Consolidated Communications Holdings Inc (CNSL) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Consolidated Communications Holdings, Inc. Third 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 and instructions will be given at that time.

(Operator Instructions)

As a reminder, today's conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Matt Smith, Treasurer. Sir, you may begin.

Thank you, Devon. And good morning, everyone. Welcome to our third quarter 2011 earnings call to review the company's results 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 results for this quarter's results which has been posted to the Investor Relation 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. Appreciate you joining our call today to discuss our third quarter results. I will begin with a few high-level comments on our accomplishments in the quarter, and then Steve will review the detailed financials. We're pleased with the third quarter results.

The Company continues to perform well despite the continued uncertainty in the economy. We generated $92.5 million in revenue in the period, which was flat compared to the second quarter. Adjusted EBITDA was $46.3 million, and operating cash flow was a very strong $32.1 million. These financial results reflect our continued focus on growing the business and providing a comfortable dividend payout ratio.

Operationally, we had a very good quarter, growing our broad band subscribers by 2,754 and driving excess line performance to its best level in seven years. We added 17,063 video customers and 991 high-speed internet subs. Our industry-leading ILEC line losses now stand at 3.9% over the last 12 months. We were pleased with our video adds in the quarter and now penetrate 16% of the homes that we pass. Our consistent effort in driving low return levels continues to support profitable growth.

In addition, video ARPU at the end of the quarter was the highest ever, at $70 per sub. We continue to see up side in ARPU and associated HD and DVR penetrations which are currently at 30 percent. The marketing efforts in the quarter resonated very well with the customers. We offered various bundling packages based on term and video programming needs. Our triple play ARPU increased to $115, which is a six percent increase over where it was this time last year.

Specifically to our wholesale and commercial services we had some big wins in our transport and SELAC operations, both from new sales and existing customers. We also added 79 new circuits in our wireless backhaul agreements for $96,000 in monthly recurring revenue.

Customer capacity needs continue to increase, and our network is well positioned to support this growth. Also on the commercial side, we continue to see growth in our Metro E product with an increase of 19 percent, versus the third quarter of last year. Overall, our business in broadband revenue now represents about 59% of our total revenues, and is expected to continue to grow.

Finally, let me touch on USF and inter-carrier comp reform. Last week the FCC issued its long-awaited order on intercarrier compensation and universal service reform. While we have been supporters of reform and pleased that there is FCC action to establish a framework for change, the details are still unknown until the 500-page order is finalized and released to the public.

We have however been active in discussions with industry associations and counsel while we continue to gather information. Once it's released and we have a chance to review it in detail, we'll have a better sense of the potential pros and cons for Consolidated and our customers, as well as to what extent it will be contested in the courts.

As we have done historically, we continue to model USF and access reductions, and believe we'll be able to manage through it. This is just the beginning of a very long process. So with that, let me turn the call over to Steve for the financial review.

Thanks, Bob, and good morning to everyone. As Bob mentioned, we are pleased to report another solid quarter. Today I'll provide details on our financial results, and then update you on our 2011 guidance.

Operating revenue for the third quarter was $92.5 million as compared to $95.6 million for the same period 2010. Revenue declined by $2.5 million when excluding $600,000 in 2010 revenue from the operator services business, which we sold in the fourth quarter of last year.

Local calling, long distance and subsidies all declined due to loss of access lines, and were partially offset by the continued growth in our data and internet services. Total operating expenses exclusive of depreciation and amortization for the quarter were $55.2 million, which resulted in a decrease of $92.9 million from the same period last year. The improvement was driven by our continued focus on expense reductions, lower pension-related cost, and the divestiture of the operator services business as previously mentioned.

Net interest expense increased $1.7 million to $13.4 million. The third quarter of 2010 included a $1.4 million non-cash benefit to interest expense related to the reverse of an interest accrual associated with the net reduction in liabilities for uncertain tax positions.

Excluding this benefit, interest expense was $300,000 higher due to a 15 basis point increase in the weighted average cost of debt, which was 5.73% for the quarter. Additionally, on September 30th, 2011, we had $200 million of high-cost interest rate swaps mature.

We placed half of this amount with a swap at a rate of 1.65% and the other half rolled to one-month LIBOR. The result of these changes will be a quarterly reduction of approximately $1.5 or $1.6 million in interest expense, and an 80 basis point improvement to the average weighted cost of debt starting in the fourth quarter.

Other net income was $6.9 million, compared to $7 million for the same period last year. As detailed on the adjusted EBITDA schedule or earnings release, cash distributions from all five limited partnerships with Verizon were $6.9 million in both the current quarter and for the same period last year.

Weighing all these factors on a GAAP basis, net income for the current quarter was $5.8 million, and net income per common share was $0.19. For the same quarter last year, net income was $11.8 million, and income per common share was $0.40.

