Consolidated Communications Holdings Inc (CNSL) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Consolidated Communications Holdings First Quarter 2015 Results Conference Call. At this time, all participants are in a listen-only mode. Later there will be a question-and-answer session, instructions will follow at that time. (Operator instructions) As a reminder, today's call is being recorded.

I would now like turn the call over to Matt Smith, Treasurer and Vice President of Finance. Sir, you may begin.

Thank you, Shannon and good morning everyone. We appreciate you joining us today for our first quarter 2015 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 Udell, President and Chief Executive 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 those 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 to provide an overview of our first quarter results. Steve Childers will then provide a more detailed review of the financials and discuss our 2015 guidance. Bob?

Thanks Matt and good morning, everyone. I appreciate you joining us today for our first quarter earnings call.

This is the first full quarter results that include the Enventis acquisition, which we closed on October 16 of last year. We are pleased with how well we started 2015 and the continued progress we are making in our strategic initiatives. Revenue of $192.6 million was slightly higher both sequentially and year-over-year when excluding the equipment sales. As a reminder, the equipment sales and service revenue line will fluctuate from quarter to quarter. Adjusted EBITDA was $79.7 million and the payout ratio was a comfortable 71.4%.

Our commercial and carrier sales channels again showed strong growth with a year-over-year revenue increase of 3.7%, which was led by our Metro Ethernet and hosted VoIP solutions. As presented in our new revenue table, in the earnings release, commercial and carrier revenues were $73.7 million in the current quarter and reflect consistent growth in the periods presented. Approximately two-thirds of our investments are success based growth initiatives and we are excited about the opportunities across our markets. The new metrics we shared in our press release this quarter provide additional details to support the emphasis we have on our fiber and network expansion.

We increased our fiber network miles by over 5% in the last year to 13,038 and lit buildings by over 3% to over 4,800. These fiber expansion efforts are driving value and our consultative sales and service approach is appealing to the commercial and enterprise customers. Our network footprint and leading fiber-based data products are key to the success for our topline growth and strategic sales.

Specific to carrier, we achieved a record quarter and signed agreements for 200 fiber to the tower sites with over 30 million of contract value. This brings our total sites under contract to just under 1,100. We have good relationships with the wireless carriers and as we've continued to gain scale, the growth opportunities have increased.

On the consumer front, revenues were $69.3 million or essentially flat. Consumer broadband revenues increased by 2.1% year-over-year and were offset by ongoing declines in voice services. We continue to focus our marketing efforts on acquiring and securing the Internet services into the home. We've expanded our 1-Gig and 100-Meg offerings and are moving customers to higher speeds which increases ARPU and lowers churn.

Consumers taking our Internet products of 20-Meg or higher has increased from 8% of the customer base at this time last year to 20% of the customer base today. This success reflects the network and product set that allowed us to be very competitive in our markets. In all, we added 3,100 data connections and lost 1,000 video subscribers. As we mentioned last quarter, we are focused on growing and securing the broadband connections to the home while passing higher cost of programming on to our video subs. As a result, we are redeploying that capital dollars from lower video subscribers to higher margin commercial and carrier growth opportunities.

Now, let me provide an update on the Enventis acquisition. I am pleased with how well the assets have performed and how well the teams have worked together in completing the initial phases of integration. We are on plan and on budget with all of our projects. And with respect to synergies, we achieved an additional $2 million in annualized savings during the quarter. In total, we have achieved $7.5 million in synergies towards our two-year target of $14 million.

Looking forward, I'm excited about the prospects we have with the additional scale, growth and expansion opportunities. We have the people, network, products and services to continue to be the leading broadband provider in the markets we serve. We are well positioned to continue to achieve our strategic initiatives and deliver increasing shareholder value through organic growth, synergy savings and opportunistic M&A as well as balance sheet improvements.

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

Thanks, Bob, and good morning to everyone.

