SureWest Reports Second Quarter 2011 Results

ROSEVILLE, Calif., July 28, 2011 /PRNewswire/ -- SureWest Communications (NASDAQ: SURW) today announced operating results for the second quarter ended June 30, 2011.

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Steve Oldham, SureWest’s president and chief executive officer, said, “Our strong second quarter results underscore the potential of our long-term Broadband growth strategy and our ability to capitalize on the demand for our new premium services. We are very pleased with the increases in residential subscribers and RGUs, combined with exceptional business services growth. This helped us achieve increased Adjusted EBITDA of 12 percent year-over-year, or 5 percent excluding the expense adjustment related to universal service fees. In addition, our residential churn remains low, improving year-over-year to 1.5 percent as a result of our high performance standards, our talented employees and customer satisfaction from our new Advanced Digital TV service in the Sacramento market.

“We continued the expansion of our superior fiber-to-the-home network in the areas that provide the greatest opportunity for revenue growth. The addition of 5,400 new fiber homes in Kansas City during the quarter helped drive outstanding sales results in June. We are already reaching sales penetration rates of up to 30 percent in some new fiber build areas. Our early success positions us well for continued revenue growth in the coming quarters and beyond, and demonstrates customer demand for more bandwidth delivered by a high-performing network. We are seeing outstanding business services revenue growth, driven by our advanced product offerings and revenue from new wireless carrier backhaul connections.”

The following table highlights financial results on a consolidated basis (dollars are in thousands):

Financial Results

Consolidated revenues increased 1% year-over-year to $61 million as Broadband revenues grew by $2.9 million, or 7%, more than offsetting expected Telecom revenue declines of $2.5 million, or 14%. Adjusted EBITDA increased 12%, or $2.3 million, year-over-year to $22.2 million. Broadband Adjusted EBITDA increased 36% to account for 51% of total Adjusted EBITDA. Consolidated Adjusted EBITDA margin was 36% compared to 33% in the same period last year. The quarter was positively impacted by an expense reduction in universal service fund fees of $1.4 million and $300 thousand in ongoing quarterly savings. Excluding the reduction in universal service fees, consolidated Adjusted EBITDA margin and Telecom margin results would have been 34% and 48%, respectively.  

Operating expenses, exclusive of depreciation and amortization, decreased 7%, or $2.9 million, year-over-year to $40.3 million. This decrease resulted from the universal service fee expense reduction during the quarter as well as the reductions in labor and operating costs related to June 2010 cost-saving initiatives, which more than offset video programming and transport fee increases related to subscriber growth.

Net income for the quarter was $1.3 million compared to net loss of $527 thousand in the same period last year. Diluted earnings per share was positive $0.09 compared to basic and diluted earnings per share of negative $0.12 in the first quarter 2011 and negative $0.04 in the second quarter 2010. Excluding the impact of the universal service fees, consolidated net income would have been $278 thousand, or $0.02 per share, for the second quarter 2011.

Capital expenditures totaled $20.7 million for the second quarter, a $6.8 million increase compared to $13.9 million in the same period last year. During the quarter, SureWest added 5,400 new marketable homes to its fiber-to-the-home (FTTH) network as part of the scheduled 15,500 additional fiber homes planned to be released throughout 2011 in Kansas City. Additionally, with minimal capital spend, during the quarter the company upgraded 2,800 of the planned 6,800 homes in its ILEC territory with Advanced Digital TV service, increasing the percentage of triple-play marketable homes in the ILEC to 61%, up from 50% in the second quarter 2010. In relation to these additional marketable homes and network upgrades, the company invested $7 million in network expansion capital in the second quarter 2011, compared to $1.4 million in the first quarter 2011 and $588 thousand in the second quarter 2010. The remaining $13.7 million in second quarter 2011 capital spend was driven by residential and business success and core maintenance support. The company will continue to take advantage of growth opportunities and the favorable bonus depreciation tax provision in relation to these new investments. Projected 2011 capital expenditures are expected to be on the high end of the company’s $65-74 million range. Projected capital expenditures remain in the $60-70 million range for 2012 and in the $55-65 million range for 2013.

Free cash flow, defined as net income (loss) plus depreciation and amortization less capital expenditures, was negative $3 million for the quarter compared to positive $857 thousand in the second quarter 2010. The decline was due to network expansion capital investments. Adjusted free cash flow, defined as free cash flow excluding capital investments in network-based expansion, increased $2.6 million year-over-year to $4 million. The company expects capital expenditures and associated free cash flow to vary quarter-to-quarter based on fiber network expansion in Kansas City and the resulting opportunities for additional residential and business services growth.

