Consolidated Communications Holdings Inc (CNSL) 2007 Q1 法說會逐字稿

Welcome to the Consolidated Communications First Quarter 2007 Earnings Conference Call.

(OPERATOR INSTRUCTIONS)

As a reminder, this call is being recorded today, Thursday, May 10, 2007.

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

Go ahead, sir.

Thank you, Celeste, and good morning.

And thank you to everyone for joining us today for Consolidated Communications First Quarter 2007 Earnings Conference Call.

As Celeste said, I'm Steve Jones, Vice President of Investor Relations.

And with us on the call today are Bob Currey, President and Chief Executive Officer and Steve Childers, Chief Financial Officer.

After the prepared remarks, 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 these 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 website contains reconciliations of these measures to the nearest GAAP equivalent.

I will now turn the call over to Bob.

Thank you, Steve.

And thank you all for taking the time to join us today.

Overall, we are delighted with how the business performed this past quarter, and off to a great start in 2007.

The results we reported today are evidence that we are focused on execution and that our strategy is working.

We continue to provide high-quality broadband and voice services to our markets, thus generating strong, sustainable cash flow to support our dividend.

We are achieving this by growing revenue per customer, improving our operating efficiency and maintaining our disciplined capital-expenditure philosophy.

I will provide an overview of our financial and operating results, then turn it over to Steve Childers to provide a more detailed review of the first quarter financials.

Our financial results for the quarter were very strong.

Revenue and adjusted EBITDA were $83 million and $37.2 million, respectively, in the quarter, and our adjusted EBITDA margin improved by approximately 100 basis points when compared to the first quarter of 2006.

The dividend-payout ratio was an exceptional 68.5%, and including this quarter's results, we have generated cumulative available cash flow under our credit agreement of $30 million.

Now, let me take a moment and remind you of our consumer-product strategy.

It involves the aggressive promotion and deep penetration of our DSL product, thus building the base to market and layer on our IPTV offering.

This approach has given us first-mover advantage with our triple-play offering in all of our markets.

Execution on our DSL strategy continues to go well, as we added 3,200 new DSL subscribers during this quarter.

This brings our total DSL subscriber count to 56,000 and represents 33.6% penetration of primary residential lines.

Due to the consumer demand for DSL, we believe we will continue to experience growth in the future.

Regarding IPTV, the results in both Texas and Illinois met our expectations and we are pleased with the progress in both of the states.

During the quarter, we added over 1,400 new subscribers, bringing the total count to 8,400.

Before I provide the data on the individual markets, please not that for competitive reasons and consistent with our disclosure policy for our other products, this will be the last quarter that we will provide detail on the number of IPTV customers per state.

In Illinois, we added almost 1,000 customers in the quarter, bringing the total subscriber base to 7,300 -- a very solid quarter.

Customer acceptance continues to be positive.

The network is performing well and our triple-play offering continues to be well-received.

In Texas, the rollout is also going well.

As previously stated, we launched our Lufkin market in March.

And the early results are very encouraging.

As mentioned on our last call, we expect the launch of high-definition and DVR to have a positive impact on subscriber growth in Texas, particularly in Conroe and Katy, due to their demographics.

As you know, we were targeting to launch HD early in the second quarter in Texas and in the third quarter in Illinois, with DVR launching in the third quarter in both states.

However, those dates have slipped a bit.

As with IPTV in general, we are one of the first to roll out an IP-based DVR and high-definition service, and we are working closely with both our equipment and [middleware] vendors to ensure a quality product at launch.

As mentioned, these products are very important to our growth, especially in Texas, and we must make sure that we do it right.

Texas HD will be available next week, which is a little later than we had hoped, and we still expect a third-quarter high-definition launch in Illinois.

Regarding DVR for both states, we now believe a fourth-quarter launch is more realistic.

While these vendor delays are not uncommon, they are disappointing.

However, the high-definition product is outstanding and the delays in launching these products will ensure a great customer experience and will complete our IPTV product suite.

We remain very excited about the IPTV product.