This morning, I will review our first quarter financial performance compared to pro forma results from the first quarter of last year, which include the Enventis acquisition. I'll follow that with confirmation of our 2015 guidance. Financial results for the period were as follows. Operating revenue for the first quarter was $192.6 million compared to $193.9 million in the first quarter last year. As Bob mentioned, excluding revenues for equipment sales and services, our recurring revenues were slightly higher year-over-year and sequentially. The increase was primarily driven by continued growth in commercial and carrier sales and consumer broadband revenues. These growth areas were partially offset by declines in consumer voice and network access services. Total operating expenses, exclusive of depreciation and amortization were $122.3 million compared to $120.3 million for the same quarter last year. The increase was primarily driven by $3.5 million in higher video programming cost and approximately $1 million in higher integration and severance expenses. These were partially offset by the realization of cost savings associated with the Enventis acquisition.

Net interest expense for the quarter was $20.7 million compared to $22 million for the first quarter of 2014. The improvement was attributable to fourth of 2014 repurchase of $73 million of our 10.875% senior notes, which were replaced at a lower interest rate. Other income net was $6.4 million compared to $7.4 million for the same period last year. For the quarter, we received $7.1 million in cash distributions from our Verizon Wireless partnerships compared to $9.1 million for the first quarter of 2014. The lower distributions are a result of the continued growth and success Verizon has had in its Edge program where equipment is paid by customers over a period of time versus the time of purchase.

Weighing all these factors and adjusting for certain items as outlined in the table in our press release, adjusted net income was $10.2 million and adjusted net income per share was $0.20, an increase compared to $9 million and $0.18 per share for the same period last year. Adjusted EBITDA was $79.7 million in the quarter compared to $83.4 million for the first quarter last year. Capital expenditures for the quarter were $32.7 million with roughly two-thirds being driven by success-based projects.

From liquidity standpoint, we ended the quarter with approximately $9.3 million in cash and $31 million available under our revolver. For the first quarter, our total net leverage ratio as calculated in our earnings release was 4.2 times. Cash available to pay dividends was $27.1 million resulting in dividend payout ratio of 71.4%.

Now, let me reiterate our 2015 guidance. Capital expenditures are expected to be in the range of $122 million to $129 million. Our CapEx guidance includes $5.2 million of integration CapEx from the Enventis acquisition. Cash interest costs are expected to be in the range of $78 million to $81 million and cash income taxes are expected to be in the range of $4 million to $8 million. With respect to our dividend, our Board of Directors has declared the next quarterly dividend of approximately $0.39 per common share payable on August 1, 2015 to shareholders of record on July 15, 2015. This will represent our 40th consecutive quarterly dividend.

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

Thanks, Steve. So in summary, 2015 is off to a good start as we continue to execute on our strategy. We're excited about the future and confident that achievement of our strategic initiatives will drive increased shareholder value.

And so with that, I'd like to open it up for questions. Shannon?

Davis Hebert, Wells Fargo Securities.

Good morning everyone, thanks for taking the questions. On the Ethernet growth, I'm just curious if you disclosed a percentage of revenue from Metro Ethernet if that's available.

Thanks for the question, Davis. And let me approach the question this way and then I want to make sure that I've answered what you're asking. Metro Ethernet growth in terms of increase has grown in units about 21% year-over-year and in revenue about 7.5%. If the question is in reference to what portion of our revenue that is, we haven't disclosed that. But I would think about it as the most significant contributor of revenue growth in our commercial customer group.

Okay, that's helpful. And a lot of your peers have been talking about the CAF 2 opportunity. I'm just curious if you could possibly size that up for us and how you're approaching that this year.

Hi Davis, this is Steve. I'll try that one. With respect to the CAF 2,we did just recently get the offer or the right of first refusal letter from the FCC and we're still going through in evaluating cost of build, what that revenue opportunity is and the results were actually a little bit better than what we had been anticipating. So as you'll see displayed in our 10-Q and that's filed later today, the CAF 2 funding opportunity is $14 million and again, we have until August 27 to make that decision on which states we accepted in and which states we might go to auction in. So, again, slightly favorable compared to what we had been planning on for the last couple of years. And even though it's probably going to be a step down in total revenue, we continue to be very confident in our ability to manage through the multi-year transition period provided by the plan and also as why we've been so hyper focused on executing our strategy of growing the carrier and the commercial channels of our business and really working hard to diversify all of our revenue streams.

