Otelco Inc. (OTT)
Q2 2010 Earnings Call
August 4, 2010 11:00 am ET
Kevin Enda – IR
Michael Weaver – Chairman, President & CEO
Curtis Garner – CFO
Frank Louthan – Raymond James
Dave Coleman – RBC Capital Markets
Tim Horan – Oppenheimer
Good day, and welcome to the Otelco, Incorporated Conference Call. Today’s conference is being recorded.
At this time for opening comments and introductions, I would like to turn the call over to Mr. Kevin Enda. Please do ahead, sir.
Kevin Enda – IR
Thank you Melanie. And welcome to the Otelco Conference Call to review the company’s results for the second quarter that ended June 30
2010, which were release yesterday afternoon.
Conducting the call today will be Michael Weaver, President and Chief Executive Officer; and Curtis Garner, Chief Financial Officer.
Before we start let me offer the cautionary note, that statements made on this conference call that are not statements of historical or current facts constitute forward-looking statements. Such forward looking statements involve known and unknown risks, uncertainties and other unknown factors that could cause the results of the company to be materially different from the historical results or from any future results expressed or implied by such forward-looking statements.
In addition to statements which explicitly describe such risks and uncertainties, listeners are urged to consider statements like [inaudible] with beliefs, expects, intends, anticipate plans for similar terms to be uncertain and forward looking.
Forward-looking statements contained herein are also subject generally to other risks and uncertainties that are described from time to time in companies filing with the SEC.
With that said, I will turn the call over to Mike Weaver.
Michael Weaver Chairman, President & CEO
Thanks Kevin. Good morning, everyone. Thanks for joining us on this call.
Following our usual format, I’ll provide you brief comments on the second quarter results and key accomplishments. And then ask Curtis to provide comments on financial results.
The second quarter was very productive for us as we completed several projects that are critical for our future growth and continue the positive trends for this year with an increase in both revenue and adjusted EBITDA.
The second quarter adjusted EBITDA of 12.9 million was positively influenced by our settlement with FairPoint as part of their bankruptcy proceedings.
As part of the settlement, the existing interconnection agreements remain in affect, which allows us to continue to FairPoint.
As a result of this favorable settlement, we were able to remove some of the bad debt allowances and cost accruals we had previously recorded.
June is also the month when we complete the annual Interspect cost study process for the previous year and adjust revenues based on the results of the study.
This year this study yielded a net positive impact for our five RLEC subsidiaries who filed cost-study data.
If you combine the positive benefits from these items and several other smaller one-time expense and revenue items, the adjusted EBITDA run rate for the quarter is in the $12.4 million range, which compares favorably to our first quarter results.
On the Metric Side, the second quarter is typically a soft quarter for us in relation to customer adds and deletes, and our access line equivalence declined by [inaudible] %. The decline was driven by access line line loss increasing slightly over the first quarter, combined with slow growth in the CLEC Operations.
In an effort to improve our Otelco customer retention rates and increase the growth in our CLEC revenue, we realigned our management responsibilities to increase the focus on sales and marketing. These changes, along with our expansion in New Hampshire, should yield positive results as we move into the balance of the year.
I am pleased to tell you we made tangible progress on our New Hampshire expansion as the first of the three co-location facilities is now operational. In addition, we have an office in New Hampshire and we’ve added sales staff that will be dedicated to this market.
As you may recall there are three total co-location sites in New Hampshire. As I said, the first one is operational and the other two sites will be added over the next few months with all three operational.
On the IPTV front, we continue to expand our footprint and now pass over 10,000 homes in our Alabama market.
While we are pleased with the expansion of our service capability, the market acceptance of this product is slower than we would like to see. In an effort to boost the take rate on IPTV, and to continue our effort to provide and expand our cable product offerings, in August we will add Video on Demand to our Alabama Cable Products customers. In addition we have hired additional sales staff to call on retail accounts throughout Alabama.
Second quarter saw an increase in cash of 1.5 million over the first quarter and a total increase of $5 million for the first six months of the year.
We attribute this increase to improvement in our EBITDA margin and lower-than-expected CapEx in the first half of the year. As a reminder for the year, we expect CapEx to be between $10.5 and $11million.
In June we also completed the exchange of all of our Class B shares for IDS, which increases the outstanding IDS units to 13.2 million
Another bright spot for the quarter for us was the completion of our first large hosted PBX sale. This installation, which was completed in early July, will added over 500 access lines in the third quarter results and is expected to generate month recurring revenue of approximately $6,000-$7,000. We are pleased that the demand for this product appears to be strong and we are seeing a good back log of orders from this service.