Otelco, Inc. (



Q3 2011 Earnings Call

November 3, 2011 11:00 AM ET


Kevin Enda – IR

Michael Weaver – Chairman, President and CEO

Curtis Garner – CFO



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Good day and welcome to the Otelco Incorporated third quarter 2011 conference call. As a reminder, today’s presentation is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Kevin Enda.

Please go ahead sir.

Kevin Enda

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Thank you Doris, and welcome to this Otelco conference call to review the company's results for the third quarter ended September 30, 2011, which were released 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 fact constitute forward-looking statements. Such forward looking statements involve known and unknown risks, uncertainties and other unknown factors that could cause the actual 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 describes such risks and uncertainties, listeners are urged to consider statements labeled with the terms believes, expects, intends, anticipates, plans, or similar terms to be uncertain and forward-looking. The forward-looking statements contained herein are also subject generally to other risks and uncertainties that are described from time to time in the company's filings with the SEC.

With that stated, I'll now turn the call over to Mike Weaver.

Michael Weaver

Thanks, Kevin. Good morning, everyone. Obviously I have a few brief comments before I ask Curtis to review the third quarter results.

First, I hope you saw our announcement that we finally closed the acquisition of Shoreham Telephone on October 14. This acquisition has over 5000 access line equivalents that are Otelco family [ph]. The process to integrate their operations into our systems has already started. We expect this process to take approximately 6 months, and at this time we don’t anticipate any significant problems.

Our plans for Shoreham include expanding the existing broadband coverage, adding bundled services to the current offerings, and using the existing network as our anchor to get into the CLEC business in Vermont. Second we began to see positive results from our new triple play bundles in Alabama as we experienced a 2.5% growth in our cable subscribers, growth in our data services and a decrease in the rate of decline of our access lines.

In addition to the improvement in our metrics, we continue to find ways to reduce cost as evidenced by the consolidation of our Alabama RLEC business offices. Looking at the CLEC operations, we experienced changes in our sales and marketing organization as we finally completed our planned addition of nine collocation sites in New England. With these new sites, we now have 47 sites throughout New England.

We continue to be pleased with the growth in our hosted PBX product as we saw a 34% increase in revenue generated from this product in the third quarter. The hosted PBX is a valuable addition to our product mix as it works well with any broadband provider, which gives us the ability to serve customers outside of our existing markets.

Third quarter produced adjusted EBITDA of $11.1 million, which was negatively impacted by almost $400,000 of non-recurring cost. Included in these costs are legal expense for Shoreham and severance expenses associated with office consolidation in Alabama and the changes I have just mentioned in our sales and marketing organization.

Another opportunity for us is the wireless network conversion to the 4G, which gives us the opportunity to provide fiber [ph] facilities to towers located in our existing footprint. We recently received orders to build [inaudible] additional sites in Alabama and Missouri. The construction is currently in progress and we expect to begin to bill for these services in January of next year.

We remain cautiously optimistic that the FCC USF/ICC reform plan revealed last week will have minimal financial impact on our operations. Based on the executive summary of the plan, we do not expect to see any material changes in our USF and access revenue over the next several years. The USF for our RLEC isn’t expected to change at all for the next two years, and we expect a gradual shift for the 3 to 5 years thereafter.

For the FCC wants to eventually move the current access revenue process to bill and keep the plan cost for a multi-year transition for donating [ph] access rights for companies like Otelco. In addition, there are recovery mechanisms that allow RLECs to increase charges to end users by modest amounts.

Currently, Interstate switched access revenue amounts to 9% of our total revenue and the [inaudible] portion of USF represents only 4% of our revenue so far this year. We basically view this reform as good news for our industry, and it finally removes some of the uncertainty and it actually may prove to be a catalyst for additional RLEC acquisition opportunities in the future.

We continue to look for accretive acquisitions. Finally, we paid our 27th consecutive IDS distribution in September and we remain committed to continuing our policy of returning cash to our shareholders.

Curtis, if you would, please discuss financial results.

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