Consolidated Communications Holdings Inc (CNSL) 2013 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the Consolidated Communications Holdings, Incorporated fourth quarter 2013 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 follow at that time.

If anyone should require Operator assistance please press * then 0 on your touchtone telephone. As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Matt Smith, Vice President, Investor Relations and Treasurer. You may begin.

Thank you, Nicole and good morning everyone. We appreciate you joining us today for our fourth quarter 2013 earnings call. At the conclusion of the prepared remarks we will open the call up for questions.

Joining me on the call today are Bob Currey, Chairman and Chief Executive Officer, Steve Childers, Chief Financial Officer, and Bob Udell, President and Chief Operating Officer.

Please review the Safe Harbor provisions in our press release and in our SEC filings for information about forward-looking statements and related risk factors.

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.

In addition, today's discussion will include 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 Currey 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. Good morning everyone and thank you for joining us today. I will provide some highlights for both the fourth quarter and the full year and then turn it over to Steve for a more detailed review of our financials.

The fourth quarter capped off another very successful year for Consolidated. Throughout the year we have continued our focus on meeting our strategic objectives, all of which help us deliver strong cash flows, supporting our dividend and investments for growth.

Revenue for the quarter was $148 million and adjusted EBITDA was $70 million. For the year, revenue was $601.6 million which included a 5.2% increase in data, video and internet revenues. Adjusted EBITDA was a strong $286.5 million representing a 5.7% increase over 2012.

We generated $96.3 million in cash available for dividends in 2013 and returned $62.1 million in dividends to our shareholders, representing a comfortable payout ratio of 64.5%.

Investments we made during the year continued to be driven primarily by success based opportunities. We invested $26.8 million in the quarter and $107.4 million for the year. These capital expenditures included items such as growth and expansion in our commercial services, wireless backhaul, and delivering fiber directly to new Greenfield developments.

During the quarter we installed fiber to an additional 96 power sites, bringing the total adds to 210 for the year. In addition, we installed fiber directly to 1,913 additional marketable homes in the quarter and 6,966 for the year.

We have expanded our growth initiatives by adding more sales reps and sales engineers to drive further growth in the higher margin commercial area. Specifically, by the end of the year we had 22 more commercial sales employees than we had at the end of 2012. This reflects our ability to invest in growth while maintaining a well-balanced cash flow supporting the dividend.

We also had a strong year with respect to our five Verizon Wireless partnerships. Both the quarter and the year represented record distributions from these partnerships. We received $10.5 million in the quarter and $34.8 million for the year which reflect increases over the same prior year periods of 11.7% and 19.6%, respectively. And with the LTE builds largely complete as well as the associated capital expense requirements, we are confident in the continued growth of these cash distributions.

Operationally, we had a strong quarter as demonstrated by our metrics. We increased our broadband subscribers by 3,454 with 2,723 from data and 731 from video. For the year, broadband subscribers grew by 12,082 or 3.4%.

Metro Ethernet continues to be a leading growth area for us with a 47.3% increase in the number of circuits during 2013. We also had our best quarter in two years with respect to our non-ILEC voice lines driven by commercial VoIP growth.

We also delivered another solid quarter and full year of access line performance. Our strong operating results reflect our competitive products and best in class service quality.

Overall, I was very pleased with both the financial and operating performance of the business for both the quarter and the year.

Another important step we took in the quarter was a successful refinancing of our bank debt. The new rate has a spread of 3.25% and a floor of 1% and reduces our interest cost by approximately $5 million per year.

We also extended the maturities on our term debt out to December of 2020 and our revolver to December of 2018 and in addition, our revolver capacity was increased from $50 million to $75 million. We were very pleased with the support from our existing investors and the significant interest we received from new investors.

So before I turn the call over to Steve, let me provide an update on our SureWest integration efforts. Overall, the process continues to go very well. Our final project, billing integration, is on track with our original plans. The new user interface was completed earlier this month and the rest of the project will complete in the third quarter of this year.

With respect to synergies, we mentioned last quarter that we had achieved our original $25 million in annual cost savings a full nine months ahead of schedule. In the fourth quarter we achieved an additional $760,000 in synergies that we will benefit from in 2014.

So with that, I will now turn the call over to Steve for a detailed financial review.

Thanks, Bob. Good morning to everyone. I will review our fourth quarter financial results and then provide our 2014 full year guidance.

As Bob mentioned, we did produce solid results in the quarter inclusive of the net $2.2 million in non-recurring reductions to both revenue and adjusted EBITDA due to an adjustment in the Universal Service Fund for the California market due to a late filing.

While SureWest had filed the traditional ICLS certification with NECA for 2013, a new ETC certification with the FCC which was required as part of the 2011 Intercarrier Comp USF Reform order was not filed on a timely basis.

Once notified of the late filing we have worked aggressively to cure it. However, the FCC took the unprecedented action not to provide any of the funding for the time period in question versus granting a waiver or issuing a late filing fee. We have appealed the decision and we remain optimistic the FCC will reverse the decision in 2014.

