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 fourth quarter and year ended December 31, 2014. Key highlights for Otelco include:
  • Total revenues of $18.2 million for fourth quarter 2014 and $73.9 million for 2014.
  • Operating income of $3.8 million for fourth quarter 2014 and $16.9 million for 2014.
  • Adjusted EBITDA (as defined below) of $6.6 million for fourth quarter 2014 and $28.7 million for 2014.

"The network and operating reviews Otelco initiated in first quarter 2014 have resulted in changes to our network fabric which reduced our operating costs approximately $1.5 million during 2014," said Rob Souza, President and Chief Executive Officer of Otelco. "The fourth quarter 2014 Adjusted EBITDA would have been consistent with the third quarter 2014 Adjusted EBITDA performance, if you exclude $0.7 million in separation expenses and other one-time adjustments, establishing an excellent starting point for 2015.

"Our business access line equivalents have increased by 1.9% during fourth quarter 2014 and 7.6% since the end of 2013," continued Souza. "The business growth includes our Hosted PBX product, the Classifax offering introduced in third quarter 2014, demand for fiber transport and significant growth in our support of educational facilities in Alabama. During fourth quarter 2014, we continued to reduce our senior debt through both required and voluntary payments, ending 2014 with $112.1 million or a reduction of $16.5 million during 2014. Our cash balance at December 31, 2014, was $5.1 million.

"Reliable Networks completed its first year as part of Otelco by meeting all of its targets," Souza noted. "We are adding sales capability in Boston in anticipation of continued growth of their cloud-based services as Reliable's products are very complementary to our Hosted PBX service."
 
Fourth Quarter 2014 Financial Summary
(Dollars in thousands, except per share amounts)
(Unaudited)
 
    Three Months Ended December 31,   Change
      2013   2014   Amount   Percent
Revenues $ 19,338   $ 18,178 $ (1,160 )   (6.0 )%
Operating income $ 4,341 $ 3,822 $ (519 ) (12.0 )%
Interest expense $ 2,424 $ 2,121 $ (303 ) (12.5 )%
Net income (loss) available to stockholders $ (202 ) $ 940 $ 1,142 *
Basic net income (loss) per share $ (0.07 ) $ 0.30 $ 0.37 *
Diluted net income (loss) per share $ (0.07 ) $ 0.29 $ 0.36 *
 
Adjusted EBITDA(1) $ 7,343 $ 6,590 $ (753 ) (10.3 )%
Capital expenditures $ 3,096 $ 1,523 $ (1,573 ) (50.8 )%
 
Year Ended December 31, Change
      2013   2014   Amount   Percent
Revenues $ 78,972 $ 73,870 $ (5,102 ) (6.5 )%
Operating income $ 18,651 $ 16,858 $ (1,793 ) (9.6 )%
Interest expense $ 12,673 $ 8,854 $ (3,819 ) 30.1

 %
Net income available to stockholders $ 109,144 $ 5,029 $ (104,115 ) *
Basic net income per share $ 37.36 $ 1.62 $ (35.74 ) *
Diluted net income per share $ 37.36 $ 1.59 $ (35.77 ) *
 
Adjusted EBITDA(1) $ 31,833 $ 28,744 $ (3,089 ) (9.7 )%
Capital expenditures $ 6,229 $ 6,015 $ (214 ) (3.4 )%
 
* Not a meaningful calculation
 
Reconciliation of Adjusted EBITDA to Net Income (Loss)
Three Months Ended December 31, Year Ended December 31,
      2013   2014   2013   2014  
Net income (loss) $ (202 ) $ 940 $ 109,144 $ 5,029
Add: Depreciation 2,484 2,148 9,650 8,941
Interest expense - net of premium 2,181 1,892 11,602 7,918
Interest expense - amortize loan cost 243 229 1,071 936
Income tax expense 2,083 628 6,367 3,185
Amortization - intangibles 443 363 2,981 1,642
Loan fees 6 6 45 25
Stock-based compensation (earn out) - 71 - 317
Stock-based compensation (board and senior management) - 189 - 326
Other excluded expense - 124 - 425
Cancellation of debt - - (118,209 ) -
Restructuring expense   105     -   9,182     -  
Adjusted EBITDA(1) $ 7,343   $ 6,590 $ 31,833   $ 28,744  
 

