Consolidated Communications Holdings Inc (CNSL) 2008 Q2 法說會逐字稿

Welcome to the Consolidated Communications Second Quarter Earnings Call.

At this time, all participants are in a listen-only mode.

Following management's prepared remarks, we'll hold a Q&A session.

(OPERATOR INSTRUCTIONS)

As a reminder, this conference is being recorded today August 7th, 2008.

I would now like to turn the conference over to Mr.

Matt Smith of Consolidated Communications.

Please go ahead, sir.

Thank you, Eva, and good morning, everyone.

We appreciate you joining us for the second quarter 2008 earnings conference call.

I am Matt Smith, Director 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 meaning 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 the 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 their nearest GAAP equivalent.

I will now turn the call over to Bob, who will provide an overview of our financial and operating results.

Steve Childers will then provide a more detailed review of the second quarter financials.

Bob?

Thank you, Matt, and I want to thank all of you for joining us today.

Our results for the second quarter were very strong.

Revenue, adjusted EBITDA and cash available for dividends were all solid and our Pennsylvania integration continues to be ahead of schedule.

As anticipated, the cable competitors launched voice services in our Texas markets during the quarter.

We have taken the necessary steps to be well-positioned to compete with out triple play bundle, industry-leading DSL penetration and our consumer VoIP offering.

Now, let me review some of the details for the quarter.

Revenue and adjusted EBITDA were 106.4 million and 28.3 million respectively.

The dividend pay-out ratio improved to 68.4%.

As for our metrics, we celebrated a key milestone his quarter by breaking the 100,000 mark for broadband connections.

We continue to deliver solid broadband growth with DSL and IPTV increasing by a combined 3.4% over last quarter.

Considering that the second quarter is historically a seasonal challenge, we are pleased to report DSL net adds were comparable with the second quarter performance over the last two years rising by approximate 2,300 subs or 2.7% sequentially, while IPTV showed good growth at approximately 1,100 or 8.3% sequentially.

Both our DVR and Pennsylvania IPTV launches in late April have shown positive traction and we like the prospects for these products going forward.

Our take rate on DVR and HD across all markets is up to 6% and 13% respectively.

Our VoIP offering is proving to be a substantial growth opportunity and a desirable alternative from a technology and value perspective for some of our customers.

We added nearly 1,200 lines in the quarter which is split between new customers and existing customers.

While this does in some cases, cannibalize access lines, we are saving the customer by offering this alternative, and it is another way that we successfully compete head to head with the cable providers.

Finally, regarding access lines.

As we announced on our last call, Suddenlink launched its voice service in our Texas markets early in the second quarter and Comcast followed later in the quarter.

As expected, this caused a spike in our access line loss for the quarter.

In our estimate, this means cable providers and their voice services are now virtually 100% launched in all three of our states.

We have been preparing for this challenge for years, and with our full product suite, we are uniquely positioned to compete and win,

In our Pennsylvania operations, we have seen ILEC line loss trends stabilize at an annualized 6.5% for the second quarter compared to 10% last year at this time.

For the CLEC business, we grew access line equivalents by approximate 900 in the quarter, giving us an increase of up over 5% year-to-date.

Now, in terms of the Pennsylvania integration, we continue to be very pleased with our progress and are confident in our synergies and overall plan.

We have been able to utilize the same play book and leverage the experience gained from integrating the Texas properties which was a much larger transaction that tripled the size of our Company.

As we mentioned on our last call, we have already completed the integration of our financial systems, carrier access billing system, and move the ILEC building system in-house from a third party, which enables our internal technical staff to fully support the systems.

We have successfully completed 20 bill cycles between the ILEC and access billing systems.

So in summary, we are confident we will exceed our original synergy projections of $7 million and have already taken action to realize approximately $5.5 million in annualized savings.

Now, let me touch on the economy.

Although the economy in general is in a challenging period, we like our unique blend of rural and growth markets as they have helped insulate us from major downturns.

To date, we have not seen any major impact on our business on the economy.

In fact, before I turn the call over to Steve, I want to provide an update on some of the commercial growth activity we talked about last quarter.

