Consolidated Communications Holdings Inc (CNSL) 2010 Q4 法說會逐字稿

Good day ladies and settlement welcome to your Consolidated Communications Holdings Inc. fourth quarter 2010 results conference call. (Operator Instructions) Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, today's conference call is being recorded. I would now like to introduce your host of today's conference call, Mr. Matt Smith. You may begin, sir.

Thank you, Kevin. Good morning, everyone. We appreciate you joining us today for our fourth quarter and full-year 2010 earnings call. Joining me on the call today are Bob Currey, President and Chief Executive Officer, 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 the 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 the nearest GAAP equivalent. Our now turn the call over to Bob, who will provide an overview of our financial operating results. Steve Childers will then provide a more detailed review of the financials. Bob?

Thanks, Matt. And thank you for joining us this morning. We appreciate your joining us and to review our results for the quarter and recap our 2010 accomplishments.

Overall it was another solid quarter and a very good finish to the year. We continued investing in our business and generated strong cash flows in support of the dividend. Operationally, we delivered our fifth consecutive quarter of total connections growth. Broadband subscribers additions totaled 2700, representing a 2.1% increase in the quarter. We continued our strong access line performance with losses of under 2600 or 1.1%. This represents a 19% improvement over the same period in 2009 and was the lowest quarter of port outs since the end of 2007. We also had a solid quarter of growth in our CLEC access line equivalents, driven primarily by the lowest quarterly turn rate of the year and a large metro ethernet project with a wireless carrier.

While the economy is still not doing us any favors, we continue to see rational pricing from our competitors. We find that promotional offers and service performance are the key to acquiring and retaining customers. Our triple play bundles continue to resonate well with consumers, and we are achieving higher ARPU by up-selling our premium services and video on demand. This focus on driving higher ARPU is part of a continuing initiative to balance video subscriber growth with profitability. The plan focuses on attracting and retaining high-value customers by creating an exceptional customer experience while remain vigilant in reducing the cost to deliver the product.

Financially, we've had another solid quarter. Revenue for the period was $93.8 million and adjusted EBITDA was $45 million. The dividend payout ratio was the best it has ever been at 52.3%. And in 2011, we will continue to benefit from the election of bonus depreciation, as Steve will discuss in more detail later in the call

Now let me recap some of our major accomplishments for the year. We completed the consolidation of six separate customer call centers into two, one for residential and one for business. Both our customers and the company are already benefiting from this consolidation. We delivered our best full year of access line retention since the North Pittsburgh acquisition in 2007. We increased our video subscriber base by 26.4%, and through continued expansion of HD and DVR take rates, we drove video ARPU higher by 8%. In fact, our 26% DVR penetration was a 50% increase year over year.

In 2010, we also added another 20 HD channels. Our HD penetration now stands at 24%, which represents a 78% increase over 2009. We continued to deploy pair bonding technology, increasing capacity for the existing customer base, and extending our video reach to another 18,000 homes. Our network investments positioned us to close wireless backhaul deals in each of our three states, and, we expect additional opportunities in 2011. We also completed the sale of our telemarketing business and our operator services units, which closed at the end of February and November respectively. Financially, we maintained a comfortable payout ratio and improved our balance sheet by increasing our cash position by $25 million to approximately $68 million at year end. As you can tell, we accomplished a lot in the year.

Finally, before I turn the call over to Steve, let me comment on the regulatory reform that has recently come to the forefront. We continue to agree that reform is necessary and it represents some real opportunities. We hope that some of the issues where an extensive record exists and industry consensus has been established, that those will be acted upon quickly. For the other items, we will continue to push for an appropriate transition period, no unfunded mandates, less, not more, regulation, and minimal customer rate increases. So with that summary, I will now turn the call over to Steve or the financial review. Thanks, Bob, and good morning to everyone.

We are pleased to report solid financial results for both the quarter and for the full year 2010. This morning I will review our quarterly financial performance and then provide our 2011 guidance.