(1)

Adjusted EBITDA is defined as consolidated net income (loss) plus interest expense, depreciation and amortization, income taxes and certain other 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
(Unaudited)     Quarterly Annual
% Change % Change
As of December 31, September 30, December 31, from from
2013 2014 2014 September 30, 2014 December 31, 2013
Business/Enterprise
CLEC
Voice lines 21,149 19,624 19,324 (1.5 )% (8.6 )%
HPBX seats 8,453 9,778 10,029 2.6

 %
18.6

 %
Data lines 2,725 3,150 3,313 5.2

 %
21.6

 %
Wholesale network lines 2,817 2,883 2,968 2.9

 %
5.4

 %
Classifax - 64 80 25.0

 %
*
RLEC
Voice lines 12,349 14,735 15,506 5.2

 %
25.6

 %
Data lines 1,594 1,594 1,587 (0.4 )% (0.4 )%

Access line equivalents (1)
49,087 51,828 52,807 1.9

 %
7.6

 %
 
Residential
CLEC
Voice lines 339 287 275 (4.2 )% (18.9 )%
Data lines 416 381 363 (4.7 )% (12.7 )%
RLEC
Voice lines 28,323 26,365 25,569 (3.0 )% (9.7 )%
Data lines 20,566 20,423 20,206 (1.1 )% (1.8 )%

Access line equivalents (1)
49,644 47,456 46,413 (2.2 )% (6.5 )%
 

Otelco access line equivalents (1)
98,731 99,284 99,220 (0.1 )% 0.5

 %
 
Cable, IPTV & satellite 4,164 3,865 3,852 (0.3 )% (7.5 )%
Security systems 174 224 243 8.5

 %
39.7

 %
Other internet lines 3,750 3,307 3,202 (3.2 )% (14.6 )%
 

(1)

We define access line equivalents as retail and wholesale voice lines (including Classifax, our virtual faxing solution) and data lines (including cable modems, digital subscriber lines, and dedicated data access trunks).

*

Not a meaningful calculation.
 

FINANCIAL DISCUSSION FOR FOURTH QUARTER 2014:

Revenues

Total revenues decreased 6.0% in the three months ended December 31, 2014, to $18.2 million from $19.3 million in the three months ended December 31, 2013. The decrease in residential RLEC access line equivalents and revenue decreases due to the FCC's inter-carrier compensation reform order (the "FCC's order") account for the majority of the decline, which was partially offset by cloud hosting and managed services revenue of $0.2 million relating to Reliable Networks, which we acquired on January 2, 2014. The table below provides the components of our revenues for the three months ended December 31, 2014, compared to the same period of 2013.
         
Three Months Ended December 31, Change
2013   2014 Amount Percent
(dollars in thousands)
Local services $ 6,869 $ 6,510 $ (359 ) (5.2 ) %
Network access 6,782 5,858 (924 ) (13.6 )
Internet 3,567 3,592 25 0.7
Transport services 1,383 1,313 (70 ) (5.1 )
Cable, IP and satellite television 737 682 (55 ) (7.5 )
Managed services   -   223   223   *
Total $ 19,338 $ 18,178 $ (1,160 ) (6.0 )

