Consolidated Communications Holdings Inc (CNSL) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Consolidated Communications Holdings, Incorporated, third-quarter 2014 results conference call. (operator instructions) As a reminder, this conference is being recorded.

I would now like to turn the call over to Matt Smith, Treasurer and Vice President of Investor Relations. You have the floor.

Thank you, [Andrew], and good morning, everyone. We appreciate you joining us today for our third-quarter 2014 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; Bob Udell, President and Chief Operating Officer;, and Steve Childers, Chief Financial 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 for opening remarks. Bob Udell will then provide an overview of our third-quarter results, as well as an update on the Enventis acquisition, which we closed on October 16. Steve Childers will then provide a more detailed review of the financials and an update to our 2014 guidance. Bob?

Thanks, Matt, and good morning, everyone. I appreciate you joining us today, as the third quarter was a busy one for Consolidated.

We continue to focus on our strategic transition into a leading broadband and business company, while working diligently on closing the Enventis transaction, which we accomplished in just three and a half months. We're excited about having the Enventis closing behind us and what the future offers for the combined company.

Before I turn the call over to Bob Udell, let me comment on the press release we issued on Tuesday, with regard to the organizational transition.

Since we named Udell Chief Operating Officer in May of 2011, we have put together a carefully thought-through and orderly transition of responsibility. He is ready to take over the CEO title, and my continued role as Executive Chairman will ensure a smooth transition. So with that, let me turn it over to Bob to discuss the quarter.

Thank you, Mr. Currey.

I'm excited about this additional responsibility, and I'm grateful for the leadership and oversight Bob has provided the Company and me personally over these last several years. And I appreciate the ongoing support I will receive from him in his role as Executive Chairman.

The Company is well positioned, and with the strong team we have in place, we will continue to execute on our strategy and deliver results that support our investors, customers, and employees. Now, let me provide the highlights of our quarterly results, and then I'll give an update on Enventis.

Results in the third quarter were $149 million, with 78% coming from business and broadband services. We continued to see solid growth in our commercial and carrier sales channels, with a year-over-year increase of 4.7%. Demand for our Metro Ethernet products remain strong, as revenue increased 14% compared to the third quarter of last year. Adjusted EBITDA for the quarter was $67.1 million, and the payout ratio was 72.9%.

We have been expanding our footprint and increasing our commercial sales focus, as we continue our strategic transition to less reliance on regulated revenues. These investments result in higher expenses in the near term but provide long-term benefits to the Company.

Since third quarter of last year, we have added 21 commercial sales resources, delivering solid revenue growth in that area. Also, during the quarter adjusted EBITDA was negatively impacted from lower distributions in our Verizon Wireless partnerships of roughly $2 million below our original expectations.

As Verizon recently reported, margins were impacted for them by handset and tablet subsidies. Our distributions were also impacted by partnership capital expenditures that were moved forward from 2015 for data-capacity needs. We view this has short-term volatility and continue to feel good about the growth prospects of our distributions going forward.

With respect to customer connections, we added 1802 data subscribers, while video subs were essentially flat. Consumers, as we know, are moving more to over-the-top video, and with continued increases in content costs, our focus is on profitable growth and securing the broadband connections for both consumers and businesses.

We have a fiber-rich network that allows us to be very competitive with our broadband offerings. In mid-September, we launched a 100-meg Internet product in most of our markets and will be launching a 1-gig product by the end of the year.

While consumers are not often using these speeds, we continue to see bandwidth speed demand increasing, and our fiber-rich network allows these upgrades. On the voice side, we added 284 commercial voice [feeds], which are typically bundled with our Metro Ethernet service.

Moving on to wireless backhaul, we entered into agreements for an additional 14 sites during the quarter, bringing our total under contract to 860. We installed service to 34 new sites and have 86 pending installations in the pipeline. We continue to be active in several wireless RFPs and expect demand to remain high into 2015.

Finally, before I turn the call over to Steve, let me provide an update on the Enventis acquisition. Just a reminder, we announced the acquisition on June 30 and closed it on October 16. We did a lot of work in a short period of time, and we couldn't be more pleased with the outcome.

