Consolidated Communications Holdings Inc (CNSL) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the Consolidated Communications Holdings, Inc. first-quarter of 2016 results conference call. At this time, all participants are in a listen-only mode. Later, we will host a question and answer session, then instructions will follow at that time. (Operator instructions) As a reminder to our audience over the phone, this conference is being recorded for replay purposes.

Now I will hand the floor over the Matt Smith, Vice President and Treasurer. Please proceed, sir.

Thank you, operator. And good morning, everyone. We appreciate you joining us today for our first-quarter earnings call. At the end 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 in 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 to provide an overview of our first-quarter results. Steve will then provide a more detailed review of the financials. Bob?

Thanks, Matt. And good morning, everyone. I appreciate you joining us today. I will provide some highlights for the first quarter, and touch on two transactions we've announced subsequent to the quarter. I will then turn it over to Steve for a more detailed review of the financials.

We kicked off 2016 with a great quarter of financial and operating results. Growth in our business and broadband revenues continued to perform well, and demand remains high. We expanded our commercial product offerings, and have now rolled out a set of cloud-based solutions in all markets. Early indications are positive.

We continue to execute on our strategy of extending our fiber network and maximizing commercial and carrier growth. Our results in the quarter reflect this strategy as our data and transport revenues are higher by 6.4% compared to the same period last year.

Overall, our revenues were $188.8 million, a slight increase compared to last quarter. Adjusted EBITDA was at $78.6 million for the quarter, and the payout ratio was a comfortable 61.4%.

Also for the quarter, we were pleased with our broadband metric results. We added 3,500 not data connections, and continued to move customers to higher speed packages. We are well positioned competitively with 89% of marketable homes capable of receiving 20 meg or higher speeds. We had another strong quarter of metro Ethernet circuit gains with year-over-year growth of nearly 20%.

With respect to video, our strategy continues to be driven towards profitability and passing through content cost increases. This strategy drives lower video gross ads and increased opportunities to reallocate capital dollars to higher margin broadband services.

Now let me turn to the expense side of our operations. Last year, we increased our two-year synergy target on the Enventis transaction from $14 million to $17 million. The two-year anniversary is October of this year, and we are ahead of schedule. As we finalized these synergies, we remained focused on expense control and, of course, efficiency improvement across the business.

From a capital standpoint, we continue to invest with about two-thirds on success-based efforts. The first quarter spend was slightly lower due to some weather-related challenges, but we still expect to be within our guidance for the year.

Turning to M&A, with our 11-state footprint and market diversity, we are at an existing scale where we can be very competitive and efficient. We still view fiber-based acquisitions as consistent with our strategic objectives, and we will pursue the right opportunities.

As an example, this past April 18th, we announced the acquisition of Illinois-based Champaign Telephone company, which has an all-fiber infrastructure and serves commercial customers in the Champaign-Urbana area. The acquisition adds 275 route miles of fiber, and over 300 on-net lit buildings to our portfolio. This is an attractive tuck-in opportunity for us to expand our existing Illinois footprint into a growing market that's underpinned by education and healthcare.

We're excited about the potential of this market and the opportunities to build upon the strong platform the team at Champaign Telephone has already created. And we expect to close the transaction in second or third quarter.

Also consistent with our strategic focus, we recently announced the sale of our rural Northwest Iowa ILEC. The buyers are also located in the Northwest Iowa region and are well positioned to ensure that customers continue to receive advanced product and services. The ILEC produced roughly $7 million in revenue last year. This transaction is expected to close in the second half of 2016.

So in summary, we started the year with a very good quarter reflecting the consistency of our results and the success in our strategy. The transactions we announced move us further down the fiber migration path, and we are excited about the opportunities they bring.

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

Thanks, Bob. Good morning, everyone. Today I'm going to review our first-quarter financial results as compared to the same quarter last year. I'll follow that by reiterating our 2016 guidance.

So starting with revenues, operating revenue for the first quarter was $188.8 million, as compared to $192.6 million last year. Excluding the combined $2.3 million decline from equipment sales and service and the Enventis billing company that we sold in October, total revenues declined by $1.5 million for the quarter.

Growth in our strategic revenues, which we define as commercial, carrier, and consumer broadband, were offset by declines in legacy voice revenues, network access, and subsidies.

Total operating expenses exclusive of depreciation and amortization were $120.4 million, compared to $122.3 million the same quarter last year. The improvements in operating costs were primarily tied to our Enventis synergy achievement.

Net interest expense for the quarter was $18.6 million, which was a $2.1 million improvement compared to the first quarter last year. As a reminder, we significantly improved our cost of debt and capital structure with the successful refinancing and redemption of our 10-7/8% senior note that we executed last June.

Other income, net was $7.2 million compared to $6.4 million for last year. The first quarter of last year included a $900,000 non-cash impairment loss on an investment, Central Valley Independent Network.

Cash distributions from our Verizon Wireless partnerships in the quarter were $6.8 million, which compares to $7.1 million for the first quarter of 2015.

Weighing all these factors and adjusting for certain items as outlined in the table in our press release, adjusted net income was $9.5 million, and adjusted net income per share was $0.19. This compares to $10.2 million and $0.20 per share respectively for the same period last year.

Adjusted EBITDA was $78.6 million in the quarter, compared to $79.7 million for the first quarter last year. Capital expenditures for the quarter were $28.7 million. And from a liquidity standpoint, we ended the quarter with approximately $24.5 million in cash and $65 million available in our revolver.