* Not a meaningful calculation
 

Local services revenue decreased 5.2% in the quarter ended December 31, 2014 to $6.5 million from $6.9 million in the quarter ended December 31, 2013. The decline in RLEC residential voice access lines, the impact of the FCC's order which reduces or eliminates intrastate and local cellular revenue, and CLEC market pricing accounted for a decrease of $0.4 million. A portion of the RLEC decrease is recovered through the Connect America Fund which is categorized as interstate access revenue. The decline in long distance revenue accounted for a decrease of $0.1 million. Hosted PBX and fiber installation revenue increased by more than $0.1 million. Network access revenue decreased 13.6% in the fourth quarter 2014 to $5.9 million from $6.8 million in the quarter ended December 31, 2013. The Connect America Fund and access recovery fees increased by $0.1 million. This increase was more than offset by lower state and special access charges of $0.4 million and lower user based fees and switched access of $0.6 million. Internet revenue increased 0.7% to remain at $3.6 million for the fourth quarter 2014 and fourth quarter 2013. Transport services revenue decreased 5.1% in the quarter ended December 31, 2014 to $1.3 million from $1.4 million in the quarter ended December 31, 2013 from customer churn and pricing actions. Cable, IP and satellite television revenue in the three months ended December 31, 2014 decreased 7.5% to slightly under $0.7 million from just over $0.7 million in the three months ended December 31, 2013. Growth in security and satellite revenue was more than offset by cable subscriber attrition. Cloud hosting and managed services revenue, associated with the acquisition of Reliable Networks, increased revenue $0.2 million for fourth quarter 2014 with no comparable revenue for the year earlier period.

Operating Expenses

Operating expenses in the three months ended December 31, 2014 decreased 4.3% to $14.4 million from $15.0 million in the three months ended December 31, 2013. Cost of services decreased 6.8% to $8.8 million in the quarter ended December 31, 2014 from $9.4 million in the quarter ended December 31, 2013. Expenses related to professional services and cloud computing and access increased $0.1 million. Network circuit and toll costs decreased $0.5 million and customer service expense reductions implemented earlier in 2014 decreased fourth quarter 2014 expense by $0.2 million when compared to the same period in 2013. Selling, general and administrative expenses increased 15.5% to $3.1 million in the three months ended December 31, 2014, from $2.7 million in the three months ended December 31, 2013. Cloud hosting expense associated with our acquisition of Reliable Networks, including an accrual for non-cash stock compensation, increased costs $0.2 million. Executive expenses include $0.2 million as non-cash stock incentive compensation expense which is added back for the calculation of Adjusted EBITDA (see definition) and $0.4 million associated with a separation and consulting agreement for which there are no comparable expenses in the same period of 2013. Uncollectible expense increased $0.1 million, reflecting a one-time settlement in fourth quarter 2013. These increases were partially offset by property taxes of $0.1 million and lower executive cash compensation of $0.3 million. Depreciation and amortization for fourth quarter 2014 decreased 14.2% to $2.5 million from $2.9 million in fourth quarter 2013. The amortization of other intangible assets in New England decreased $0.1 million and CLEC depreciation decreased $0.3 million from fourth quarter 2013.

Interest Expense

Interest expense in the three months ended December 31, 2014 decreased 12.5% to $2.1 million from $2.4 million in the three months ended December 31, 2013. The higher interest rate on the senior notes payable in the amended and restated credit agreement beginning May 24, 2013 was offset by lower outstanding loan principal.

Reorganization Items

Separate classification of reorganization items began in first quarter 2013 when we filed for Chapter 11 bankruptcy. There were no reorganization expenses during the fourth quarter of 2014 compared to $0.1 million during the fourth quarter of 2013.

Adjusted EBITDA

Based on the changes noted above, Adjusted EBITDA decreased $0.7 million to $6.6 million for the three months ended December 31, 2014 when compared to $7.3 million in the same period in 2013. Adjusted EBITDA was $7.2 million in the third quarter of 2014. Stock based compensation, restructuring expenses and other excluded expenses are added back in the calculation of Adjusted EBITDA. See financial tables for a reconciliation of Adjusted EBITDA to net income.