Operating revenue for the fourth quarter was $93.8 million, compared to $100.8 million for the same period of 2009. Almost half of the year-over-year decline is associated with the low-margin revenue from the telemarketing operator services and business unit that we sold in 2010. The remaining decline of $3.8 million, or 3.2%, local calling, network access, and subsidy revenues, which all declined primarily due to continued access line erosion, which was partially offset by our double-digit growth in data and Internet service revenues. Also the quarter we recognized the non-recurring subsidy adjustment that reduced revenue by $700,000. Total operating expenses, exclusive depreciation and amortization were $56.5 million, compared to $62.3 million for the same period last year. In addition to the lower costs related to selling the two previously mentioned business units, the $5.8 million improvement was the result of the full years benefit from cost reduction initiatives, and efficiency improvements implemented throughout 2009 and early 2010.

Net interest expense for the quarter declined by $1 million to $13.1 million compared to the same period of 2009. The decline was driven by 38-basis-point improvement in our weighted average cost of debt, which was 5.58% throughout the fourth quarter. At the end of 2010, we had $175 million of interest rate swaps roll off with an average rate of 4.3%. We replaced these with new swaps that mature in March 2013 and carried an average rate of 1.83%, resulting in an improvement to the current overall weighted average cost of debt 5.15% as we go into 2011. Other net income -- other income net was $7 million compared to $6.5 million for the same period last year. For the quarter we recognize $7 million in cash distributions from our wireless partnerships compared to $6.9 million for the fourth quarter of 2009.

Weighing all these factors, on a GAAP basis, for the fourth quarter 2010, net income was $6.8 million and net income per common share was $0.23 compared to net income of $7 million and net income per share of $0.24 for the fourth quarter 2009. We also look at net income per share on an adjusted basis. As detailed in the adjusted net income per share schedule in the earnings release, our adjusted net income was $8.2 million, and adjusted net income per share was $0.28, compared to $7.5 million and $0.25 per share respectively in the fourth quarter of 2009. Adjusted EBITDA was $45 million in the quarter compared to $48.1 million for the same period last year. Capital expenditures for the quarter were $9.2 million. From a liquidity standpoint, we ended the quarter with $67.7 million in cash, and our $50 million revolver remains undrawn. As a reminder, we have no debt maturities until December 2014.

For the quarter, our total net leverage ratio as calculated in our earnings release was 4.46 times to 1. Our leverage and coverage ratios were well within clients' levels of credit facility. Cash available to pay dividends increased by $3.1 million for the same period in 2009, resulting in a very strong payout ratio of 52.3%. We did benefit in the quarter from the election of bonus depreciation and intend to make the same election in 2011.

Consistent with prior years, we will provide guidance for 2011 with respect to CapEx, cash interest, and cash income taxes. First, capital expenditures are expected to be in the range of $38 million to $41 million, which is down from our $41.7 million CapEx spent for 2010. Cash interest expense is expected to be in the range of $45 million to $48 million, which is an improvement compared to 2010 cash interest of $50.2 million. Cash income tax, given the effect of the benefit of bonus depreciation, are expected to be in the range of $14 million to $16 million. This compares to 2010 cash taxes of $18.7 million. With respect to our dividend, our board directors have declared the next quarterly dividend of approximately $0.39 per common share payable on May 1, 2011 to shareholders of record on April 15, 2011. I will now turn the call back over to Bob for closing remarks.

So in summary, we had another great year, full of many accomplishments. We continue to invest in the business, upgrade our products, and improve the customer experience. The economy has not recovered as fast as we had hoped, and the weather has provided some interesting challenges. But while our network is best in class, it is our employees who continue to provide the real differentiation with our customers, and for that I am very grateful. With that , Kevin, let's open it up for questions.

(Operator Instructions)Our first question comes from Gary Powell from Wells Fargo.

