Edited Transcript of OTEL earnings conference call or presentation 5-May-20 3:30pm GMT

Jene J. Long

ONEONTA May 18, 2020 (Thomson StreetEvents) — Edited Transcript of Otelco Inc earnings conference call or presentation Tuesday, May 5, 2020 at 3:30:00pm GMT

* Curtis L. Garner

Otelco Inc. – Secretary & CFO

Otelco Inc. – CEO, President & Director

* Dru L. Anderson

Corporate Communications, Inc. – SVP and Principal

Good day, and welcome to the Otelco’s First 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 Ms. Dru Anderson. Please go ahead, ma’am.

Dru L. Anderson, Corporate Communications, Inc. – SVP and Principal [2]

Thank you, Anita, and welcome to the Otelco conference call to review the company’s results for the first quarter ended March 31, 2020.

Conducting the call today will be Richard Clark, President and Chief Executive Officer; and Curtis Garner, Chief Financial Officer. Richard will provide strategic and operational updates from the first quarter as well as information on the company’s adjustments during and performance under the changed environment caused by the COVID-19 pandemic. Curtis will highlight the financial results for the quarter, and then we will take questions from investors. As a reminder, the earnings press release and the company’s Form 10-Q are available in the Investors section of the company’s website, which is located at otelco.com.

Before we start, let me offer the cautionary note that statements made during this 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 known — unknown factors that could have caused 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.

With that stated, I will now turn the call over to Richard.

Richard Allen Clark, Otelco Inc. – CEO, President & Director [3]

Thank you, Dru. Good morning. It is good to host everyone on our first 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 on Otelco’s results and activities.

Before I cover operational and strategic results for the first quarter, I would like to address Otelco’s response and recent actions related to the COVID-19 pandemic. While we did not begin to experience any disruptions to our business until mid-March or late in the first quarter reporting period, as everyone is acutely aware, the world and our business environment have changed dramatically in the last 2 months. For Otelco, we are closely monitoring developments in each of our states and believe we are taking the necessary steps to mitigate the potential risks related to the COVID-19 pandemic to the company, our employees and our customers.

Otelco provides a central voice and data services to our customers, and we have continued to do so during this period in spite of the ongoing challenges. To protect our employees while continuing to provide the communication services needed as many of our customers shelter in place, the company adapted installation and repair service processes to limit customer contact and minimize employee contact with other employees in our operational locations.

In addition, we changed technician dispatch procedures to further limit contact and provided them with personal protective equipment, including masks, gloves and sanitizing products. Each technician is empowered to reschedule any in-person installation and/or repair if they determine that circumstances at the location present a health risk.

During March, technicians made 349 visits to connect new customers and new services, in addition to clearing storm damage in both Alabama and Maine. Their dedication and work ethic has allowed the company to continue providing critical services to our customers during these challenging times.

Otelco’s office-based employees have been working remotely since the middle of March. Even as late season snow and early season tornadoes affected portions of the company’s service areas and more than doubled customer service and repair calls, we were able to address customer needs in a timely fashion. Travel remains restricted to limit the risk of employees who may potentially come in contact with the virus and bring it home or to work with them.

To assist our customers during this time, we are providing several payment options to allow customers to avoid contact in our offices while paying for their services. In line with the telecommunications industry’s response to the FCC and State Public Utilities Commission’s guidance, the company is working with customers who have been affected by the coronavirus on payment strategies that avoid discontinuance of voice and data services since many customers are facing financial hardships.

Otelco has provided 91 new data services within the territories served at no cost for the first 2 months of service to low-income families with students that qualify for free lunch or lifeline to help facilitate remote learning.

We understand the challenges facing our customers. We live in the communities we serve and are also affected by the same obstacles. I have a college-age kid that came home in March instead of late May, and with a wife who works in a hospital serving coronavirus patients, life has changed dramatically for our home.

Our employees have truly stepped up to the plate to both continue to serve our customers while protecting themselves and their families as they juggle work in home responsibilities.

As our communities begin the process of opening the local economies, we will continue to exercise care and balance as we work to return to a new normal, whatever that may look like. We are targeting the beginning of a return to work around the 1st of June.

Now looking at the first quarter’s operational results.

Revenues declined $0.3 million or 2.1% from first quarter 2019, primarily from a reduction in customers’ voice services and access fees, partially offset by increases in Internet, transport services, video and security and managed services.

As we have discussed on previous calls, we are focused on making investments in our network infrastructure, and we are optimistic about the future benefits for Otelco and our customers. During the first quarter, we invested an additional $3.3 million in our network infrastructure as we completed the $3.3 million fiber investment in our Arab, Alabama territory.

Much of the investment in Arab was part of the $12.4 million invested in 2019 that we discussed on our March call. Fiber-to-the-prem, which will be the primary vehicle to increase data capacity for Alabama customers, combined with the conversion of our cable plant in the Blount County, Alabama to DOCSIS 3.1 this year. VDSL and fiber-to-the-node are also part of our plan in other areas of the company.

