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Otelco Reports Second Quarter 2016 Results

ONEONTA, Ala., Aug. 02, 2016 (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 second quarter ended June 30, 2016. Key highlights for Otelco include:

  • Total revenues of $17.2 million for second quarter 2016.
  • Operating income of $4.9 million for second quarter 2016.
  • Consolidated EBITDA (as defined below) of $7.1 million for second quarter 2016.

“The improvements we have made in our network and operations cost structure offset the decline in revenue this quarter when compared with the same period in 2015,” said Rob Souza, President and Chief Executive Officer of Otelco. “Operating income increased $0.1 million, and Consolidated EBITDA was essentially flat when compared with the prior year period. Top line residential revenue remains under pressure for all telephone companies, and our strategy is focused on both delivering continuous cost improvements across our markets and implementing top-line revenue enhancements, promotions, and, where appropriate, pricing actions.

“Marketing programs, including new speed and pricing options and delivery approaches, helped keep our residential data lines basically flat compared to the end of 2015,” continued Souza. “We have received a multi-year contract extension for circuits serving Alabama schools in and adjacent to our territory, including orders to increase capacity on the majority of these circuits that will be upgraded during third quarter 2016. In addition, we have added a second 10 gigabit light-wave to our new northern fiber ring project to meet another customer’s requirement for high-speed connectivity in Northern Maine. Sales of video and security products, which are residentially focused, both grew during second quarter. While sales of our Hosted PBX product continue to grow as our flagship CLEC business product, we saw a slower growth rate in second quarter 2016.

“Our capital investment of $1.5 million in the business during second quarter 2016 is consistent with our level of investment over the past several years,” noted Souza. “We continue to increase the reach of fiber in our network to support higher data speeds as required by our customers. We ended second quarter 2016 with $8.3 million in cash, or an increase of $1.4 million since December 31, 2015.”

Second Quarter 2016 Financial Summary
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended June 30, Change
2016 2015 Amount Percent
Revenues$17,232 $17,892 $(660) (3.7)%
Operating income$4,899 $4,765 $134 2.8 %
Interest expense$(2,721) $(1,991) $730 36.7 %
Net income available to stockholders$1,324 $1,655 $(331) (20.0)%
Basic net income per share$0.40 $0.51 $(0.11) (21.6)%
Diluted net income per share$0.39 $0.50 $(0.11) (22.0)%
Consolidated EBITDA(1)$7,053 $7,104 $(51) (0.7)%
Capital expenditures$1,509 $1,528 $(19) (1.2)%
Six Months Ended June 30, Change
2016 2015 Amount Percent
Revenues$34,722 $35,535 $(813) (2.3)%
Operating income$9,645 $9,273 $372 4.0 %
Interest expense$(5,203) $(4,039) $1,164 28.8 %
Net income available to stockholders$3,074 $3,790 $(716) (18.9)%
Basic net income per share$0.94 $1.17 $(0.23) (19.7)%
Diluted net income per share$0.91 $1.15 $(0.24) (20.9)%
Consolidated EBITDA(1)$14,680 $15,112 $(432) (2.9)%
Capital expenditures$2,215 $3,013 $(798) (26.5)%
Reconciliation of Consolidated EBITDA to Net Income
Three Months Ended June 30, Six Months Ended June 30,
2016 2015 2016 2015
Net income$1,324 $1,655 $3,074 $3,790
Add:Depreciation 1,792 1,929 3,571 3,843
Interest expense less interest income 2,400 1,768 4,439 3,590
Interest expense - amortize loan cost 321 222 764 447
Income tax expense 858 1,102 1,991 2,490
Amortization - intangibles 259 335 518 670
Stock-based compensation (earn-out) (78) (54) - 71
Stock-based compensation (Board & senior management) 137 105 199 141
Other excluded expense - 17 - 20
Loan fees 40 25 124 50
Consolidated EBITDA(1)$7,053 $7,104 $14,680 $15,112