Balance Sheet

As of December 31, 2014, the Company had cash and cash equivalents of $5.1 million compared to $9.9 million at the end of 2013. During fourth quarter 2014, the Company reduced its credit facility balance by $2.3 million through voluntary and required quarterly payments to $112.1 million. The Company's senior credit facility extends through April 2016 and includes a $5.0 million undrawn revolver.

Capital Expenditures

Capital expenditures were $1.5 million for fourth quarter 2014 compared to $3.1 million in the same period in 2013.

Fourth Quarter Earnings Conference Call

Otelco has scheduled a conference call, which will be broadcast live over the internet, on Tuesday, March 3, 2015, at 11:30 a.m. (Eastern Time). To participate in the call, participants should dial (719) 457-1512 and ask for the Otelco call 10 minutes prior to the start time. Investors, analysts and the general public will also have the opportunity to listen to the conference call free over the internet by visiting the Company's website at www.OtelcoInc.com. To listen to the live call online, please visit the website at least 15 minutes early to register, download and install any necessary audio software. For those who cannot listen to the live webcast, a replay of the webcast will be available on the Company's website at www.OtelcoInc.com for 30 days. A two-week telephonic replay may also be accessed by calling (719) 457-0820 and using the Confirmation Code 1350651.

ABOUT OTELCO

Otelco Inc. provides wireline telecommunications services in Alabama, Maine, Massachusetts, Missouri, New Hampshire, Vermont and West Virginia. The Company's services include local and long distance telephone, digital high-speed data lines, transport services, network access, cable television and other related services. With approximately 99,000 voice and data access lines, which are collectively referred to as access line equivalents, Otelco is among the top 25 largest local exchange carriers in the United States based on number of access lines. Otelco operates eleven incumbent telephone companies serving rural markets, or rural local exchange carriers. It also provides competitive retail and wholesale communications services and technology consulting, managed services and private/hybrid cloud hosting services through several subsidiaries. For more information, visit the Company's website at www.OtelcoInc.com.

FORWARD LOOKING STATEMENTS

Statements in this press release 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 describe such risks and uncertainties, readers are urged to consider statements labeled with the terms "believes," "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 Securities and Exchange Commission.
 
OTELCO INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share par value and share amounts)
 

(unaudited)

 
  As of December 31,
2013   2014
Assets
Current assets
Cash and cash equivalents $ 9,916 $ 5,082
Accounts receivable:

Due from subscribers, net of allowance for doubtful accounts of $274 and $229, respectively
3,730 3,732
Unbilled receivables 1,906 1,675
Other 2,050 1,931
Materials and supplies 1,654 1,915
Prepaid expenses 1,863 3,441
Deferred income taxes   905     547  
Total current assets   22,024     18,323  
 
Property and equipment, net 54,462 51,237
Goodwill 44,957 44,976
Intangible assets, net 4,074 3,178
Investments 1,895 1,870
Deferred financing costs, net 2,097 1,161
Deferred income taxes 1,606 1,216
Other assets   563     471  
Total assets $ 131,678   $ 122,432  
 
Liabilities and Stockholders' Deficit
Current liabilities
Accounts payable $ 1,552 $ 1,104
Accrued expenses 5,141 5,054
Advance billings and payments 1,422 1,410
Deferred income taxes 469 600
Customer deposits 84 70
Current maturity of long-term notes payable   7,441     6,665  
Total current liabilities   16,109     14,903  
 
Deferred income taxes 23,181 25,243
Advance billings and payments 736 681
Other liabilities 139 142
Long-term notes payable, less current maturities   121,192     105,470  
Total liabilities   161,357     146,439  
 
Stockholders' deficit

Class A Common Stock, $.01 par value-authorized 10,000,000 shares; issued and outstanding 2,881,154 shares
29 29

Class B Common Stock, $.01 par value-authorized 250,000 shares; issued and outstanding 232,780 shares
2 2
Additional paid in capital 2,876 3,519
Retained deficit   (32,586 )   (27,557 )
Total stockholders' deficit   (29,679 )   (24,007 )
Total liabilities and stockholders' deficit $ 131,678   $ 122,432  
 

