Q2 2020 Otelco Inc Earnings Call
Good day and welcome to the old Telcos second quarter 2020 earnings 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. Anderson. Please go ahead ma'am.
Thank you and welcome to the Otelco Conference call to review the company's results for the second quarter ended June Thirtyth 2020.
Conducting the call today will be Richard Clark, President and Chief Executive Officer, and Curtis Garner Chief Financial Officer.
Richard will summarize last weeks announcement about the pending acquisition of a telco bio kill partners.
He will then provide strategic and operational updates from second quarter as well as information on the company's adjustments during and performance under the changed for environment caused by the Cove at night Gene pandemic.
This will highlight the financial results for the quarter and then we will take questions on quarterly results from investors as a reminder, the Ernie.
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And part is probably the this is the operator looks like I drew has disconnected I will reach back on.
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That's before we start the call let me off with the cautionary notes that statements made during this call better 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 have.
Caused the actual results for the company to be materially different from the historical results well from any future results expressed or implied by such forward looking statements condition to statements, which explicitly describes such risks and uncertainties readers are urged to consider statements label with the terms believes belief expects intends.
Anticipates plans or similar terms to be uncertain in forward looking.
I was looking statements contain any here in we're also subject to generally other risks and uncertainties that are described from time to time [laughter] companies filings with the Securities Exchange Commission, well that started let's turn the call over to Richard.
Thank you Chris Good morning, it's good to host everyone on our second quarter 2020 investor call.
I hope that you and your extended families. Both home and work are staying safe in these difficult times I appreciate the opportunity to update you today I know telcos results in activities.
Let me start with an event, which happened after the close second quarter as announced on July 22nd 27th Otelco entered into a definitive agreement to me acquired by affiliates form by Oak Hill capital, a private equity firm for $11.75 per share in cash, which represents an equity purchase price.
As a 40 point sixmillion and the enterprise value of 105.6 million. That's part of the definitive agreement Oak Hill will soon were refinanced so telcos outstanding debt.
Consider ration represents a 43.3% premium to the unaffected share price of Otelco as of June 20, Threerd 2028, 53.2% premium to the 20 day volume weighted average price as of the same date any 58.1% premium tow tacos average daily closing.
Stock price during the second quarter of 2020.
More information will be available.
When the proxy is provided to shareholders. Our board of directors approved the merger agreement and recommended the approval and adoption of the merger agreement by the holders of shares of Otelco common stock.
The agreement includes what is commonly referred to as a go shop provision.
In which the company will return to the market to solicit alternative proposals from other parties for the company, which may be.
A greater benefit to the shareholders that process is underway once that process has been completed a special meeting of Otelco shareholders will be held as soon as practicable. After the filing of a definitive proxy statement with the United States Securities Exchange Commission and subsequent mailing to share holders.
The transaction is not subject to financing contingencies and is expected to close in the fourth quarter of 2020.
Well tacos largest shareholder as a group of related entities, which collectively own 49.6% of the company's outstanding shares and has agreed to vote in favor of the transaction.
Like much of the telecommunications industry Otelco is rapidly deploying technology, including fiber to the Prime Minister increase internet speeds for our customers.
We have invested in fiber network construction over the last several years in response to the demand for higher bandwidth and have demonstrated our ability to deliver the necessary technology.
Okay. All has invested capital another telecommunications providers to advance the deployment of the technology needed to support up to one gigabit Internet speeds Oh kills commitment to facilitate we'll talk was growth will allow the company to accelerate fiber growth plans that would not have been possible within our existing capital structure.
We believe this transaction is a good outcome pro telco shareholders, our customers and our employees. Please note that doing the question period, we will not answer questions related to the transaction.
Before I cover operational strategic results for the second quarter I would like to provide an update on our tacos actions related to the cope with 19 pandemic since the outbreak Otelco has continued to monitor developments in the states we serve.
We believe we've taken the necessary steps to mitigate the potential risks related to cope with 19 pandemic to the company our employees and our customers to protect our employees were continuing to provide communication services needed by our customers. The company adapted installation and repair service processes to limit customer contact at minimum.
Hi, guys employee contact with other employees as covert 19 restrictions have been ease in some states Otelco has begun heavy employees. We've been working from home since March 2020 returned to their normal work locations at the same time, we've continued to empower the company's technicians to reschedule any in person installation or repair.
