Consolidated Communications Holdings Inc (CNSL) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Consolidated Communication Holdings' first quarter 2011 results conference call. At this time all participants are in a listen-only mode. Later, we will conduct a question and answer session with instructions following at that time. (Operator instructions.) And as a reminder, this conference call is being recorded.

And now, I'll turn it over to Matt Smith, Treasurer. Please begin, sir.

Thank you, operator, and good morning, everyone. Welcome to our first quarter 2011 earnings call to review the Company's results that were released this morning.

Joining me 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 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 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 financials. Bob?

Thanks, Matt, and good morning, everyone. Thanks for joining us today as we discuss our first quarter 2011 results. I'll make a few comments about our performance and then Steve will provide more details on the financials.

We are pleased to kick off the year with a strong quarter. Revenue and adjusted EBITDA were $95.4 million and $46.5 million, respectively. We delivered our best ever quarterly payout ratio of 51% and our strongest access line performance in five years.

Our total connections increased for the sixth consecutive quarter. This increase was primarily driven by almost 2,400 broadband subscriber additions. The ILEC line losses were 0.9% for the quarter and 4% over the last 12 months.

With respect to those broadband additions, we grew IPTV subscribers by 1,144 in the quarter and now serve over 30,000. Our increased focus on balancing IPTV growth and profitability is starting to pay off. For the quarter, IPTV ARPU was in the mid-60s per sub and churn was down 18% year-over-year, both of which are the best they have been.

We also reached new highs with our HD and DVR penetrations and continue to drive higher ARPU with a robust selection of video on demand content. While the product and bundling strategy has consistently helped drive our line losses lower and increase the pull-through on DSL, it has been dilutive to gross margins.

We are proud to report that this is the first quarter where we've recognized a positive margin contribution for all three states combined. Two key areas helped drive this contribution -- higher ARPUs and lower churn. I could not be more pleased with the progress we are making on video.

We also had another good quarter of DSL growth by gaining 1,247 new subscribers and our best-in-class DSL penetration now stands at 46%.

Our CLEC business had a solid quarter with 541 access line equivalents added. Churn continues to be low and businesses are starting to show modest signs of an economic recovery. In our commercial, Metro-E product grew by over 7% in the quarter driven by our customers' need for additional bandwidth and more efficient ways to connect multiple facilities.

Looking ahead I remain confident in our business and the sustainability of our cash flows.

So, with that overview, I'll now turn the call over to Steve for the financial review.

Thanks, Bob, and good morning to everyone.

We are pleased to report solid financial results for the quarter. Operating revenue for the first quarter was $95.4 million, compared to $98.3 million for the same period of 2010. Revenue declined by only $600,000, or less than 1% when giving affect to the telemarketing and operator services business units, which we sold during 2010. These two businesses accounted for $2.3 million in revenue during the first quarter of 2010 and, as we stated in the past, were neutral to earnings.

Local calling, subsidies, and long distance revenues were down by $2.7 million, primarily due to lower access lines. Revenues from data and Internet increased $1.6 million, driven by growth in our broadband products.

Total operating expenses, exclusive of depreciation and amortization, were $56.4 million, compared to $58.7 million for the same period last year. The year-over-year decrease is primarily attributable to the elimination of the costs related to the divested business, as previously mentioned.

Additionally, due to our continued success in growing our IPTV subscriber base, video programming costs increased approximately $1 million year-over-year. This was offset by recognizing lower building lease expenses due to the implementation of new terms in our Illinois buildings and the benefit from the call center consolidation that was completed in April of last year.

Net interest expense decreased by $950,000, or almost 7.5% year-over-year. The improvement was driven primarily by the 2010 year-end expiration of $175 million of interest rate hedges that were replaced with hedges at lower rates. The overall weighted cost of debt for the quarter was 5.15%.

Other income net was $7.1 million, compared to $6.4 million for the same period last year. The increase is mainly due to the higher income from our pro rata share of the earnings in our three rural Verizon Wireless partnerships. As detailed on the adjusted EBITDA schedule in the earnings release, cash distributions from all limited partnerships with Verizon were $6.9 million in both the current quarter and the same period last year.

Weighing all of these factors, on a GAAP basis net income was $7.4 million and net income per common share was $0.25 per share. Last year our first quarter net income was $6.9 million and income per common share was $0.23.

Adjusted EBITDA was $46.5 million compared to $47.1 million for the same period last year.

Capital expenditures for the quarter were $10 million, which was an 8% reduction compared to the first quarter of 2010.

From a liquidity standpoint, our cash on the balance sheet at the end of the quarter was $77.2 million, which was an increase of $32.9 million from the last 12 months.

In addition, our $15 million revolver remains undrawn and we have no debt maturities until December of 2014.

For the quarter, our total net leverage ratio, as calculated in our earnings release, was 4.4 times to 1. Our leverage and coverage ratios were well within compliance levels of the credit facility.

Cash available to pay dividends was $22.6 million compared to $18 million in the same period of 2010.

