ATN International, Inc. (ATNI) Q1 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Atlantic Tele-Network First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. I would now like to turn the call over to your host, Mr. Justin Benincasa, CFO. Mr. Benincasa, you may begin.

Good morning, everyone, and thank you for joining us on our call to review our first quarter 2015 results. As usual, with me here is Michael Prior, ATN’s President and Chief Executive Officer. And I’ll be covering the relevant financial information and certain operational data; and Michael will be providing update on the business. Before I turn the call over to Michael for his comments, I’d like to point out that this call and our press release contain forward-looking statements concerning our current expectations, objectives and underlying assumptions regarding our future operating results and are subject to risks and uncertainties that could cause actual results to differ materially from those described. Also, in an effort to provide useful information to investors, our comments today include non-GAAP financial measures. For details of these measures and reconciliation to comparable GAAP measures, and for further information regarding the factors that may affect our future operating results, please refer to our earnings release on our website at atni.com or the 8-K that we filed with the SEC. And with that I’ll turn the call over to Michael for his comments.

Thank you, Justin. Good morning everyone. As usual, I’ll start with some highlights for the quarter. It was a good start to the year as with 2014, U.S. wireless growth was the main positive contributor to growth offset by declines in uncertain legacy voice driven businesses like long-distance in Guyana. The year-on-year comparisons got a significant boost all the way down in the net income with the addition of our renewables business which we closed at the very end of last year. We also made progress during the quarter in our campaign to restructure and reposition our smaller businesses to ensure any continuing investments are made on the sound basis. Lastly, we ended the quarter with $380 million in cash or so, and about $37 million of debt, despite the substantial Ahana investment and significant capital investment towards expanding our fiber and wireless networks and upgrading technologies. We helped to build on the already accretive Ahana investment we made late last year as I just noted with additional investments in 2015, though we will remain patient to ensure that we're deploying capital at reasonably valuation. So, now turn to some specifics for the quarter, starting with U.S. wireless. As noted U.S. wireless produced another very good quarter with solid year-on-year growth. While we continue to anticipate our growth rates to be below those of last year and we’ve already seen reduction to last year's very strong fourth quarter, we are pleased with the performance of this business and delivering about $22 million in adjusted EBITDA for the quarter. The drivers are consistent with past periods. The biggest factors were growth in the number of 3G base stations and service and growth in usage, partly offset by declining rates. Data traffic on the usage side, data traffic more than doubled year-on-year and total voice traffic was up about 11% and that’s really because of the larger network footprint. The next few quarters as we’ve talked about, last quarter and in press release, will not benefit from the same very favorable year-on-year comparisons of sites and service, plus 3G sites and service. But our capital spending plan should put us in a solid position, going into 2016 with extensive investments being made in backhaul capacity and technology improvements and redundancies. As we discussed at length at year-end, our focus is on fortifying this business for long-term cash flows as a partner and alternative network provider for our carrier customers and as the main provider of the advanced wireless infrastructure to the truly rural areas of the country. Moving on to international wireless, revenues posted a 9% decline in the first quarter which echoed a similar pattern in 2014. The biggest single factor in the decline was lower roaming revenue across the Caribbean and Bermuda; and this will continue to affect year-on-year comparisons in coming quarters, albeit to a lesser extent in the second half of the year. Future quarters will also be reduced by the absence of our Turks and Caicos business which we sold late in the quarter. However, this is a positive move for profitability and cash flows on the Island Wireless segment, although not materially so to consolidated results. We've taken other steps as well to improve profitability in the certain international markets with restructurings and reductions in force where necessary. At the same time, we're making more aggressive moves in some markets where we think that an opportunity exists, to see share and growth. In wireline operations, revenues were down slightly although that was partly the result of the lack of long distance transitions service revenues that we earned in 2014. Long distance revenue in Guyana also declined again. In the Northeast, we've had a number of significant wins lately, utilizing our recently completed fiber network and also landed a major deal, bringing on a customer to utilize 100% of the initial available space in the data center we are building in Burlington, Vermont. This will bring added capital expenditures but also valuable a long-term tenant and customer of our suite of services. In renewable energy, the first quarter for us is real quarter, for us for the segment. The result clearly benefited from the addition of this business. As we talked about when we held the conference call at the end of -- after the acquisition, this is a very predictable business with existing assets, so results were very much in line with expectations with over $5 million in high margin revenue. And surprisingly the massive snow in Massachusetts, they covered a lot of the panels that are here, didn't materially change those numbers in a major way. We are in the midst of year long project to fine tune the Ahana platforms, so that it is the clear partner of choice for earlier stage solar developers. We want to be smart, transparent, fast, and provide ready access to capital. We are actively looking at opportunities to build facilities in new geographies in the U.S. and elsewhere and there is a plenty of competition to fund these fields. So we've had a particular focus on opportunity that we think has the potential to open up new markets and relationships. In addition, we are looking at a number of strategic opportunities in this space. As with the build opportunities, we look both at basic return expectations and at whether an opportunity has a larger strategic benefit such as, again opening up new geographies for segments within sector. So in summary, our first quarter operating results were in line with our expectations and reflected the trends that we have seen over the past five quarters or so in our telecom service businesses. Looking ahead, we see a number of ways to enhance the value of the company. In domestic wholesale wireless, we are offering attractive value propositions to major carriers which in turn provide us with reasonable risk adjusted returns. And we continue to look at additional opportunities to expand our footprint and customer base in this business. In international wireless, we see the potential to increase retail subscribers and gaining share in certain markets and improve profitability in others. And in Wireline, we are continuing to invest in our on network private platform. Lastly, distributed solar energy is a type of business we've been successful in, in the past, one that has solid cash flows and the potential to expand and yield higher returns through real time investments. We're pleased with the start but aware that there's much to be done to ensure a long-term success and viability. With that I'll turn it back to over to Justin.