For the quarter, our total net leverage ratio as calculated in our earnings release was 4.19 times. Cash available to pay dividends was $31.8 million, resulting in a dividend payout ratio of 61.4% for the quarter.

Now let me reiterate the 2016 guidance we provided last quarter. Capital expenditures are expected to be in the range of $125 million to $130 million. Cash interest costs are expected to be in the range of $73 million to $75 million. And finally, cash income taxes are expected to be in the range of $1 million to $3 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 1st, 2016 to shareholders of record on July 15th, 2016. This will represent our 44th consecutive quarterly dividend.

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

Thanks, Steve. We started 2016 on a positive path with solid results and the announcement of a strategic fiber-based acquisition. We have continued our strategy of investing for the future and delivering a comfortable payout ratio for our shareholders.

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

Thank you. (Operator instructions)

Alex Sklar, Raymond James.

Yes, hi, guys. Thanks for taking the question. I just had a couple about the cloud services rollout. Can you talk about maybe the take rate of these services you saw in the early markets? Is there anything about these offerings that require you to actually have lit access into the buildings to bundle with it? Or is it possible to sell these even further (inaudible)?

Yes, thanks for the question. Let me start with the focus on bundling. We are not -- and you never say never -- but we're not focusing on marketing these services outside of our network footprint. These are all about enhancing the value and moving our sales approach to a much more consultative, business problem-solving sales strategy. And we've been very effective in transitioning that.

So if you think about it and you look back through history, we've been in the cloud service business and offering that product before cloud was even a cool thing with our cloud voice product, our VoIP. And that service is really focused on unified messaging.

And so when you break it down, our portfolio of cloud services includes four services, the first of which is the cloud voice offering with unified messaging, voicemail, instant messaging, things like that. And that's really a replacement for legacy PBX systems. The second is cloud compute where we host the IT systems for a business.

The third is cloud WiFi, which is really a Trojan horse-like product that allows us to see all the IP devices operating inside a customer's business and help them guard against rogue cloud offerings that their employees might be using, and helps them improve productivity. And the final is data protection. And that's a service where we host the infrastructure for our customers in one of our 12 data centers.

So in terms of the take rate, it's really early on in the launch. And so it's probably not worth commenting on the take rate. But I would tell you, the pipeline looks very good, and we're excited about the energy that this has injected into our sales time.

Okay, great. Thank you. And then a little bit more in terms of that Champaign telecom acquisition. Are there any capabilities you acquired that you didn't previously have? Or any opportunities for you to sell a bigger suite of services into these customers that Champaign didn't have?

Yes, it's really the latter. This is really a revenue synergy opportunity because it gives us 300 lit buildings very near where we have a significant resource pool in terms of sales engineering. So yes, they don't have the cloud portfolio that we have, although they've got a very high service experience for their customers. So it's a really good combination that allows us to extend our marketing and sales strategy.

All right, great. Thank you.

(Operator instructions)

Michael Rollins, Citi.

Hey, good morning. This is Adam Ilkowitz for Mike. First question that I have is, on the two transactions that you've announced, you've disclosed revenue and the gross proceeds and the cost for the two acquisitions. Can you kind of describe the net on EBITDA in free cash flow between the two? Will it be neutral to consolidated? Or it sounds like based on what the acquisitions are and the divestiture, that'll be a little bit dilutive.

Well, actually I think we're looking at it as being slightly accretive. I mean, I think the EBITDA numbers -- again, thanks for the question. This is Steve. So we're looking at it as being slightly neutral to positive on the bottom line here, free cash flow accretion. If you think about -- you mentioned the revenue numbers -- EBITDA's largely offsetting.

We think there's more growth opportunities, as Bob talked about, in the commercial market in Champaign. And then from a cash flow, when you factor in CapEx, we're going to have a really strong reallocation of CapEx from what we would have spent on cap [too] in Iowa and just really being able to use that CapEx better with the Champaign deployment.

Okay. And then the second question was the data and transport. I know you re-classed revenues a little bit between business and network revenues this quarter. But the 6.5% growth was a little bit slower than it had been in previous quarters. I was wondering if you were seeing any price pressure related to any of the business rulings that are going on in the FCC? And then more broadly, what you see happening in the special access and how that might impact you? Thanks.

Let me start first with the special access piece. The order was just released on Monday, so we're still reviewing it like all of you. But when you look at, first of all, the threshold issue being there's really not much of a need for major special access reform. The marketplace is already driving lower special access. And really in our case, we're seeing it transition to our fiber-based metro Ethernet product.

And so if you look through history, our special access revenues haven't been declining $3 million or $4 million per year for several years now. And we've been replacing that legacy revenue with fiber and metro Ethernet circuits. So I don't see the provisions that the FFC's worried about in any of our tariffs. So we don't see any impact or likely exposure there. And our trend has been to move those customers to an IP-based service anyway. And we think we're in front of that curve.

With respect to the growth rate, there's been really no major change in our traction from a sales strategy in terms of price per meg and the pricing structure. There's a natural price compression that you continue to see across the industry. But we're replacing that. Our ARPU is continuously consistent to growing because we're replacing that revenue opportunity with add-on services like you see in the cloud examples that we've just launched. So I don't see that as a weakness in results by any stretch. I think the 6% growth is fairly robust.

Okay, thank you for the updates.

Thank you. There are no further questions in queue. I will now hand the call back to Bob Udell, Chief Executive Officer, for closing comments.

Well, I thank you again for joining us today. I feel really good about our strategic position, and I'm very excited about the future. We hope you'll again join us next quarter. Thanks, and have a great day.