Consolidated Communications Holdings Inc (CNSL) 2014 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the Consolidated Communications Holdings, Incorporated first quarter 2014 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. (Operator Instructions)

As a reminder, today's conference is being recorded.

I would now like to introduce your host for today's conference call, Mr. Matt Smith. You may begin, sir.

Thank you, Kevin and good morning everyone. We appreciate you joining us today for our first quarter 2014 earnings call. At the conclusion of the prepared remarks we will open up the call 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 and good morning everyone and thank you for joining us today. I will provide some highlights for what was a strong first quarter performance and then turn it over to Steve for a more detailed review of the financials.

I am pleased with how we kicked off the year and with the results we delivered for the quarter.

Revenue and adjusted EBITDA were $149.6 million and $71.1 million, respectively. We generated $48.4 million in cash from operations and delivered a strong payout ratio of 56.9%. Our strategic focus on business and broadband services continues to produce positive results.

The majority of our capital investments are tied to these success-based opportunities and our business and broadband revenues now represent 77% of our total top line.

Metro Ethernet continues to be a leading product with 21% revenue growth year over year. Demand for our hosted VoIP solutions and our data center offerings has also increased and we have a very competitive product set.

We are pleased with the performance of the new commercial sales employees that we added late last year and our commercial sales pipeline is solid.

On the carrier side, we installed service to 25 new wireless backhaul tower sites and sold 17 additional sites for future installation. This brings our total wireless backhaul sites under contract to 805.

On the consumer side we continue leading with our broadband products and utilizing the bundled savings to attract voice and video subscribers. The quality of our fiber rich network continues to exceed the speed demands of our customers and we are consistently upselling them to higher bandwidth. We can deliver over 10 Meg to 96% of our network and over 20 Megs to nearly 80%.

We added 3,197 new data and video subscribers during the quarter bringing our total broadband connections to 369,000. Our triple play ARPU is up to $131 and we are continuing to add value to our product bundle to increase ARPU through both speed upgrades and higher HD and DVR penetrations.

We also had another good quarter with our best in class performance on voice connections primarily driven by the success in our bundling efforts and the success of our hosted VoIP product.

Moving on, we had another solid quarter with respect to our five Verizon Wireless partnerships. The total cash distributions we received in the quarter were $9.1 million compared to $8.1 million in the same period of 2013 representing a 12% increase. We believe these will continue to perform well throughout the year.

And finally 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. The final phase of billing integration is on track with our original plans for completion in the third quarter of this year. With respect to synergies, we achieved an additional $600,000 in annual savings.

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

Thanks, Bob. Good morning to everyone. I will review our strong first quarter financials and then reiterate our 2014 full year guidance.

Revenue for the quarter was $149.6 million compared to $151.5 million for the first quarter of 2013. Increases in our data and video services and continued growth in our commercial sales were offset by the expected declines in subsidies and network access services.

Total operating expenses exclusive of depreciation and amortization were $88.2 million compared to $88.4 million in the same period last year. The cost savings related to the SureWest acquisition were partially offset by increased investments in our commercial sales teams as well as the ongoing increases in video programming cost.

Net interest expense was $19.8 million compared to $24.6 million for the first quarter of last year. The improvement was driven by lower overall cost of debt due to the successful refinancing of our term debt in December as well as reductions in rates from the maturity of certain higher cost interest rate hedges.

Other income net was $7.4 million compared to $8.7 million for the same period last year. In addition to the cash distributions from our wireless partnerships that Bob mentioned, the current quarter included a $700,000 non-cash loss from the sale of a building in our Pennsylvania market.

Adjusted net income and earnings per share as presented in our earnings release were $10 million and $0.25, respectively. In comparison, adjusted net income and earnings per share for the first quarter of last year were $8.2 million and $0.21 per share.

Adjusted EBITDA for the quarter was $71.1 million versus $73.5 million for the same period last year. Capital expenditures for the quarter were $25.4 million with the majority of the investments driven by success-based projects.

From a liquidity standpoint, we ended the quarter with $67 million in unused revolver capacity and $6.8 million in cash on hand. From 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 well within compliance levels of our debt agreements.

Cash available to pay dividends was strong, $27.3 million, resulting in a dividend payout ratio of 56.9%.

Now, let me reiterate our guidance for 2014. First, capital expenditures continue to be expected in the range of $97 million to $103 million compared to $107.4 million in 2013.