If they determine the circumstances of the location present, a health risk.
During second quarter 2020, the company saw an increase in customer calls for new and changed service payment arrangements and for service troubles, a trend, which has recently begun to return to normal more normal levels.
As a result of the measures implemented by the company no significant adverse impact on results of operations through June Thirtyth 2020 has occurred.
As we begin the return to normal for operations the full extent of the future impassive covert 19 on our operations is uncertain.
An increase of Cobot 19 cases in our service areas could have a negative impact on financial results in business operations of the company, including the timing and ability of the company to collect accounts receivable and procure materials and services from suppliers.
As there was a return to more normal operations, we will continue to work with customers who have been affected by the Corona virus on payment strategies that avoid discontinuance of voice and data services, while allowing for the company to receive payment for services provided.
We're proud of the dedicated work of Otelco employees, who have successfully navigated the challenges presented by covert 19 to serve our customers while protecting themselves and their families. The crisis does not appear to be over but many of our communities are beginning the process of opening their local economies and their schools, we will adapt to balance service.
Provisions and safety as we returned to a norm, which is expected to continue to evolve for some time into the future.
Now looking at second quarter's operational results revenues for the second quarter 2020 declined point 2 million or 1.2% from second quarter 2019.
This reduction was primarily a reduction in voice services in access fees, partially offset by increases in Internet transport services video and security and managed services demand for Internet and higher Steve species lowered the decline from over 2% in the first quarter.
Compared to the first quarter 2019.
In 2019, Otelco invested 12.4 million to grow was five or distribution network and improve its broadband capabilities. The company is connecting customers to that.
268, new miles of fiber in service territories in leveraging Vdsl technology were deployment is complete.
In 2020, the company continues to invest in Vdsl technology to meet or exceed it.
Or exceed its revised federal alternative contracting connect America model requirements, while also standardizing on a single companywide broadband access platform.
Network investment in 2020 also includes upgrading cable equipment to DOCSIS 3.1, and expanding availability of gigabit service in the fiber footprint. The company invested 2.2 million its network and operations during the second quarter of 2020, bringing the total for the year to 5.5 million.
All of the fiber for the 40 167, eight Rav locations in service and was a big part of the reason we grew customers in the second quarter.
Fiber to the premise provides up to one gigabit speed internet capability.
Through June 817 customers in the red market evergreen either existing service or signed up for the new Lightwave fiber service equipment is being deployed in new England service territories to support higher speed Vdsl service in standardized on the same platform to provide service in Alabama, and Missouri locations.
In the southern part of Alabama territory in and around awning, Ana, Alabama, well Telco is also the cable provider work to upgrade is hybrid fiber co asks network to DOCSIS 3.1 should be completed by the end of the year.
Covert 19 impacted our completion date by about three months due to travel restrictions for our contractor and employees. Upon completion of this project Otelco expected. All his cable customers will also gain access to one gigabit internet speeds like speeds available over a fiber to the prime network.
Company also continues to increase the speed of our Lightwave fiber to the Prime service and then in net and is now offering gigabit speeds in several of its F TTP communities in Maine.
We're pleased with our progress as our employees have worked hard Duane extremely difficult times to execute on these initiatives as we ramp up to get more broadband speed available to our customers.
New work routines and locations presented challenges from making and keeping commitments. However by the end of 2020, we expect our projects to bring gigabit internet capability to more than 27% of our market.
While increasing available speeds to 50 and 70.
Bps to another 9% of our market with Vdsl when these projects completed approximately 21%.
Of the Otelco market will have access to speeds ranging from 20.
Five megabits per second to 75, Megabits per second and 27% will have availability to gigabit speeds.
Our objective is simple improve service capabilities and add new customers tier two the otelco family of companies looking ahead with the support of Oak Hill partners.
We have greatly enhance our ability to meet this objective.
Curtis will now summarize the second quarter financial results.
Thank you Richard we appreciate everybody joining us today.
I'll hit a few financial highlights for second quarter, and then we can take your questions around about the quarter unless noted otherwise every comparisons against is against the same period in the previous year.
The press release, we issued yesterday and our 10-Q filings include additional details of our second quarter results.