As a reminder, in the third quarter of 2010, our net income included a non-cash, after-tax benefit of $5.5 million or $0.19 per share associated with net reduction in liabilities for uncertain tax positions. As illustrated in the adjusted net income and per share schedule in the earnings release, adjusted net income for the quarter was $6.1 million, and adjusted income per share was $0.21. This compares to net income of $6.8 million in the third quarter of 2010, and adjusted net income per share was $0.23.

Adjusted EBITDA was $46.3 million for the current quarter, $46.7 million for the prior year period. Excuse me. The capital expenditures were $10.5 million for the quarter, and were $10.8 million for the third quarter of 2010.

From a liquidity standpoint, we ended the quarter with $92 million in cash on the balance sheet, which represents an increase of $10 million for the quarter and an increase of $36 million over the last 12 months. The cash buildup is net of $3.8 million we contributed to the pension plan in the third quarter. We made our last pension contribution for the year of $1.9 million on October 15th for a total of $9.5 million for the full year of 2011.

In addition to the cash on the balance sheet, our $50 million-dollar revolver remains undrawn and fully available to us. For the quarter, our total net leverage ratio as calculated in the earnings release was 4.24 times to one. Our leverage and coverage ratios were well within compliance levels of the credit facility. Cash available to pay dividends was $20.8 million resulting in a strong dividend payout ratio of 55.7%.

Now let me provide an update for our full-year guidance for 2011. We are narrowing the ranges for CapEx and cash interest while lowering the range for cash taxes. Capital expenditures are now expected to be in the range of $40 million to $41 million, versus original guidance of $38 to $41 million. Cash interest expense is now expected to be in the range of $47 million to $48 million compared to previous guidance of $45 million to $48 million.

Cash taxes are now expected to be in the range of $8 million to $9 million, which is down from previous guidance of $9 million to $11 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 February 1st, 2012 to shareholders of record on January 15th, 2012. With that, I'll now turn the call back over to Bob for closing remarks.

In summary, these excellent operating results that I get to report only happen as a result of the effect from 1,000 employees doing an outstanding job every day of the week. I could not be more pleased with what they have accomplished. With that, Devon, I'd like to open it up for questions.

(Operator Instructions). Our first question comes from Frank Louthan of Raymond James.

Great, thank you. I apologize, I missed the first part of the call. But can you give us an update on the universal service/intercarrier comp impact? And then, to what extent do you think this may unlock some M&A opportunities with some smaller carriers? What would be, what's sort of your appetite and your parameters around M&A at this point? Thank you.

Yes, good morning, Frank. Regarding the FCC reform, what we said in the beginning was, you know, it's a 500-page order, hasn't actually been written and certainly hasn't been released to the public yet. So while we support reform, you know, we hope that it ends up being in a manner that will provide a sufficient transition and not negatively impact the consumers.

But a little early yet to be able to say its real impact on Consolidated until we get it and get a real good opportunity to analyze it. You know, some of the rumors you like and some you don't like. But we would probably be prudent to just withhold, because we frankly don't know enough yet to be able to accurately project the impact on Consolidated.

Regarding the M&A, you know, certainly when you look at the way that - the rumors again on how the rate of return will be - companies will be treated - looks like it kicks the can down the road. More uncertainty, uncertainty provides anxiety, and maybe some opportunities. Again, a little early yet to know, but suspect that the thrust of your question probably is spot on that there will be some opportunities.

And what is sort of your appetite at this point from a growth perspective for M&A? Would you - are you - I mean, of course I'm always interested in things at a price, but are you more of a buyer, seller, what? And any other kinds of assets? Seen a fair amount of interest in regional fibre networks and so forth for some other, from some other (inaudible). Is that something that's of interest to you? How would you - how do you characterize your M&A appetite say for the next 12, 18 months?

Well, we're very anxious. We've never been positioned better to do an acquisition. We have a history. We've done three. We've done them very well. The integrations are complete. The team is ready. And if we found the right opportunity, we'd be all over it. That said, though, Frank, we're a public company and if somebody felt that we were worth more to them than we think we can achieve for our shareholders, obviously we'd have to weigh those considerations.

Great, thank you.

Thank you. Our next question comes from Dave Coleman of RBC Capital Markets.

Thank you very much. Nice improvement in the access line trends. I was just wondering what you attribute that to, if that's largely a function of IPTV growth (and bumbling? And then, can you just remind us if you're - what the net contribution from USF is for Consolidated? And then finally, the wireless backhaul circuits. I'm just wondering if there's a backlog of sites that are still to be connected? Thanks.

Yes, thank you, Dave. As far as the access line improvement, it's just - you know, it's a combination of things. It's the - it's a quality product. It's bundling. Surely no question that bundling and our focus on the value of a triple play - we continue to see less churn when customers take more services. So it's just blocking and tackling, day in and day out I think on the access line performance.