Hello guys. Good morning. Thanks for taking the question. I just had a few. So, obviously you have done a great job of reducing access line losses this year. Going forward, do you think we can maintain this loss rate in the low to mid 4% range? And then, can you just segment out your expectations between residential and business?

Great, Bob, good morning. Yes, on the first part of your question. On the access line loss rates we would expect them to stay in this range if not improved. The second part of it, if you could repeat it, it was something to do with business and res. I'm sorry did not catch it.

I'm sorry. Can you just segment out your expectations for business and residential line performance going forward?

Yes. The business loss was up a little bit. I think the trends that you see in this quarter are sort of our expectations for 2011. I think that's a good proxy for 2011.

Okay. That's very helpful. And then, I'm just taking rough guess, but it looks like about one third of the total homes in your territory take your broadband service. I just wondered if you have any stats or if you have anything to take a guess as to what your market share, how that compares to that of cable. And then in the homes where you have IPTV, can you just talk about how your offering stacks up against the cable competition and the types of broadband speeds that you offer to those homes?

Yes. As far as broadband penetration, it goes way back to who was first to market, etc. And in some of our territories, we have no way of really knowing, but, a good guess would be that in some of our markets in Illinois where we were first, it is near 70%. And in some of the markets where we were not first, for instance one of the Texas markets, we are probably in the 35% range but taking share.

On the speeds, we are up to 96% percent of our customers can get our broadband product, and that's a minimum of 3 MB, and probably two thirds of that we can provide 10 MB. So from a speed basis, we are very competitive, and then with the bonding technology, we are up over 20 MB where, depending on distance or the availability of bonding. On the IPTV front, your question there about how we compete, or compare head to head with the cable provider, over the last year, so we have described how we relaunched our product so we can enter with a very low price, and then the customer pays for each additional set top for each HD for different tiers that they want. So, that's primarily been responsible for our 8% increase in ARPU last year. And then frankly, that's the focus that we have on that product right now is to upsell. We are very happy with the product performance. And, obviously, from IPTV, we do get some DSL pull through.

Now the other part of your question, you ask about what percent of our homes take our product? It's roughly about 50%. So even though we have industry-leading penetration rates, we are focused on going back into some of the homes that do not currently have one of our services. So, while that's not passing new homes, there's facilities, there's copper in the ground, and there's a good opportunity to go back, and that's what we have been doing now for the past year.

Got it. That's very helpful. Thank you very much.

You're welcome. Have a great day.

Our next question comes from Dave Coleman from RBC Capital Markets.

Thanks a lot. Just a couple questions. Steve , I think you mentioned a $700,000 nonrecurring subsidy adjustment. I just wondering if that's what accounts for the step down in the subsidies from 3Q to 4Q.

Primarily, the $700,000 adjustment really comes back from a USAC adjustment, based on audits that go back to 2004, 2005 and again it's behind us. We didn't necessarily agree with the findings. We're appealing those based on contingency accounting rules. We went ahead and booked it in the quarter. So I think that is probably 75% of the decrease quarter over quarter.

Okay. Thanks. And then on the data and internet side, despite continued broadband continued growth, the revenue growth was sort of flat on the data and internet side. I was wondering if you could talk about what is causing that?

Are you talking sequentially or year-over-year?

Sequentially.

One second here. Dave, we may have to get back to you, but I think the primary factor, we are having to grow. Part of that's probably net on some of the promotions we are running in the fourth quarter. And I think we might have lost a little bit of private line revenue that goes in there. But I will follow-up with you.

Okay.

David, I would just add that in the first quarter, we have also bumped the price $5.00 on the entry-level on new customers. So, we would expect to -- growth to start again there.

Okay. Great. And then on the wireless backhaul RFPs that you were awarded, can you talk about the number of cell sites that are included in those three contracts? The amount in CapEx dollars? And then, finally you talked about accelerating some CapEx to take advantage of bonus depreciation. If you were to sort of normalize and sort of take out the accelerated CapEx, what would be the run rate CapEx that you would anticipate for the business? Thank you.