Total revenues decreased 1.2% to 15.5 million from 15.7 million in the prior year period revenues actually increased $50000 in second quarter over first quarter 2020.
Components of revenue are as follows local service revenue decreased 4.4% in the second quarter are like residential voice line revenue, including long distance and other related services decreased just over 1 million revenue associated with special line and rental revenue decreased just that were just under 0.1 day.
Next on network access revenue decreased 5.9%.
HM revenue increased 8.3 million, reflecting the fccs adjustment of funding for our conversion to Vermont, Aiken, which was not reflected in second quarter of 2019.
Half another transition support payments decreased point, Threemillion switched and special access as well as end user fees decreased 5.3 me.
Internet revenue increased 6.4%, reflecting an increase from customers and data speeds transport services revenue increased 4.5%, reflecting wholesale customer growth.
Video and security revenue increased 3.3% an increase in that be TV customers and pricing associated with increased programming costs.
Changed.
We're off partly offset the decline in traditional cable customers.
Managed services revenue increased 20.1%, reflecting modestly higher.
About hosting and professional services revenue.
Moving on to operating expenses for the second quarter.
Operating expenses increased 5.8% to 12.6 million from 12 man in the prior year period.
Legal and other costs associated with the transaction that Richard talked about what was reported on July 27 at the primary.
Driver for the increase.
Cost of services decreased 2.6% as network access told them circuit expense accounted for a decrease of point 2 million and lower sales and customer service expense accounted for decreased 6.1 million. These decreases were partially offset by an increase in cable programming and Internet extensive point 1 million.
Selling general and administrative expenses increased 29.0% to 3.3 million from 2.6 million a year ago.
Legal and other costs associated with the X. acquisition of Hotel Cobble Hill capital accounted for the increase without the transaction expenses SGN a would've been flat.
Depreciation and amortization increased 7.6% and increasing our like depreciation, reflecting new fiber investment placed in service accounted for the increase.
Operating income for second quarter was 2.8 million compared to 3.7 million for second quarter of 29.
Interest expense declined 8.4 million, reflecting lower interest rates and the reduction in principal outstanding under the company's credit agreement.
Other income increased point 1 billion, reflecting the sale of unusually in Vermont.
Net income was 1.4 million in second quarter 2020, compared to 1.7 million in second quarter 2019 basic net income per share was 42 cents per second quarter 2020, compared to 50 cents per share in the same period of 20 Meg.
Consolidated EBITDA was 5 million for second quarter 2020, compared to 5.7 million for the same period the previous years.
If you exclude the transaction related costs I mentioned earlier consolidated EBITDA was unchanged from second quarter 2020, when compared to 2019.
Our balance sheet reflects cash of 8.5 million at the end of second quarter compared to 3.1 billion at the end of 2019, including $3 million and Paycheck Protection program loan proceeds received in April of 2020.
During the first half of 2020, the company invested 5.5 made an improving its network and operational capabilities compared to 4.4 million during the same period in 2019.
The company's leverage ratio of consolidated indebtedness to consolidated EBITDA was 3.03 at the end of second quarter, reflecting the use of additional cash generated from business operations to improve our network versus reducing principal.
Right.
Debt net of cash to consolidated EBITDA was 2.65, reflecting the scheduled payments made on the debt and the PPP loan proceeds I think that covers the highlights for the quarter. Richard I think you wanted to make one more comment before we take investor questions.
Thanks Curtis.
I want to commend the dedicated work of a telcos employees during this unprecedented time.
Despite the challenges we face or employees continue to provide an essential service to our customers at a time when they need at the most.
Finally, we look forward to our next stage of growth.
Orlando, if you'll provide directions, we had shifted taking questions from from our investors at this time.
As a reminder, we cannot answer questions related to the Oak Hill acquisition.
Thank you and if you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speakerphone. Please make sure you mean function is turned off to a lighter signal to return equipment again. Please press star one to ask a question, we'll pause for just a moment to assemble the queue.
And as an additional reminder, please press star one if you would like to ask a question at this time again that is star one to ask a question.
And it appears we currently have no questions in the Q.
Thanks, everybody. We appreciate you joining us this morning.
We'll keep you informed as things develop over time.
Alright, and everyone that does conclude today's call. We thank you for your participation you may now disconnect.
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