(1) Consolidated EBITDA is defined as consolidated net income (loss) plus consolidated net interest expense, depreciation and amortization, income taxes and certain other fees, expenses and non-cash charges reducing consolidated net income. Consolidated EBITDA is a supplemental measure of the Company’s performance that is not required by, or presented in accordance with, accounting principles generally accepted in the United States (“GAAP”). Consolidated EBITDA corresponds to the definition of Consolidated EBITDA in the Company’s credit facilities. The lenders under the Company’s credit facilities utilize this measure to determine compliance with credit facility requirements. The Company uses Consolidated EBITDA as an operational performance measurement to focus attention on the operational generation of cash which is used for reinvestment into the business; to repay its debt and to pay interest on its debt; to pay income taxes for other corporate requirements. The Company reports Consolidated EBITDA to allow current and potential investors to understand this performance metric and because the Company believes that it provides current and potential investors with helpful information with respect to the Company’s operating performance and cash flows. However, Consolidated EBITDA should not be considered as an alternative to net income, operating income or any other performance measures derived in accordance with GAAP or as an alternative to net cash provided by operating activities as a measure of the Company’s liquidity. The Company’s presentation of Consolidated 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, from
2014 2015 2016 2016 March 31, 2016
Business/Enterprise
CLEC
Voice lines 19,324 18,606 18,069 17,650 (2.3)%
HPBX seats 10,029 10,740 10,746 10,800 0.5 %
Data lines 3,313 3,629 3,621 3,638 0.5 %
Wholesale network lines 2,968 2,743 2,680 2,651 (1.1)%
Classifax 80 140 158 163 3.2 %
RLEC
Voice lines 15,506 16,123 16,139 16,030 (0.7)%
Data lines 1,587 1,539 1,532 1,652 7.8 %
Access line equivalents (1) 52,807 53,520 52,945 52,584 (0.7)%
Residential
CLEC
Voice lines 275 225 221 219 (0.9)%
Data lines 363 282 281 278 (1.1)%
RLEC
Voice lines 25,569 23,143 22,604 22,140 (2.1)%
Data lines 20,206 20,089 20,031 20,009 (0.1)%
Access line equivalents (1) 46,413 43,739 43,137 42,646 (1.1)%
Otelco access line equivalents (1) 99,220 97,259 96,082 95,230 (0.9)%
Video 3,852 3,648 3,708 3,671 (1.0)%
Security systems 243 326 337 343 1.8 %
Other internet lines 3,202 2,840 2,794 2,684 (3.9)%

(1) 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 SECOND QUARTER 2016:

Revenues

Total revenues decreased 3.7% in the three months ended June 30, 2016, to $17.2 million from $17.9 million in the three months ended June 30, 2015. The decrease in residential RLEC voice access lines and access revenue decreases due to the FCC’s inter-carrier compensation reform order (the “FCC’s order”) account for the majority of the decline, which was partially offset by an increase in internet, and video and security revenue. The table below provides the components of our revenues for the three months ended June 30, 2016, compared with the same period of 2015.

Three Months Ended June 30, Change
2016 2015 Amount Percent
(dollars in thousands)
Local services$5,849 $6,314 $(465) (7.4)%
Network access 5,345 5,614 (269) (4.8)%
Internet 3,879 3,726 153 4.1 %
Transport services 1,230 1,328 (98) (7.4)%
Video and security 718 688 30 4.4 %
Managed services 211 222 (11) (5.0)%
Total$17,232 $17,892 $(660) (3.7)%

Local services revenue decreased 7.4% in the quarter ended June 30, 2016, to $5.8 million from $6.3 million in the quarter ended June 30, 2015. 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, 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 interstate access revenue. The decline in long distance and special line revenue accounted for a decrease of $0.2 million. Network access revenue decreased 4.8% in the second quarter 2016 to $5.3 million from $5.6 million in the second quarter 2015. The Connect America Fund and end user charges increased $0.1 million. This increase was offset by declines in special access charges of $0.2 million and interstate and intrastate switched access charges of $0.2 million. Internet revenue increased 4.1% in the second quarter 2016 to $3.9 million from $3.7 million in the second quarter 2015. Higher equipment fees, increased broadband speed and pricing accounted for the increase. Transport services revenue decreased 7.4% in the quarter ended June 30, 2016, to $1.2 million from $1.3 million in the quarter ended June 30, 2015. The decrease was in wide area network revenue, including a one-time customer adjustment. Video and security revenue increased 4.4% in the three months ended June 30, 2016, to just over $0.7 million from just under $0.7 million in the three months ended June 30, 2015. Increases in security and IPTV deployment and cable pricing were partially offset by decreases in pay per view revenue and digital cable subscribers. Managed services revenue decreased 5.0% in the quarter ended June 30, 2016, over the comparable period in 2015 to remain at just over $0.2 million. The decrease was in equipment sales and groupware services.

