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Otelco Reports Second Quarter 2011 Results

Stocks in this article: OTT

Otelco Inc. (NASDAQ: OTT) (TSX: OTT.un), a wireline telecommunications services provider in Alabama, Maine, Massachusetts, Missouri, New Hampshire and West Virginia, today announced results for its second quarter ended June 30, 2011. Key highlights for Otelco include:

  • Total revenues of $25.5 million for second quarter 2011.
  • Operating income of $7.3 million for second quarter 2011.
  • Adjusted EBITDA (as defined below) of $11.9 million for second quarter 2011.

“After a slow start in the first quarter of the year, our second quarter results generated growth in revenue, operating margin and EBITDA when compared to first quarter. The management team focused on delivering superior service and controlling costs. With our expanded CLEC sales and marketing capability finally in place and the completion of our six colocation facilities in New Hampshire, we are in a position to begin to see growth in our non-regulated business.

“Our cash position remains strong,” continued Weaver. “In May, we made another voluntary repayment on our senior debt of $0.4 million representing a reduction of $11.5 million since the credit facility was renewed in October 2008. Capital investments of $3.5 million in our business infrastructure during the quarter, including approximately $0.7 million to replace assets damaged by spring tornadoes in Alabama, will support both growth and cost improvements in all of our service territories.

“The planned acquisition of Shoreham Telephone Company in Vermont is on schedule to close in fourth quarter,” added Weaver. “Shoreham will also anchor our CLEC expansion into the fourth New England state.

“The strength of our commitment to building value for and returning cash to our shareholders is unwavering, as evidenced by our twenty-sixth consecutive IDS dividend,” Weaver concluded.

Distribution to Income Deposit Security Holders

Each quarter, the Board will consider the declaration of dividends during its normally scheduled meeting. For this quarter, the Board is meeting on August 11, 2011. The scheduled interest and any dividend declared will be paid on September 30, 2011, to holders of record as of the close of business on September 15, 2011. The interest payment will cover the period from June 30, 2011 through September 29, 2011. Currently, it is anticipated that the Company’s dividends in 2011 will continue to be treated as a return of capital for tax purposes. The Company has made twenty-six successive quarterly distributions of dividends and interest since its IDSs were originally offered to the public in December 2004.

Second Quarter 2011 Financial Summary
(Dollars in thousands, except per share amounts)
 
   

Three Months Ended June 30,

    Change
      2010     2011     Amount     Percent
Revenues $ 26,511     $ 25,501 $ (1,010 )     (3.8 )%
Operating income $ 7,011 $ 7,327 $ 316 4.5 %
Interest expense $ (6,179 ) $ (6,199 ) $ 20 0.3 %
Net income available to stockholders $ 417 $ 1,283 $ 866 *
Basic net income per share $ 0.03 $ 0.10 $ 0.07 *
Diluted net income per share $ 0.03 $ 0.10 $ 0.07 *
 
Adjusted EBITDA (a) $ 12,890 $ 11,887 $ (1,003 ) (7.8 )%
Capital expenditures $ 2,333 $ 3,508 $ 1,175 50.4 %
 
* Not a meaningful calculation
 

Six Months Ended June 30,

Change
      2010     2011     Amount     Percent
Revenues $ 52,305 $ 50,893 $ (1,412 ) (2.7 )%
Operating income $ 12,880 $ 12,647 $ (233 ) (1.8 )%
Interest expense $ (12,168 ) $ (12,369 ) $ 201 1.7 %
Net income available to stockholders $ 32 $ 1,288 $ 1,256 *
Basic net income per share $ - $ 0.10 $ 0.10 *
Diluted net income per share $ - $ 0.10 $ 0.10 *
 
Adjusted EBITDA (a) $ 25,220 $ 23,300 $ (1,920 ) (7.6 )%
Capital expenditures $ 4,087 $ 6,351 $ 2,264 55.4 %
 
* Not a meaningful calculation
 
Reconciliation of Adjusted EBITDA to Net Income
Three Months ended June 30, Six Months ended June 30,
      2010     2011     2010     2011
Net income $ 417 $ 1,283 $ 32 $ 1,288
Add: Depreciation 3,327 2,307 6,900 5,829
Interest expense - net of premium 5,840 5,857 11,491 11,685
Interest expense - amortize loan cost 339 342 677 684
Income tax expense 262 357 1 359
Change in fair value of derivatives 176 (480 ) 1,062 (986 )
Loan fees 19 19 38 38
Amortization - intangibles   2,510     2,202     5,019     4,403  
Adjusted EBITDA $ 12,890   $ 11,887   $ 25,220   $ 23,300  
 