During 2019 and the first quarter of 2020, Otelco added a total of 268 miles of fiber in service territories, an increase of 50% over its fiber mileage built in 2018. Otelco’s Lightwave fiber-to-the-prem network now passes approximately 12,890 discrete locations. The company has over 2,500 miles of distribution and transport fiber in its network. During 2020, we plan to continue to invest in standardized VDSL technology to meet or exceed our revised federal ACAM requirements.

Since the beginning of 2019, approximately $6.4 million was spent on constructing fiber in our territories. An additional $0.5 million was spent meeting our ACAM speed performance obligations. In 2020, we expect our projects to bring gigabit Internet capability to more than 20% — 27% of our market, while increasing available speeds to 50 and 75 megabits per second to another 9% of our market with VDSL. Another 13% of our market will have access to 25 megabits per second service. We believe our customers are responding favorably to the increased speed we are being able to provide. During this time of distance learning and entertainment at home, the higher speeds are critical for our customers’ needs.

We are pleased with our progress as our employees have worked hard doing difficult times to execute on these initiatives as we ramp up to get more broadband speed to our customers. Looking at some of the customer metrics for first quarter 2020, we are pleased that customers served increased 1.1% or 350 customers, reflecting an increase in residential customers, partially offset by a decrease in business customers. The increase in customers represents an improvement in churn when compared to a decrease of both business and residential customers in 2019. Services provided to these customers decreased 0.9% or 607 services, reflecting an increase in data services, more than offset by a decrease in voice and video services. The increase in data services reflects the company’s focus on increasing data speeds available throughout our network.

The continued deployment of fiber-based services, the transition to VDSL in a larger portion of our networks and the deployment of DOCSIS 3.1 in our cable network are expected to improve the speed of our service offerings in 2020 and positively affect the level of customer and service churn. Our capital plans for 2020 are focused on completing these network upgrade projects, with the goal of having nearly 50% of our market being able to be served by at least 25 megabits per second speeds for Internet by the end of the year.

Other than the fiber constructed in the first quarter of 2020 in Arab, we do not have any other large fiber construction plans in 2020.

Curtis will now summarize the first quarter financial results.

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Curtis L. Garner, Otelco Inc. – Secretary & CFO [4]

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Thank you, Richard. We appreciate everyone joining us today. I’ll hit a few financial highlights for first quarter and then we can take questions. Unless noted otherwise, every comparison is against the same period in the previous year. The press release we issued yesterday and our 10-Q filing include additional details for our first quarter results.

As Richard noted, total revenues for the first quarter of 2020 were $15.4 million, down 2.1% from last year’s first quarter. Local services revenues declined 7%, primarily from the decline in residential voice services. Network access revenue declined 4.8%, primarily from the decline in transition services funding and access and the end user revenue, partially offset by the conversion of our Vermont territory to ACAM in the middle of 2019. Internet revenue increased 2.2% from new customers and customers requiring higher speeds. Transport services increased 10.4%, reflecting new wholesale customers. Video and security were up 10.6% due to the increased pricing to recover the higher content costs. And finally, managed services increased 9% on modestly higher professional services revenue.

Moving on to operating expenses for the first quarter.

Operating expenses increased 1% to $12.1 million in 2020 from $12 million in the first quarter of 2019. When comparing costs of services and selling and general and administrative expenses, the costs and expenses were basically flat when compared to the same period last year. The elimination of the Chief Operating Officer position for 2020 partially offset the annual payroll increases provided to our employees last September. Additional details on cost and expense are covered in the 10-Q that was filed last night.

Depreciation and amortization increased 5.5% to $2 million, reflecting the new fiber investment placed in service in our RLEC territories.

Operating income for the first quarter was $3.3 million compared to $3.8 million for the prior year period, primarily driven by the change in revenue.

Interest expense decreased 13.5% to $1.2 million. Lower outstanding principal balance and lower LIBOR interest rates accounted for the decrease. For the first part of second quarter, our bank margin will increase 4.5% before returning to 4.25% in the middle of May. This increase should be offset by even lower LIBOR rates during second quarter.

Other income increased 19% to $0.7 million, reflecting our annual CoBank dividend and a onetime gain on the sale of the surplus vacant building.

For the first quarter of 2020, net income was $2.2 million compared to $2.3 million for the same period in 2019. Basic net income was $0.65 per share for first quarter of 2020 compared to $0.67 per share in the same period of 2019. Consolidated EBITDA was $6.1 million for the first quarter of 2020 compared to $6.4 million in the same period last year, driven by the increase — decrease in revenue.

Our balance sheet reflected cash of $4.1 million at the end of first quarter compared to $3.1 million at the end of 2019, primarily from the annual CoBank dividend on the sale of the vacant building I just mentioned.

As Richard noted, during the first quarter, the company invested $3.3 million in our network and operational capabilities.

Total assets increased from $120.7 million at the end of 2019 to $121.8 million on March 31, 2020, reflecting the increased investment in our business.

Our ratio of debt net of cash to consolidated EBITDA or net leverage was 2.81 at the end of first quarter, reflecting the use of additional cash generated from the business to improve our network rather than make additional prepayments on the company’s indebtedness. The improvement in the company’s leverage over the last 5 years puts us in a very positive position during the economy’s reaction to the COVID-19 crisis.