Second, cash interest expense is still expected to be in the range of $75 million to $78 million compared to $81.9 million last year. And lastly, cash income taxes continue to be expected in the range of $10 million to $15 million compared to $1 million in 2013. Our cash tax guidance does not include any assumptions around the benefits of an extension for bonus depreciation.

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 1, 2014 to Shareholders of Record on July 15, 2014.

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

So in summary, we are off to a great start in 2014. We continue to focus on our strategy, on business and broadband, providing our customers will quality service and competitive products and delivering shareholder value and cash flow that supports our dividend.

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

(Operator Instructions) Our first question comes from Barry Sine with Drexel Hamilton.

If I look at the first page of the press release you have the table where it shows total connections down by 6,000 yet if I think about the growth story, the strong Ethernet connections you have, it doesn't seem like that metric on the front page is really telling the whole story. Could you share with us any other data points to help us understand where that growth is coming from in data services and then maybe you can call out where that Ethernet revenue is? I think it breaks into two different revenue line items.

Barry, this is Bob Udell. I will start and then Steve might have some things to add.

I think that is a fair observation. While connections are down, we are focused very much on balanced growth and the commercial and carrier continued to produce increased revenue per unit opportunities as well as better margin opportunities led to a large degree by our metro Ethernet product as you mentioned.

We saw in first quarter a continued increase and if you look at the run rate in revenue, we are seeing roughly $12 million coming from that metro Ethernet on a recurring basis and so the increase year over year in that is demonstrated not only by that run rate but a result of the sales resources we have added across the five major markets that we serve.

With respect to the consumer side, I would take your attention back to the bundles and the benefit of focusing on leveraging not only the access lines and the retention that the video service brings but also leading with most recently, the data product. We have had some great success with that data product in the west markets where we hadn't offered internet as a standalone and that has resulted in some not only increases in units but also increases in the opportunity to expose those customers that didn't have our video product because it was satellite service to our data service, and our unified portal and some over-the-top options that we can bring them that they otherwise wouldn't have access to.

Barry, this is Steve. Just to follow up on your question on the line items, the metro Ethernet revenue, as you said, goes to two different places. It does go to data. It also goes to local. I would say the vast majority of it is rolling into the data number and it is contributing to the growth quarter over quarter on that line item.

Shifting gears, on the distributions out of Verizon, again continue to be very, very strong. Verizon Wireless had a pretty significant event themselves during the quarter. Now that they control all of Verizon Wireless, they have taken Vodafone out, any prospect that you might look at doing something with them? For example, I am thinking about they are doing some type of a tax free swap of assets you might be interested in, for them to get back those minority stakes in wireless.

Barry, any swap like that I think would be highly speculative. We have really enjoyed over the $30 million a year in cash flows that we are getting with those. We hope the Vodafone transaction just eliminates some distraction for Verizon and they just continue to deliver the same level of performance and cash distributions that we have been seeing and again, we expect those to continue to increase double digit growth for this year so we are pretty content with our position with those right now.

And then just lastly, overall M&A environment. We are coming up on the two year anniversary of SureWest and two years is typically the anniversary of when we might see something else from you. You also have talked about very, very good progress of the last of the integration, due to wrap up in 3Q on SureWest. What are you guys thinking from M&A in the future and what are your thoughts on the current environment in terms of opportunities and in terms of pricing that might be out there?

Barry, this is Bob Udell. We always work to maintain good relationships with potential strategic partners and you're right. We are at the end of our integration effort this year. We are interested in strategic opportunities. We are going to be disciplined as we have in the past. As our Chairman, Bob Currey, has mentioned in the past, our funnel is a little bit wider on the things we might consider and so as you would expect, if there is an opportunity out there we will be considering it and doing the appropriate analysis but it's got to fit on our screen. It needs to be deleveraging and be good for our balance sheet as well as markets and assets that we think we can add value to.

Our next question comes from Jennifer Fritzsche with Wells Fargo.

I am just going to follow up on Barry's question on the M&A and then just had the one follow-up.

Bob, either Bob, would you consider, if you look at it, are you tied to your three territories? Is there a case to be made to keep it contiguous with those three territories or would you consider other geographies?

Jennifer, we would consider other geographies. Obviously, the preference would be something contiguous or in a state where we already operate but that is just one of the thresholds that we would look at. Back to what Bob said, the leverage, the ease of integration, accretive, and an ability to launch products that are competitive would be the screens.