 
OTELCO INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(unaudited)
       
Three Months Ended

December 31,
Twelve Months Ended

December 31,
2013 2014 2013 2014
 
Revenues $ 19,338 $ 18,178 $ 78,972 $ 73,870
 
Operating expenses
Cost of services 9,395 8,756 37,200 35,516
Selling, general and administrative expenses 2,676 3,090 10,489 10,913
Depreciation and amortization   2,926     2,510     12,632     10,583  
Total operating expenses   14,997     14,356     60,321     57,012  
 
Income from operations   4,341     3,822     18,651     16,858  
 
Other income (expense)
Interest expense (2,424 ) (2,121 ) (12,673 ) (8,854 )
Other income (expense), net   19     (133 )   275     210  
Total other expenses   (2,405 )   (2,254 )   (12,398 )   (8,644 )
 
Income before reorganization items and income tax 1,936 1,568 6,253 8,214
 
Reorganization items   (55 )   -     109,258     -  
 
Income before income tax 1,881 1,568 115,511 8,214
Income tax expense   (2,083 )   (628 )   (6,367 )   (3,185 )
 
Net income (loss) $ (202 ) $ 940   $ 109,144   $ 5,029  
 
Weighted average number of common shares outstanding:
Basic 3,103,728 3,103,728 2,921,208 3,103,728
Diluted 3,103,728 3,281,106 2,921,208 3,168,161
Basic net income (loss) per common share $ (0.07 ) $ 0.30 $ 37.36 $ 1.62
Diluted net income (loss) per common share $ (0.07 ) $ 0.29 $ 37.36 $ 1.59
 

 
OTELCO INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
(unaudited)

Years Ended December 31,

2013
2014
Cash flows from operating activities:
Net income $ 109,144 $ 5,029
Adjustments to reconcile net income to cash flows provided by operating activities:
Depreciation 9,650 8,941
Amortization 2,982 1,642
Amortization of loan costs 1,071 936
Amortization of notes payable premium (31 ) -
Provision (benefit) for deferred income taxes 6,157

2,692

Excess tax benefit from stock-based compensation

-

249
Provision for uncollectible accounts receivable 418 476
Stock-based compensation amortization expense - 643
Changes in operating assets and liabilities
Accounts receivable 3,442 (128 )
Material and supplies 191 (261 )
Prepaid expenses and other assets 44 (1,486 )
Accounts payable and accrued expenses 334 (534 )
Advance billings and payments (191 ) (67 )
Other liabilities (351 ) (10 )
Reorganization adjustments:
Non-cash reorganization income   (114,210 )  

-
 
Net cash from operating activities   18,650     18,122  
 
Cash flows used in investing activities:
Acquisition and construction of property and equipment (6,229 ) (6,015 )
Proceeds from sale of property and equipment - 58
Purchase of investment - (1 )
Purchase of Reliable Networks, net of cash acquired   -     (500 )
Net cash used in investing activities   (6,229 )   (6,458 )
 
Cash flows used in financing activities:
Principal repayment of long-term notes payable (33,368 ) (16,498 )
Loan origination costs   (1,653 )   -  
Net cash used in financing activities   (35,021 )   (16,498 )
 
Net decrease in cash and cash equivalents (22,600 ) (4,834 )
Cash and cash equivalents, beginning of period   32,516     9,916  
Cash and cash equivalents, end of period $ 9,916   $ 5,082  
 
Supplemental disclosures of cash flow information:
Interest paid $ 8,581   $ 7,924  
Income taxes paid $ 248   $ 1,535  
Loan fees paid via issuance of Class B common stock $ 2,772   $ -  
Cancellation of Class A common stock $ 132   $ -  
Issuance of Class A common stock $ 29   $ -  

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