CNSL
#Thank you, Nicole, and good morning, everyone.
We appreciate you joining us today for our fourth quarter earnings call.
At the end of the prepared remarks, we will open the call up for questions.
Joining me on the call today are <UNK> <UNK>, President and Chief Executive Officer, and <UNK> <UNK>, Chief Financial Officer.
Please review the safe harbor provisions in our press release and in our SEC filings for information about forward-looking statements and related risk factors.
This call may contain forward-looking statements within the meaning of the federal securities laws.
Such forward-looking statements reflect, among other things, Management's current expectations, plans and strategies and anticipated financial results, all of which are subject to known and unknown risks, uncertainties and factors that may cause the actual results to differ materially from those expressed or implied by these forward-looking statements.
In addition, today's discussion will include certain non-GAAP financial measures.
Our earnings release for this quarter's results has been posted to the Investor Relations section of our website, contains reconciliations of these measures to their nearest GAAP equivalent.
I will now turn the call over to <UNK> to provide an overview of our fourth quarter results.
<UNK> will then provide a more detailed review of the financials.
<UNK>.
Thanks, <UNK>, and good morning, everyone.
I appreciate you joining us today.
I will provide some highlights for both the fourth quarter and the full year, and then turn it over to <UNK> for a more detailed review of the financials.
We capped off 2015 with a solid quarter of financial and operating results.
We continued our strategy of extending our fiber network and maximizing commercial and carrier revenue growth while producing consistent cash flows supporting our dividend.
Overall, revenue was $188 million for the quarter and $776 million for the year, while adjusted EBITDA was $79 million for the quarter and $329 million for the year.
For 2015, we invested $134 million in capital into the business for growth and integration while returning $78 million to our shareholders in dividends, resulting in a payout ratio of 67%.
Now, let me highlight some of our accomplishments in both the quarter and the year.
In 2015, we had a record year of new fiber to the tower sales with 345 new towers signed to contract and 43 coming in the fourth quarter.
This significant growth gave us the opportunity to make fiber expansion investments that provide long-term benefits in other areas of the business.
The success of our fiber investments is also reflected in the growth of our commercial and carrier revenues, which increased at 3.8% for the year.
This growth was led by a 21% increase in metro Ethernet circuits and a 17% increase in hosted cloud voice lines.
Metro Ethernet continues to be the lead product for our commercial accounts, and we have expanded our cloud service offerings supporting a full suite of advanced solutions and our consultative sales strategy.
Also, during the quarter we added 3800 net data connections, resulting in strong growth for the year with a total of 12,600 adds.
Both our commercial and our consumer data products are very competitive.
Our broadband speeds continue to increase, and consumers are choosing higher bandwidth offers.
We have just under 800,000 consumer marketable homes, with an 89% of those able to receive 20-meg speed or more, and 42% have access to 100-meg or greater.
Next, with respect to Enventis, one of our key initiatives in 2015 was, of course, integrating the acquisition and achieving our synergy targets.
We made great progress in combining the companies throughout the year while increasing our synergy target to $17 million from the original $14 million.
We will achieve the $17 million target in the first half of 2016, which is six months ahead of the original two-year plan.
The Enventis transaction is another example of our successful track record in making good acquisitions and completing smooth integrations.
iginal $14 million.
We will achieve the $17 million target in the first half of 2016, which is six months ahead of the o the o Another important accomplishment in 2015 was the refinancing of our 10-7/8% bonds.
In June, we raised $300 million, an add-on to our 6.5% bonds to repay the outstanding principal amount of the 10-7/8% bonds as well as a portion of our revolver.
In total, this netted approximately $6 million in annual cash interest savings.
So in summary, we ended the year with a solid quarter, reflecting the consistency of our results and the success of our strategy.
2015 was an exceptional year for Consolidated, and I am extremely proud of our progress.
We have the right team, the right capital structure and the right strategy, all of which positions us well for the future.
And with that, I'll turn the call over to <UNK> for the financial review.
<UNK>.
Thanks, <UNK>.
Good morning, everyone.
This morning, I will review our financial results for the quarter compared to the pro forma results for the same quarter last year.
I'll follow that by outlining our 2016 guidance.
So, starting with revenues, operating revenue for the fourth quarter was $188.2 million, as compared to $192.6 million last year.
