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Otelco Reports First Quarter 2014 Results

Stocks in this article: OTEL

Otelco Inc. (NASDAQ: OTEL), a wireline telecommunications services provider in Alabama, Maine, Massachusetts, Missouri, New Hampshire, Vermont and West Virginia and a provider of cloud hosting and managed services, today announced results for its first quarter ended March 31, 2014. Key highlights for Otelco include:

  • Total revenues of $18.8 million for first quarter 2014.
  • Operating income of $4.0 million for first quarter 2014.
  • Adjusted EBITDA (as defined below) of $7.5 million for first quarter 2014.

“The first quarter of 2014 produced adjusted EBITDA of $7.5 million,” said Mike Weaver, Chief Executive Officer of Otelco. “This performance includes our annual CoBank dividend and the impact of the 2013 RLEC access revenue annual cost studies, both of which will not recur in the balance of 2014. The combined impact of these two items represents an increase of $0.7 million when compared with the same period in 2013. Access line equivalents remained essentially equal to our fourth quarter 2013 subscriber metrics, aided by the installation of transport fiber services to school systems in our Alabama markets. During first quarter, we reduced our senior debt by 4.2% or $5.4 million and our cash balance at March 31, 2014 was $6.9 million.

“As part of our ongoing efforts to control expenses and improve our efficiencies,” Weaver continued, “we have identified a number of areas where our operating costs can be reduced. As a result of these initiatives, which will be implemented in second quarter of this year, network, cable programming and labor cost reductions of approximately $1.2 million will be realized in 2014.

“Capital investment in our business was $1.4 million for first quarter,” noted Weaver. “These expenditures included enhancements to our New England network and switching facilities in anticipation of growth in Reliable Networks, the cloud hosting and managing services provider we acquired in January. We expect a similar rate of capital expenditures for the balance of the year.”

 
 
First Quarter 2014 Financial Summary
(Dollars in thousands, except per share amounts)
(Unaudited)
 
  Three Months Ended March 31,   Change
    2013   2014   Amount   Percent
Revenues $ 20,988   $ 18,782 $ (2,206 )   (10.5 )%
Operating income $ 4,889 $ 3,973 $ (916 ) (18.7 )%
Interest expense $ (5,554 ) $ (2,322 ) $ (3,232 ) (58.2 )%
Net income (loss) $ (1,774 ) $ 1,394 $ 3,168 *
Net income (loss) per share $ (0.67 ) $ 0.45 $ 1.12 *
 
Adjusted EBITDA (a) $ 8,786 $ 7,530 $ (1,256 ) (14.3 )%
Capital expenditures $ 799 $ 1,415 $ 616 77.1 %
 
* Not a meaningful calculation
 
 

Reconciliation of Adjusted EBITDA to Net Income (Loss)

 
Three Months ended March 31,
    2013   2014
Net income (loss) $ (1,774 ) $ 1,394
Add: Depreciation 2,380 2,343
Interest expense - net of premium 5,212 2,082
Interest expense - amortized loan cost 342 239
Income tax expense (benefit) (72 ) 911
Stock-based compensation (earn out) - 112
Loan fees 19 6
Reorganization items 1,493 -
Amortization - intangibles   1,186     443  
Adjusted EBITDA $ 8,786   $ 7,530  
 

(a) Adjusted EBITDA is defined as consolidated net income (loss) plus interest expense, depreciation and amortization, income taxes and certain fees, expenses or non-cash charges reducing consolidated net income.  Adjusted EBITDA is not a measure calculated in accordance with generally accepted 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 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.

 
 
 
 

Otelco Inc. - Key Operating Statistics (2)

    (Unaudited)
        % Change
December 31, March 31, from
2012 2013 2014 Dec. 31, 2013
Business/Enterprise
CLEC
Voice lines 23,950 21,149 20,752 (1.9 )%
HPBX seats 6,172 8,453 8,698 2.9 %
Data lines 2,771 2,725 2,919 7.1 %
Wholesale network lines (2) 2,289 2,817 2,846 1.0 %
RLEC
Voice lines 11,542 12,349 12,879 4.3 %
Data lines 1,630 1,594 1,593 (0.1 )%
Access line equivalents (1) 48,354 49,087 49,687 1.2 %
 
Residential
CLEC
Voice lines 348 339 324 (4.4 )%
Data lines 391 416 407 (2.2 )%
RLEC
Voice lines 31,479 28,323 27,670 (2.3 )%
Data lines 21,112 20,566 20,620 0.3 %
Access line equivalents (1) 53,330 49,644 49,021 (1.3 )%
 
Otelco access line equivalents (1) 101,684 98,731 98,708 (0.0 )%
 
Cable, IPTV & satellite 4,388 4,164 4,128 (0.9 )%
Security systems 63 174 199 14.4 %
Other internet lines 4,506 3,750 3,585 (4.4 )%
 

(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) Excludes Time Warner Cable which comprised 98% of the wholesale network connections on December 31, 2012 and none of the wholesale connections in 2013.

 

FINANCIAL DISCUSSION FOR FIRST QUARTER 2014:

Revenues

Total revenues decreased 10.5% in the three months ended March 31, 2014, to $18.8 million from $21.0 million in the three months ended March 31, 2013. The non-renewal of the Time Warner Cable (“TWC”) contract accounted for $1.3 million or approximately 61% of the decline. The decrease in residential RLEC access line equivalents and revenue decreases due to the FCC’s InterCarrier Compensation reform order account for the majority of the remaining decline. The table below provides the components of our revenues for the three months ended March 31, 2014 compared to the same period of 2013.

   
 
Three Months Ended March 31, Change
2013   2014 Amount   Percent
(dollars in thousands)
Local services $ 8,542 $ 6,772 $ (1,770 ) (20.7 )%
Network access 6,497 6,195 $ (302 ) (4.6 )
Internet 3,676 3,561 $ (115 ) (3.1 )
Transport services 1,498 1,326 $ (172 ) (11.5 )
Cable television 775 731 $ (44 ) (5.7 )
Managed services   -   197 $ 197   *
Total $ 20,988 $ 18,782 $ (2,206 ) (10.5 )
 
* Not a meaningful calculation
 

Local services revenue decreased 20.7% in the quarter ended March 31, 2014 to $6.8 million from $8.5 million in the quarter ended March 31, 2013. TWC accounted for a decrease of $1.1 million. The decline in RLEC residential voice access lines and CLEC market pricing accounted for a decrease of $0.7 million. The FCC’s ICC order which reduces or eliminates intrastate and local cellular revenue accounted for a decrease of $0.3 million. A portion of the RLEC decrease is recovered through the Connect America Fund which is categorized as interstate access revenue. Network access revenue decreased 4.6% in the first quarter 2014 to $6.2 million from $6.5 million in the quarter ended December 31, 2013. TWC accounted for a decrease of $0.3 million. Internet revenue for the first quarter 2014 decreased 3.1% to $3.6 million from $3.7 million in the three months ended March 31, 2013. A decrease in residential data lines and dial-up internet was partially offset by an increase in fiber rental. Transport services revenue decreased 11.5% to $1.3 million from $1.5 million in the quarter ended March 31, 2013 from customer churn. Cable television revenue in the three months ended March 31, 2014, decreased 5.7% to just under $0.8 million from just over $0.7 million in the three months ended March 31, 2014 and 2013 due to subscriber attrition. Cloud hosting and managed services revenue associated with the acquisition of Reliable Networks increased revenue $0.2 million for first quarter 2014 with no comparable revenue for the year earlier period.

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