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SureWest Reports First Quarter 2011 Results

Strong Broadband Growth Drives 1% Increase in Consolidated Revenues and Adjusted EBITDA, Offsetting Scheduled $1 million Telecom Subsidy Decline in the Quarter

- Broadband Business revenues increased 19% year-over-year driven by increases in customers and ARPU due to the success of wireless carrier backhaul and continued Kansas City business market growth

- Broadband Residential revenues increased 3% year-over-year due to 2% subscriber growth and a 5% increase in RGUs from growth in Advanced Digital TV and high-speed Internet

- Combined costs of $3.5 million from one-time debt refinancing and officer retirement expense impacted net income, which decreased by $2.2 million year-over-year to a net loss of $1.6 million

- Free cash flow of $2.7 million marks the eighth consecutive quarter of positive free cash flow

- Debt, net of cash and cash equivalents, was reduced by $11 million year-over-year resulting in a net debt to Adjusted EBITDA ratio of 2.38x


News provided by

SureWest Communications

28 Apr, 2011, 04:05 ET

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ROSEVILLE, Calif., April 28, 2011 /PRNewswire/ -- SureWest Communications (NASDAQ: SURW) today announced operating results for the first quarter ended March 31, 2011.

(Logo:  http://photos.prnewswire.com/prnh/20050908/SFSUREWESTLOGO)

Steve Oldham, SureWest’s president and chief executive officer, said, “Our momentum continued in the first quarter, supporting the company’s strategy of driving long-term Broadband growth. Revenue growth continues in line with our plan, reflective of excellent residential subscriber and RGU increases combined with business services ARPU growth. These results offset the anticipated Telecom subsidy declines we’ve previously discussed, which included a sequential reduction of $1 million in the first quarter. The planned subsidy reductions will be fully phased out in 2012.

“SureWest continues to increase top-line revenues and manage expenses as a result of the efforts of our talented employees. We are still early in the growth cycle for Advanced Digital TV and wireless carrier backhaul services, and our fiber network continues to over-perform to meet increasing bandwidth demands from customers. Adding new fiber homes in Kansas City and expanding Advanced Digital TV in Sacramento, combined with increases in revenue per customer, will drive further growth and long-term sustainable free cash flow. Short-term, network expansion will impact free cash flow; however, this is consistent with our historical trends of building network to drive long-term revenues and is the growth engine behind our success to date.”

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

















Y-O-Y comparison


Q-O-Q comparison

Consolidated

Q1'11


Q1'10


Change


%


Q4'10



Change


%

Broadband Revenue

$ 45,379


$ 42,577


$   2,802


7%


$ 45,032



$      347


1%

Telecom Revenue

15,176


17,611


(2,435)


(14%)


16,614



(1,438)


(9%)

Total Revenue

60,555


60,188


367


1%


61,646



(1,091)


(2%)

Adjusted EBITDA

19,721


19,468


253


1%


21,780



(2,059)


(9%)

Net Income (Loss)

(1,644)


527


(2,171)


(412%)


1,951



(3,595)


(184%)

Capital Expenditures

11,452


12,536


(1,084)


(9%)


13,289



(1,837)


(14%)

Net Cash Provided by Operating Activities

19,372


16,341


3,031


19%


17,044



2,328


14%

Free Cash Flow

2,679


3,097


(418)


(13%)


4,439



(1,760)


(40%)

Net Debt

197,119


208,063


(10,944)


(5%)


202,472



(5,353)


(3%)

See Non-GAAP measure notes near end of release, and Adjusted EBITDA, Free Cash Flow and Net Debt reconciliations for adjustments.

First Quarter Financial Results

Consolidated revenues increased 1% year-over-year to $60.6 million as Broadband revenues grew by $2.8 million, or 7%, more than offsetting Telecom revenue declines of $2.4 million, or 14%. Adjusted EBITDA increased 1% year-over-year to $19.7 million, with Broadband Adjusted EBITDA increasing 26% to account for 52% of total Adjusted EBITDA. Consolidated Adjusted EBITDA margin was 33% compared to 32% in the same period last year.