First, Westinghouse is consolidating its nuclear division in our Cranberry, Pennsylvania territory with plans to bring as many as 3,000 jobs to the area.

Construction is well under way and we have already installed some services to support their construction efforts.

Secondly, KBR continues to be on track to build a 900,000 square foot facility in our Katy, Texas market with construction beginning by year end.

This will centralize about 4,500 jobs in our market.

We are focused on both of these outstanding opportunities.

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

Thanks, Bob, and good morning to everyone.

We again delivered strong results for the second quarter.

This morning, I will review our quarterly financial performance and then update our 2008 guidance.

Operating revenue for the second quarter of 2008 increased 24% to $106.4 million, compared to $80.9 million in the second quarter of 2007.

The increase was primarily due to $24 million in revenue generated by our new Pennsylvania operations.

Excluding the contribution for our North Pittsburgh acquisition, operating revenues were $82.4 million for a quarter over quarter increase of $1.5 million.

Contributing to the increase were the following factors.

Data and internet revenue was up $2.1 million primarily due to the growth of DSL, IPTV and VoIP subscribers, this was partially offset by decline in local calling services associated with the reduction in access lines.

Total operating expenses exclusive of depreciation and amortization for the second quarter of 2008 were $63 million, compared to $48.1 million in the second quarter of 2007.

The increase was due to the recognition of $14.3 million in cost of sales and SG&A expenses associated with our new Pennsylvania operations which were inline with our expectations.

Also, our second quarter of 2008 total operating expenses includes approximately $1 million of integration and severance expense which qualifies as an add back to adjusted EBITDA under the terms of our credit agreement.

Depreciation and amortization expense for the quarter was $22.4 million, an increase of $5.7 million compared to the second quarter of 2007.

This increase was driven by the North Pittsburgh acquisition.

Net interest expense for the quarter was $16 million, an increase of $4.5 million compared to the second quarter of 2007.

This increase was due to the incremental debt and terms of the new credit facility associated with the North Pittsburgh acquisition net of the interest savings associated with the April 1st redemption of the remaining 130 million of our 9.75 senior notes.

As a result of the redemption in the quarter, we recognized a $9.2 million loss in extinguishment of debt.

This charge consists of $6.3 million redemption penalty and a write off of $2.9 million in previously deferred financing costs.

By using available cash and only drawing $120 million under $140 million delayed term loan, we were able to replace our high coupon notes with bank debt at a weighted average cost of 7% and reduced gross debt by $10 million.

As a result of this transaction, we will save approximately $4 million in annualized cash interest costs.

Other income of $4.6 million increased $2.8 million compared to the same period last year.

As part of the North Pittsburgh transaction, we acquired limited interest in three additional Verizon Wireless partnerships.

These investments contributed approximately $2.9 million in the quarter.

Weighing all these factors, net income for the second quarter of 2008 was $180,000 compared to net income of $5.5 million for the same period last year, while net income per common share was $0.01 and $0.21 respectively.

However, we believe is it appropriate to look at income per share on an adjusted basis as detailed on the adjusted net income per share schedule on the earnings release.

Our adjusted net income was $6.4 million, and adjusted net income per share was $0.22 per share in the second quarter of 2008, compared to $4.9 million and $0.19 per share respectively in the second quarter of 2007.

Adjusted EBITDA for the second quarter was $48.3 million, compared to $36.1 million for the same period last year.

The primary driver of the $12.2 million or 34% increase was the inclusion of results from our Pennsylvania property.

Capital expenditures were $13 million in the second quarter of 2008 and our year-to-date CapEx spend is $26.3 million.

The accelerated spending rate for the first half of the year was driven by integration related CapEx and network additions necessary for the video build out in Pennsylvania.

As we'll discuss, when we review guidance, our 2008 capital spending will not exceed $48 million.

From a liquidity standpoint, we ended the quarter with $10.4 million in cash and our new $50 million revolver remains undrawn.

For the second quarter of 2008, our total net leverage ratio as calculated in our earnings release was 4.6 times to 1.

Please note that the schedule reflects both the pro forma LTM-adjusted EBITDA calculation and our new capital structure.