Enventis has a strong competitive position with its extensive fiber infrastructure and technology-advanced product portfolio. This acquisition advances our strategy of expanding our footprint for continued broadband growth, increasing our product offerings and strengthening our balance sheet.

At the closing of the transaction, we achieved $4.9 million in annualized synergies towards our two-year target of $14 million. In addition, we closed on the escrow of our $200 million in 6.5% unsecured notes and paid off $150 million of outstanding Enventis debt.

We used the excess proceeds to purchase $46.8 million in face value of our outstanding $300 million 10 7/8 notes. As a result, this will save us over $2 million in annual cash interest expense.

The actions we have taken and the ongoing benefits we will achieve provide our shareholders with a solid company and an attractive dividend. I'm excited to have the great employees of Enventis join the team, and I look forward to what we can accomplish together.

And with that, I'll turn the call over to Steve for the financial review. Steve?

Thanks, Bob. Good morning to everyone. This morning, I will review our quarterly financial performance and then discuss our 2014 guidance, which has been updated to include Enventis.

Operating revenue for the third quarter was $149 million, compared to $150.8 million in the third quarter last year. Increases in our commercial carrier broadband revenues were more than offset by declines in legacy voice services, network access, and subsidies.

Total operating expenses exclusive of depreciation and amortization were $89.1 million and were flat compared to the same period last year. Higher expenses from our commercial sales resources and increased video-programming costs were offset by our continued cost-savings initiatives.

Net-interest expense for the quarter was $20.7 million versus $20.6 million in the third quarter of 2013. The current quarter included $1.1 million in amortization expense for the Enventis bridge commitment fee. We also incurred $500,000 in interest expense for the 13 days in the quarter that our successful $200-million bond offering was held in escrow.

Other income net was $8.6 million, which was down $400,000 compared to the same period last year. For the quarter, we received $7.6 million in cash distributions (inaudible) Verizon Wireless partnerships, compared to $8.6 million for the third quarter 2013. As Bob mentioned, device subsidies and capital needs drove the decline.

Weighing all these factors on a GAAP basis, for the third quarter of 2014 net income was $7.6 million, and net income per common share was $0.19. This compares to net income from continuing operations of $10.4 million and net income per common share of $0.26 for the third quarter of 2013.

As detailed in the adjusted net income per-share schedule in the earnings release, our adjusted net income and adjusted net income per share were $8.9 million and $0.22, respectively.

Adjusted EBITDA was $67.1 million in the quarter, compared to $71.2 million for the same period last year. Capital expenditures for the quarter were $25.6 million, with over 63% being driven by success-based projects

From a liquidity standpoint, we ended the quarter with approximately $4.9 million in cash and $60 million available under our revolver. For the quarter, our total net-leverage ratio, as calculated in our earnings release, was 4.34 times [to 1]. Cash available to pay dividends was $21.4 million, resulting in a dividend-payout ratio of 72.9%.

Now let me discuss guidance. We are updating our guidance to include Enventis as if we'd owned the Company for the full year. Therefore, on a pro-forma basis, capital expenditures are expected to be in the range of $129 million to $133 million.

Cash-interest costs are expected to be in the range of $78 million to $80 million, and cash income taxes are expected to be in the range of $12 million to $14 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 2, 2015, to shareholders of record on January 15, 2015. This will represent our 38th consecutive quarterly dividend.

With that, I'll turn it back over to Bob for closing remarks

So in summary, we had a solid quarter, and the closing of the Enventis transactions have us very excited about our future. We're combining two strong businesses that provide greater scale and geographic diversity and will provide us a platform to continue our delivery of our strategy.

With that, I'd like to open it up for questions. Andrew?

(operator instructions) Scott Goldman, Jefferies.

Congratulations to both Bobs. I guess a couple questions, if I could. First, you talked on the cost and [unit] side of the equation about some of the investments you're making around the commercial sales that may have impacted EBITDA aside from the lower distributions from Verizon. Just wondering how long you see some of these impacts from commercial sales depressing the margins, as well as the programming-cost side of the equation.

And then secondly on the video side, I think you mentioned you had flattish adds this quarter. You mentioned you're managing that for more profitable growth. With some of the recent headlines out about over-the-top with HBO and CBS, wondering how you guys are thinking about smaller video packages to appeal to a different demographic and what the associated economics of that might look like.