Okay, that's helpful. And then, I wanted to ask question on the video connections. Just a slight decline in connections this quarter. Is this something that consumer is switching to other providers or they cord-cutting or is it something you're not emphasizing as much given the high programming cost?

It's really the latter. And specifically to our strategy around the consumer business, the highest margin opportunity is the value-add data connection and Internet access. So we've been focused on speed increases. And if you look at the industry as a whole, the transition to over-the-top opportunities is where our strategy as well has shifted. And so with the positive response to 100-Meg and 1-Gig Internet launches and our promotions being build around that emphasis, the easiest way to think about it is we're deemphasizing the video package on a standalone basis and using it as a complement to our bundle to grow the ARPU and the average profit margin of our consumer business.

Okay, that's helpful. And last one from me and I'll let someone else jump on. Just the leverage outlook, you're at 4.2 times. I think you want to get under the 4s, maybe if you could just clarify your preference for leverage over the next 12 months? Thank you.

Davis, this is Steve. I think our view remains the same. We are at 4.2 times, ticked up modestly in the quarter. I think, as we think about capital structure, we don't think we have to get into the necessarily, the low 3s or whatever, but getting below 4 times, I think would be kind of what the target is.

Thank you.

And the only thing I'd add there is we're going to be opportunistic with the markets being good to continue to look at our capital structure and optimize interest expense and reduce it when possible. So that's something we're always evaluating for the benefit of our shareholders and long-term cash flow.

Okay, thank you very much.

Barry Sine, Drexel Hamilton.

Good morning, gentlemen. I want to start out and ask you, obviously the key growth driver here is your business fiber. I wanted to ask about the sales force. What is the current size of the quota-bearing sales force? What are you seeing there in terms of productivity? With the merger, is everybody in place? So there is still more pieces, hires or systems that you need to put in place to get that sales force taking it full speed?

Yeah, Barry, thanks for the question. That's really where our integration focus has been over the last two quarters and of course, we always start with ERP system and get a view of the financial landscape and we started out the year converted on the common platform. But we also started out the year with a common sales organization. And that strategy has been getting great traction. We've got roughly 120 right now sales resources, average productivity target is in the 3,000 plus range. But of course, you've got some people ramping at different stages. We've had an expansion in Dallas last year, which we talked about. We've added a team in a couple different markets. And so I think, over the last quarter, we probably have six new sales people on in total. But to address your question with regards to the with recalling the Enventis, the North region, it's fully productive already. We're very happy with our traction in the first quarter, feeling quite optimistic about how the Metro Ethernet product and the sales strategy are disciplined around how we divide up the accounts is quite structured. It goes from a very focused silver, gold, platinum framework that has a very disciplined account management for existing customers, renewal process and then a high-touch consultative sales approach for prospects in our [hunter] group. So we're feeling really good about both the Metro Ethernet growth as the platform and the new product activity that's in the pipeline to add value and stickiness to that Metro Ethernet relationship with our customers.

Okay, that's helpful. Next question, you've changed the reporting structure in terms of the revenue categories. And I think that's quite informative, so I think that shows the business the way you guys are really operating it. As analysts, so we don't have a lot of history with that new structure, so maybe, you could give us some comments to help us thinking about that? On the commercial side, you just grew 3.7%, it sounds like that can accelerate a little bit; consumer, it sounds like you're not going to invest there maybe flattish at best; equipment, that's kind of all over the place, I'm guessing, depending on (inaudible) maybe you can give us some near-term, is 2Q going to be another drop down, do you have any big orders there? Usually on subsidies, you're able to give pretty good sense of the year direction, they're down about 2% in the quarter year-over-year and then access was a pretty big tick down, what're you looking for over the next, the rest of this year in access revenue?

