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Otelco Reports Third Quarter Results

ONEONTA, Ala., Nov. 4, 2015 (GLOBE NEWSWIRE) -- 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 third quarter ended September 30, 2015. Key highlights for Otelco include:

  • Total revenues of $17.9 million for third quarter 2015.
  • Operating income of $4.9 million for third quarter 2015.
  • Adjusted EBITDA (as defined below) of $7.2 million for third quarter 2015.

"Otelco's third quarter 2015 results produced Adjusted EBITDA of $7.2 million," said Rob Souza, President and Chief Executive Officer of Otelco. "The Company has been able to offset much of the revenue decline from fewer residential customers and lower intercarrier compensation with network cost and operational expense savings and increased data revenue to generate similar Adjusted EBITDA to the same quarter last year and second quarter of 2015. Revenue from internet, transmission services, cable and satellite and managed services is growing or unchanged from last year as we focus on the unregulated services we offer. We continue our active expense management process to closely control the underlying costs associated with these unregulated services as we grow this aspect of our business.

"Our business access line equivalents grew just under 1.0% during third quarter and 1.6% this year and now represent nearly 55.0% of our total access line equivalents," continued Souza. "Our Hosted PBX and Classifax product offerings grew this quarter. Hosted PBX now accounts for nearly 36.0% of our CLEC retail voice lines.

"During third quarter, our New England-based operation realigned its internal processes and work load with the appropriate personnel," Souza noted. "These changes eliminate a managerial layer and artificial barriers between work groups to improve our ability to fulfill new service requests and respond to existing customers' needs. In addition, a new Director of Marketing and Product Development joined Otelco responsible for all outbound marketing efforts, inbound lead generation and marketing and product development activities. The responsibilities of this position will expand to include the Alabama and Missouri Divisions. A single well-coordinated marketing and product approach will provide important operational benefits to the entire company.

"By the end of 2015, Otelco expects to have reduced our senior debt by over $60 million from the level prior to restructuring," added Souza. "Otelco continues to focus on the reduction of its long-term debt. At the end of third quarter, the debt was $102.0 million with our cash balance of $5.9 million for net debt of $96.1 million. The lower level of debt has also significantly reduced our cash interest expense."

Third Quarter 2015 Financial Summary
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended September 30, Change
2014 2015 Amount Percent
Revenues $ 18,421 $ 17,850 $ (571) (3.1)%
Operating income $ 4,625 $ 4,910 $ 285 6.2%
Interest expense $ (2,167) $ (1,949) $ (218) (10.1)%
Net income available to stockholders $ 1,387 $ 1,850 $ 463 33.4%
Basic net income per share $ 0.45 $ 0.57 $ 0.12 26.7%
Diluted net income per share $ 0.44 $ 0.56 $ 0.12 27.3%
Adjusted EBITDA(a) $ 7,249 $ 7,171 $ (78) (1.1)%
Capital expenditures $ 1,578 $ 1,556 $ (22) (1.4)%
Nine Months Ended September 30, Change
2014 2015 Amount Percent
Revenues $ 55,692 $ 53,385 $ (2,307) (4.1)%
Operating income $ 13,036 $ 14,183 $ 1,147 8.8%
Interest expense $ (6,733) $ (5,988) $ (745) (11.1)%
Net income available to stockholders $ 4,089 $ 5,640 $ 1,551 37.9%
Basic net income per share $ 1.32 $ 1.74 $ 0.42 31.8%
Diluted net income per share $ 1.31 $ 1.72 $ 0.41 31.3%
Adjusted EBITDA(a) $ 22,154 $ 22,247 $ 93 0.4%
Capital expenditures $ 4,491 $ 4,568 $ 77 1.7%
Reconciliation of Adjusted EBITDA to Net Income Three Months Ended September 30, Nine Months Ended September 30,
2014 2015 2014 2015
Net income $ 1,387 $ 1,850 $ 4,089 $ 5,640
Add: Depreciation 2,112 1,913 6,793 5,756
Interest expense - net of premium 1,935 1,731 6,025 5,323
Interest expense - amortize loan cost 232 218 707 665
Income tax expense 766 1,125 2,557 3,615
Amortization - intangibles 369 267 1,281 938
Loan fees 6 7 19 19
Securities expense 300 (12) 300 8
Stock-based compensation (earn-out) 77 -- 246 71
Stock-based compensation (board & management) 65 72 137 213
Adjusted EBITDA(a) $ 7,249 $ 7,171 $ 22,154 $ 22,248

