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Otelco Inc.'s CEO Discusses Q2 2012 Results - Earnings Call Transcript

With that stated, I will now turn the call over to Michael Weaver.

Michael Weaver

Thank you, Kevin. Good morning everyone and welcome to the call. The second quarter press release has both historical results and projections for future years, and I want to make a few comments about both of those. Then, I will ask Curtis to provide a brief summary of our second quarter results. The SEC Form 10-Q will have additional details and will be filed shortly.

What we are trying to accomplish with this change in format is just to allow more time for questions and discussions. From the operational standpoint for the second quarter, we produced adjusted EBITDA of $10.8 million, which included approximately $500,000 of non-recurring expenses. These expenses consisted of severance costs and legal fees, the write-off of deferred costs associated with an expired shelf registration.

Without these costs, our adjusted EBITDA for second quarter would have been closer and more in line with 2012 first quarter results.

If you look forward with the remainder of this year and beyond, the combination of the non-renewal of the Time Warner contract and the recent FCC’s Inter-Carrier Compensation reforms will have a negative impact on our business. The FCC reforms, which affect both our RLEC and CLEC operations, have various implementation dates and there still remains a great deal of uncertainty and confusion surrounding some aspects of the order.

Numerous groups have challenged the FCC order and the appeals process could result in additional changes and modifications to the order that’s in place today. One aspect of the FCC’s order that will materially impact our CLEC operations took effect on July 1 st of this year. That portion of the order requires that intrastate access rates be lowered to the applicable federal access rates over the next three years, and then we moved rapidly to a ‘bill and keep’, meaning no inter-carrier compensation payment basis.

In addition to the FCC changes, the Time Warner contract, on April 20 th, we announced the anticipated expiration of the contract for wholesale network connections provided by Otelco.

Consistent with their actions in other markets, Time Warner elected to begin to perform the work within their own organization. Official notice of non-renewal by Time Warner Cable was received in June and a transition agreement to provide services through June 2013 is currently being negotiated. Under the terms of the existing agreement, the revenue stream from the contract is unaffected through the end of this year. During the transition period in 2013, the revenue will decline as customers are moved from the Otelco service platform to Time Warner Cable.

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