During the quarter, we sold our small billing support services company that we acquired as part of the Enventis acquisition.
Excluding the $1 million decline in revenues due to this sale and the $1 million decline from our low margin equipment sales and service business, total revenues declined by $2.5 million compared to the same period last year.
Growth in our strategic revenues were offset by declines in legacy voice, network access and the first full quarter of subsidy step-downs for the Connect America Fund.
Total operating expenses, exclusive of depreciation and amortization, were $121.8 million, compared to $121.9 million for the same quarter last year.
Cost reductions through the Enventis synergy achievement were offset by increases in video programming expenses.
Net interest expense for the quarter was $19.3 million, which represented a $3 million improvement to the fourth quarter last year.
This improvement was tied to the successful refinancing redemption of our 10-7/8% senior notes that we executed in June.
Other income net was $9.4 million, compared to $8.4 million for the same period last year.
Cash distributions from our Verizon Wireless partnerships in the quarter were $11.2 million, which compares to $9.2 million for the fourth quarter of 2014.
Weighing all these factors and adjusting for certain items as outlined in the table in our press release, adjusted net income was $8.1 million and adjusted net income per share was $0.16.
This compares to $8 million and $0.16 per share, respectively, for the same period last year.
Adjusted EBITDA was $79.4 million in the quarter, compared to $80.6 million for the fourth quarter last year.
Capital expenditures for the quarter were $33.8 million.
From a liquidity standpoint, we ended the quarter with approximately $15.9 million in cash and $65 million available in our revolver.
For the quarter, our total net leverage ratio, as calculated in our earnings release, was 4.2 times.
Cash available to pay dividends was $27.1 million, resulting in a dividend payout ratio of 72.2% for the quarter and 67.3% for the year.
Now, let me provide our 2016 guidance.
Capital expenditures are expected to be in the range of $125 million to $130 million.
Cash interest costs are expected to be in the range of $73 million to $75 million.
And finally, cash income taxes are expected to be in the range of $1 million to $3 million.
With respect to our dividend, our Board of Directors has declared the next quarterly dividend of approximately $0.39 per common share payable May 2, 2016, to shareholders of record on April 15, 2016.
This will represent our 43rd consecutive quarterly dividend.
With that, I'll now turn the call back over to <UNK> for closing remarks.
Thanks, <UNK>.
So we had another solid quarter to close out 2015.
We achieved a lot throughout the year and delivered on our strategic initiatives.
We continued our strategy on success-based fiber projects, with $134 million invested in capital, and we returned $78 million to our shareholders through the dividend.
The Company is well positioned for the future.
So with that, I'd like to open it up for questions.
Nicole.
Hey, <UNK>, this is <UNK>.
I'll take the first part of your question, and <UNK> will take the second part.
So thanks for the questions.
With respect to the wireless distribution, it's a little bit different.
I think what you were referring to is maybe in Los Angeles, where US Cellular had a huge spectrum buy that got allocated down to the partnership and was a mega transaction, and that TDS maybe had a little problem with some of their distributions.
We're not expecting that to happen as Verizon participates.
I mean, this is ---+ again, for the number of years that we've owned those or been involved in those partnerships as they've gone to the various options, it's never really been ---+ just maybe one small partnership that got allocated to us.
And I guess one thing to think about is like in the ---+ even if it was in the Houston market, we only own like 2% of the whole partnership, so, again, based on where that spectrum might be purchased, we think it would have a de minimis impact to us on the overall partnership distributions.
Yes, with regards to the Kansas City offerings, broadband offerings, we still, <UNK>, only overlap Google in about 2500 of our homes, and we respect ---+ we expect and respect that that may change over time, as they've announced they're working on launching in other markets.
But when you look at our footprint there, the investments we've made allow us to offer a competitive-gig product to over 50% of our base there.
We differentiate ourselves by providing a consultative approach to marketing our product, so we help our customers use bandwidth versus some of the lower touch models that they can get other places, and we're seeing a growth in the gig product, although I would also tell you we offer other options that allow customers to spend less per month if they want on Internet.
And the one final thing I'd add there is that while the consumer market gets a lot of attention in KC, Kansas City, because of Google, we have a very strong track record of growth there with our commercial metro Ethernet service.
It's a very good performing market on that customer focus.
Let me start first with the dark fiber piece.