In April, we received the $3 million loan under the Paycheck Protection Program. This loan has allowed us to retain all employees and continue providing the increased services our customers need during these trying economic times when our customer base is responding to both the virus and the impact — economic impacts it is causing. Additional details on the CARES Act and the Paycheck Protection Program are included in our Form 10-Q.

I think that covers the highlights. Richard, if you had anything else before we go to questions?

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Richard Allen Clark, Otelco Inc. – CEO, President & Director [5]

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Thanks, Curtis.

I want to commend the dedicated work from Otelco employees during this unprecedented time. Despite the challenges we have faced, our employees have continued to provide an essential service to our customers at a time when they need it the most.

While we still face a lot of uncertainty as to when we will return to more normal business conditions, we remain focused on our efforts to enhance our customers’ experience and improve available data speeds and product offerings. We are confident the execution of the strategy will bring new customers back into the Otelco family of companies.

Operator, if you will provide directions, we can shift to taking questions from our investors at this time.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have a question from Jean Riley from stockholder.

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Unidentified Shareholder, [2]

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I’m just curious. You talked about 27% of the market, up with — up to gigabit speed, 9%, 50 to 75, and another 12%, 25 to 50. I’m just wondering, how many homes perhaps do you consider to be your total market?

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Richard Allen Clark, Otelco Inc. – CEO, President & Director [3]

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Approximately 67,400.

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Operator [4]

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(Operator Instructions) Our next question from Michael Wu from private investor.

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Unidentified Participant, [5]

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I just want to confirm about the interest saving. So because of the LIBOR, you guys are in a variable rate. So if — going forward, if the interest rate stay at around like 1%, so in my estimate, it would be around close to $800,000 to $1 million interest saving going forward. Is that — can you guys confirm?

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Curtis L. Garner, Otelco Inc. – Secretary & CFO [6]

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Compared to historical numbers, no. That would be a little high. The 1% change in interest expense is — would be less than — about $700,000, I think, is what we put in the 10-Q. That would be a 1% change. And so we — I mean you look at it.

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Unidentified Participant, [7]

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Okay. So my second question is about going forward. So would you guys have any like long-term plan for the — I mean the expansion, like I mean they replace the low-speed network like — I mean, CapEx, basically. So I know this year, it could be like around $12 million. So how about going forward next year? Or going forward, what do you think like the long-term plan? Where are you going to put the money into the CapEx?

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Richard Allen Clark, Otelco Inc. – CEO, President & Director [8]

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So in 2020, our CapEx expenditures are focused — was focused on finishing the Arab fiber build. And in terms of network enhancements, it’s focused on VDSL deployment and the cable upgrade to DOCSIS 3.1. As we look forward, we have an ongoing commitment to upgrade our ACAM territories over the next several years to meet those minimum requirements. Beyond that, we will look at opportunities within our footprint where there are other cost-effective ways of increasing the speeds deliverable to the customer base. As you can imagine, we have a lot of potential target customers with a very large network, so we have to be selective to deliver the types of return on invested capital that we believe our shareholders would want in every incremental dollar of investment.

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Unidentified Participant, [9]

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Yes. So I mean the fundamental question about the company. I mean I know like it’s kind of a long history about the high debt in the beginning. And then it’s actually, nowadays, we feel like the debt level is actually much more manageable. But so — like the question now remains more on how like — when — like the heavy investment, I mean compared to previous years, will bear fruit? So then the revenue or the EBITDA numbers then eventually will go up or — that’s what we hope, right? So I was just wondering how are you guys looking about the future? Like, I mean what’s the like opposite turner? Like when we maybe see a kind of like a turning point?

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Curtis L. Garner, Otelco Inc. – Secretary & CFO [10]

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We have a practice of not providing forward-looking forecasts about what we believe the future lies — what the future lies. We are going to continue to invest in our network, trying to upgrade the available service to the customer base that we serve.

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Unidentified Participant, [11]

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Okay. Okay. That’s great. So — and let me ask a different question like. So I — so some — is that a new thing or like — I didn’t check more carefully like — so basically, I noticed that the residential customer number is actually going up this quarter. Is that correct? Like I mean is that new thing or it has been a while? Or would you — could you provide more kind of?

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Richard Allen Clark, Otelco Inc. – CEO, President & Director [12]

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It is the first quarter in — a number of quarters for our customer accounts to go up.

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Unidentified Participant, [13]

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So it’s kind of a good sign, right?

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Richard Allen Clark, Otelco Inc. – CEO, President & Director [14]

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I think I’ll let everybody reach their own conclusions. Going up is better than going down.

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Curtis L. Garner, Otelco Inc. – Secretary & CFO [15]

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Anita, are there others who are waiting to ask questions?

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Operator [16]

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We have no further questions at this time, sir.

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Richard Allen Clark, Otelco Inc. – CEO, President & Director [17]

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Well, thank you, everyone, for joining us this morning. We always welcome your questions, and we plan on keeping you informed regarding the developments in our business. Thank you.

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Operator [18]

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This concludes today’s call. Thank you for your participation. You may now disconnect.

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