(a) Adjusted EBITDA is defined as consolidated net income 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) % Change
As of December 31, March 31, June 30, September 30, from
2013 2014 2015 2015 2015 June 30, 2015
Business/Enterprise
CLEC
Voice lines 21,149 19,324 19,148 19,191 18,963 (1.2)%
HPBX seats 8,453 10,029 10,148 10,258 10,594 3.3%
Data lines 2,725 3,313 3,425 3,411 3,510 2.9%
Wholesale network lines 2,817 2,968 3,036 3,075 2,888 (6.1)%
Classifax -- 80 92 104 129 24.0%
RLEC
Voice lines 12,349 15,506 15,438 15,680 16,026 2.2%
Data lines 1,594 1,587 1,580 1,559 1,547 (0.8)%
Access line equivalents (a) 49,087 52,807 52,867 53,278 53,657 0.7%
Residential
CLEC
Voice lines 339 275 262 249 239 (4.0)%
Data lines 416 363 353 327 301 (8.0)%
RLEC
Voice lines 28,323 25,569 24,944 24,386 23,811 (2.4)%
Data lines 20,566 20,206 20,261 20,320 20,258 (0.3)%
Access line equivalents(a) 49,644 46,413 45,820 45,282 44,609 (1.5)%
Otelco access line equivalents (a) 98,731 99,220 98,687 98,560 98,266 (0.3)%
Cable, IPTV & satellite television 4,164 3,852 3,806 3,801 3,786 (0.4)%
Security systems 174 243 270 290 302 4.1%
Other internet lines 3,750 3,202 3,100 2,962 2,896 (2.2)%

(a) 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).

FINANCIAL DISCUSSION FOR THIRD QUARTER 2015:

Revenues

Total revenues decreased 3.1% in the three months ended September 30, 2015, to $17.9 million from $18.4 million in the three months ended September 30, 2014. The majority of the decrease is due to the decline in RLEC residential access line equivalents and the FCC's Intercarrier Compensation reform order (the "FCC's order"). The table below provides the components of our revenues for the three months ended September 30, 2015, compared to the same period of 2014.

Three Months Ended September 30, Change
2014 2015 Amount Percent
(dollars in thousands)
Local services $ 6,693 $ 6,255 $ (438) (6.5)%
Network access 5,819 5,564 (255) (4.4)
Internet 3,683 3,748 65 1.8
Transport services 1,321 1,356 35 2.6
Cable, IP and satellite television 692 686 (6) (0.9)
Managed services 213 241 28 13.1
Total $ 18,421 $ 17,850 $ (571) (3.1)

Local services revenue decreased 6.5% in the quarter ended September 30, 2015, to $6.3 million from $6.7 million in the quarter ended September 30, 2014. Growth in Hosted PBX revenue of $0.1 million was more than offset by the decline in RLEC residential voice access lines and the impact of the FCC's order which reduces or eliminates intrastate and local cellular revenue which accounted for a decrease of $0.3 million. A portion of the RLEC decrease is recovered through the Connect America Fund which is categorized as network access revenue. The decline in long distance, directory and special revenue, plus one-time fiber installation revenue in 2014, accounted for a decrease of $0.2 million. Network access revenue decreased 4.4% in the quarter ended September 30, 2015, to $5.6 million from $5.8 million in the quarter ended September 30, 2014. Switched access, including projected cost study adjustments increased by $0.2 million. This increase was more than offset by lower state and special access charges of $0.3 million and lower Connect America Fund of $0.1 million. Internet revenue increased 1.8% to just over $3.7 million in the quarter ended September 30, 2015, from just under $3.7 million in the quarter ended September 30, 2014, primarily from equipment rental fees. Transport services revenue increased 2.6% to just under $1.4 million in the quarter ended September 30, 2015 from just over $1.3 million in the quarter ended September 30, 2014, from wide-area network and wholesale transport growth. Cable, IP and satellite television revenue decreased 0.9% to remain at just under $0.7 million in both the quarter ended September 30, 2015, and the quarter ended September 30, 2014. Increases in pay-per-view revenue were more than offset by cable subscriber attrition. Cloud hosting and managed services revenue increased 13.1% to remain at just over $0.2 million in both the quarter ended September 30, 2015, and the quarter ended September 30, 2014.