Hi Barry, this is Steve, I'll try and Bob can jump in if he wants to redirect. I think your initial thoughts on commercial and carrier kind of growth rate we saw for this quarter is what we expect. And again, we have lots of several build opportunities, some nice expansion opportunities and we're looking for nice growth on the commercial carrier side. Consumer, based on what Bob described in terms of the strategy change, we would expect video to be flat to declining. We still expect to see growth in broadband, video on that side. The equipment sales and services, again it is going, if you look at the revenue chart that we have in the earnings release, on page 10 or my section says page 10 of the earnings release that equipment sales and services line is going to be, I don't know what they're called, lumpy or volatile or whatever. But the number is going to bounce around a little bit and just for perspective, when the EIS business for Enventis last year had a high of $22 million in the quarter and a low of $11 million, we're a little bit below that for first quarter of 2015. And the way to think about that business is kind of based on a relationship with Cisco, when they're running promotions and the activity is really going to happen in the second and third quarter of the year. So the last year on a stand-alone basis, EIS would have been about $60 million business, we still expect that to be a $60 million business this year, although it was slow for Q1 of this year. The subsidy numbers, I think you're probably directionally correct. Obviously, we've been seeing a little bit of step down with our Texas subsidies, I won't go through that, but you can look at the 10-Q for kind of the direction on that and again numbers will adjust based on kind of the CAF 2 funding over time. Network Access, we would expect to kind of continue to see the decline that we saw in the first quarter. You had the step down, every July 1, you are having a step down to match access rate. So, just kind of getting close to the [some 0.005] or whatever the bottom that range is plus just the deterioration and minutes of use of network access is special and switched access is probably going to continue to modestly decline for us. So I hope that addressed your questions.

That's great. I get a lot of rundown, that's [pretty thorough]. But just a follow-up on the equipment revenue, the concern there is, that's so volatile that you can exceed or miss quarters in terms of revenue based on what that number does. I'm thinking maybe, I know you don't have a crystal ball out too long on that, but just over the next quarter or so, it sounds like you're saying with promotional activity from Cisco that we probably see a little bit stronger quarter for equipment revenue at least for the second quarter?

Yeah, I'd step up to that.

Okay.

And you know I think I'd to that Barry is that you got to remember that's a low margin business. And so while the revenue is a bit inconsistent, we like the talent pool and we like the conversation that it allows us to have with customers and while it's low margin and isn't a high EBITDA contributor, it certainly fits our strategy of the consultative sales approach to hunting and prospecting with new customers.

Okay. And my last question, just in terms of the distributions from the Verizon partnerships, obviously down and I can understand they're having to finance the Edge program handset financing. Do you have any sense when that introduction of Edge might normalize out so that customer payments of prior Edge commitments start to equalize new Edge commitments and so your distributions can return to prior levels and even grow again?

Yeah, from our point of view that can't happen fast enough. I mean, just maybe to review for those I think and Barry you're probably really familiar with this, but 2013, 2014 total distributions were about $35 million from Verizon Wireless. We still think that's an extremely important source of diversification for our cash flow. We think 2015 despite sort of the elongated collections time on the Edge side, we'll still be around the $35 million range. And so again, we're -- the plus side is that we're seeing a lot of success from subscriber units with the Edge program. Obviously, it's putting a little pressure on their working capital with the extended payment cycle. We're optimistic that they might consider factoring some of those receivables maybe accelerate the payment. So again, I can't give you a specific timeline on when that's going to normalize, but we're hopeful that happens sometime later this year.

Okay, those are my questions. Thank you, gentlemen.

Scott Goldman, Jefferies.