The only other comment that I would make on that is that we wouldn't go into a new territory unless it had some size and scale to it. We wouldn't move to a state we're not in with $1 million of revenue. It would have to be in the $50 million to $100 million, of some size. Those would be the general screens that we would use as a first cut prior to some significant diligence.

And just one follow-up question, if I may, on the Verizon properties. Those properties which have launched with LTE, Verizon itself has been saying that there is a large move to densify these markets and where they're already live with LTE and I am just wondering, in the five JVs you are in, are you expecting to see CapEx in total decline and therefore, your free cash flow distribution go up or is it fair to say in those properties they are doing a similar thing where they are densifying that network and that CapEx lever is remaining fairly stable in absolute dollars?

Jennifer, thanks for the question. Obviously, as we mentioned, the JVs for Verizon were generating about $34 million cash flow last year. We had one of the five that were still kind of going through their initial stage of the 4G build-outs last year. We think that is largely behind them going into the first part of this year so I think it is kind of a mix based on the information that we have on whether they are, to your point, making additional investments in those markets but net-net based on the information that we have, prior performance, we would continue to see them to grow, their cash flows grow 10% to 12% a year.

Our next question comes from Frank Louthan with Raymond James.

Looking at some of the metrics, the video attach rate was a little bit lower than what we were looking for. I'm just curious what changed there on the face of some really good broadband adds. And then, a longer term on the video penetration, staying pretty steady, just over 20%, any thoughts on how that gets higher? What would it take? Is that just more of a marketing effort? What do we think about that from a long term perspective?

With regards to the data heavy tilt to our broadband adds for the first quarter, as I mentioned earlier we had some strong promotions running to tap the internet-only opportunities that we haven't tapped previously in the west markets.

In the east markets, specifically Texas, we've had a great continued run there based on a very strong economy of overall adds and just as we've said in the past, we think that the potential for video penetration is well into the mid to high 30% range in terms of opportunity and while it has not been rising quickly on the average, we have some early markets in Kansas City that continue to increase and we have some early markets in Pennsylvania and Texas still that, some of our later-deployed fiber markets, that are still in the single digits that provide some upside opportunity.

We still feel real good about the growth potential there and I would remind you though, the best margins come from the internet and the speed increase opportunities that we have with the internet product and the video with programming costs is a little less profitable and so we are very focused on a balanced growth approach. It is very promotion sensitive and so we are constantly looking at how do we increase ARPU, increase the margin opportunity, increase the broadband penetration from a data service perspective and we will continue to do that to maximize our profitability and opportunity in those markets.

Okay and then just a follow-up on the business opportunity, how are we seeing that in Sacramento and then maybe extending that into Kansas City and Texas markets, any changes there? Any potential upside for the rest of the year?

We continue to benefit from having a portfolio of markets. Starting with your Sacramento comment, that market has been a pleasant surprise in terms of the available fiber from the legacy SureWest acquisition of the WINfirst assets and so we are extending our smart-build program there. We have a capital committee that meets every two weeks that reviews projects above $100,000 of investment. We have an equal number of projects coming out of California as we have in Kansas and in Texas where you would see the greatest economic environment for growth.

In Pennsylvania, we are seeing the Marcellus Shale around the south area of Pittsburgh bring some growth opportunity and so we are extending network there through the south.

I can't really tell you that one market is better than the other. It is really situational and across the board we are real happy with the performance of the sales resources and the Management there that is doing the appropriate blocking and tackling to increment out a growth opportunity for us with the specifics of each market being addressed appropriately by the market leaders.

(Operator Instructions) Our next question comes from Mike McCormack with Jefferies.

Maybe just make a quick comment regarding broadband ARPU, how should we see that trending throughout the year and your thoughts on a lot of recent announcements in the cable industry with respect to consolidation, how that might play out maybe from a pricing standpoint but also from a product capability standpoint in your overlap markets.

Broadband ARPU for us because of our focus on balanced growth is probably near the highest it has been at $131 on the average for the triple play customer. That I think will continue to increase driven by some of the deployment of our fourth component to that bundle, the security product which is currently launched in Texas and Kansas City.