Operating expenses, exclusive of depreciation and amortization, increased 2% year-over-year to $42.8 million. This was primarily due to increases in residential video license fees and transport charges associated with growth, as well as one-time officer retirement expense of $888 thousand. These expenses were partially offset by reductions in labor and operating costs related to the cost saving initiatives completed in June 2010. Cost reductions were due to a decline in employee counts of 72 to a total of 817, reduced professional fees and office space consolidation, resulting in an estimated annualized savings of over $7 million.

Net loss for the quarter was $1.6 million compared to net income of $527 thousand in the same period last year primarily due to one-time debt refinancing and retirement costs of $3.5 million in the quarter. Earnings per share was negative $0.12 compared to $0.14 in the fourth quarter 2010 and $0.04 in the first quarter 2010.

Free cash flow, defined as net income (loss) plus depreciation and amortization less capital expenditures, was $2.7 million for the quarter, compared to $3.1 million in the first quarter 2010. The company expects capital expenditures and associated free cash flow to vary quarter to quarter based on fiber-to-the-home (FTTH) expansion in Kansas City and the resulting opportunities for additional residential and business services growth.

Cash and cash equivalents increased by $10 million sequentially, from $2.9 million in the fourth quarter 2010 to $12.9 million. During the quarter, SureWest entered into a new credit agreement refinancing $210 million in debt. Quarterly amortization payments of $3.75 million will commence on September 30, 2011. Total debt net of cash and cash equivalents (net debt) was $197.1 million, resulting in a net debt to Adjusted EBITDA ratio of 2.38x.

Capital expenditures totaled $11.5 million for the first quarter, a decrease from $12.5 million in the same period last year. The company expects to continue taking advantage of growth opportunities, as well as favorable tax treatment, and is targeting its 2011 capital spending on business sales opportunities and increases in residential RGUs. Beginning in the second quarter 2011, the company began to construct and pass 10,000 additional fiber homes that will be released throughout the year in Kansas City where it has experienced superior penetration levels. The existing Kansas City hybrid fiber coaxial (HFC) network has 40% penetration and the 11,600 new fiber homes passed in 2009 have already reached 34% penetration. Additionally, with minimal capital spend, the company is reaching 6,800 new homes in its ILEC territory with Advanced Digital TV service, increasing the percentage of triple-play marketable homes in the ILEC to 65%, up from 24% at the beginning of 2010. SureWest is reiterating projected 2011 capital expenditures of $60-70 million and anticipates long-term growth opportunities for this level of capital spend through mid-2013, which will also impact short-term free cash flow.

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 first quarter 2010. Broadband Adjusted EBITDA increased 26% year-over-year and now represents 52% of the company’s total Adjusted EBITDA. SureWest expects to continue increasing its Broadband revenues and Adjusted EBITDA through aggressive marketing to both residential and business customers. SureWest’s capital plan is focused on its core Broadband growth strategy, with approximately 25% of 2011 expenditures planned for network expansion and over 55% scheduled for success-based investment.

Broadband Residential:

Broadband Residential revenues increased 3% year-over-year to $31.8 million as a result of 5% growth in RGUs and a 1% increase in overall ARPU, primarily driven by new triple-play Advanced Digital TV customers in the ILEC. ARPU for the company’s FTTH and HFC networks decreased 1% year-over-year to $114 due to promotional discounts implemented in the second quarter of 2010 related to the launch of Advanced Digital TV.

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 some pricing power. Competitors in the company’s markets are returning to more conservative promotional tactics, allowing SureWest to scale back its discounting programs. This should have a positive impact on ARPU moving forward.

In Sacramento, Advanced Digital TV continued to drive growth, increasing total net video RGUs by 8% year-over-year and 2% sequentially. SureWest served 15,800 Advanced Digital TV subscribers through the first quarter, representing 60% of the company’s video RGUs in Sacramento. Advanced Digital TV subscribers have an ARPU of $135, with approximately 98% bundling Internet and 85% subscribing to a triple-play.