Operating Expenses

Operating expenses in the three months ended September 30, 2015, decreased 6.2% to $12.9 million from $13.8 million in the three months ended September 30, 2014. Cost of services decreased 5.3% to $8.3 million in the quarter ended September 30, 2015, from $8.8 million in the quarter ended September 30, 2014. Network circuit and toll costs decreased $0.4 million reflecting network efficiencies and customer service, sales and plant operations expense decreased $0.1 million as a result of operational reductions implemented over the past year. Selling, general and administrative expenses decreased 3.7% to $2.5 million in the quarter ended September 30, 2015, from $2.6 million in the quarter ended September 30, 2014. The decrease reflected a reduction in earn-out stock compensation of $0.1 million, which has no impact on Adjusted EBITDA. Depreciation and amortization decreased 12.1% to $2.2 million in the quarter ended September 30, 2015, from $2.5 million in the quarter ended September 30, 2014. Depreciation decreased by $0.1 million in Missouri and by $0.1 million in the CLEC. The amortization of other intangible assets decreased $0.1 million.

Interest Expense and Other Income/Expense

Interest expense in the three months ended September 30, 2015, decreased 10.1% to $2.0 million from $2.2 million in the three months ended September 30, 2014. While the interest rate remained constant, the lower outstanding loan principal accounted for the decrease. In third quarter 2014, the Company had $0.3 million in securities expense (which is excluded from Adjusted EBITDA) for which there was no comparable expense in third quarter 2015.

Adjusted EBITDA

Based on the changes noted above, Adjusted EBITDA decreased by less than $0.1 million to be $7.2 million for both the three months ended September 30, 2015 and September 30, 2014. Adjusted EBITDA was $7.1 million in the second quarter of 2015. Stock-based compensation and other excluded expenses are added back in the calculation of Adjusted EBITDA. See financial tables for a reconciliation of third quarter 2014 and 2015 Adjusted EBITDA to net income.

Balance Sheet

As of September 30, 2015, the Company had cash and cash equivalents of $5.9 million compared to $5.1 million at the end of 2014. During third quarter 2015, the Company reduced its credit facility balance by $3.1 million to $102.0 million. The Company's senior credit facility extends through April 2016 and includes a $5.0 million undrawn revolver.

Capital Expenditures

Capital expenditures were $1.6 million in both the third quarter 2015 and the same period in 2014.

Third Quarter Earnings Conference Call

Otelco has scheduled a conference call, which will be broadcast live over the internet, on Thursday, November 5, 2015, at 11:30 a.m. (Eastern Time). To participate in the call, participants should dial (785) 830-7987 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 3026069.