Okay. Let me take the last part of that question first. I appreciate the question.

The video, as part of our triple-play portfolio, continues to be an attractive retention tool. And so while we're de-emphasizing it because of the capital costs of set-top boxes and the increase in programming costs, we're very focused on broadband growth, which is much higher margin for us, and enhancing our portal to facilitate over-the-top access by our customers through a unified [login].

So I wouldn't call it, necessarily, a demographic shift, as much as an adoption rate that both the content providers as well as the device manufacturers are facilitating.

So we're going to watch that closely and continue to focus on penetration of broadband and increase in video penetration with only a stronger eye towards profitability.

Scott, this is Steve. The first part of your question, kind of the pressures on EBITDA for the third quarter, primarily in commercial sales and Verizon distribution. Bob kind of addressed the video-programming content.

We think we're making very key strategic decisions in how we're deploying the commercial sales teams across our platform and excited about what the Enventis acquisition is going to mean to that. So we think that's just a matter of time before a level of expense with the ramp for the commercial sales team matches up with the new revenue sales.

And again, as we called out, over 4.7% growth for commercial sales -- commercial and carrier sales combined, so we're pleased with the results there. Just kind of going through a ramp process.

On the wireless, itself, again, that was a big impact in the quarter. We're down about $2 million compared to our expectation. As Bob said in his remarks, additional handset subsidies as well as some CapEx being pulled forward by Verizon into 2014 to address some capacity needs.

We think there's going to be short-term volatility in our numbers. Again, we still are very committed -- or excited about the $35 million, $36 million a year that we're going to draw in wireless cash flows. And we think that, again, we will have some short-term volatility, but hopefully that will be behind us as we go into 2015.

Great. Thanks, guys.

Jennifer Fritzsche, Wells Fargo.

Congratulations to both Bobs, as well. I wanted to ask a little bit about dark fiber. It's obviously become a major part of the conversation. And is that something you will emphasize? Do you see that becoming a larger part of your overall business?

And then just to add to that, as you -- I know you just closed on an acquisition, but as you look out to other acquisitions that might be in this space, is it fair to say that you'd continue to look in this fiber-centric area?

Jennifer, thanks for the question. With regard to dark fiber, let me start the answer this way. We're always going to emphasize managed services and a consultative sales approach because that's certainly what we're good at and where we see the best margin and returns.

Dark fiber is viewed as an enabler because we leverage those common assets across commercial carrier and consumer. We'll use dark fiber as a way to keep a relationship with the larger wireless players and to extend our network and outset construction costs. But it isn't our first choice for service offering.

Related to M&A, if you look at the Enventis closing just a few weeks ago, that's really our focus. We want to exploit the value of bringing the teams together, leverage having more market diversity in our portfolio. That's always served us well.

However, if a fiber asset became available contiguous or near some of our newly acquired or existing operations, that, of course, would be of interest to us. But we're not seeking -- going out seeking larger deals such as Enventis or anything that size in the near term.

Great. Thanks, Bob.

Frank Louthan, Raymond James.

I apologize if I missed this, but a couple of quick questions. One, is there is a lock-up on the shares issued for Enventis? Can you give us an idea of that might be? And then a couple quarters ago, you made a fairly concerted effort at driving broadband customers and over-the-top. Are you still making those marketing efforts, and has there been any new competitive impacts, viewers expanding their footprint or other providers that have made things more competitive in your markets?

Frank, this is Steve. I'll take the first part, and Bob can take the next couple questions. With respect to Enventis and the new shares that were issued, there's no lock-up associated with that.

Regarding the competitive situation, we're really not seeing drastic changes there, other than continued focus on speed increases, which we've been quite effective at also advancing for our customer base. And so I think really in the over-the-top area, we're investing our energies in really two buckets, if you will.

One is facilitating enhancement to our unified portal for consumer login and making more over-the-top content available via that. And the second is, we're upgrading speeds across our entire network.

I commented earlier in our remarks that we've launched a 100-meg product. That's available to roughly 40% of our base. We've been upgrading people across our markets to 10, 20, and in some cases an 18-meg product.