Residential customer churn improved year-over-year and sequentially from 1.6% to 1.4% in the first 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:


Q1 '11 vs. Q1 '10 Change


Q1 '11 vs. Q4 '10 Change



Sacramento Market


Kansas City Market


Total


Sacramento Market


Kansas City Market


Total


Broadband Residential RGUs

7%


2%


5%


1%


1%


1%


Data RGUs

2%


4%


3%


0%


2%


1%


Video RGUs

15%


3%


8%


3%


1%


2%


Voice RGUs

11%


(1%)


5%


2%


0%


1%


Total Residential Subscribers

2%


3%


2%


0%


1%


1%


Broadband Business:

Broadband Business revenues increased by $2 million, or 19%, year-over-year to $12.6 million. Business customers increased 5% year-over-year to 7,800 and ARPU grew 13% from the prior year to $539. Broadband Business growth expectations remain high in both Sacramento and Kansas City. The Kansas City market grew ARPU by 8% year-over-year while increasing customer counts by 8%. The Sacramento market grew customer counts by 3% and ARPU grew by 17% driven by wireless backhaul and existing customers taking additional products such as data center services.

As of March 31, 2011, SureWest was billing for 198 wireless backhaul access points at annualized revenues of $2.5 million. Due to increased customer demand, the company beat expectations and is scheduled to be billing for over 360 connections currently under contract by the end of 2011; pulling forward an additional 60 access points that were previously scheduled for 2012. Opportunities exist and are currently being pursued to serve additional connections in each region.

Telecom Segment Results

Telecom revenues declined 14% year-over-year to $15.2 million due to the industry-wide trend of declines in access lines and access revenues. However, the Telecom segment has consistently generated 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.

First quarter 2011 year-over-year consolidated ILEC voice RGU loss was 4,200, compared to a loss of 6,400 in the first quarter 2010. Also, the migration of existing Telecom ILEC access lines to Broadband Voice over IP (VoIP) enables the continued preservation of voice revenues on a consolidated basis. First quarter 2011 consolidated year-over-year loss in ILEC and CLEC voice RGUs combined was 4,400, compared to a loss of 8,200 in the first 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 first quarter 2011, Telecom revenues accounted for 25% of total company revenues compared to 29% in the first quarter 2010.

Telecom Residential:

Telecom Residential revenues declined 26% year-over-year to $3.6 million resulting from a 23% decline in Telecom voice RGUs. However, of the 8,200 year-over-year Telecom Residential voice RGU losses, 3,200, or 39%, migrated to the SureWest Broadband VoIP service.

Telecom Business:

Telecom Business revenues remained steady year-over-year at $8.4 million due to a data price increase in September 2010 offsetting a 6% decline in customers due to the impact on small businesses from competitive pressures and strained economic conditions causing some to go out of business. Telecom Business services revenues now represent 55% of the total segment revenues. The economic impact on businesses has been stabilizing over the last four quarters and the company expects to see growth through new commercial opportunities as the California economy recovers and vacancy rates improve.

Telecom Access:

Telecom Access revenues decreased by $1.1 million year-over-year to $3.1 million primarily due to the scheduled reduction in the California High Cost Fund (CHCF) subsidy, the elimination of transport interconnection charges as of January 1, 2011 and the decline in switched access revenues related to access line loss. The annual CHCF subsidies are scheduled to be $2 million in 2011, a decrease from $4.1 million in 2010, and will be zero in 2012. Additionally, the elimination of transport interconnection charges will result in an estimated reduction of $2 million in full year 2011 intrastate access revenues.

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) 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. Free cash flow is 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, April 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 May 5, 2011 by calling 888.286.8010 and entering pass code 87034497. 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 (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, 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.

