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Otelco Reports Third Quarter 2013 Results

Otelco Inc. (NASDAQ: OTEL), a wireline telecommunications services provider in Alabama, Maine, Massachusetts, Missouri, New Hampshire, Vermont and West Virginia, today announced results for its third quarter ended September 30, 2013. Key highlights for Otelco include:
  • Total revenues of $19.0 million for third quarter 2013.
  • Operating income of $4.3 million for third quarter 2013.
  • Adjusted EBITDA (a non-GAAP measure defined below) of $7.3 million for third quarter 2013.

“Third quarter 2013 results produced Adjusted EBITDA of $7.3 million,” said Mike Weaver, President and Chief Executive Officer of Otelco. “We invested $1.6 million in capital equipment, returning to a more typical spending level after a year of controlled investment during our balance sheet restructuring.

“Business access line equivalents grew in third quarter in both our RLEC and CLEC markets,” added Weaver. “The quality of our Hosted PBX product is gaining attention as other carriers are exploring arrangements with Otelco to potentially white label our product for their customers. We expect to complete the first installation of these wholesale customers in November, expanding our enterprise marketing footprint. Our capital equipment investments continue to increase our capabilities to provide the higher data speeds our customers require to meet their expanding needs.

“We made our first scheduled principal payment of $1.7 million on our new senior credit facility, completed the payment of our remaining restructuring expenses, and ended the third quarter with $10.4 million in cash, down only $0.8 million from the previous quarter. An additional required principal payment of $0.3 million was made at the end of October, reflecting the terms of our senior credit facility as we continue to focus on reducing our leverage,” Weaver concluded.
               
Third Quarter 2013 Financial Summary
(Dollars in thousands, except per share amounts)
(Unaudited)
 
Three Months Ended September 30, Change
      2012     2013     Amount     Percent
Revenues $ 24,428 $ 18,980 $ (5,448 ) (22.3 ) %
Operating income $ 6,487 $ 4,301 $ (2,186 ) (33.7 ) %
Interest expense $ (5,674 ) $ 2,470 $ 8,144 (143.5 ) %
Net income available to stockholders $ 316 $ 1,472 $ 1,156 365.8 %
Basic net income per share $ 0.12 $ 0.47 $ 0.35 291.7 %
 
Adjusted EBITDA (1) $ 11,369 $ 7,256 $ (4,113 ) (36.2 ) %
Capital expenditures $ 851 $ 1,551 $ 700 82.3 %
 
Nine Months Ended September 30, Change
      2012     2013     Amount     Percent
Revenues $ 74,516 $ 59,634 $ (14,882 ) (20.0 ) %
Operating income (loss) $ (134,957 ) $ 14,310 $ 149,267 *
Interest expense $ (17,162 ) $ (10,248 ) $ (6,914 ) (40.3 ) %
Net income (loss) available to stockholders $ (126,876 ) $ 109,346 $ 236,222 *
Basic net income (loss) per share $ (47.98 ) $ 38.24 $ 86.22 *
 
Adjusted EBITDA (1) $ 33,659 $ 24,491 $ (9,168 ) (27.2 ) %
Capital expenditures $ 3,396 $ 3,133 $ (263 ) (7.7 ) %
 
* Not a meaningful calculation
 

Reconciliation of Adjusted EBITDA to Net Income (Loss)
Three Months Ended September 30, Nine Months Ended September 30,
      2012     2013     2012     2013
Net income (loss) $ 316 $ 1,472 $ (126,876 ) $ 109,346
Add: Depreciation 2,467 2,397 7,942 7,166
Interest expense - net of premium 5,332 2,217 16,136 9,421
Interest expense - amortize loan cost 342 253 1,026 828
Income tax expense (benefit) 498 (587 ) (24,690 ) 4,284
Change in fair value of derivatives - - (241 ) -
Loan fees 19 6 57 39
Amortization - intangibles 2,147 446 7,076 2,539
Goodwill impairment (344 ) - 143,654 -
Impairment of long-lived assets - - 8,622 -
IXC tariff dispute settlement - 112 - 181
Cancellation of debt - - - (118,209 )
Restructuring expense   592     940     953     8,896  
Adjusted EBITDA (1) $ 11,369   $ 7,256   $ 33,659   $ 24,491  
 

(1) 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 or increasing 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 or consolidated statement of cash flows 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 Company’s 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.