Thank you, Michael. So for the quarter, total company revenues were up 14% to $85.3 million, which reflected 26% growth on our U.S. wireless business. And for the first full quarter of operations from our renewable energy acquisition completed in late 2014 which added $5.3 million or approximately one half of the revenue increases compared to last year's first quarter. Adjusted EBITDA continues to outpace revenue growth, increasing 20% to $35.3 million and resulting in adjusted EBITDA margin of 41%. In addition to the strong performance of our domestic wholesale business, overall margins were helped by our renewable energy segment, which posted an adjusted EBITDA margin of 77% for the quarter. Continuing down the income statement, this quarter's operating income was $19.2 million, up 18% from the same quarter in 2014. Operating expenses this quarter included a $1.2 million of non-cash stock-based compensation expense and that compared to $1.1 million in last year's first quarter. Our reported net loss from continuing operations for the quarter was $3.3 million and the loss of the quarter included a $19.9 million charge related to the deconsolidation of our holdings in Turks and Caicos following the sale of that business. This amount is the accumulated losses that were previously accounted towards minority interest over the last six plus years. Adjusting for this charge, net income for the quarter would be $9.6 million or $0.60 per share compared to $7.8 million or $0.49 per share reported in the first quarter of last year. Another point I should note is that for the quarter net income attributable to ATN’s stockholders includes approximately $1.1 million from our Ahana acquisition which is more accretive to earnings than originally anticipated as we're able to account for the non-controlling interest with a more generally accepted method that better aligns with the actual economics of the partnership structures. Looking at the balance sheet, at March 31, we ended the quarter with cash and cash equivalents of $380 million, following the release of approximately $39 million of restricted cash this quarter related to an indemnity escrow account as part of the Alltel sale agreement and for the quarter the company generated $35.5 million of cash from operating activities. Capital expenditures for the quarter totaled $13.8 million of which approximately $6.4 million [ph] was incurred by our U.S. wireless wholesale business and $2.8 million was incurred by our International Telephony segment. Consistent with what we said last quarter, we expect telecom CapEx -- telecom capital expenditure for the quarter of 2015 -- for the full year 2015 to be between $65 million and $75 million and we'll look to provide update to these amounts, if necessary with the second quarter earnings. We still expect that more than half of this amount will be spent in the U.S. wireless segment. Just some additional operating data for the quarter: We ended the quarter with 786 base stations in our U.S. wireless territories, up from 764 at the end of the last quarter and 605 a year ago. International wireless subscribers totaled 313,500 at the end of the quarter, which no longer includes the Turks and Caicos subscribers and internationally the fixed line ended the quarter approximately 154,000 access lines and DSL subscribers ended the quarter at 52,300 [ph] which is essentially flat from a year ago. And that with that operator I would like to open the call up for questions.