Operating Expenses

Operating expenses in the three months ended June 30, 2016, decreased 6.0% to $12.3 million from $13.1 million in the three months ended June 30, 2015. Cost of services decreased 6.3% to $7.9 million in the quarter ended June 30, 2016, from $8.4 million in the quarter ended June 30, 2015. Internet, circuit and digital equipment expense decreased $0.2 million; access, toll and reciprocal compensation expense decreased by $0.1 million; HPBX expense decreased by $0.1 million; and marketing, sales and directory expense decreased by $0.1 million, reflecting New England operations optimization. Selling, general and administrative expenses decreased 2.0% to $2.4 million in the three months ended June 30, 2016, from $2.5 million in the three months ended June 30, 2015. Small decreases in external relations, executive, insurance and uncollectible were partially offset by small increases in legal expense and sales concession costs. Depreciation and amortization for second quarter 2016 decreased 9.4% to $2.1 million from $2.3 million in second quarter 2015. New England CLEC and RLEC and Alabama cable depreciation decreased $0.1 million and the amortization of other intangible assets decreased $0.1 million.

Operating Income

Operating income in the three months ended June 30, 2016, increased 2.8% to $4.9 million from $4.8 million in the three months ended June 30, 2015. Cost improvement and expense management savings exceeded the decrease in revenue for the period.

Interest Expense

Interest expense in the three months ended June 30, 2016, increased 36.7% to $2.7 million from $2.0 million in the three months ended June 30, 2015. Higher interest rates on the Company’s new loan facilities accounted for an increase of $0.6 million and the increased loan cost amortization accounted for an increase of $0.1 million.

Net income

Based on the changes noted above, net income decreased $0.3 million to $1.3 million for the three months ended June 30, 2016, when compared to just over $1.6 million in the same period in 2015.

Consolidated EBITDA

Consolidated EBITDA decreased slightly to just under $7.1 million for the three months ended June 30, 2016, when compared to just over $7.1 million in the same period in 2015. Stock-based (non-cash) compensation is added back in the calculation of Consolidated EBITDA. See financial tables for a discussion of Consolidated EBITDA (a non-GAAP measurement) and a reconciliation of Consolidated EBITDA to net income.

Balance Sheet

As of June 30, 2016, the Company had cash and cash equivalents of $8.3 million compared with $6.9 million at the end of 2015. As announced during first quarter, the Company entered into new five year senior and five and a half year subordinated loan facilities. The combined $100.3 million term loan facilities were used to pay all amounts due under the Company’s previous credit facility and, with cash from the balance sheet, to pay loan costs associated with the transaction. A $5.0 million revolver under the senior loan facility remains undrawn. Principal payments on the senior term loan facility are $1.0 million per quarter, payable on April 1, July 1, October 1 and January 1 of each year. A change in GAAP nets loan costs against the outstanding balance of the term loan facilities. At June 30, 2016, the outstanding senior loan balance is $84.0 million and the outstanding subordinated loan balance is $15.4 million.

Capital Expenditures

Capital expenditures were $1.5 million for both second quarter 2016 and the same period in 2015.

Second Quarter Earnings Conference Call

Otelco has scheduled a conference call, which will be broadcast live over the internet, on Wednesday, August 3, 2016, at 11:30 a.m. (Eastern Time). To participate in the call, participants should dial (719) 325-2402 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 entering the Confirmation Code 6457216.