(a) Adjusted EBITDA is defined as consolidated net income (loss) plus interest expense, depreciation and amortization, income taxes and certain non-recurring fees, expenses or charges and other non-cash charges reducing consolidated net income. Adjusted EBITDA is not a measure calculated in accordance with generally acceptable accounting principles (GAAP). While providing useful information, Adjusted EBITDA should not be considered in isolation or as a substitute for consolidated statement of operations data prepared in accordance with GAAP. The Company believes Adjusted EBITDA is useful as a tool to analyze the Company on the basis of operating performance and leverage. The definition of Adjusted EBITDA corresponds to the definition of Adjusted EBITDA in the indenture governing the Company’s senior subordinated notes and its credit facility and certain of the covenants contained therein. The Company’s presentation of Adjusted EBITDA may not be comparable to similarly titled measures used by other companies.

Otelco Inc. - Key Operating Statistics                      
   
Quarterly
% Change
December 31, March 31, June 30, from
2009 2010 2011 2011 March 31, 2011
Otelco access line equivalents (1) 100,356 99,639 99,271 98,304 (1.0 )%
 
RLEC and other services:
Voice access lines 48,215 45,461 44,770 44,113 (1.5 )%
Data access lines   20,066   20,852   21,158   21,137 (0.1 )%
Access line equivalents (1) 68,281 66,313 65,928 65,250 (1.0 )%
Cable television customers 4,195 4,227 4,029 4,054 0.6 %
Satellite television customers 100 125 217 222 2.3 %
Additional internet customers 9,116 6,975 6,435 6,046 (6.0 )%
RLEC dial-up 786 393 341 307 (10.0 )%
Other dial-up 6,439 4,300 3,786 3,403 (10.1 )%
Other data lines 1,891 2,282 2,308 2,336 1.2 %
 
CLEC:
Voice access lines 28,647 29,944 30,084 29,842 (0.8 )%
Data access lines   3,428   3,382   3,259   3,212 (1.4 )%
Access line equivalents (1) 32,075 33,326 33,343 33,054 (0.9 )%
Wholesale network connections 132,324 149,043 152,101 154,785 1.8 %
 
 
For the Years Ended For the Three Months Ended
December 31, March 31, June 30,
2009 2010 2011 2011
Total Revenues (in millions): $ 103.8 $ 104.4 $ 25.4 $ 25.5
RLEC $ 60.8 $ 58.4 $ 14.2 $ 14.3
CLEC $ 43.0 $ 46.0 $ 11.2 $ 11.2
 

(1) We define access line equivalents as voice access lines and data access lines (including cable modems, digital subscriber lines, and dedicated data access trunks).

FINANCIAL DISCUSSION FOR SECOND QUARTER 2011:

Revenues

Total revenues decreased 3.8% in the three months ended June 30, 2011, to $25.5 million from $26.5 million in the three months ended June 30, 2010. A one-time settlement in 2010 accounted for the majority of the difference. In addition, declines from the traditional loss of RLEC voice access line related revenues were not fully offset by growth in CLEC and cable television revenues. The table below provides the components of our revenues for the three months ended June 30, 2011 compared to the same period of 2010.

 

    Three Months Ended June 30,     Change
2010     2011 Amount     Percent
(dollars in thousands)
Local services $ 12,286 $ 11,940 $ (346 ) (2.8 )%
Network access 8,604 8,076 (528 ) (6.1 )
Cable television 699 707 8 1.1
Internet 3,527 3,458 (69 ) (2.0 )
Transport services   1,395   1,320   (75 ) (5.4 )
Total $ 26,511 $ 25,501 $ (1,010 ) (3.8 )
 

Local services revenue decreased 2.8% in the second quarter to $11.9 million from $12.3 million in the quarter ended June 30, 2010. The growth in CLEC revenue accounted for an increase of $0.1 million. RLEC revenue decreased $0.4 million reflecting the decline in RLEC voice access lines. Network access revenue decreased 6.1% in the second quarter to $8.1 million from $8.6 million in the quarter ended June 30, 2010. Interstate and intrastate switched access declined $0.1 million. A one-time settlement in 2010 accounted for the remainder of the difference. Cable television revenue in the three months ended June 30, 2011, increased 1.1% to remain at $0.7 million in the same periods for 2011 and 2010. Growth in IPTV subscribers and the shift to high-definition packages in Alabama was offset by the decline in revenue associated with the conversion of our Missouri cable customers to satellite services during first quarter 2011. Internet revenue for the second quarter 2011 decreased 2.0% to stay at $3.5 million in the three months ended June 30, 2011 and 2010. Growth in broadband data lines offset the loss of dial-up subscribers. Transport services revenue decreased 5.4% to $1.3 million in the three months ended June 30, 2011 from $1.4 million for the same period in 2010. Market price changes for new and existing customers caused the decline.

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