SureWest Reports First Quarter 2010 Results

ROSEVILLE, Calif., April 29 /PRNewswire-FirstCall/ -- SureWest Communications (Nasdaq: SURW) today announced operating results for the first quarter ended March 31, 2010.

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Steve Oldham, SureWest's president and chief executive officer, said, "During the first quarter, we launched a significant effort to support future growth. In the Sacramento market, we rolled out our exciting new Advanced Digital TV product, which is powered by Microsoft Mediaroom. After performance and reliability tests delivered glowing returns from our initial customers, we initiated an aggressive sales and marketing campaign mid-quarter that provided very positive results for subscriber and RGU growth during March and April. Our wireless carrier backhaul service sets the stage for future high-margin revenue growth in the business segment, capitalizing on the increasing demand for wireless data. We have secured agreements with two national wireless carriers to provide wireless backhaul over our high-capacity fiber-optic network to nearly 200 towers and we continue discussions to expand this business.

"Over the last several years, our investments in a fiber-to-the-home infrastructure have created a next-generation growth platform, which allows us to reduce network expansion and capital spend, and still create new revenue generating opportunities through increased penetration over our existing networks. Our commercial services offering continues to improve our profile, with increases in Kansas City business revenues of 32% and customer counts of 24% year-over-year.

"Looking forward, we will maintain focus on profitable growth, expense efficiencies and diligent capital management. We expect continued Broadband growth in 2010 and beyond as consumers take advantage of the superior network performance and speed only SureWest can offer. This will generate additional free cash flow and increased EBITDA."

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

Financial Results

Consolidated revenues decreased 1% year-over-year to $60.2 million resulting from 9% Broadband revenue growth offset by Telecom revenue declines of 19%. Adjusted EBITDA, which is adjusted for non-cash pension of $420 thousand and stock compensation of $800 thousand, remained flat year-over-year at $19.5 million as the company continued to recognize cost savings from initiatives such as consolidation of office space and reduced employee counts, which decreased 3% from the prior year to 888 employees. Office space consolidations are expected to save $1.3 million annually beginning in 2011.

Operating expenses, exclusive of depreciation and amortization, decreased 2% year-over-year to $41.9 million primarily due to reductions in labor and labor-related expenses offset by an increase in transport charges associated with commercial business growth and an increase in video license fees due to higher programming rates and new channel additions.  

Net income was $527 thousand compared to $2.5 million in the first quarter 2009 due to a $2.5 million gain from the sale of SureWest's wireless towers in February 2009. Earnings per share from continuing operations was positive $.04 compared to positive $.01 in the first quarter 2009 and zero in the fourth quarter 2009.

Free cash flow, defined as income from continuing operations plus depreciation and amortization less capital expenditures, increased by $6.6 million year-over-year to positive $3.1 million. The increase is due to lower capital expenditures for network expansion. The company continues to focus on increasing sales and free cash flow by growing penetration on its existing inventory of marketable homes. SureWest expects that its capital expenditures and associated free cash flow results will vary quarter-to-quarter based on developing business sales opportunities such as additional data center space and wireless carrier backhaul opportunities.

Cash and cash equivalents slightly decreased sequentially to $7.0 million from $7.5 million. During the quarter, SureWest reduced its outstanding debt by $8 million resulting in $208 million in remaining total debt net of cash and cash equivalents (net debt), and a net debt to adjusted EBITDA ratio of 2.67.

Capital expenditures totaled $12.5 million for the first quarter, a decrease of $5.8 million year-over-year. The company is projecting 2010 capital expenditures of $55 million to $60 million, approximately two-thirds of which is scheduled for residential and business success-based investment. The 2010 capital plan is aimed at obtaining market share through increased subscriber and RGU penetration.

During the quarter, SureWest extended its ability to provide video service to 21,300 existing voice and data homes over its copper network in the Sacramento region. By the end of the second quarter, another 4,000 will be video serviceable. Together with the 22,000 fiber-to-the-home marketable passings in the ILEC, these copper network video upgrades now offer the company an opportunity to provide a superior triple-play bundle to over 50% of its ILEC market.

In late January, SureWest launched the new Advanced Digital TV powered by Microsoft Mediaroom platform throughout the Sacramento market. The company initiated a soft launch to test the product's performance in the field, and then rolled out an aggressive sales and marketing campaign mid-quarter to very positive results. At quarter-end, over 3,200 Advanced Digital TV video RGUs were added, representing 14% of overall video RGUs in the Sacramento market, with all new video customers receiving the product since its launch. Compared to the previous video platform, monthly recurring revenues for Advanced Digital TV were 12% higher, premium network take rate for channels like HBO, Showtime and Starz was 37% higher and high definition TV take rate was 33% higher. Notably, 71% of all Advanced Digital TV customers subscribed to SureWest's HD package. New Advanced Digital TV subscribers, including current customer conversions, require a new 12-month agreement.