In terms of our competitive positioning with the cable mergers that have been announced, I think we are going to have to pay close attention like we always do. We are an effective competitor. With any deal and integration comes some distraction factor. We are not going to miss the opportunity to make sure we are first at people's doors to capitalize on our mission of making sense out of technology for them especially on the business side but we also respect them as viable competitors and so we are going to stay sharp on our game. We are going to keep refining our sales model. In the commercial sector we are going to keep building on our strength of adding data center services and hosted VoIP and other cloud services that add value and stickiness to our metro Ethernet product so that we stay effective at our, I think, best in class retention capabilities to retain those business customers. It is something we pay attention to.

The next question comes from Donna Jaegers with D.A. Davidson.

On the cable overlap, can you remind us what it was as far as who you compete with, what percentage of lines? And then I don't know if there was any, with this recent reshuffling between Charter and Comcast and Time Warner Cable, any change in who you are going to be competing with in any of your franchises?

Let me kind of rattle through the states, if I may, Donna, and remind you of who the competitors are and then I will comment on how that may be affected by the recent announcements. In general, it is not a huge impact except for where Comcast and Time Warner are in the same market.

Pennsylvania is Comcast, roughly 60%, Armstrong, a smaller entity at roughly 40%. They are a more aggressive competitor but have been fairly well behaved the last few years.

Texas, you have SuddenLink, with some of the old Cox properties, at about 60% and Comcast in the Houston metro area at roughly 40%.

In Illinois, Mediacom and NewWave with the split being 70% Mediacom and 30%, NewWave.

California is Comcast, AT&T and Frontier with the largest, of course, being Comcast.

And then the overlap of Time Warner and Comcast in Kansas City where there might be some sorting that takes place and a little bit of Charter there and that is really the majority of the competitors that we see in the marketplace.

On the rollout of the security product in the bundle, can you, any sort of take rates that you can talk about yet or is it too early still?

It is really too early. We are still refining the model and working out what makes sense there in terms of the customer's need and the implementation process but the nice thing with the service is it has some margin in it and it fits well with our unified portal, residential portal where the customer has all of their logon information, centralized logon for their TV on the go, for some of the over-the-top options, and then access to the content including cameras for security in their home. We are trying to really work hard at making it easy for our customers to access our services and we think that portal is a good leap in that direction.

Our next question comes from Barry Sine with Drexel Hamilton.

Go back and ask about two revenue line items, both network access as well as subsidies. If you guys could discuss the outlook for the rest of this year into next year given what you know about the current regulatory environment both at the state and the federal levels, please.

Barry, this is Steve. I will try that and Bob can pile on if need be but with respect to the subsidies for the quarter, we were down about $300,000 for subsidy. That was primarily due to what is going on in Texas as we have talked about previously and what would be in our 10-Q here on Friday is in Texas there are two things going on.

We are stepping down on the high cost assistance fund, basically $4 million that went away January 1. That is about $350,000, $360,000 in the first quarter. And then there is also a change in the high cost fund itself in Texas that over four years we will see about $4.8 million go away sort of ratably over the course of the next four years so there is another $300,000, $350,000 in the quarter for that as it moves to a line base and then rates will be changed, but in Texas, because of the rate structure on local rates, we are in process of moving rates up that we think will largely offset what is going on from a Texas USF standpoint so we expect to be relatively neutral there.

With respect to the broader question on USF funding, with the order that came out the twenty-third, we now are --- we were expecting the shift in USF funding to start declining July 1 of this year. Now, it is more likely that it will be 2015. Again, we still don't know based on where they are at with development of the cost models, some of the information we still don't know, the timing and exactly how much we will lose but again, we expect to see USF funding decline just based on the fact that we are already 98%, 100% built-out on our broadband deployment so again, we are still evaluating what came out last week to see the opportunities, if any, moving forward.

And then from an access perspective, we've had the two step-downs, basically getting to jurisdictional parity on the interstate access rates. We will continue to see that decline probably at about $1.5 million per year as we step down to the 0.00075 five or six years out and in the first quarter we are seeing some things, just the usual decline in minutes of use and also some changes in subscriber line charges, part are change in rates and part of how we are packaging our local line rates in Texas.

So again, we expect the subsidy number to be pretty flat for this year with maybe a little bit of reduction on the Texas side and then access will kind of continue the path that we have, that you have seen the last couple of quarters.

Okay, that is very thorough, thank you.

I am not showing any further questions at this time. I would like to turn the conference back to Bob Currey.

Thank you, Kevin, 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 and have a great day.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.