So that's really become our sweet spot that we've got 40% of our customers now in either a 10- or 20-meg product. And that is how we're working to lead customers to a more profitable package.

Great. And congratulations, as well, on all the changes. Appreciate time for the questions.

Thank you.

James Moorman, D.A. Davidson.

Just to follow up on the competition. Is there anything else -- with the sequential increase in line losses, was there anything from price increases that might have had anything to do with that? And then also on the 1-gig roll-out, is it that much of a substantial increase in cost to do this, and are you -- any concerns with getting a return on that if too many competitors start offering 1-gig, as well? Thanks.

James, welcome, and thanks for the question.

With regards to the line loss, there's some of that that's been self-imposed. We're seeing a good transition in the commercial space from traditional access lines to our VOIP platform -- hosted VOIP platform that rides over our Metro Ethernet lead product.

With regards to the price increases, we did -- in order to stay consistent with the FCC minimum rates increase -- rates in Texas and Pennsylvania -- and this was the first full quarter of that impact, and the [turn] was actually about what we expected.

Matt [Swift] from [Baird].

Good morning, guys. Can you talk a little bit more about those Verizon partnerships? You said they came in $2 million lower than your expectations. How much visibility do you have to decisions they're making, in terms of both CapEx and handset subsidies within those systems?

Thanks for the question. This is Steve. With respect to Verizon, again, we are a limited partner in all five of those situations. As I said earlier, they generate $35 million, $36 million a year. We have visibility into what their annual budget is and to what their annual operating budget -- Matt Smith, our Investor Relations and Treasurer, sits on the board for each one of those partnerships. So we do have some insight into what's going on from an operating standpoint. But again, we are limited partners, and Verizon is clearly driving the day-to-day operations.

So are you only hearing from them -- or only seeing numbers once a quarter, then, from that?

Yes, that would be fair.

Got it. Can you see any changes to those? Would there be a situation where you would increase your ownership in any of the partnerships or could be either adding or divesting to some of those?

Well, each one of the partnerships -- again, there's -- we own anywhere from 2% to 24% depending on the partnership. And Verizon has control of all the partnerships. But we have first right of refusal if any of the other independent telcos would want to sell out. And we've exercised that right a couple of different times to increase our overall ownership interests; and we would probably continue to do so if those opportunities presented themselves in the future.

Got you. But you don't anticipate any changes in the near term to those?

No.

On the M&A question you were asked earlier, could you -- I know your preference is for fiber and things like Enventis right now -- could you see a situation where you bought more [RLEC] type lines?

This is Bob Udell. I wouldn't see that as our first priority. Really, our strength is in leveraging the fiber assets for broadband services and making sense out of those for our customers. While there's still some life left in copper -- we see technological advances with bonding that allows us to bring in recent tests 100-meg to customers -- that's not our first choice for asset or company acquisition targets.

Got it. Are you guys willing to provide any kind of CapEx guidance for 2015?

We will, most likely in the next-quarter call or in February, I guess is when we report on the year.

We did update our [end of the] year in 2014 guidance to reflect Enventis in a way -- maybe the way to think about it is, we've been spending roughly $100 million a year on CapEx. Their numbers for this year are $28 million to $30 million. So even though we'll give 2015 guidance on next call, that's probably the fair way to think about it.

That's helpful. And then just a last one -- is there a situation where you could see yourself buying your stock back? The stock's obviously taken a little bit of a hit today. Is that something you talk about with the Board with your cash-flow characteristics, maybe instead of, or in addition to, the dividend?

It is something that we talk about periodically with the Board. And where it's at today, we're certainly not -- even if it backs up a little bit today, we're certainly not going to buy -- we don't feel like we need to support the stock, I guess, with a buy-back. We'd rather consider paying down debt or building cash back up for acquisition.

And the only comment I'd add to that is that -- we're pleased with the acquisition and not only the operational (inaudible) to advance our strategy but the de-levering of our balance sheet. So a buy-back would be counterproductive to that.

Got it, great. Thanks for the questions, guys.

(operator instructions) And that's all the questions that we have for today. I'd now like to turn the call back over to the speakers for closing remarks.

Well, thank you again for joining us today and for your continued interest and support of Consolidated Communications. We hope you will again join us next quarter, and thank you, and have a great day.

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