The expectation is for positive growth in video RGUs in coming quarters and average revenue per user (ARPU) increases as the promotional periods phase out.  

Broadband Segment Results

Broadband revenues increased 9% year-over-year and accounted for 71% of the company's total revenues, compared to 64% in the first quarter 2009, due to the successful long-term strategy of growing Broadband operations to counteract declining Telecom segment revenues.

Broadband Residential:

Broadband Residential revenues increased 7% year-over-year to $31 million due to an 8% growth in ARPU and a 2% increase in RGUs. To illustrate growth trends, Broadband RGUs, subscriber counts and ARPU are detailed both year-over-year and sequentially in the table and text below:

ARPU for the company's fiber-to-the-home (FTTH) and hybrid fiber coaxial (HFC) networks increased 4% year-over-year to $117 from $112 as customer demand for higher data speeds, HDTV and DVR services continued to increase. ARPU was also positively impacted by a fourth quarter 2009 video and data price increase that reinforced the company's ability to maintain growth while targeting customers who value superior service offerings.

Broadband Business:

Broadband Business revenues increased by $985 thousand, or 10%, year-over-year. Customer counts increased 7% year-over-year to 7,200 and ARPU grew 2% from the prior year to $494. Broadband Business growth expectations continue to remain high in both Sacramento and Kansas City. The Kansas City market grew ARPU 5% year-over-year while increasing customer counts by 24%. Following a depressed economic environment in Sacramento during 2009 that caused many businesses to downsize their communications services and some to go out of business altogether, sales contracts and proposals increased greatly during the first quarter 2010 compared to previous quarters and have continued to increase in the beginning of the second quarter. SureWest's fiber-optic network provides a superior platform for additional revenue opportunities in both regions that include data center and wireless carrier backhaul offerings, as well as new indirect dealer channel partnerships.

Broadband Access:

Broadband Access revenues increased $343 thousand year-over-year to $727 thousand primarily due to one-time cash settlements received for disputed carrier access charges from prior-year periods.

Telecom Segment Results

Operating only in the Sacramento market, Telecom segment revenues declined 19% year-over-year to $17.6 million due to the industry-wide trend of declines in access lines and access revenues. The Telecom segment accounted for just 29% of total revenues compared to 36% in the first quarter 2009. Internal forecasts anticipate the slowing of Telecom declines over the next several years.

Telecom Residential:

Telecom Residential revenues declined 29% year-over-year to $4.9 million resulting from losses in Telecom voice RGUs of 28% year-over-year. The company continues to mitigate Telecom voice line losses through its Broadband VoIP product. Of the 14,000 year-over-year Telecom Residential voice RGU losses, 6,000 (43%) migrated to the SureWest Broadband VoIP service.

Telecom Business:

Telecom Business revenues declined 7% year-over-year to $8.4 million due to a decline in small- and medium-sized business customers, particularly those impacted by California's depressed real estate industry, and a decrease in services from a few large carriers. These declines are related to the economy, not competition, and are expected to flatten out and begin growing as the Sacramento office market recovers and businesses begin returning.

Telecom Access:

Telecom Access revenues decreased $1.5 million year-over-year to $4.2 million primarily due to the scheduled reduction in the California High Cost Fund (CHCF) subsidy of $510 thousand during the quarter and the decline in switched access revenues related to access line loss. The annual CHCF subsidies are scheduled to be $4.1 million in 2010, a decrease from $6.1 million in 2009, and will continue to decline by $2 million annually through 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 and net debt. Adjusted EBITDA represents net income (loss) from continuing operations excluding amounts for income taxes, depreciation and amortization, non-cash pension and certain post-retirement benefits, non-cash stock compensation, and all other non-operating income/expenses. Free cash flow represents net income (loss) from continuing operations plus depreciation and amortization less capital expenditures. Free cash flow is a measure of operating cash flows available for corporate purposes after providing significant 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, April 29, 2010. Open to the public, a simultaneous live webcast of the call will be available from the company's investor relations Web site at www.surw.com. A telephone replay of the call will be available shortly after completion through Thursday, May 6 by dialing 888.286.8010 and entering pass code 43646592. Visit www.surw.com for updates prior to the call.  

About SureWest

SureWest Communications (www.surewest.com) is a leading integrated communications provider and the bandwidth leader in the markets it serves. Headquartered in Northern California for more than 95 years, the company expanded into the Kansas City region in February 2008 with the acquisition of Everest Broadband, Inc. and offers bundled residential and commercial services 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.

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.

SOURCE SureWest Communications