It provides a very compelling offer, has strong consumer appeal, contributes to our top line; and by adding to the attractiveness of the bundle, has a positive impact of customer retention.

DSL and IPTV are sticky and have been drivers of the growth in connections and revenue per customer.

In fact, over 90% of our IPTV continue to take our full triple-play offering, making us the leading network-based triple-play provider in our markets.

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

As a result of the initiatives we implemented last year, we experienced a market improvement in our adjusted EBITDA margins this quarter and continue to look for opportunities to take cost out of the business going forward.

In terms of billing integration, phase three, our final phase, is progressing as planned.

It is on-time and on-budget and we expect to complete this final phase in August of this year.

On the competitive front, there is really nothing new to report.

No additional cable companies have launched a voice product in our markets during the quarter.

And finally, on the M&A front, as you are all well aware, there has been activity in the sector and we continue to evaluate acquisition opportunities.

Our approach here is consistent again: If we find an opportunity that makes sense to Consolidated, we will pursue it using the same disciplined process we used when acquiring the Illinois and Texas assets.

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

Steve?

Thanks, Bob, and good morning to everyone.

As Bob mentioned, we are very pleased with our first -- strong first quarter results.

This morning, I'll review our quarterly financial results and then reiterate our 2007 guidance.

Revenue for the quarter was $83 million, which reflects a $3.6 million increase, compared to $79.4 million in the first quarter of 2006.

This was primarily due to a $1.4 million increase in data and Internet-services revenue and a $1.2 million increase in network access revenue.

The increase in data and Internet revenue was driven by the growth in our DSL and IPTV subscribers.

The network-access increase was driven by an increase in switched-access rates associated with our 2006 tariff filings in the settlement of an outstanding billing claim.

This claim related to access charges on prepaid calling-card traffic.

Also, there were several other miscellaneous revenue settlements in the quarter, collectively totaling approximately $500,000.

These receipts reflect the final settlements in all these disputes.

Total operating expenses for the first quarter of 2007 were $64.6 million, which were essentially flat compared to the same quarter of last year.

Net interest expense increased $1.4 million to $11.4 million for the quarter, compared to the first quarter of 2006.

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

Income-tax expense was $3.7 million for the quarter, compared to $2.9 million for the same period last year.

The period-over-period increase was due to the change in pre-tax income.

Accordingly, net income for the first quarter of 2007 was $4.6 million, compared to $3.5 million for the same period last year.

Net income per common share for the first quarter of 2007 was $0.18 per share, compared to $0.12 for the same period last year.

However, we believe it is appropriate to look at income per share on an adjusted basis.

As detailed on the adjusted-net-income-per-share schedule in the earnings release, our first quarter adjusted number was $0.21 per share, compared to $0.15 in 2006.

Adjusted EBITDA increased $2.4 million to $37.2 million for the quarter, compared to $34.8 million for the same period last year.

Results even after adjusting for the impact of the revenue settlements were strong, and we are pleased with the margin increase we achieved in the quarter.

Driving this was not only our strong revenue performance, but also a full quarter's impact of the cost-reduction initiatives that were implemented throughout 2006.

Capital expenditures were on-plan at $8.2 million for the first quarter of 2007.

We ended the quarter with $26.1 million in cash and cash equivalents, and our $30 million revolving credit facility remains fully available to us.

For the first quarter of 2007, our total net-leverage ratio, as calculated in our earnings release, has decreased to four-times-to-one.

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

Cash available to pay dividends, or CAPD, was $14.7 million for the first quarter, yielding a 68.5% dividend payout ratio.

And now, I'd like to reaffirm our 2007 guidance, which remains unchanged from the guidance provided in our fourth quarter 2006 earnings call.

Capital expenditures are expected to be in the range of $32 million to $34 million.

Cash-interest expense is expected to be in the range of $43.5 million to $45 million, and cash income taxes are expected to be in range of $12 million to $14 million.

With respect to our dividend, our board of directors has declared the next quarterly dividend of approximately $0.39 per common share, payable on August 1, 2007 to shareholders of record on July 15, 2007.