Hi, good morning, guys. Also have a few questions, I guess a couple of follow-ups and then one additional one. Just following up on the distribution side, it seems as though you know Verizon was historically a little bit slower to adopt the device installment plans versus some of the peers. And so it seems like that's accelerating a bit more this year than perhaps people had originally intended. So assuming that they do not factor, would that change your outlook for what 2015 distributions would be and then maybe 1Q would look like a more normal rate or how does that dynamic work? Secondly, a follow-up on the video side, you talked about sort of deemphasizing the video given the high programming cost. Wondering what you're doing strategically to focus more on the OTT side? Are there opportunities for you to partner with the likes of a Netflix or I think we saw Cablevision announce something with Hulu in the last couple weeks. Spotify I think just this morning talked about maybe getting into web video services. So are there opportunities for you to partner with some of these guys and maybe make for a little bit more compelling offer where you could sort of promote the higher speed broadband tiers that you have? And then lastly, can you just provide any commentary about what you're seeing from broadband inside the 1-Gigabit markets that you have today? I think you probably had them for few months now. So any commentary there, either from a competitive reaction or level of demand in those markets for broadband would be great. Thank you.

Great. We'll take those three questions in order or at least we'll attempt to. Steve, you want to start on distribution follow-up.

Sure. On the distribution follow-up Scott, your question about if they would factor or normalize whatever with that would mean in the distribution. I think we're still thinking about the $35 million number being sort of on an as is basis assuming no improvement in the collections or speed collections, the adoption of factories or whatever. We would actually see some potential upside for 2015 if they did do that. So again we think $35 million is still a pretty decent number for 2015.

And the only thing I'd add on the distribution side is that, they don't dividend to themselves separately from us. So they want to realize the cash distribution so do we and so motivations are same. With regards to the video question, the opportunity to partner at our size with Netflix and Hulu's isn't quite the same as Verizon and we know that. But however, those discussions are starting to pick up momentum through our MCTC relationships, which is the source for roughly 75%, 80% of our broadcast content today. It's also been a resource to help leverage the HBO on-the-go and Showtime things that are part of our TV Anywhere, Everywhere product at this stage. So I expect that what you're hearing from Spotify and others is going to cause that momentum to increase. And we hope later this year it gives us more product flexibility for our consumer bundle and enhances the value of the portal which has a unified login capability that has allowed us to differentiate our consumer product from some of our competitors in the marketplace. The last point with respect to the take rates on 1-Gigabit or the benefit that it's brought us, it's really early, we're really about a quarter and a half, maybe four months into that and it's getting traction nicely. And let me tell you what is really the benefit. It's caused another conversation with our customer. And so while the Gig is of interest, few people really need that kind of speed and we're seeing an uptick in our 100-Meg, our 50-Meg, our 20-Meg products. And so the conversation with the customer has really been the initial best benefit from the launch, but I'm sure that we'll see take rates on Gig pick up too in the short-term future.

And just remind me what percentage of your households can get the 1-Gig and sort of where you expect that to be at year-end?

Yes, it's roughly 5% now because it's so early. And at this stage, I would have to get back to you on your end. I think with the momentum we're building in video capacity ads, that should more than triple by the end of the year, but more to come on that as we have new market launches.

Great, thanks for taking the questions guys.

(Operator Instructions) Frank Louthan, Raymond James.

Great, thank you. Just wanted to circle back on the CAF 2, you're offered at just under $14 million. Can you walk us through what your federal exposure is here? I'm looking at your subsidies and I know there are some state subsidies as well, just can you let us now, remind us what that is? And are there any properties that you might consider walking away from? I mean, I think given your throughput and speeds what you have, maybe, maybe not, but is there anything that you've might not want to be able to take?

Frank, this is Steve. Yes, in terms of the overall impact CAF 1 funding is about $34 million. And so we've been planning on the step down roughly $5 million a year through our modeling year for since this plan got introduced and again I'd remind you that prior, when the high cost of four was frozen, we typically saw roughly $5 million, $6 million reduction and always managed our way through that. In terms of the, which properties that we would expect, based on our initial analysis, we would expect to accept it in most states, although there are, there's at least one that will cause us, think about it as we evaluate the build cost going forward. So, again I think, it's probably safe to say most states we will accept and there's one, maybe two that we will strongly evaluate going to auction on.

Thank you. I'm showing no further questions at this time. I would like turn the call back over to Bob Udell for closing remarks.

Well, in summary, thank you again for joining us today and for your continued interest in and support of Consolidated Communications. We're very excited about the future, confident in our strategy and hope you will join us again next quarter. Thanks and have a great day.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.