Now, let me reiterate our full-year guidance for 2011 CapEx, cash income taxes and cash interest. Capital expenditures are expected to be in the range of $38 million to $41 million; cash interest expense is expected to be in the range of $45 million to $48 million; and cash income taxes are expected to be in the range of $14 million to $16 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 1st, 2011, to shareholders of record on July 15th, 2011.

With that, I'll now turn the call back over to Bob for closing remarks.

So, in summary, we are pleased with our solid results for the first quarter and believe the business is positioned well for the future.

And with those comments, Tyrone, we're ready to open it up for questions.

Thank you, sir. (Operator instructions.) Gray Powell, Wells Fargo.

Good morning and thanks for taking the call. I just had a few questions. Can you discuss the main driver of the improvement in access lines that you saw, and do you think you can maintain the loss rate in sort of the high 3%, low 4% loss rate going forward? And then, if you are able to maintain line losses at current levels and grow to DSL and IPTV base, should we expect continued revenue growth?

Yes, good morning, Greg. Let me take those.

On the access line losses, yes, I think the low 4% is certainly a good number that you should continue to expect us to achieve. And of course, we'll try very hard to even do better than that, but clearly we've been in that range now for some period of time. And the product offerings and the service, and clearly the bundle, are having a positive impact for us.

As far as revenue growth goes, it's basically flat year-over-year. There was an out-of-period that helped that to some extent. But, we would still model a slight revenue decline quarter-over-quarter, but we're hyper-focused on some growth area opportunities.

Got it. That's very helpful. And just on a separate topic, I mean, cash has steadily been building on your balance sheet for the last two years. That kind of naturally leads me to the question of how you want to use it or M&A. Do you see any opportunities right now and, to the extent that you can, what kind of strategic assets would you consider?

Hey, Greg, this is Steve. You're absolutely right. The way we're building cash on the balance sheet, we are building that up hoping that we could use that as the down stroke on a potential acquisition.

So, Bob, you want to comment on what we're looking at?

Yes. We're focused on building cash. Obviously, the security of the dividend is very important. Each quarter our -- when we meet with our Board, we talk about the uses of that cash and it goes all the way from acquisitions, as Steve said, to delevering share buybacks, and none of those are really on the horizon for us.

We've said historically we would like to be acquisitive and we're looking at -- we're always out scanning the horizon and looking for an opportunity, but we're going to be prudent. As our performance has demonstrated, we're at a size and have a product pipeline that allows us to minimize revenue declines and hopefully in the future show some revenue growth.

Got it. Thank you very much.

Thank you, Gray.

Thank you. (Operator instructions.) Donna Jaegers, D.A. Davidson.

Hi, guys. Two quick questions. Bob, you're usually pretty plugged in on the regulatory environment. Can you talk about what you're hearing as far as inter-carrier comp reform this year in the FCC?

Yes, I can, Donna, although I think you give me more credit for being plugged in than I deserve.

But, there's progress. The industry continues to try to arrive at something that we could all live with, all companies, reaching out to others to try to also get a consensus.

Our position has not changed. We still think that reform is necessary. And our push remains to be on let's take care of some of the easier ones that are out there, the phantom traffic, the traffic pumping, the treatment of IP. And I would -- there's still a lot of unknowns, but at least the discussions with the major parties, including the FCC, recognize that some transition period and some other mechanisms to offset some of the proposed revenue declines.

So, we like the momentum, the way it's headed. There's still a long way to go before we get to the goal line.

Frontier this morning thought that maybe something could come out sort of third or fourth quarter. Would you sort of agree with that?

I might agree with the part that can the industry arrive at a position. We've been working this for 10 years, so I would be optimistic on that, but I wouldn't share that optimism on would it be accepted by all parties implemented at the FCC. That would be a very aggressive schedule.

Great. And then just one quick follow-up. You mentioned that there was some out-of-period adjustment that helped the first quarter revenues. I didn't see that broken out in your release, but I've been swamped with six other releases this morning. Can you break that out for us?

Yes, Donna, this is Steve. On the one-timer in the quarter, if you look at the network access on a sequential basis, we're up $1.7 million in the first quarter. Probably half of that will be recurring, half of that was attributable to a one-time thing, primarily on carrier access disputes that were settled in our favor in the quarter.

Great. Thanks, Steve. And one quick question for you. Are you guys -- what's your hedge position now? Have all the high-cost hedges rolled off?

No. Well, the overall position is we're still at 70% today. We have about $175 million rolling off towards September of this year. We already have a hedge and forward-looking interest rate swap in place that will take care of that at a much lower rate. There's still some residual of the higher cost instruments on there, but we're in a heck of a lot better shape than we were.

Great. Thanks, guys.

Thank you. And I'm showing no further questions or comments at this time. I would like to turn the call over to Mr. Bob Currey for any closing remarks.

Well, thank you again for joining us today and we appreciate your support. We do not take your investment and confidence in the Company for granted. We look forward to you joining us again next quarter, and thanks and have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect and have a wonderful day.