Also I would add that the port outs are down. You know, the cable guys are, are reporting less voice access lines. And we see it. Our port outs are down roughly 25% from a year ago. Regarding the wireless backhaul - you know, I mentioned that we added 79 circuits in the quarter.

And I would add that, you know, that now gives us 318 and an annualized revenue run rate of $4.4 million. We have approximately 242 towers in our footprint, and we serve nearly all of them. So in most cases, they have fiber. So we're prepared that, as the bandwidth requirement expands - which it's doing - we're in a great position to, to provide that additional capacity to the wireless carriers.

Hey, Dave, this is Steve. To answer your question on the USF and what the contribution to us is currently, for 2011 we'll probably be in total, a subsidy revenue of somewhere between $45 million-$46 million. And what - quite a bit of that comes from State funding as well.

So I would guess that the Federal - all in, federal USF support is probably less than $25 million, up to $25 million or less. And yes, that's been declining year over year as we've continued to take cost out of the business and our cost per loop continues to go down, relative to the overall national average cost per loop.

That $25 million is the receipts? What, how much do you pay out to the USF fund?

We're a net, we're a net receiver.

Yes.

We're not a net contributor. And that's the net amount which, as Steve said, has been coming down, and in our models we model it, reducing each year. So one of the misnomers maybe about the plan, at least the rumors of the FCC plan is, I think all of us have been managing that down over time. Clearly on both USF and inter-carrier comp as we lose access line and access minutes. So again, I'm not going to predict what the 500-page order will do to us, but clearly we've been managing through that environment of reduction over the last three or four years.

That's helpful, thank you. And then, just with regard to the five wireless JV's with Verizon, any indication as to what their CapEx plans for those JV's would be, whether that would be lightening up now that LTE I think has probably built out in a lot of those markets? Thanks.

Dave, this is Steve. Again, the, the wire, the five wireless partnerships - we did collect $6.9 million in cash contributions for the third quarter. We expect that to be kind of the floor for the fourth quarter. And part of that is, it's actually been - last year we would have had $27.5 million in total cash distributions. We'll be pretty close to that or maybe a little bit above it for 2011.

On the CapEx plans, I mean, our distributions are already net of that. And they've been building out LTE in some of the markets already this year, and have the plan going forward for the next few months. So we don't see - at this point in time, we don't anticipate a wide variance on the distributions that we would have received for 2011.

Great. Thanks a lot.

Thank you. Our next question comes from Barry Sine of Drexel Hamilton.

Good morning, gentlemen. I want to first start by just following up on that last question. So what you were talking about in terms of the capital spending - does that then imply that we should start to see an uptick in your distributions in 2011 - 2012 - as the Verizon LTE CapEx is completed?

Hey, Barry, that's a, that's a great question, and it's nice to hear from you. It's kind of hard for us to predict right now. Again, we - I would experience - I - there's going to be growth once the LTE is completely done, and they have actually - you know, they're launching the iPhone now.

So I would expect, to be safe for 2012, I would probably say, we're hoping that the numbers are going to be relatively flat, maybe a slight increase. But I think once we get past this build-out for 2000 - we should be done in 2012 - I think 2013 and then beyond we'll get back to 10%, 15% growth like we have for the last few years before they start doing the LTE build-out this year and had the iPhone - dilution from the iPhone.

Okay, that's very helpful. I want to change the topic. In terms of the subscriber numbers are reported, obviously on IPTV the numbers look good; they had a beneficial impact on the voice access lines. Could you talk about what type of offers you were in the market with? Were there any special promos? How did you go to market, TV ads, direct door knockers? Things like that. During the quarter, what drove the results that we saw? And then, what are you doing in the market today in the fourth quarter that might impact fourth quarter subscriber metrics?

Bob Currey; Barry, I guess to start with, number one, it'd be - the second quarter historically is always a down quarter for the industry, and clearly for us. So while I'm very proud of the results in the third quarter on IPTV, part of that lift automatically happens from a low point of the second quarter.

It's just a continuation of the things that we've done all along. It's the media, a lot of direct mail. It is some billboards. It's refreshing existing programs, tweaking them, pointing out the value of the bundle driving people that way. We had introduced very low introductory offers. And then upsell with feature packages, more VOD, HD, along with DVR.

As far as, as far as the sales, it's door to door, it's direct marketing, it's feet on the street. And frankly, it's, it's great customer service. We've dramatically reduced the churn from a year ago. Product performs better. And so it's a combination of all of those things. No real one silver bullet.

Okay, that's very helpful. Thank you very much, gentlemen.

(Operator Instructions). Our next question comes from Michael Nelson of Mizuho Securities.

(Inaudible) question. A couple, if I may. First just a follow-up clarification on, on the regulatory front. Appreciate the disclosure on the USF revenue. Can you give us a sense of what your exposure, what your switched access revenue run rate is?