Dave, on the sites, it's 49 currently under agreement. The CapEx is less than $1 million. And the very attractive payback periods on that CapEx, and it's generating about $35,000 a month in recurring revenue. As far as the --

Hey, Dave, this is Steve. I'll take the question on the CapEx relative to bonus depreciation. I don't think we said that we were going to accelerate CapEx because of bonus depreciation. We are -- the guidance that we gave for the $38 million to $41 million, that is what we consider to be a fully funded CapEx based on how we see the business and even including normal success-based CapEx on video plus some of these wireless backhaul projects and other opportunities we are looking at. But we obviously will benefit from taking bonus depreciation on anything we spend relative to CapEx in 2011. And I think to your point, I would say that if there is a success-based CapEx project that comes down the road that is beyond our guidance range that we would take that into consideration in making that decision.

Yes. If you look historically, over the last four or five years, as we've said in the as we completed our IP backbone, the shape of our copper, et cetera, pushing fiber deeper in the network, we expected to bring CapEx down on a fairly steady state. And, obviously, this fiber backbone, this fiber network that support our products also positions us well to pursue these wireless backhaul revenue opportunities. And as Steve said, there's flexibility in that budget. You know, if we had some opportunities that are budgeted that were to occur, we have the flexibility. But we are pretty confident with the guidance that we give in on our CapEx.

That's great. Thanks a lot.

Our next question comes from Frank Louthan from Raymond James.

Great. Thank you. Can you give us an idea of what your video on demand library looks like and how much that is improved, where you see that possibly going over the next 12 months? And where exactly have you deployed the pair bonding technology, and where would you see that being available within your footprint over the next 12 months?

Yes. Frank. Good morning. It's about 3,000 hours of VOD currently. That's up just under 50%, maybe 40% year-over-year. And by the way, that has generated $2.70 of ARPU per customer. So that's where we're seeing some of that 8% growth. As far as pair bonding, it's in all three states, Frank. We have launched it and currently, gosh, a percent of houses, I don't -- I would have to get back to you on that. I know really --

Or do you have an idea of sort of -- obviously there's some places that it's feasible to do and others that it is not. Can you give us an idea of where you are as far as a percentage of the potential households that you think you could use that technology to get to, or businesses?

Yes. Unless there is an improvement in the technology, we're getting close to the end. I think that's -- we said we passed an additional 18,000 homes last year. That primarily, Frank, came from pair bonding technology. It allowed us to get our bandwidth requirements out to the additional 18,000. We will add another five this year, but again, and hopefully, we'll see some improvement in the technology. It continues to get better year after year.

So, are you using this primarily to extend the reach of your plant or are you using it to send more bandwidth, possibly more video streams and so forth in some of your denser areas of your network or both?

It's both Frank. It extends the footprint but it's also, for those who have seven or eight TVs in their house, for those who want multiple HD streams, we didn't have that capability in some of just the pure copper. So that's what's allowed us to get the 10 MB out to 60% of our customers and 20 MB out to a significant number if they need it. So it's a combination of both of those factors that you cited.

Okay. And can you remind us for the revenue and EBITDA impact from the sales of the business units that you completed in February?

Yes. Frank, the businesses we sold in February of this year was the telemarketing group, and then in November we wound down the operator services group. In total, revenue was about $15 million that we'll obviously want to see going forward, but there's basically no EBITDA impact to divesting ourselves of those businesses. And actually we think there's probably some economy of scale despite not focusing on those types of applications.

Hey, Frank, Bob.It just made me think too, on your previous question, we have 14,000 lots where we have fiber to the home. Just under 4,000 customers on fiber to the home. So any greenfield new operations, it's not bonding, we're going fiber to the home. And obviously, a lot of that is in Texas.