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 95,000 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)
June 30, December 31,
2016 2015
Assets
Current assets
Cash and cash equivalents $8,276 $6,884
Accounts receivable:
Due from subscribers, net of allowance for doubtful accounts of $183 and $258, respectively 3,423 3,575
Unbilled receivables 1,610 1,610
Other 1,640 1,722
Materials and supplies 2,079 1,906
Prepaid expenses 1,519 2,775
Deferred income taxes 57 57
Total current assets 18,604 18,529
Property and equipment, net 48,274 49,811
Goodwill 44,976 44,976
Intangible assets, net 2,038 2,363
Investments 1,833 1,846
Other assets 269 259
Total assets $115,994 $117,784
Liabilities and Stockholders' Deficit
Current liabilities
Accounts payable $940 $1,818
Accrued expenses 5,662 4,567
Advance billings and payments 1,377 1,418
Customer deposits 72 68
Current maturity of long-term notes payable, net of debt issuance cost 2,912 2,203
Total current liabilities 10,963 10,074
Deferred income taxes 26,163 26,163
Advance billings and payments 601 628
Other liabilities 8 27
Long-term notes payable, less current maturities and net of debt issuance costs 91,254 97,052
Total liabilities 128,989 133,944
Stockholders' deficit
Class A Common Stock, $.01 par value-authorized 10,000,000 shares; issued and outstanding 3,283,177 and 3,015,099 shares, respectively 33 30
Class B Common Stock, $.01 par value-authorized 250,000 shares; issued and outstanding 0 and 232,780 shares, respectively - 2
Additional paid in capital 3,971 3,881
Retained deficit (16,999) (20,073)
Total stockholders' deficit (12,995) (16,160)
Total liabilities and stockholders' deficit $115,994 $117,784
The accompanying notes are an integral part of these condensed consolidated financial statements.


OTELCO INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(unaudited)
Three Months Ended June 30, Six Months Ended June 30,
2016 2015 2016 2015
Revenues $17,232 $17,892 $34,722 $35,535
Operating expenses
Cost of services 7,875 8,406 16,005 16,663
Selling, general and administrative expenses 2,407 2,457 4,983 5,086
Depreciation and amortization 2,051 2,264 4,089 4,513
Total operating expenses 12,333 13,127 25,077 26,262
Income from operations 4,899 4,765 9,645 9,273
Other income (expense)
Interest expense (2,721) (1,991) (5,203) (4,039)
Other income (expense) 4 (17) 623 1,046
Total other expenses (2,717) (2,008) (4,580) (2,993)
Income before income tax expense 2,182 2,757 5,065 6,280
Income tax expense (858) (1,102) (1,991) (2,490)
Net income $1,324 $1,655 $3,074 $3,790
Weighted average number of common shares outstanding:
Basic 3,283,177 3,239,306 3,283,177 3,239,306
Diluted 3,380,445 3,285,534 3,378,090 3,283,332
Basic net income per common share $0.40 $0.51 $0.94 $1.17
Diluted net income per common share $0.39 $0.50 $0.91 $1.15


OTELCO INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended June 30,
2016 2015
Cash flows from operating activities:
Net income $3,074 $3,790
Adjustments to reconcile net income to cash flows provided by operating activities:
Depreciation 3,571 3,843
Amortization 518 670
Amortization of loan costs 609 447
Loss on extinguishment of debt 155 -
Provision for uncollectible accounts receivable 119 175
Stock-based compensation 199 211
Payment in kind interest - subordinated debt 115 -
Changes in operating assets and liabilities
Accounts receivable 115 (1)
Material and supplies (173) (221)
Prepaid expenses and other assets 1,246 2,076
Accounts payable and accrued expenses 217 905
Advance billings and payments (67) (27)
Other liabilities (14) (13)
Net cash from operating activities 9,684 11,855
Cash flows used in investing activities:
Acquisition and construction of property and equipment (2,215) (3,013)
Net cash used in investing activities (2,215) (3,013)
Cash flows used in financing activities:
Loan origination costs (5,215) (15)
Principal repayment of long-term notes payable (101,053) (7,046)
Proceeds from loan refinancing 100,300 -
Tax withholdings paid on behalf of employees for restricted stock units (109) -
Net cash used in financing activities (6,077) (7,061)
Net increase in cash and cash equivalents 1,392 1,781
Cash and cash equivalents, beginning of period 6,884 5,082
Cash and cash equivalents, end of period $8,276 $6,863
Supplemental disclosures of cash flow information:
Interest paid $3,728 $3,591
Income taxes paid $685 $11
Conversion of Class B common stock to Class A common stock $2 $-
Issuance of Class A common stock $1 $-

Contact: Curtis Garner Chief Financial Officer Otelco Inc. 205-625-3580 Curtis@otelcotel.com

Source:Otelco Inc.

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