Our leverage in all other coverage ratios were well within compliance levels of the new credit facility.

Cash available to pay dividends or CAPD was a strong $16.6 million for the quarter yielding an uncomfortable 68.4% dividend pay-out ratio.

Now, I'd like to update you on our 2008 guidance.

First, with respect to capital expenditures, as just discussed, we are lowering the top end of the range from $49.5 million to $48 million.

As a result, our new full year guidance range is $46.5 million to $48 million, including $2 million in integration CapEx.

Cash interest expense remains unchanged at $64 million to $67 million.

And, full year cash income taxes remain in a range of $12 million to $15 million.

As a reminder, on our first quarter earnings call, we lowered our guidance on cash taxes from $15 million to $18 million to the new range, due to the tax effect of the $9.2 million loss on redemption of the associated with calling our senior notes.

And finally, with respect to our divided, our Board of Directors has declared the next quarterly dividend of approximately $0.39 per common share payable on November 1, 2008 to shareholders of record on October 15th.

With that, I will now turn it over to Bob for closing remarks.

Thanks, Steve.

So in summary, the business performed very well in the quarter.

We are excited about our growth opportunities with our broadband and VoIP products in all of our markets and the major commercial development underway in our communities.

We continue to believe we are well positioned in the markets we serve and look forward to the future.

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

(OPERATOR INSTRUCTIONS)

Our first question is from Patrick Rien with Lehman Brothers.

Please go ahead with your question.

Good morning, and thanks for taking the question.

First, on the synergies.

It looks like you guys are probably on track to beat the $7 million guidance you gave for this year.

Does that mean you are pulling some of the synergies from next year into this year, or you think you will also potentially exceed 11 million next year?

And then also, on the DSL adds, another strong quarter.

I was just wondering if you had some promotions going on, and how you're feeling there so far to the quarter?

Thanks.

Patrick -- and thanks for joining us in the question.

Regarding the synergies, the 5.5, that is just a jump on the $7 million of this year.

So it is not bringing forward the $11 million from next year.

We are confident that we will exceed the $7 million this year and that we will meet or exceed the $11 million next year.

Regarding DSL, we have a strategy of constant promotions refreshing each quarter, but nothing out of the ordinary, it is our normal just refreshing along the way.

And as we announced before, we launched an extended reach where we are taking it beyond the limitation giving somebody a broadband product but maybe not a full 10 meg, or 6 meg and that has been very successful for us, but other than that, no unique or aggressive promotion activity.

All right.

Can I get one more follow up?

The DVR box.

How do you price that for customers that are already IPTV subscribers?

And did they sign new contracts or do you subsidize it or what's the hit on that when you go out and switch it out?

We price it at $12.95 if you are not in a bundle, and if it is in a bundle, it drops to $7.95.

And there is no contract, Patrick.

Okay, great.

Thank you.

Our next question comes from the line of Frank Louthan with Raymond James.

Please go ahead with your question.

Thank you.

Any change on long distance calling patterns, the minutes of use shifting in June going into July that we have seen there?

And can you give us an update on what you think the outlook is that you see, like in Pennsylvania?

Do you think you will be able to ramp the growth there a little more or is that is still going -- going pretty steady?

Thanks.

Yes, good morning, Frank.

On the LD, there's really no major shift, and in fact, we had a slight uptick in the present take of our LD product, we are at an all time high as far as penetration.

But as you know, there has been pressure on price and on usage.

So -- but is as predicted, no major change, nothing there.

Regarding the CLEC, we are very -- as we've announced in the past, we're very pleased with the results of the CLEC operation in Pittsburgh.

We think that North Pitt was doing that very well.

We like the growth and we see it kind of steady, growing -- we have grown over 5% year-to-date and we think that's a good number to look at going forward.

Okay, great.

And let's see -- a couple of other things.

The other income line, below the line I guess with the wireless partnerships, is that a good run rate that we should be thinking about going forward?

And then, can you give us an idea on the consumer VoIP side, how are you positioning that and how do you market that product to customers currently?

Hey, Frank, this is Steve Childers.