Got it. And then just lastly, any thoughts on M&A, any activity there that may have picked up or looks attractive, and is there anything outside of the traditional ILEC business that you might find interesting? I've seen some other ILECs looking at CLEC businesses and so forth, fiber networks, anything like that you might find attractive or how is that market going right now?

Well, we have broadened our net a bit on what we're taking a look at, Frank. Consolidation obviously is continuing. Credit markets have never been better. And we still consider ourselves as acquirers. Again, we have to make sense. Our focus has been triple play and IPTV, but we would broaden that a bit outside the RLEC , but at the end of the day, it goes back to what is the shape of the property? Is it cash flow accretive? Does it fit our model and our skill set of the way we have our strategy? And we will continue to look, and at the end we will do what is best for our shareholders.

Okay great. Thank you very much.

Our next question comes from Barry Sine with CapStone Investments.

Good morning. First question, you mentioned promotional offers on the triple play a number of times. I was wondering if you can give a little bit of detail on that. What price points are you offering? What's involved with those price points, and how does that compare to the cable operators' offerings in your markets?

Well, what we have done, and Barry, thanks for the question, with the relaunch, we went to a wireless, one CAT-5 into the home, and then a wireless distribution within the house. So we were able to offer a $79.95 offer for one TV and then upsell with set-top boxes, additional streams, DVR, HD, and if you run through what the normal customer ends up paying, it comes out to be around $100. It can be higher, obviously. Or, if it's an elderly person in a one-bedroom apartment, the lower price point appeals to them. And as far as the competition, the same introductory offers, no irrational or immature behavior, I think, new offerings, you got to read the fine print, and they are doing a lot of the things we are doing - focusing on the bundle.Drive the value through the bundle. The more services you take the better value.

Just to clarify, the $79.95, that's triple play voice video data?

That is. Yes, sir.

Okay. My next question is regarding your subsidy revenue line. I think the past on the call you provide a little more visibility, what you expect for the coming year. Do you have any more information the give us on that?

Yes, Barry, this is Steve. This year, year-over-year, you probably saw about a $7 million decline, that was primarily a federal high cost fund because, as we take cost out of the business, we're not benefiting as much from our cost efficiency as other people in the pool are, as their costs increase relative to the national average cost per loop. So this year we took a fairly big hit in 2010. Looking forward, 2011, we expect it to be much more moderate, maybe coming down, 3% to 4% a year. As we have always talked about, as we get more efficient and take cost out of our business, we would see a slight decline in subsidies over time.

Okay. And my last question regards the cash balance, a very sizable cash balance. It's been building for some time. Could you walk through, we've already had a question on M&A, just walk us through the priorities for that cash? If you don't see an M&A opportunity are we likely see a large buyback? Your debt doesn't come due to 2014. What are you looking to do with that cash?

Barry, right now we're fine with the building. Our priority and our preference is to use the cash and kind of reconstitute the balance sheet in terms of refinancing with an acquisition. As Bob said, the capital markets are extremely hot for now. We're well aware of what we could potentially do with a refinancing opportunity should we go down that path. We're watching what all of our peer group members are doing relative to the success they're having with their refinancing. I think we're just going to kind of continue to save -- to keep the dry powder for a while as we, again, look for buybacks or look for an acquisition.Probably not, even though we've considered a buyback, I personally don't see that happening in the short term at least.

Okay. Thank you very much, gentlemen.

(Operator Instructions)Our next question comes from Donna Jaegers with D.A. Davidson.

Hi. Actually this is Mike Burke coming in for Donna. Thanks for taking the questions. I just have two questions. First, on the gross margins in the fourth quarter, they showed pretty good cost control. Could you elaborate in more detail on how you are able to improve the gross margins during the quarter sequentially? And then my second question would be, with the Verizon wireless rollout and investment in LTE, how much will this impact of the distribution from your wireless partnerships in 2011? Thanks.

I'm sorry, could you repeat the second question?