And finally, we expect our 2007 dividend distributions to be classified as both a non-dividend distribution or a return-of-capital, as well as ordinary dividends.

We are currently projecting that approximately 10% of our 2007 distributions will be classified as a return-of-capital.

I'll now turn the call back over to Bob.

Thank you, Steve.

In summary, we are very pleased with our performance in the first quarter.

We continue to execute on our strategy, and our results demonstrate that it is paying off.

We are excited with our start in 2007 and look forward to building upon it.

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

(OPERATOR INSTRUCTIONS)

Your first question comes from the line of Gray Powell with Wachovia.

Good morning, everyone.

Good morning, Gray.

Thanks for taking the question.

I just had a couple of quick ones.

Can you give us some insights into how you measure the ROIC for IPTV, and then, give us some ideas to the idea or the timeframe for the product going from being diluted to free cash flow to becoming accretive?

Hey, Gray.

This is Steve.

First question -- return -- you're looking for the return on investment on video?

Is that right?

Yes, or just, generally, how you think about it.

Well, I guess, maybe we'll kind of link the two questions together.

I mean, if you think about our entry into video, basically all -- we've got our IP infrastructure, our backbone network already built, DSL platform already built.

The incremental cost from a capital basis of getting into the business was roughly $3 million for a head in.

We put a head in in each state.

So it's really -- as we look at it, we're really leveraging our existing voice and data network.

As we look at the overall product -- I mean, as we've talked about based on the [RPU], cost of programming, we would expect each product to be basically cash-flow accretive and even accretive within 18 months to two years from date of launch.

Okay.

And then, the other thing I wanted to ask would be on stand-alone DSL.

Can you just talk about the possible win-back opportunity there and where you stand on potentially doing a naked DSL offering?

Yes.

Good morning, Gray.

It's Bob.

I'll take that one.

We have launched a stand-alone DSL product.

We've had -- we've had some success with it already.

As you know, for a long time, we stuck with a bundled offering.

But now, we estimate there's a significant number of homes in our territory that do not have our voice line.

So we think there is a nice market there for DSL -- stand-alone DSL; also, paired with IPTV.

And we've seen -- we've seen some activity in that area so far.

We're pricing it about $5 above the tier -- whatever tier you're taking of DSL.

If you're taking the standard package, it's $5 more.

If you're talking [light], it's $5 more.

So that's sort of the price point.

And we've had -- it's early, but we've had some nice success with that so far.

Okay.

Great, thank you very much.

Your next question comes from the line of Jonathan Chaplin with JPMorgan.

Hey, Bob.

Hey, Steve.

Good morning.

Two quick questions on -- I'm wondering if you could remind us of how the savings from the last step in the billing process kind of filter in over the next few quarters.

I'm assuming it's going to -- after you finish the transition in August, it will take at least a couple of months before you're able to realize some of the savings.

And then I'm wondering if you could talk a little bit about if you've gone through your -- both markets now, selling IPTV -- what you've been able to detect in terms of the pent-up demand for HD and what that could potentially do for both the sort of subscriber-growth perspective and an [RPU] perspective when it becomes available.

Thank you.

On the first question, Jonathan, regarding billing and phase three: It does allow us some opportunities to reduce costs.

But just as importantly, it gets both states on totally common platforms, allows us much more detailed information, slicing and dicing of customers, and it also allows -- it enhances our marketing programs.

We'll be able to market consistently across the total market.

I would tell you, though, that in addition to the billing, obviously, we're also focused on all other cost aspects -- staff, headquarters, overhead, consultants, lawyers.

We -- as we've gotten out of the public -- the first cycle of being a public company successfully, 404 stocks implementation -- there's other areas now where we're going back and looking at that work and improving and enhancing it.

So there are some opportunities for us to continue to improve our operating efficiency.

Regarding IPTV, clearly, one of the lessons learned around HD is -- and I think there are marketing studies that support this, but we've learned it firsthand in our markets -- is that the higher the per capita income, the better the demographics of an area, the more important HD is to that customer.