I'll take the other income question and Bob will take the VoIP question.

I think that the second quarter, what you see in the financials for the second quarter probably is a good run rate from an equity basis in the way we are looking at earnings.

But I would remind you that according to the credit agreement that we had when we made or adjusted EBITDA, we are backing out the equity earnings and adding the cash distribution to those partnerships in there.

And, relative to cash distributions, we are probably about 700,000 higher in the first quarter than we were compared to the second quarter.

But I think the second quarter is representing it both on a run rate basis for the cash distributions and the equity earnings from those partnerships.

Frank, regarding your question on VoIP.

As we said, we launched it in Texas first.

And in certain markets in Texas, it has -- it has become a primary offer for us.

But, it is always stimulated with the bundle.

The focus is on the bundle and they get a nice price break if it is taken in conjunction with the bundle.

In Illinois, where we are just started with it, it has strictly been a win back -- a retention saved product for us in Illinois, and that will change over time as it will in Pennsylvania.

Okay great.

Thank you.

Our next question is from Michael Nelson with Stanford Group.

Please go ahead with your question.

Yes.

Hi guys, thanks for taking the question.

I'm wondering if you could provide us some color on how well your IPTV service has been received in Pennsylvania, and are you seeing the same types of trends or anything different in that market?

Thanks.

Well, we're pleased with finally getting the product launched and actually, very quickly, four months after closing.

And just some context, even though we launched it over 13,000 homes or 12,000 homes, we didn't launch all those day one.

We launched that over a period of the quarter, so we are now out selling in all those homes.

We have been very pleased with the subscriber growth during this initial period and the customer acceptance.

Each market has a different characteristic, so it's not particularly valuable to compare the launch metrics like when we launched in Illinois almost three years ago.

But as far as expectations, I would say that it was inline or slightly better with our expectations.

We expect to see good growth in the near term and then overtime, it starts to moderate.

And obviously for competitive reasons, particularly with the aggressive competitor there, we decided not to disclose how many of the new IPT additions from that market.

But I will tell you the network and the team all right doing very well for just taking over the property at the beginning of the year.

And we are excited and the employees are very excited to have a competitive offering our there to compete with a very aggressive cable company.

Great.

And If I could possibly sneak in a second question just regarding potential M&A, obviously lots of talk in the industry, you guys seem to be doing a great job integrating the North Pittsburgh property.

And as you complete that integration, I'm wondering, do you see any other attractive assets out there, and do you feel like you have the balance sheet and bandwidth to target additional acquisitions at this point?

Thanks.

Well, it is a great question.

We're not going to comment specifically on any specific companies.

We do view ourselves as a consolidator.

I think over the last three that we have done, we have proven that we can do them very well.

We have a -- we are always looking but our focus is on executing, finishing this Pittsburgh even though we are well ahead and very confident that it will go well, our focus is on delevering.

Executing our business plan, integration, get the synergies and delever.

At the same time, we will have our eye open and be opportunistic should something come on the market.

Obviously, the financial markets need to improve.

And -- but we will be in a good position should something that makes sense for us come on the market.

Great.

Thanks.

Good luck, guys.

(OPERATOR INSTRUCTIONS)

Our next question is from Gray Powell with Wachovia.

Please go ahead with your questions.

Good morning, guys.

Thanks for taking my question.

I have a few.

How should we think about overall access line trends with the expansion of your IPTV product in North Pittsburgh?

And, does the increased competition in Texas offset the gains that you are making in Pennsylvania?

And then just lastly, do you see further opportunity for improvements in the North Pittsburgh territory?

Yes, thanks for the question, Gray.

Regarding the competition, we have been expecting it and commenting on these calls for a number of years that we get the launch in Texas.

It has happened.

You know some of the history, what happens is you get that initial spike, you have it for two or three quarters and then it sort of moderates.

We think we are well-positioned because even though we don't have a coverage of 100% with our IPTV product in Texas, we have been out in the market, we are known.

I think also, our high DSL penetration also serves as a nice barrier to competition.

So, we think we are -- we feel like we are very well positioned to compete in Texas.