 
             

Key Operating Statistics
(Unaudited) Quarterly
    % Change
December 31, March 31, June 30, September 30, from
2011 2012 2013 2013 2013 June 30, 2013
Otelco access line equivalents (1) 102,378 99,395 98,839 97,496 96,980 (0.5 ) %
 
RLEC and other services:
Voice access lines 46,202 43,021 42,274 41,354 41,036 (0.8 ) %
Data access lines   22,904   22,742   22,718   22,604   22,333 (1.2 ) %
Access line equivalents (1) 69,106 65,763 64,992 63,958 63,369 (0.9 ) %
 
Cable television customers 4,201 4,155 4,102 4,027 3,963 (1.6 ) %
Satellite television customers 226 233 235 237 237 0.0 %
Security - 63 96 111 121 9.0 %
Additional internet customers 5,414 4,506 4,312 4,124 2,957 (28.3 ) %
RLEC dial-up 301 198 169 153 141 (7.8 ) %
Other dial-up 2,797 1,895 1,726 1,590 455 (71.4 ) %

Other data lines

2,316

2,413

2,417

2,381

2,361

(0.8

)

%
 
CLEC:
Voice access lines 30,189 30,470 30,589 30,252 30,337 0.3 %

Data access lines
 

3,083
 

3,162
 

3,258
 

3,286
  3,274 (0.4 ) %
Access line equivalents (1) 33,272 33,632 33,847 33,538 33,611 0.2 %
Wholesale network connections 157,144 162,117 2,608 2,709 2,756 1.7 %
 
For the Year Ended For the Three Months Ended
December 31, March 31, June 30, September 30,
2011 2012 2013 2013 2013
Total Revenues (in millions): $ 101.8 $ 98.4 $ 21.0 $ 19.7 $ 19.0
RLEC (2) $ 57.4 $ 62.8 $ 14.5 $ 13.5 $ 14.1
CLEC $ 44.4 $ 35.6 $ 6.5 $ 6.2 $ 4.9
 

(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).

(2) Includes regulated and unregulated RLEC revenue.

FINANCIAL DISCUSSION FOR THIRD QUARTER 2013 (unaudited):

Revenue

Total revenues of $19.0 million decreased 22.3% in the three months ended September 30, 2013, when compared to the three months ended September 30, 2012. The expiration of the Time Warner Cable (“TWC”) contract at the end of 2012 was the primary reason for the decrease in 2013, accounting for 73.2% of the total revenue decline.
                   
 
Three Months Ended September 30,  

Change
2012 2013 Amount Percent
(dollars in thousands)
Local services $ 11,003 $ 7,081 $ (3,922 ) (35.6 ) %
Network access 7,500 6,112 (1,388 ) (18.5 )
Internet 3,683 3,630 (53 ) (1.4 )
Transport services 1,454 1,413 (41 ) (2.8 )
Cable television   788   744   (44 ) (5.6 )
Total $ 24,428 $ 18,980 $ (5,448 ) (22.3 )
 

Local services revenue decreased 35.6% in the third quarter of 2013 to $7.1 million from $11.0 million in the third quarter ended September 30, 2012. TWC related revenue decreased $3.2 million. The decline in RLEC voice access lines and reductions in toll calling decreased revenue by $0.7 million. Network access revenue decreased 18.5% in the third quarter of 2013 to $6.1 million from $7.5 million in the quarter ended September 30, 2012. TWC related access revenue declined $0.8 million. End user-related access revenue, net of payments from the new Connect America Fund, decreased $0.6 million, reflecting reduced subscriber usage and lower intrastate calling revenue associated with the FCC’s InterCarrier Compensation order. Internet revenue for the third quarter 2013 decreased 1.4% to $3.6 million from just under $3.7 million in the quarter ended September 30, 2012. The decline in dial-up internet services and a pricing change for multiple email addresses was partially offset by an increase in fiber revenue. Transport services revenue decreased 2.9% to $1.4 million in the three months ended September 30, 2013 from just under $1.5 million for the three months ended September 30, 2012. The decrease was associated with contract renewal pricing. Cable television revenue in the three months ended September 30, 2013 decreased 5.6% to just over $0.7 million compared to just under $0.8 million in the same period in 2012. The decrease was associated with reduced subscriber base which was only partially offset by increased security services revenue in our Alabama territory.

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