We don't lead with dark fiber as a product in our wholesale or commercial areas of focus, although on the wireless backhaul side, especially with some small sale opportunities we've pursued, we do incorporate it in an overall package.
But unlike some of the others in that segment of the industry, that isn't a lead product for us.
It will be a component to secure a deal.
With respect to ---+ what was the rest of the question, <UNK>.
I tried to get it all.
I think you're seeing it in our revenue line already.
It's a constant effort, and what we have done intentionally is simplified our strategy around leveraging the fiber assets across all three customer groups of consumer, commercial and carrier, with commercial and carrier being the most significant growth and profitable growth component for us.
So we have, every two weeks, a capital committee that meets.
We have a really good track record in the last few years of organic extensions of our network, with a focus on a minimum of a three-year payback or 25% IRR, and that serves us very, very well.
So with the downward pressures, you've seen us keep the revenue line relatively flat, and we'll continue to balance the capital investment when we see opportunities for good return and keep our cash flow in a position that also satisfies our interest in returning value to shareholders through the dividend.
Sure.
I think the way to think about CapEx is we continue to see a relatively high percentage of our CapEx, roughly two-thirds, that go to success-based initiatives.
We still spend more in set top boxes on the consumer side than ---+ like our compadres in the industry than we probably want to, but overall our growth CapEx on the commercial side continues to be a more significant part of our spend.
We don't give a lot of detail in terms of exact dollars, but I think the way to think about it is roughly ---+ and it's a growing percentage ---+ half of our success-based CapEx is going to the commercial and the carrier areas, and it's continued to grow as we emphasize those network expansion opportunities.
Well, we're not giving prospective guidance on that, but let me do it this way and talk about what we've accomplished 2014 to 2015, and I think it might be representative.
We've got roughly 89% of our market that can get the 20-meg product, and in terms of the 100-meg product in actual homes past, we have roughly 42% of our addressable market that can take that product and receive it.
That's up from 31% in 2014, so you can see we've continued to expand our capability and backbone network ability to support those capacity adds.
Well, <UNK>, I appreciate the comment.
That's something that we'll continue to evaluate.
<UNK> mentioned that we have the right capital structure.
We'll continue to be opportunistic on refinancing and looking at opportunities, whether it be on the bond or credit facility, so we'll let you know when we do something.
And we have the capacity to do it within our credit facility, so we'll continue to be opportunistic.
We do.
<UNK>, thanks for the question.
Well, the way that we look at all three of our customer group areas of focus is we're ---+ our strategy starts with leveraging the common assets and making sense out of technology for our customers.
So if someone wants to buy just dark fiber from us, we'll consider it if it expands our capability to serve another one of the three customer groups, but it isn't a lead product because the many service relationships for us are very good EBITDA margins.
They're a long-term, sustainable revenue source, and dark fiber usually leads to a bypass, and so it's a balancing act of making sure that we're focusing our energies in places that create a longer revenue return opportunity for us.
I think we're seeing the sales force and the engine we've been building there really getting traction.
We've got roughly 85 quota-bearing reps and then the support resources that are aligned from an incentive perspective, including sales engineers, managers and such that total in the 100 to 120 range depending on which you include.
But the overall ramp is probably in its last stages in terms of the growth.
There's always a bit of turnover that happens early in an expansion situation, but I think that's starting to stabilize, and so we feel real good about the effectiveness of that group, and you're seeing it reflected in our capital investments because they're bringing deals that are attractive from an on net expansion perspective.
Yes, I think it's a continuation of that strategy.
We continue to focus the consumer marketing efforts on the broadband pipe and increasing RPU, and we've seen that result.
The video product is going to be part of our bundle.
We're de-emphasizing the broadcast product and emphasizing the over the top to capitalize on making bandwidth more valuable to our end users.
That's demonstrated by the positive response to our 100-meg and 1-gig launches.
So think more of that strategy you'll see play out in our results this year.
Well, I guess in terms of the ---+ if you think about run rate for Q4 going into 2016, I guess the way I would think about it on the subsidies line, that ---+ as we mentioned in the prepared remarks, that subsidy line does represent the first full quarter of the transition to Connect America Fund, and we are ---+ based on the quality of the network already and the high speeds we have in the network, we are ---+ we'll be backing up on CAT 2 funding.