Now, let's get into the specifics of the quarter. Revenue was $148 million compared to $153.8 million for the fourth quarter of 2012. Increases in our data and video services and continued growth in our commercial sales were offset by declines in subsidies and network access services.

Total operating expenses exclusive of depreciation and amortization were $90.8 million representing a $3.1 million improvement compared to the same period last year. The operating expense reduction was primarily driven by the continued success in achieving synergy cost savings from the SureWest acquisition as well as lower transaction related cost.

Net interest expense was $19.8 million compared to $20.5 million for the fourth quarter last year. The improvement was primarily attributable to $100 million of swaps that matured on September 30, 2013 that were replaced at much lower rates.

Other income net was $10.8 million compared to $9.4 million for the same period last year. The increase was driven by growth from our Verizon Wireless partnerships.

Adjusted net income and earnings per share as presented in our earnings release were $9.2 million and $0.23, respectively. In comparison, adjusted net income and earnings per share for the fourth quarter of last year were $8 million and $0.20, respectively.

Adjusted EBITDA for the quarter was $70 million versus $73.2 million for the same period last year. Excluding the $2.2 million unfavorable subsidy true-up, adjusted EBITDA would have been $72.2 million.

Capital expenditures for the quarter were $26.8 million with over 60% of the spend being driven by success-based projects.

From a liquidity standpoint, we ended the quarter with $62 million of revolving capacity and $5.6 million in cash on hand. For the quarter, our total net leverage ratio as calculated in our earnings release was 4.25 times to one. All leverage and coverage ratios were within compliance levels of our debt agreement.

Cash available to pay dividends was $24.1 million resulting in a strong dividend payout ratio of 64.4%.

Now let me provide our guidance for 2014. First, capital expenditures are expected to be in the range of $97 million to $103 million compared to $107.5 million in 2013.

Second, cash interest expense is expected to be in the range of $75 million to $78 million compared to $81.9 million last year.

And finally, cash income taxes are expected to be in the range of $10 million to $15 million compared to $1 million in 2013.

With respect to our dividend, our Board of Directors has declared the next quarterly dividend of approximately $0.39 per common share, payable May 1, 2014 to Shareholders of Record on April 15, 2014.

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

So in summary, we had another strong year full of many accomplishments. I am thankful for all the hard work of our employees in making 2013 a success.

Going forward, we will continue our focus on providing the best products and services in our markets, delivering cash flow that supports our dividend and funds our growth prospects and completing a successful integration of SureWest.

So with that, Nicole, let's open it up for questions.

(Operator Instructions) Our first question comes from the line of Frank Louthan of Raymond James. Your line is now open.

A couple things, one, the subsidies in the quarter were down. Is there anything one-time, a true-up or anything like that? Is $11 million kind of a new baseline?

And then just one thing to clarify, I don't think there is really any change and I apologize if you mentioned this earlier in the call but just to make sure everyone is clear, post-Verizon acquiring all of Vodafone, there really isn't any impact to your partnerships. There shouldn't be any impact to your business or do you expect any changes?

And then can you give us an update on the -- been passing a couple thousand homes every quarter with fiber. Is that sort of system-wide? Is it concentrated in a couple of particular markets? Where are you seeing those opportunities and should we expect that going forward?

With respect to the subsidies, we talked about it on the call that basically, we took a $2.2 million write-down due to ICLS funding in California for the first six months of 2013 that we previously recognized so yes, the run rate should be the same once your normalize for that $2.2 million adjustment that we made in the fourth quarter and we are optimistic that is going to get reversed in fourth quarter, sometime in 2014 but it is based on where we were with the FCC at the end of 2013. We felt it was appropriate, for 2013 we felt it was appropriate to take a revenue write-down at that point in time.

With respect to wireless, we expect absolutely no change in the performance of our wireless partnerships or the cash distributions to stop as a result of the Vodafone/Verizon deal.

Frank, regarding the fiber to the home passings, we have done very well penetrating the homes we built fiber to and had the exclusivity but some of the opportunities still for bringing new services and products to some of the markets in the SureWest areas still give us some upside.

We had 7,000 passed in '13. I expect to see somewhat less than that in '14 because our penetration levels are still in the mid-teens and we think 30%, north of 30% especially in the fiber to the home markets are realistic expectations for us to have so we are looking at balanced growth across our portfolio and really focusing capital investments in the success-based opportunities we find in carrier and commercial as a higher priority than new Greenfield fiber developments for residential.

Just one quick follow up, going forward I see the guidance for the cash taxes, becoming a full cash taxpayer. Just to clarify, my understanding has been you have been taking advantage of the tax situation to make additional investments and so forth. You've got some room in your CapEx to kind of throttle that to keep the free cash flow and the payout ratio relatively stable. As we see that cash tax begin to climb, should we see somewhat of a -- do you have room to have an offset there on the CapEx? How should we think about that going forward?

