL that will be used in the future, I presume, beyond '07?

No.

We would expect -- well, they're subject to the 382 limitations.

Right.

There could be a small portion carried over to 2008, but it's -- I wouldn't say it -- classify it as substantial.

All right.

Thank you very much.

You bet.

Thank you.

Our next question comes from Chris Larsen with Credit Suisse.

Please go ahead with your question.

Hi.

This is actually Brad, for Chris -- just a couple more questions on IPTV.

First, are you seeing customers coming from one MSO or one satellite provider or one other genre versus another?

Also, on the Texas markets, you mentioned that you're seeing growth consistent at the initial launch.

And I'm just wondering if long term, you think you can still get to the 17% total penetration you have in Illinois right now or the 26% in the first three markets -- if you could expect to see those levels within a year or two or if the demographics are just too different that you won't get there.

Thank you.

Yes.

Thanks, Brad, for the question.

First of all, where are we taking share?

It's across all the markets.

But remember, we're just getting going in Texas, so most of the growth, with exception of 600 or 800 customers, is all in Illinois.

And we've taken that, probably, proportionately from both Mediacom and Charter.

They're the two competitors in Illinois.

We started -- just as a reminder, we started on the eastern part of the -- of our geography in Illinois and moved west, and on the eastern parts, Mediacom -- so, probably, slightly disproportionate to Mediacom, but ramping in the Charter territory.

And we would expect the same in Texas.

Regarding penetration rates, yes, we would expect to see similar performance as we are in those markets for a longer period of time, launch the marketing programs and the word of mouth.

This builds.

You have to get a broader offering out and get people to start to take it, get your feet on the street, salespeople going.

And we would expect -- as we've said all along, in the midterm, we would expect to capture a third of the market.

And our business plans are right on target with where our expectations were.

Okay, great.

Thanks a lot.

[OPERATOR INSTRUCTIONS]

There are no further questions at this time.

Please proceed with your presentation or any closing remarks.

Well, thank you, Molly, and thank all of you for joining us today and for your continued interest and support of Consolidated Communications.

As we've said, we remain very excited about our current position and opportunities and look forward to updating you on our further progress.

Thanks again for joining us and have a great day.

Ladies and gentlemen, that concludes your conference call for today.

We thank you for your participation and ask that you please disconnect your lines.