[Operator Instructions] Our first question is from Ric Prentiss with Raymond James. Your line is open.

A couple of questions, first on the U.S. wireless business. Have the price cuts been reflected within 1Q at all or are they still expected in the wings?

Yes, they have been reflected; there is more impact to come but we had -- we'll have a bigger favorable year-on-year comparison in total network size this quarter than we'll have in next few quarters with the addition of our build rigid in the Midwest that was released mostly in the latter half of the year last year.

Sure that makes sense but the price cuts were in there basically for the full quarter?

Yes.

Obviously seasonality also plays into it as you look into the middle two quarters of the year?

Right. But there is -- there will be usage growth and there will be some additional price impact, so it's not -- a big chunk is reflected but I wouldn’t say it's all.

And then in the prepared remarks and in the press release, you talked a little bit about Guyana and wanting to improve things there. You had mentioned that also last quarter. Can you walk us through some of the specific things that are happening in the market and what your responses might be?

With respect to which part of the market?

Guyana.

Well I think that the from the point of view of the reported numbers, the main impact had been some further hit to legacy voice revenues, particularly long distance. And there is only so much that can be done without that unless the government actually enforces the laws and/or the courts. And that's a slow process at best in Guyana unfortunately. So, I wouldn't expect a quick turnaround. They are known to us by-passers and it's clearly not license and legal activity but it takes more than us to correct that situation. And going to the things that we can control though there is on the wireless side, I think revenues have helped up. We really think we should be doing quite a bit better from a point of view total share of revenues which as how we look at that market. We don't know what that total pie is but we think we're getting significantly less than half. And so that's both sub acquisition; it's penetrating the higher value segments; it's increasing ARPU. And there is things that we need to do to improve the customer experience. While our network is good, the retail experience and some of the customer care aspects really need some work. And so those are the sorts of things we're doing. What we would also like to do which is again dependant on the government is we have been trying for years to move forward and add mobile broadband. Guyana is quite a bit behind the region and it's cut for our lack of willingness to build it. We've been waiting years for spectrum and neither -- our competitor has not receives any as well but it’s just kind of sitting now for whatever reason.

And then you said some other markets where you might focus on costs or profitability I guess?

Yes, I mean as you saw with the Island comment, we didn't do a good job over time there in terms of it protecting investors’ money. I think we invested and refunded losses for too long period of time. And there were external factors for that but we could have been more disciplined about that. And so it's -- we just have a charge to make sure that anything that we don't see is on a good growth trajectory out of negative cash flows that we attack the other side of it. It's not material numbers to us overall but it's an important thing and if you do that consistently over many markets, it will have an impact.

Thank you. And our next question is from Barry McCarver with Stephens, Inc. Your line is open.

I guess first off on the energy projects, it sounds like you're doing a lot of work there to optimize the pitch for scouting new projects and you said it was going to be yearlong project. Can you give us a little more color around the opportunities to secure any projects this year and is the fact that you’re optimizing; is that pushing out any potential deal flow here?