So just as we've talked about this in the past, CAT 2, on an annual basis, we will lose roughly $5 million a year.
I think it's about $1.2 million a quarter, so that is sort of factored in ---+ that run rate is factored into Q4.
The other thing we have going on is the ---+ which is very adequately disclosed in our 10-K, so I'd refer you to that, too, for additional information, <UNK>, but we also have kind of the continuation of the Texas high cost fund kind of going away, so we'll probably be losing $1.2 million for that next year.
So I think ---+ that's what I think about subsidies.
And on the access number, again, it's a combination of switch and special access, and I think kind of looking at sort of the run rate year over year, you're probably ---+ I think you can use sort of the last couple years as a predictor for 2016.
Yes, thanks, <UNK>.
Let me start with the metered point first.
We're going to watch that closely.
We've got the technical capability to introduce that, but I must say that we've really worked hard to stay in front of the customer demand and have managed our backbone network as well as continued to upgrade speeds, to your earlier point, both in an offensive as well as a demand response move.
And so when I look at metered pricing as a strategy, that's to control usage as well as capitalize on some margin opportunities, and with our approach and marketing strategy to make sense out of technology for our customers and try and simplify those decisions, metered pricing makes that a little more complicated, and so we're not going to be a leader in that.
We're going to watch it closely and seize the opportunity if it makes sense for our customers and our shareholders, but at this stage, we're really focused on what the customer demand is and how we remain their first choice when it comes to broadband services.
Yes, to answer the last part of that first, fiber assets are going to be a priority when we look at opportunities for acquisitions.
I think we are in a good position on the tail end of the Enventis integration, and so we're certainly open to opportunities and look at them all the time.
The capital markets have to be receptive to that, and you've seen some volatility in the high-yield markets, obviously, but we've got a flexible capital structure, as <UNK> mentioned earlier, and we think about that capital structure in the context of M&A opportunities.
So obviously I can't say anything forward-looking there, but we're in a good position to maximize opportunities if we see something that makes sense.
I'll take the first two, and then <UNK> can handle the billing system sale.
With regards to the strategy, I'll just remind those that are familiar with it and maybe re-emphasize it for those that might not be.
We're focused on a long-term, sustainable business that provides value back to our shareholders, and it starts with our organic strategy, and then we've done some selective merger and acquisitions ---+ or some acquisitions that accelerated that organic strategy, and it's an extension of our network, and doing it based on the demand for broadband services and layering on other services that make that sticky, so that isn't changing.
We've, with the last two acquisitions, significantly upgraded our infrastructure in terms of capability for servicing the customer, positioned us well for self-serve, which you can see in our portals for both the consumer and the commercial customers, and we're adding value to each of those portals for those customers so that customers can deal with us in the most efficient way they choose.
So that's going to continue, and internally, we've talked about it in our all-employee meetings, is to finish long-term projects that we've started.
So there are always going to be tweaks around the edges on our strategy as the market conditions require, but we feel really good that our strategy is working.
We've consistently paid our dividend for 43 quarters now, and while we're a constantly learning organization, we feel pretty good about our plan and the alignment of our employees around it.
<UNK>, this is <UNK>.
On the question about the revenue run rate for the business that we sold, yes, that would be a full run rate.
It's basically $4 million a year.
The transaction happened in early fourth quarter.
So that's the way to think about it.
Yes.
More specifically on that ---+ and I generally did ---+ we're going to be tweaking pricing as it makes sense.
On the consumer side, we've probably increased, like our compadres in the industry have, the video prices as content costs have gone up.
And I'll remind you we launched that product in 2003 and 2004, so we're very mature in the video offering and have a pretty good penetration there.
It's part of our retention strategy.
And so for those that are launching in it at this stage because the technology has stabilized, I hope we've paved the road for them to not have to go through the pains that we did in the mid-2000s, but it's a mature product for us, and so de-emphasizing it is a natural part of our evolution.
And so pricing tweaks will occur as market will tolerate and new service offerings can support in terms of price increases, and we're seeing the positive impacts of speed increases affecting our consumer RPU, which is up almost 10% over last year.
Thanks, Nicole, and thank you all again for joining us today for your continued ---+ and for your continued interest and support of our Company.
We hope you will join us again next quarter, and we thank you all, and have a great day.