So it definitely -- in the Katy and Conroe markets, we're seeing a greater demand -- a requirement to take -- to have an HD product prior to switching either from the cable company or the satellite.

It's not -- while it is going to be important in the more rural markets, we definitely see a difference there.

And that's why, in my opening comments, I pointed that, while we were not thrilled with the delay, we have this product now in Texas and it will launch commercially next week.

But we've had it in the laboratory now for a couple of months and it's a terrific product.

We're very excited about it and we think it's going to take a few weeks to get it and market it and get some word of mouth advertising going.

But we're very excited about the product and think -- actually think we need it in those markets.

Bob, if I could just follow up on the first question, quickly -- the -- when you put together the potential savings from having gone through the billing consolidation and then from rationalizing the costs that you took on to deal with SOX.

In sort of round numbers, what's the size of the opportunity there?

Well, Jonathan, this is Steve.

We're probably not going to give you a precise number.

But maybe the way to think about it is that in billing integration on the second phase, when we were able to do our consolidation of some existing call centers, we had a net reduction of roughly 24 people on a net basis, resulting in about $1 million savings.

We don't expect this opportunity in the final phase to be that big, but we will see some overall efficiencies and some head-count opportunities as a result of that.

And then, from a SOX perspective, last year, I think we did it relatively cost-efficiently last year for our first year of compliance.

We had, roughly, about $1.2 million in external costs -- out paying consultants and our auditor.

This year, we're expecting to do that, roughly, half of that to three-fourths of that.

So, hopefully, $400,000 to $500,000 savings on that one.

Awesome.

Thank you, very much.

Thank you.

Your next question comes from the line of Tom Seitz with Lehman Brothers.

Close enough.

Good morning, guys.

Thanks for taking the question.

The questions regarding IPTV -- do you expect that there'll be a bit of a governor on sales until you get all the capabilities, so that you're not swapping out equipment?

Or is there a way that you can handle the implementation of both hi-def and DVR over time so that, perhaps, sales can still see a nice pickup from Texas?

And then, I guess, related to that, was there -- your margins were terrific this quarter.

Was there any benefit to slowing down -- any measurable benefit to slowing down TV results, maybe, related to not wanting to sell customers and then have the HD capability later in the year?

And then, finally, just longer-term, strategically speaking, given that Bell South is likely to move to the VDSL platform and away from ADSL2+ -- and I think CenturyTel was ADSL up in Wisconsin, but now, with their second trial, is doing VDSL -- do you have any concerns at all about vendor support down the road for ADSL2+?

Thanks.

Okay.

I think I got them all, Tom, but push back if I miss them.

On the HD and DVR, you're spot-on.

We wanted to launch Texas and -- to test the network, to test the processes, to test the back office that -- to start to train technicians.

But we also realized that with HD and DVR, we were going to have to go back out and make those gateway changes -- change out as we went to MPEG-4.

So it was just like it was in Illinois: "Do you wait?

Do you start?" And we wanted to at least get started, perfect the processes, recognizing that we -- particularly in Katy and Conroe, we needed HD and DVR to compete.

So we'll have -- we'll have some truck rolls when we launch -- and that's next week, when we launch HD.

As those people take HD, we'll have to go back out.

So that was a -- that was a conscious decision that we made and a balance that we made on it.

Regarding the second part of your question, which is related to the first, the margin impact of the -- what I'll call a "slight delay" in IPTV -- yes, IPTV, as Steve has mentioned in the past, is dilutive.

That install is dilution.

But there wasn't enough of a delay to really move the needle.

Obviously, it helps us a little bit in the quarter.

But, frankly, the margin improvement comes from the cost reductions and all of the things that we've talked about over the last couple of years that we had in plan -- in play, including the different phases of billing integration.

Regarding vendor support and ADSL versus VDSL, we're very comfortable with our ADSL choice at this point.

Our technology is capable of supporting VDSL and ADSL.

We can do both.