We will work our way through the spike of the next couple of quarters.

Regarding PA, absolutely, we see upside there.

We have seen in just a short period of time with the launch of our IPTV product, some excitement around that.

It is a word of mouth product, it is getting out in the community.

And so, we would be disappointed if we didn't continue to make progress both on line loss and on total connection growth in not only Pittsburgh, but across our three-state operation.

Okay.

And then finally, just on your IPTV efforts.

It seems like -- at least relative to my model that you maybe pulled in some of the expansion from Q3 this year into Q2?

Can you guys talk about what you expect to do for the rest of the year?

And, can you give us a sense of the operating expenses and CapEx associated with the IPTV expansion in 2008?

Hey, Gray, can you clarify the question on what the expansion?

Are you asking if -- cover more territory or --?

Yes.

If you're at about 130,000 homes passed, just roughly speaking, what you expect to cover the rest of the year?

Except for Pennsylvania, Gray, there are some -- we will expand the market in PA.

Between now and the end of the year, we will add a minimum of 4,000 to 5,000 homes passed in PA.

And then there are some minor little tuck-ins, but it really doesn't move the needle in Texas or Illinois as far as homes passed.

Okay.

What we are really -- I do not want to say waiting for, but bonding which we are testing in the laboratories now and supposedly, will be commercially available later this year, we are not counting on it quite that early, but that is what we are waiting for, we can much more economically pass homes when we get to bonding.

We've sort of gotten the low hanging fruit with our initial launches and bonding will open up significantly more homes.

Okay, great.

That makes a lot of sense.

Thank you very much.

Thanks for the question, Gary.

Our next question comes from Chris Larsen with Credit Suisse.

Please go ahead with your question.

Hi.

Thank you.

Good morning.

A couple of questions.

Bob, I think you said 100% cable VoIP launch, and I just wanted to clarify, was that 100% of your territory has competition from cable VoIP, or that 100% of what's going to happen has been launched?

And then secondly, off of that, as you look at how that competition is going to play out, are you thinking, one to two quarters as the big rush of people that are excited to change and then it begins to stabilize out after that?

Sort of like what we have seen in some of the other carriers, or how are you sort of thinking about the level of access line losses with the cable competition?

And then lastly, you just mentioned something about the bonding and it got me to thinking that you could dramatically increase, obviously, your data rates with DSL bonding.

And are you considering selling bonded DSL service so that you can offer higher data rates just of pure data to your customers.

Because it seems like at least in some of the other territories, cable is doing well because they have the higher data rates.

Thanks.

Yes.

Let me try, Chris, and jump back in if I miss some of these.

As far as the 100%, it was the latter of the explanations that you gave.

It is launched by all of the cable companies in the areas where they can provide service, i.e., parts of their territory they haven't built long loops -- so it is roughly 85% of our serving territory.

But all the companies that overlap us in service have launched their VoIP product.

That is what I meant by the 100%.

To the competition question and the spike, in general, and what we have seen from Mediacom, you get that couple of quarters, maybe three, and then it starts to moderate.

And in some places, obviously, some of the companies we've followed, it's gone on longer than that.

Again, my comment about IPTV and DSL, we think we will moderate that fairly quickly.

You get the early adapters that change and then it levels off, and then your products and your quality of your service, etc, then start to differentiate how well you compete.

Regarding bonding, yes, it does open up some opportunities.

However, we currently can get 10 meg to about 80% of our DSL subscribers.

So at this point, we really don't need -- there is very little need to beyond a 10 meg product.

But bonding will open up that should we need additional speed going forward.

It also obviously extends the loops.

You can get much more distance, it is a trade off as you are well aware of whether it's bandwidth or the length of the loop, but it certainly will add -- will take our coverage from roughly 95% today to perhaps closer to 100% if not 100%.

I think I got them all.

Yes you did.

Thank you very much, I appreciate it.

There are no further questions at this time.

Mr.

Currey, please proceed with your presentation or any closing remarks.

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

Thanks, and have a great day.

Ladies and gentlemen, that concludes your conference call for today, we thank you for you participation, and ask that you please disconnect your line.