Cash and cash equivalents decreased by $1.8 million sequentially, from $12.9 million in the first quarter 2011 to $11.0 million. The average cost of debt for the quarter remained low at 4.3%. Total debt net of cash and cash equivalents (net debt) was $199 million, resulting in a net debt to Adjusted EBITDA ratio of 2.3x. During the quarter, the company entered into an interest rate swap agreement with a notional amount of $75 million. This fixes the total interest expense on $75 million of SureWest’s outstanding long-term debt at 5.6%. SureWest also purchased two interest rate cap agreements with notional amounts of $25 million each with a 2% strike price, effectively fixing the rate on $125 million of the current total $210 million in outstanding debt. In addition, in accordance with its debt agreement, SureWest’s leverage ratio is below 2.5x, which reduces its borrowing spread starting in August 2011 on all outstanding debt by 50 basis points to Libor plus 325 basis points for approximately $1 million in annualized interest expense savings.

Broadband Segment Results

Broadband revenues increased 7% year-over-year and accounted for 75% of the company’s total revenues in the quarter, compared to 71% in the second quarter 2010. Broadband Adjusted EBITDA increased 36% year-over-year and now represents 51% of the company’s total Adjusted EBITDA. SureWest expects to continue increasing its Broadband revenues and Adjusted EBITDA as a result of growth in both residential and business services. SureWest’s capital plan is focused on its core Broadband growth strategy, with approximately 29% of 2011 expenditures planned for network expansion and over 51% scheduled for success-based investment.

Broadband Residential:

Broadband Residential revenues increased 4% year-over-year to $32.1 million as a result of 3% growth in RGUs and a 2% increase in overall ARPU, primarily driven by new Advanced Digital TV customers throughout its Sacramento market in both the ILEC and broadband CLEC footprints.

Advanced Digital TV continued to drive growth, with total net video RGUs increasing by 6% year-over-year and 2% sequentially. SureWest served 17,800 Advanced Digital TV subscribers through the second quarter, representing 66% of the company’s video RGUs in Sacramento. ARPU for these subscribers is $133 with approximately 98% bundling the company’s high-performing data service with video.

New products and features like Advanced Digital TV, increased Internet speeds, additional HD channels, home networking and Internet security software have continued to create enhanced subscriber value and improve SureWest’s pricing power. In July 2011, the company implemented video and data price increases for an expected positive impact on third quarter ARPU.  

Residential customer churn improved year-over-year from 1.6% to 1.5% in the second quarter as a result of customer retention programs, value-added features and ongoing superior service levels.

To illustrate growth trends, Broadband RGUs and subscriber counts are detailed both year-over-year and sequentially in the table below:

Broadband Business:

Broadband Business revenues increased by $1.7 million, or 16%, year-over-year to $13 million. Business customers increased 5% year-over-year to 7,900 and ARPU grew 10% from the prior year to $551. Broadband Business growth expectations remain high in both Sacramento and Kansas City. The Kansas City market grew ARPU by 7% year-over-year while increasing customer counts by 7%. The Sacramento market grew customer counts by 4% and ARPU grew by 13% driven by wireless backhaul and existing customers adding new products and features.

As of June 30, 2011, SureWest was billing for 249 wireless backhaul access points at annualized revenues of $2.9 million. Due to increased demand for the service, SureWest is pulling forward 90 connections from 2012 into 2011. The company now is scheduled to bill for over 390 backhaul connections by the end of 2011. Opportunities exist and are currently being pursued to serve additional connections in both the Sacramento and Kansas City markets.

Telecom Segment Results

Telecom revenues declined 14% year-over-year to $15 million due to the industry-wide trend of declines in access lines, minutes of use and access revenues. As previously noted, SureWest reported a decrease of $1 million in sequential regulatory support revenues in the first quarter 2011. The company’s scheduled regulatory support declines began in 2006 and will be fully phased out after the final payment in the last quarter of 2011.

The Telecom segment has consistently produced Adjusted EBITDA margins greater than 40% and continues to generate significant free cash flow, which is utilized to reduce debt and fund Broadband segment expansion. The company expects declines in Telecom revenues to flatten over the next two years, due to the phasing out of Telecom support mechanisms and the slowing of access line losses. SureWest has effectively removed the risk from its business by investing in high performing broadband networks that will continue to drive additional revenue and cash flow growth.

Second quarter 2011 year-over-year consolidated ILEC voice RGU loss was 3,900, compared to a loss of 5,700 in the second quarter 2010. Also, the migration of existing Telecom ILEC access lines to Broadband Voice over IP (VoIP) service enables the continued preservation of consolidated voice revenues. Second quarter 2011 consolidated year-over-year loss in ILEC and CLEC voice RGUs combined was 5,200 compared to a loss of 6,100 in the second quarter 2010.

As the company focuses on growing its Broadband segment, the Telecom segment is expected to continue accounting for a smaller percentage of total revenues. For the second quarter 2011, Telecom revenues were 25% of total company revenues compared to 29% in the second quarter 2010.