Yes. What they were Verizon Wireless rollout, and the investment in LTE, how much will this impact your distribution from your wireless partnerships?

Let's start there first. With respect to the Verizon Wireless partnerships, this year, for the fourth quarter, as we mentioned, we received $7 million in cash distribution from the five partnerships that we are involved in for the full year. It was $27.4 million, up about 22% compared to 2009. And we have seen budgets for the partnerships for 2011. We're not forecasting another 22% of growth. I think our expectations are a little bit more moderate going into 2011, but with respect to the 4G question or the build-out, our distributions are net of cash, and it's a little bit different in each partnership, but their CapEx spends have -- they've been working on the 4G build-outs for the last couple of years. So we are actually looking -- I think most of that is actually behind us now. And so going forward, we would actually be looking, even though in our model we have a pretty conservative number in there, we are actually hoping for some upside with the successful launch of 4G and more data revenue across those markets.

Okay great.

And then on the margin question, a lot of the cost improvement, or some of the cost improvement is really, in part, as we talked about getting rev two of our business are telemarketing operator services. Those, again, like I said earlier, those generated, I said -- I think it was $10 million actually for 2010 and maybe $15 million on a go-forward basis in our model. But again, those generated virtually no margin for, so you can probably back up $4 million in revenue , no margin associated with that. And then I think the rest of it is simply the focus that we talked about with video profitability going forward, tremendous focus on cost reduction, improving the customer experience, all that type of thing, and then also just continuing to benefit from all of the workgroup consolidation that Bob mentioned earlier just getting the full year benefit of that. So I think our cost structure continues to improve, and again, it'll be hyper focused on video profitability in 2011.

Okay. Great. Very helpful, thanks a lot.

Our next question comes from Michael Nelson with Mizuho Securities.

A couple questions. First on the CLEC business, you had extremely strong quarter in terms of the CLEC access line equivalents. Bob, I'm wondering, can you provide some more insight from your comments or your prepared remarks regarding the lower turn in the ethernet project and what really led to the strong performance there?

Yes. Good morning Michael. The turn is just focus. We put a different group, new leadership in out there and really put some focus on the turn and it has paid off. Lowest ever. On the CLEC, I want to be totally transparent on this, that we are very happy with that CLEC business. It is good news, it's growing, it's very profitable. On the other hand, we have sold some large circuits and, because of - 1 GB, actually - and because of the way we do our ALE count, our access line equivalent count, and it's a matrix that we established five years ago, it's one 1 MB for each 2.5 ALEs. A 1 GB circuit produces 2,500 ALEs. So again, I don't want to mislead anybody on how those are counted. Those are access line equivalents, 1 MB equals to 2.5. So we sell a 1 GB circuit, and we happen to sell two of them, you're picking up. But again, highly profitable, good revenue, and like access lines, over time, I think the ALE is going to become less and less important as far as modeling what is going on.

Great.

Even without, let me reinforce, even without those big circuits, we still would have had positive growth, and we like that business.

All right.That's helpful. And then just a couple of follow-up and clarifications from previous questions. Steve, just to clarify the Verizon Wireless question, it does sound like you expect the cash distribution to at least increase in 2011 versus 2010?

Yes, sir. Absolutely correct.

Great. And then, Bob, a follow-up question on M&A. You talked about potentially diversifying your asset mix. I'm wondering, some of your other larger peers have expanded into data center and managed hosting segments. Do those businesses make strategic sense for you guys?

Well, maybe not just exactly the ones that you mentioned, Michael, but as far as expanding our net of what we would look at, CLEC, we like the business, fiber assets tuck-ins adjacent to us. It could even include taking a look at some cable properties, et cetera. But It would depend on geography.It depends on fit. I'm not going to Hawaii or anything like that. So, depending on the size, as we described in the past, we'd go to a new state for something of substantive size, but within our own territory, our own states, it has to make sense. And of course the quality of the asset. So, as the RLEC sector has shrunk, I think it is prudent to take a look at with widening your net a bit and, where you can get some growth, delever, and get a nice return, creative return for your shareholders. We would certainly take a look at those and have in the past. We just haven't found anyone the made any sense to us.