So -- in fact, we have VDSL in test and, actually, may use it for some applications.

So we're very comfortable with the vendor choice.

They're working with us and it's really almost transparent.

We can -- we can make that move to VDSL when and if it's required.

And would that be significant capital expense or is the network design such that it really would be more software-related?

It's incremental, Tom.

The network is designed.

It's an interchangeable card.

It's a very simple change -- and modest incremental CapEx.

We can make that change within the $32 million, $33 million guidance that we've given you on CapEx.

Oh, that's great.

Thank you, very much.

Your next question comes from the line of Chris Larsen with Credit Suisse.

Hi.

Thanks for taking the question.

A couple questions on the HD -- what sort of throughput are you seeing now?

Are you guys using the MPEG-4, and what sort of compression are you seeing out of that?

And what do you think that -- once you have the DVRs, are you going to be able to put two streams of HD through?

And, initially, I think you said eight to ten channels.

Are you still thinking eight to ten channels?

And one more -- I apologize for the string of questions here -- have you seen a change -- I know that the vendors, you said, were a little bit later than you wanted them to be, but has there been a material change in the cost of any of the equipment associated with it or is it just more of a time issue?

Let's start with the -- I don't know that I got them all, but --

Sorry about that.

-- (inaudible) questions.

As far as the initial launch, we're going to launch with nine to 11 HD channels.

And, as you pointed out, we are launching with MPEG-4.

We'll begin with a -- one HD channel and two standard [deck] channels.

Over time, we'll be able to add the second HD channel.

The --

And is that through paired bonding on the ADSL2+ or better compression on the MPEG-4?

Better compression on the MPEG-4.

It is still a single copper pair.

And to your question, we're getting 18 to 20 Meg easily out 5,000 to 7,000 feet.

So -- and with the engineering of our loops, a large percentage of our customers can get 18 to 20 Meg.

So with MPEG-4, we're easily within the parameters of that to provide the HD channel, two standards, three to six Meg for DSL and a standard voice channel.

And then any material changes in the network or in any of the cost for the HD?

No.

It's roughly 25,000 per channel.

So $250,000 -- $300,000 per state.

And again, all of that is included in the CapEx guidance that we gave you.

And then, the set-top boxes -- no changes there -- to their prices?

No, they're -- there are -- there is an increase in price.

It's approximately -- today, it's approximately $200 more per gateway.

Okay, but that's -- for the -- but that's just relative to standard def.

It's not $200 more than you thought it was going into hi-def, right?

No, no.

Again, that was all planned.

It's about where -- actually, it's about where we thought it would be.

And as others get into this game, we expect those prices to come down.

So just -- so that I don't confuse you, the incremental investment is just per-HD-channel of roughly $25,000.

And then the remainder -- there's no additional CapEx.

The remainder of the CapEx is all the success based on how much we sell.

Got you.

Thank you.

You're welcome.

(OPERATOR INSTRUCTIONS)

Your next question comes from the line of Michael Rollins with Citigroup.

Hi.

Good morning.

Just a quick question -- you referenced in the release about some price increases on the access side.

I was wondering if we could look forward to any additional price increases, whether it's in your local charges on access and, basically, how you see the pricing environment over the next 12 to 24 months.

Thanks.

Hey, Mike.

This is Steve.

Thanks for the question.

I really probably -- we probably really don't expect to see much in terms of price movement one way or the other from an access or a retail basis or anything.

I mean, what we referenced in the press release was our normal tariff-filing process based on our revenue requirement based on our existing cost structure that went into effect mid-year correction last year.

And we are benefiting from that from now.

So on anything else, we're really not anticipating any other material adjustments -- carrier or retail-based.

Great, thank you.

You bet.

(OPERATOR INSTRUCTIONS)

There are no further questions at this time.

Please proceed with your presentation or any closing remarks.

Well, thank you, Celeste, for assisting us today.

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

As you can tell, we remain excited about our current position and opportunities, and we look forward to updating you on our progress.

Thanks again, and have a great day.

This concludes today's conference call.

You may now disconnect.