With respect to the cash tax answer, number one we are increasing from $1 million to the guidance for 2014 is in the range of $10 million to $15 million. A couple things just to set the expectation for cash taxes, basically, at the end of the year we had roughly $43 million in NOLs. We expect to exhaust those by the end of 2014. We don't anticipate bonus depreciation being available in 2014 to that net. Those are reflected in our estimates for 2015 so even though cash taxes are going up in '14, to your point we are slightly pulling back on CapEx while still making the appropriate growth investments and we will also give our dues to the very successful refinancing that we had in the fourth quarter. You also see a reduction in cash interest as well for next year so net, net on the things we provide guidance on we are actually down, or actually have a more positive cash flow number than 2013 actual results.

So we do think we have a lot of room and flexibility within the CapEx guidance that we are giving for this year, again focuses on success-based CapEx, more focused on commercial and carrier opportunities.

Our next question comes from Mike McCormack of Jefferies. Your line is now open.

Bob, maybe just a quick comment regarding cable competition in the commercial space, what you are seeing out there from a pricing perspective and then maybe also the product offering versus what you guys have.

And then hearing a lot from other video providers regarding -- high speed data providers, rather -- regarding Wi-Fi in-home distribution. I think it is clearly a result of multiple devices in the home streaming video services. Just trying to get a sense for what you guys are seeing as far as in-home Wi-Fi distribution, thanks.

Let me start first with the question around the commercial competition, cable providers.

We have been competing against the major cable companies for years. There is no doubt we see a bit of a trend with them getting a little more aggressive and better at delivering for small businesses but while we don't take any competitor lightly, we have got an excellent product set and have more new things rolling out in our business or commercial customer group offering than we have had in years with a stronger data center product in all of our markets and a very robust voice-over-internet platform so while I think there has been some step up everyone has seen across the nation from the cable guys, we feel very well positioned because of our consultative sales approach, our beef-up and focus on retention, to continue to compete effectively with that both on, certainly on quality, speeds and price.

The advantage we have is being early in the IPTV deployment game almost ten years ago, we have been upgrading capacity across our network for years and so we are very good at capacity management, very good with tools for commercial entities to be able to measure and monitor their own bandwidth use.

With regards to the consumer and the residential Wi-Fi utilization in the home, we deployed a few years back a tool that allows us to help our residential subscribers manage the number of IP devices they have in their home and so we can actually turn off an IP device if it is a problem or hogging too much bandwidth because it is less in a mode that isn't productive for the family use or for our network and in addition, with the over the top adoption that is happening with the digestion of content by end users, we have been refining our capacity management tools, as I mentioned, on the commercial side, also on the consumer side and so I think we are well prepared with a strong core network. We are well prepared because of the way our network is constructed on a by user or by residence address basis to help our customers manage the number of devices they have online at any point in their home and to provide a high quality experience by ensuring that we cache and store the content as close to the customer as possible.

(Operator Instructions) Our next question comes from the line of Donna Jaegers with JB. Your line is now open.

Can you remind us a little, on your cable overlap who do you overlap most with? I'm sure you guys have those sort of percentages that you can remind us on.

And then on commercial growth, you added to sales and sales engineering. Any new product upgrades or you guys already have a pretty robust stake in that line?

Yes Donna, let me take the commercial part first. I would say it is more of a product evolution than a major new deployment. We have been recently upgrading our VoIP voice platform with some very new unified messaging tools that we are getting a very good response from and HD Voice is a big component. We joke about it internally that HD is kind of the trend line now for everything, HDTV, HD Voice, HD Radio, and it is because we have become so accustomed to poor volume voice transmission I think on wireless phones that people are wanting to get back to a very good quality voice experience and it is serving us very well with our customers.

The data center product, we are adding a Tier 3 higher level data center product to our portfolio. That has been a natural evolution as people's requirements for cloud computing get more sophisticated. So I think our sales folks have never been more excited about their portfolio of services. I can honestly say the metro Ethernet platform has become the table stakes as a transport path to customers that then we layer the other things on as a retention pool and it is working very well for us.

On the consumer front, the cable competition that we have talked about in the past, it's still the same. In Pennsylvania, it's Comcast and Armstrong, Texas, Suddenlink and Comcast, MediaCom and NewWave in Illinois, a mix in California and Kansas of the national players you would expect -- Comcast, AT&T, and a little bit of Frontier -- but then of course, you've got Google in Kansas City which we are asked about more often than it probably deserves attention.

So that is really the players that we see and while they continue to run the various promotions, we don't see any irrational behavior different than what we have seen in the past. They are all pretty fairly well behaved and fairly predictable.

Great, just a quick follow up, on the Tier 3 data center that you guys added to the portfolio, are you leasing space from somebody? Did you stand that up on your own or are you reselling somebody else's service?

It is a mix. Where we have the facility and the space and it is economically justified, we are adding capacity and we have added over 8,000 square feet of new data center space across California, Texas and Kansas City and in Pennsylvania, we have some space still available. We are contracting with an underlying provider that we are very confident in in Texas for Tier 3 space. It is a mix. It is a build versus buy decision just like network decisions you make.

Thank you and I am showing no further questions at this time. I would like to hand the call back over to Bob Currey for any closing remarks.

Thank you, Nicole and thank all of you for joining us today and for your continued interest and support of Consolidated. We hope you will join us again next quarter. Have a great day.

Ladies and gentlemen, I thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Have a great day, everyone.