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 98,000 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. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share par value and share amounts)
(unaudited)
December 31, September 30,
2014 2015
Assets
Current assets
Cash and cash equivalents $ 5,082 $ 5,893
Accounts receivable:
Due from subscribers, net of allowance for doubtful accounts of $229 and $246, respectively 3,732 3,878
Unbilled receivables 1,675 1,627
Other 1,931 2,060
Materials and supplies 1,915 1,997
Prepaid expenses 3,441 1,680
Total current assets 17,776 17,135
Property and equipment, net 51,237 49,780
Goodwill 44,976 44,976
Intangible assets, net 3,178 2,529
Investments 1,870 1,851
Deferred financing costs, net 1,161 521
Other assets 471 313
Total assets $ 120,669 $ 117,105
Liabilities and Stockholders' Deficit
Current liabilities
Accounts payable $ 1,104 $ 898
Accrued expenses 5,054 5,926
Advance billings and payments 1,410 1,419
Deferred income taxes 53 53
Customer deposits 70 72
Current maturity of long-term notes payable 6,665 102,015
Total current liabilities 14,356 110,383
Deferred income taxes 24,027 24,027
Advance billings and payments 681 641
Other liabilities 142 137
Long-term notes payable, less current maturities 105,470 --
Total liabilities 144,676 135,188
Stockholders' deficit
Class A Common Stock, $.01 par value-authorized 10,000,000 shares; issued and outstanding 2,881,154 and 3,006,526 shares, respectively 29 30
Class B Common Stock, $.01 par value-authorized 250,000 shares; issued and outstanding 232,780 shares 2 2
Additional paid in capital 3,519 3,802
Retained deficit (27,557) (21,917)
Total stockholders' deficit (24,007) (18,083)
Total liabilities and stockholders' deficit $ 120,669 $ 117,105
OTELCO INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
2014 2015 2014 2015
Revenues $ 18,421 $ 17,850 $ 55,692 $ 53,385
Operating expenses
Cost of services 8,763 8,301 26,760 24,964
Selling, general and administrative expenses 2,552 2,458 7,823 7,544
Depreciation and amortization 2,481 2,181 8,073 6,694
Total operating expenses 13,796 12,940 42,656 39,202
Income from operations 4,625 4,910 13,036 14,183
Other income (expense)
Interest expense (2,167) (1,949) (6,733) (5,988)
Other income (expense) (306) 14 343 1,060
Total other expenses, net (2,473) (1,935) (6,390) (4,928)
Income before income tax 2,152 2,975 6,646 9,255
Income tax expense (765) (1,125) (2,557) (3,615)
Net income $ 1,387 $ 1,850 $ 4,089 $ 5,640
Weighted average number of common shares outstanding:
Basic 3,103,728 3,239,306 3,103,728 3,239,306
Diluted 3,181,280 3,289,679 3,129,874 3,285,502
Basic net income per common share $ 0.45 $ 0.57 $ 1.32 $ 1.74
Diluted net income per common share $ 0.44 $ 0.56 $ 1.31 $ 1.72
OTELCO INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended September 30,
2014 2015
Cash flows from operating activities:
Net income $ 4,089 $ 5,640
Adjustments to reconcile net income to cash flows provided by operating activities:
Depreciation 6,793 5,756
Amortization 1,280 938
Amortization of loan costs 707 665
Provision for deferred income taxes 1,122 --
Provision for uncollectible accounts receivable 360 350
Stock-based compensation 383 283
Changes in operating assets and liabilities:
Accounts receivable 158 (577)
Material and supplies (161) (82)
Prepaid expenses and other assets 24 1,919
Accounts payable and accrued expenses 414 666
Advance billings and payments (67) (31)
Other liabilities (33) (3)
Net cash from operating activities 15,069 15,524
Cash flows used in investing activities:
Acquisition and construction of property and equipment (4,491) (4,568)
Proceeds from sale of property and equipment 58 --
Purchase of Reliable Networks, net of cash acquired (500) --
Net cash used in investing activities (4,933) (4,568)
Cash flows used in financing activities:
Principal repayment of long-term notes payable (14,240) (10,120)
Loan origination costs -- (25)
Net cash used in financing activities (14,240) (10,145)
Net increase (decrease) in cash and cash equivalents (4,104) 811
Cash and cash equivalents, beginning of period 9,916 5,082
Cash and cash equivalents, end of period $ 5,812 $ 5,893
Supplemental disclosures of cash flow information:
Interest paid $ 6,027 $ 5,322
Income taxes paid $ 721 $ 1,726

CONTACT: Curtis Garner Chief Financial Officer Otelco Inc. 205-625-3580 Curtis@otelcotel.comSource:Otelco, Inc.