Got you. And then a couple questions on the IPTV business. It looks like, in the quarter, you did have a step down in net adds around 1.3 thousand from 1,900 in the third quarter. I think you previously discussed adding between 1,600 to 2,000 per quarter. So, the first question is, were there competitive pressures in the quarter and, is there typically any type of seasonality around that service . And then currently, you're a little bit over 14% penetration. Where do you think that can go near term, maybe over the next 12 months and then longer term over the next couple years?

Yes. Michael, there's a lot of pieces there. Let me see if I can get them.

Yes.

First of all, we were happy with the quarter. Happy with the growth, and the product continues to perform well and gets better week after week. But, as we said on the call and in the past, we are going to balance growth with profitability. And, so, we continue to make improvements with it. We have -- you're spot on on the 14% penetration. To that question, we would hope to grow that, to 14%, 15% this year. We've had quarters of 1,600 in the past. I think where you see it right now, it'll bounce around quarter to quarter depending on how aggressive we are with some of our marketing efforts. We are certainly focused on churn and trying to attract the high value customers, and having some success there, tightening up on some of your credit policies, going after the programmers, and the cost there. So it's a multi-pronged strategy, but clearly, having our foot on the gas for growth. We have markets that are above 25%. There's absolutely no reason that long term, we shouldn't be striving for those kinds of penetrations across all of our markets. But short term, I would tell you, if we could add three or four percentage points this year, that would be as successful year.

Great. And can you -- do you typically see any type of seasonality in that business? Are certain quarters seasonally stronger than others?

A little -- you can see some. Second quarter, generally with moves and stuff is not necessarily a strong quarter. But, other than that, the other quarters , there really isn't, what you would call a seasonality.

Great. Thanks.

Our next question comes from George Whiteside with SWS Financial Services.

Good morning and congratulations on a good quarter.

Thank you.

And finishing strong for the year. A quick question in terms of your balance sheet. I note the decline in shareholder value. I presume that this is primarily due to depreciation of plant and equipment. Can you comment on this for me?

I'm not sure I totally understand your question. I talked about shareholder's equity section of the balance sheet?

Exactly.

Well, what's running through there obviously is our net income which is obviously impacted by the high depreciation and amortization that we have, because basically our company is based on three acquisitions. So we've had a step up and fair value for all three of those transactions. So, what was really running through the retained earnings number then is basically the difference between what net income is, which is a little bit artificially low because of transactions we have done versus the amount of dividends that we are returning to shareholders.

Yes. I assumed that this must be what was going on. And I view this as a cash flow play.

Well we are generating cash. As we said, we increased our cash on the balance sheet by over $25 million for the year, and we are in very strong cash position going forward and have a lot of cushion relative to the dividend that we are paying.

Yes, and you've certainly made very substantial progress in that area. Thank you.

Thank you.

Our next question comes from Michael Rollins from Citi Investment Research.

Hi, good morning. Thanks for taking my question. Have you guys quantified the benefit that you are getting from the bonus depreciation in terms of tax and, if the bonus depreciation goes away at some point the future, what normalized tax expense might look like?

Well my, this is Steve, for 2010, the benefit from bonus depreciation was roughly $7.5 million, and that payout ratio probably would've taken us to a high 60. And I think what we are thinking about, as we think about payout ratio and trying to balance that with leverage, we would be comfortable in a mid-60 type of number where again, we think the business would be absent bonus depreciation going forward.

Thanks. Helpful.Thanks very much.

Thank you.

And I'm not showing any further questions at this time.

Thank you all for joining us today and for your continued interest and support of Consolidated Communications. We hope you'll join us again next quarter and thanks and have a great day.

Ladies and gentlemen this does conclude today's presentation. You may now disconnect.