Hey, Michael, let me try that. Basically, what's at risk here is on the switched side, and basically on the, you know, the terminating side. And so switched access overall is probably about 4% of revenue for the quarter, and the terminating piece would be about 2.5%.

Great. All right. And then, just changing topics, on IPTV and access line trends, obviously, you know, nice improvement overall. I'm wondering, are you seeing any different types of trends in the three different markets that you operate in? And can you give us a sense maybe if there are different trends and how they're different?

Yes, Michael. There are really not any trends, difference in trends. But as we've said in the past, there are some different characteristics in the markets. Those continue to hold. For instance, you know, some of the high income, per capita income markets in Texas want more HD, more sets per home, more band width requirements. Some of the rural markets in Illinois, older demographics, not the demand for band width. They want certain channels and want to be handled. So no real change in trends. But the individual market characteristics have basically stayed the same.

Got you. And then in - regarding the, I guess the economics around IPTV, can you give us a sense of how that's trending? Obviously you said, you know, video ARPU, highest ever. How are the costs trending in the overall profitability of that product?

Well, we put a lot of focus on that. And let me start by saying that the only cost that's out of control is programming.

Yes.

If we had control over programming, we'd have a nicely profitable product. The flip side is, it's us trying to manage installation costs, equipment costs, bundling. You know, we use wireless where we can. So it's a constant push on our part to control the costs that we can control, and to do what we can in programming. But as you're well aware, the programming costs are the real impediment to getting this product as profitable as we like. However, this year, you know, with our emphasis on profitability, we have, we have finally, on an overall company - for the last three quarters we have been profitable.

Great. And if I could just ask one last question on margins. I guess, Steve, you know, 50% margins, great improvement; where can you go from here?

Well, it's a good question, and it's one that Mr. Currey asks me fairly often. I mean, 50% is kind of what we've been targeting. I would remind you that that also includes the distributions from the wireless partnerships.

But we're going to continue to do what we've been - you know, as Bob said, based from an acquisitions standpoint, all our properties are fully integrated. You know, getting the common systems, workgroups, all that. So we're continuing to, you know, look at the efficiency of our, of our cost structure. And we're - and as Bob said, we're really focused on improving the profitability on video.

You know, we were happy to report, like in the first quarter, that that turn profitable for us. We're still in the low single digits from a margin standpoint. We do measure that on a stand-alone basis. But we think there's some great opportunity just continuing to move video and other product profitability up, up the margin scale.

You know, last quarter you identified some cost-cutting initiatives. How much of that came through in the third quarter, and how much is left?

Most of it, it came through in the, in the third quarter. It will now be fully baked into the, into the run rate in the fourth quarter. Now I'm specifically addressing your question about what we said on the last quarter. But just to pile on, on Steve's response, you know, there still are opportunities, you continue to find opportunities. So the third quarter ones or the second quarter ones that we announced, they're done; they're in the fourth quarter run rate. But we're not done yet.

All right, thank you.

Thank you. Our next question comes from Donna Jaegers of D.A. Davidson.

Hi, guys. Just two quick questions. On your SELAC operations, you mentioned I think on the first part of the call that you had some nice wins. Can you give us a little more detail on that, and what are you doing with your sales force in the SELAC operations? Are you growing that now?

Yes, Donna, on the, on the wins, you know, we've had some fairly substantial ones. They've - and I'm not going to necessarily name the customers - there was a fairly large financial institution. We've also had some agreements with schools, assisted living groups, several mid-sized companies. So it's kind of across the board. And then in the transport side, you know, we commented on the wireless backhaul. We've had some success there. The second part of your question?

On sales force, on the SELAC business, are you growing feet on the street at all?

Oh, it's fairly constant right now, but we're certainly evaluating some opportunities to grow, particularly in the Pittsburgh market. We've got a nice fiber footprint there, and there are some buildings that could easily with entrance facilities be added and provide some opportunity. So if we grew, it would be a modest body or two. We're not looking at growing, you know, a significant number of salespeople.

Okay. Then on Wi-Fi, given your ventures with, with Verizon, and the increasing need to sort of offload data traffic off of the cellular network on the Wi-Fi - are you doing anything in that area?

No. You know, we continue to look at the application for our customers. But you know, but as far as Wi-Fi, you know, some modest things maybe in some buildings where, to get a, to get your entrance into the building you might provide the landlord with some Wi-Fi services. But as far as the broader footprint, no.

Okay.

We're, we're not doing anything in that area.

Great. Thanks, Bob.

Thank you. I'm showing no further questions at this time. I'd like to turn the conference back to the speakers for closing remarks.

Thank you again for joining us today. And we appreciate your support. We look forward to joining - to you joining us again next quarter. And with that, we'll conclude the call. Have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This includes the program. You may all now disconnect.