Telecom Residential:

Telecom Residential revenues declined 24% year-over-year to $3.4 million resulting from a 22% decline in Telecom voice RGUs. However, of the 7,200 year-over-year Telecom Residential voice RGU losses, 2,900, or 40%, migrated to the SureWest Broadband VoIP service.

Telecom Business:

Telecom Business revenues declined 1% year-over-year to $8.3 million. A data price increase in September 2010 offset a 6% decline in customers from competitive pressures and strained economic conditions. Telecom Business services revenues increased to 55% of Telecom segment revenues. The economic impact on California businesses has been stabilizing over the last year and the company expects to see growth through new commercial opportunities as the economy recovers and property vacancy rates improve.

Telecom Access:

Telecom Access revenues decreased by $1.3 million year-over-year to $3.1 million primarily due to the scheduled reduction in the California High Cost Fund (CHCF), the January 1, 2011 elimination of the transport interconnection charge (TIC) and the decline in switched access revenues related to access line loss and declining minutes of use. The combined annual regulatory support related to the CHCF and TIC will decline by $4 million in 2011 - from $6.1 million in 2010 to $2.0 million 2011 - and will be fully phased out after the final payment in the fourth quarter of 2011.

Non-GAAP Measures

In addition to the results presented in accordance with generally accepted accounting principles (GAAP) throughout this press release, the company has presented non-GAAP financial measures such as Adjusted EBITDA, free cash flow, Adjusted free cash flow and net debt. Adjusted EBITDA represents net income (loss) excluding amounts for income taxes, depreciation and amortization, non-cash pension and certain post-retirement benefits, non-cash stock compensation, severance and other related termination costs, and all other non-operating income/expenses. Free cash flow represents net income (loss) plus depreciation and amortization less capital expenditures. Adjusted free cash flow represents free cash flow as defined above, excluding the network expansion capital investments. Free cash flow and Adjusted free cash flow are a measure of operating cash flows available for corporate purposes after providing sufficient fixed asset additions to maintain current productive capacity. Net debt represents total long-term debt (including current maturities) less cash and cash equivalents. Net debt can be used as a component in measuring leverage. The company believes these non-GAAP measures, viewed in addition to but not in lieu of its reported GAAP results, provide useful information to investors as they are an integral part of the internal evaluation of operating performance. In addition, they are measures that the company uses to evaluate management’s effectiveness. Reconciliations to the comparable GAAP measures are provided in the accompanying financial and operating summaries. SureWest’s non-GAAP financial measures may not be comparable to similarly titled measures presented by other companies.

Conference Call and Webcast

SureWest will host a conference call providing details of its results and business strategy at 5 p.m. Eastern Time on Thursday, July 28. Open to the public, a simultaneous live webcast of the call will be available from the company's investor relations website at www.surw.com. A telephone replay of the call will be available shortly after completion through August 4, 2011 by calling 888.286.8010 and entering pass code 97427407. Visit www.surw.com for updates prior to the call. To receive SureWest financial news by email, please visit www.surw.com and subscribe to “Email Alerts.”

About SureWest

SureWest Communications is a leading integrated communications provider and the bandwidth leader in the markets it serves. Headquartered in Northern California for more than 95 years, SureWest offers bundled residential and commercial services in the greater Sacramento and Kansas City regions that include IP-based digital and high-definition television, high-speed Internet, Voice over IP, and local and long distance telephone. SureWest was the nation’s first provider to launch residential HDTV over an IP network and offers one of the nation’s fastest symmetrical Internet services with speeds of up to 50 Mbps in each direction on its fiber-to-the-home network. For up-to-date information on products and services, visit the company on Facebook and Twitter.

Safe Harbor Statement

Statements made in this news release that are not historical facts are forward-looking statements and are made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995. In some cases, these forward-looking statements may be identified by the use of words such as “may,” “will,” “should,” “expect,” “plan,” “anticipate” or “project,” or the negative of those words or other comparable words. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Such forward-looking statements are subject to a number of risks, assumptions and uncertainties that could cause the company's actual results to differ from those projected in such forward-looking statements.

Important factors that could cause actual results to differ from those set forth in the forward-looking statements include, but are not limited to, advances in telecommunications technology, changes in the telecommunications regulatory environment, changes in the financial stability of other telecommunications providers who are customers of the company, changes in competition in markets in which the company operates, adverse circumstances affecting the economy in California, Kansas and Missouri in general, and in the greater Sacramento, California and greater Kansas City, Kansas and Missouri areas in particular, the availability of future financing, changes in the demand for services and products, new product and service development and introductions, and pending and future litigation.

Contacts:

Ron Rogers
Corporate Communications
916-746-3123
[email protected]

Misty Wells
Investor Relations
916-786-1799
[email protected]

SOURCE SureWest Communications