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Otelco, Inc. (



Q4 2011 Earnings Call

February 22, 2012 11:30 a.m. ET


Kevin Enda – IR

Michael Weaver – Chairman, President and CEO

Curtis Garner – CFO


Frank Louthan – Raymond James

Timothy Horan – Oppenheimer & Co.

Richard Diamond – Strait Lane Capital

Eric Will – Fertile Mind Capital

David Coleman – RBC Capital Markets

William Span – Raymond James

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Good day everyone and welcome to the Otelco Inc. conference call. Today’s conference 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

Thank you Vicky, and welcome to this Otelco conference call to review the company's results for the fourth quarter and year ended December 31, 2011, which we 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 belief, 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, and welcome to our call. As usual I want to cover a few highlights for the quarter and 2011 before I ask Curtis to cover the fourth quarter financial information.

The fourth quarter produced adjusted EBITDA of $10.9 million, which was negatively impacted by $400,000 of non-recurring and one time cost. Included in the fourth quarter costs are legal expense for the Shoreham acquisition, bad debts and inventory write offs for obsolete items as well as cable equipment for operations in Missouri as we transition customers from our cable system to satellite.

In addition to these non-recurring expenses we recorded RLEC estimated cost study adjustments that reduced revenue by $174,000. These cost study adjustments are in annual occurrence and the adjustment base from year-to-year as an example that 2010 cost study adjustments which we recorded in the fourth quarter of last year was a positive $203,000 which if we do the math means we had a quarter over quarter difference of $377,000 when you compare fourth quarter 2010 with fourth quarter 2011.

The change in this adjustment amount is primarily attributable to more CapEx dollars being spent in the non-regulated portion of our business. Our EBITDA margin for the quarter was 42.5% versus a 43.8% margin for the third quarter of this year. The percentage of our total EBITDA generated by our CLEC operations was higher in the fourth quarter than in the previous quarter which has the effect of lowering the overall EBITDA margin.

For the year we generated EBITDA of $45.3 million which is below our expectations. Our overall performance was hampered by the growing pains we felt as we expanded our available markets in our CLEC operations with the addition of eight new collocation sites. The delays in bringing these sites online coupled with the increased cost we incurred for the expansion of the service area, resulted in lower revenue and EBITDA generated by our non-regulated operations.

In addition, the competitive pressures increased and we see more downward pricing pressure in our markets. Our response to these changes has been to restructure our sales organization and the leadership and improve our product offerings. We believe these changes have us headed in the right direction as we posted our best results of the year in the fourth quarter for our CLEC operations.

Our hosted PBX product continues to perform well as we installed more than 2100 PBX seats in 2011. The new location sites I mentioned earlier provide new marketing opportunities for us in this year and will allow us to continue the geographic expansion of our services.

We also completed the acquisition of Shoreham Telephone Company, a Vermont RLEC in the fourth quarter, which further expanded our operations in New England and added approximately 5000 excess line equivalents to our customer base. With the addition of Shoreham we generated a 2.7% increase in customer units for 2011. Exploiting the acquisition our total excess line equivalents declined by 3.2%.

We are pleased with the results so far from this acquisition and we intend and expect to use it as a base for future CLEC expansion in the State. Our integration efforts are underway and we expect them to be completed by the end of the first quarter or early in the second quarter. There remain some uncertainties surrounding the FCC reform plan that became effective January 1st as a number of states have challenged the order in federal courts. Based on the information we reviewed we expect the USF revenue we receive and our RLECs to remain relatively unchanged subject to normal variations in the computation.

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