I can make it a little clear. It’s hard as always, to predict the M&A side and the nature of growth in this business for us is somewhat a conduit, it’s both acquiring built projects as we've talked about before which are already in introduction and that's really M&A. And then it’s capital expenditures in the sense its acquiring projects that haven't been built but have been worked on. So, they're ready to be build; there is customer; there is - -arrangements have been made with the utility and so on so forth. And the competition for that second group, if you want to call that the organic group and what would show up as CapEx for us, it's fairly active market, right? There is a lot -- there are more funding sources than there used to be and there is -- in some areas, there is a flurry to put that money use. And so, part of what I've talked about isn't just -- isn't going to take a full year to do but part of what you want to do to make sure you are attracting the more promising projects from both the returns standpoint and relationships standpoint, as you want to be a very good partner and you want it to be a very smooth, seamless experience and fast, right? And if you succeed there, I think you can get in a little earlier, get slightly better returns. And so that’s what the team at Ahana is working on that front. So, from a point of view of trying to look forward, it is hard. I think we have some tax appetite which we would like to offset and that helps drive returns in those organic projects. But at the same time, we were very disciplined about looking at total returns and looking at risks. And as I noted in my comment, just to add further color that we're really taking a long view; so it's not just what we do now and the return on it, that incremental use of capital is -- what does it open up? Does it open up new relationships or geographies or segments within the business that we think ultimately will drive even higher returns and more growth for us. And I think we're pretty bullish on that happening, it’s just timing; it's hard to predict timing in the short-term.

And then on the U.S. wireless business, I appreciate the CapEx guidance there. Could you break that down between just upgrades versus new base stations and can get an idea of what the base stations could look like at the end of the year?

We haven't really given that kind of -- how much guidance, but there definitely is some base station growth in there as well as capacity.

I'd say that more than last year, it's more about strengthening network than adding overall revenue capacity if you will.

Yes. Footprint maybe, I don't know if that's right.

Yes. It's a very good example that is just areas where we think we need some buildings from additional redundancies for capacity or areas where we think, we need to improve the technology a bit. And I think that's got good rewards in terms of being -- really being that long-term alternative provider but it's got less of a short-term.

Directionally that's helpful. And then just lastly on the sale of the Turks and Caicos business, I'm curious kind of what led to the final decision to cut that business loose and is there any other pieces of international wireless that are kind of up for debate?

I think that what happened there is we were the third provider in the market, when there were some segments to the market that were much more robust including at that time roaming rates were very different; and of course this is a high tourist place. That with the hurricane and some other things really changed in the recession; changed the nature of the market. The market in fact lost a third of its population from when the moment we invested. A lot of -- there is a lot of guess work; there is another activity in expats there that left with the recession and hasn't really recovered. So number one, the market opportunity looked a lot less attractive than we regionally invested. We had been continuing because we continue to gain share; we had a very good quality network; we had a good reputation. But with the market by the way, they had no number portability and we just looked at it that unless we got even more aggressive with investment, we either had to get lot more aggressive investment with the high uncertainty as whether to be successful to get it to the level of free cash flow positive comfortably so or we get out. And we basically cut our losses. And we're able to sell it for on reasonable price under the circumstances and find a home for our customers, find a home for some of our employees. And so all those things together, was the right move. And so other markets, I mean, we don't ever want to predict any of that; I think just ultimately long-term that we -- every market we have ultimately, you're investing in it for a reason to get positive cash flows and if you don't -- and if you start seeing that that's going to be too longer path or too uncertain, then you have to make changes. And sometime, those changes are offensive adding, strategically investing more in network, but sometimes they're defensive and retreating.

[Operator Instructions]. Your next question is from Hamed Khorsand with BWS Financial. Your line is open.

Could you describe for us how much of a decline in U.S. wireless was from seasonality of Q1 versus the rate decline that you can talk about?

The year-on-year was, it is probably not what you're asking but the year-on-year is not seasonality with rate decline even though we did have an increase overall because the network was larger as we've talked about.

It's Q-over-Q though…

Consecutive quarter rates decline was the big impact.

Keep in mind that the fourth quarter does always have seasonality. It's not hard for us to quantify those amounts honestly.

And on the Sovernet business, the U.S. wireline, the last several quarters you have been talking about just the expansion of fiber and adding more fiber customers. How big is that customer pool in that market for you and why hasn't it really translated into much revenue growth for the same period?

Can you say that again, Hamed?

On the U.S. wireline, [indiscernible] expansion in customer base for the fiber line and I just want to know how big is that customer pool that you can track that market potential and why that hasn't translated into revenue growth for that segment?

Well, it’s a potential for ATN overall, it's not material but it is for that segment for that business. I think there's a lot of opportunity to grow that on fiber customer base. But what you’ve seen to-date we start to receive as you've seen some of the legacy revenues drop, all that sort of traditional like business, really get reprised more than losing customers. And that curve will end up below the curve of the increase of this, on network business. And so I think we are heading into that inflection point now. And you'll start to see, if it perceives as we hope, start to see increases all the way down.

My last question is, on the Island businesses, since Turks and Caicos sold towards the end of the quarter, how much of a benefit will that segment see going forward and how much will we see in Q2 of the profitability?

I mean I would say that, it is a business that does about -- did about $5 million a year in revenues but as Michael noted that it was slightly negative on the cash flows.

Thank you. We do have a follow-up from Ric Prentiss with Raymond James. Your line is open.

A couple of follow-ups, if I could. On the U.S. side, there is been a lot of DC happenings, with Comcast deal getting turned down, Title II, net neutrality. How does all of that play into the U.S. landscape for your current businesses or any potential future businesses?

Yes, I think we are not directly in the path of any of those things. I guess, I was a little bit -- I wasn't ultimately surprised any more than anyone else was but initially I was expecting the Comcast deal to go through. So that was an interesting turn. But I think what that had to say was much more about very large deals on the distribution side. And net neutrality, it remains to be seen. Again we're not right in the crosshairs of that but I can't say we like it. I think that our concern as investor and operator of smaller businesses in U.S. telecom is that it's going to add a lot of uncertainty and it's going to add cost, right? And so that disadvantages the small guys compared to the big guys, because so far what we are seeing in that Title II, it looks like a lawyer's dream because there nothing seems a 100% clear; seems like somebody could say were you acting reasonably. And the reality is admittedly with a telecom carrier bias, telecom carriers would be crazy to discriminate based on content. That's not the business we've ever been in. And when government has asked telecom carriers to do that, nobody wants to be in that business. But managing a network to handle these just amazing increases in this demand seems reasonable. So I’m not a fan but I don't think we're directly in the crosshairs there either.

And then the broadcast auction seems to be getting a lot of attention, the FCC chairman talking about first quarter T-Mobile yesterday on their call being very energetic and excited, they'd like to see it in the first half of 2016. What are your thoughts on the broadcast auction timing and would you be participating?

Yes, I think, we will certainly look at it. It's a good chunk of what spectrum that should be valuable. It's going to be acquired by the big carriers and therefore you expect it to be put into the license fairly quickly than other equipment. We don’t have that same pressing need in most places that some of these carriers do. But we will look at it and I thought, I agree with you, just to sit aside I thought that it was interesting comment by T-Mobile. So, clearly that plus there are less and you know full attack on the recent exhibit [ph] auction indicates they are at least seem to be lining up to be aggressive. So, it could be another fairly robust auction.

And then, if you guys were to participate, I would assume you'd be able to go into the reserved area, so you wouldn't have to compete against T and Verizon for pricing?

Yes, I think that we were obviously very aware of and had some participation in and we really appreciate the SEC has taken a lot of efforts to help make this auction have some potential for the smaller carriers. So that means that there is a better chance for us to acquire a spectrum at a reasonable -- at a price we can afford let's say.

So, betting then, does it happen before President, Obama is gone?

I don’t want to bet on this. That one is s suckers bet, it's just -- because my bets would have been wrong in the past.

Thank you. I am not showing any further questions. Please proceed with any closing remarks.

That's all we have, everybody. Thank you. And we'll see you in another quarter. Take care.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.