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]


SUREWEST COMMUNICATIONS

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited; Amounts in thousands, except per share amounts)














Quarters Ended








March 31,


December 31,


$


%




2011


2010


Change


Change

Operating revenues:









Broadband

$   45,379


$          45,032


$     347


1%


Telecom

15,176


16,614


(1,438)


(9%)



Total operating revenues

60,555


61,646


(1,091)


(2%)











Operating expenses:









Cost of services and products (exclusive of depreciation and amortization)

27,261


26,948


313


1%


Customer operations and selling

6,983


7,095


(112)


(2%)


General and administrative

8,548


6,828


1,720


25%


Depreciation and amortization

15,775


15,777


(2)


(0%)



Total operating expenses

58,567


56,648


1,919


3%











Income from operations

1,988


4,998


(3,010)


(60%)











Other income (expense):









  Interest income

15


15


-


-


  Interest expense

(4,416)


(2,157)


(2,259)


(105%)


  Other, net

207


107


100


93%


  Total other income (expense), net

(4,194)


(2,035)


(2,159)


(106%)











Income (loss) before income taxes

(2,206)


2,963


(5,169)


(174%)











Income tax expense (benefit)

(562)


1,012


(1,574)


(156%)











Net income (loss)

$   (1,644)


$            1,951


$ (3,595)


(184%)











Basic and diluted earnings (loss) per common share

$     (0.12)


$              0.14


$   (0.26)













Shares of common stock used to calculate earnings per share:









Basic and diluted

13,784


13,694


90













Dividends declared per common share

$       0.08


$                  -


$    0.08





SUREWEST COMMUNICATIONS

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited; Amounts in thousands, except per share amounts)














Quarters Ended March 31,


$


%




2011


2010


Change


Change

Operating revenues:









Broadband

$ 45,379


$42,577


$  2,802


7%


Telecom

15,176


17,611


(2,435)


(14%)



Total operating revenues

60,555


60,188


367


1%











Operating expenses:









Cost of services and products (exclusive of depreciation and amortization)

27,261


25,617


1,644


6%


Customer operations and selling

6,983


7,510


(527)


(7%)


General and administrative

8,548


8,813


(265)


(3%)


Depreciation and amortization

15,775


15,106


669


4%



Total operating expenses

58,567


57,046


1,521


3%











Income from operations

1,988


3,142


(1,154)


(37%)











Other income (expense):









  Interest income

15


18


(3)


(17%)


  Interest expense

(4,416)


(1,643)


(2,773)


(169%)


  Other, net

207


(166)


373


225%


  Total other income (expense), net

(4,194)


(1,791)


(2,403)


(134%)











Income (loss) before income taxes

(2,206)


1,351


(3,557)


(263%)











Income tax expense (benefit)

(562)


824


(1,386)


(168%)











Net income (loss)

$ (1,644)


$     527


$ (2,171)


(412%)











Basic and diluted earnings (loss) per common share

$   (0.12)


$    0.04


$   (0.16)













Shares of common stock used to calculate earnings per share:









Basic and diluted

13,784


14,002


(218)













Dividends declared per common share

$     0.08


$        -


$    0.08





SureWest Communications

Quarterly Selected Financial Results & Reconciliations of Non-GAAP Measures

(on a consolidated and a segment basis)

(Unaudited; Amounts in thousands)






















Consolidated Results of Operations




















































Twelve Months




Quarter


Sequential



For 2010 Quarters Ended:


Ended December


Quarter Ended


Year-over-Year


Qtr-over-Qtr



March 31


June 30


September 30


December 31


31, 2010


March 31, 2011


$ chg


%


$ chg


%

Operating revenues  (1)  





















Broadband


$            42,577


$            43,076


$                43,861


$                45,032


$              174,546


$            45,379


$        2,802


7%


$           347


1%

Telecom


17,611


17,472


17,256


16,614


68,953


15,176


(2,435)


(14%)


(1,438)


(9%)

Total operating revenues


60,188


60,548


61,117


61,646


243,499


60,555


367


1%


(1,091)


(2%)






















Operating expenses (1)  


41,940


43,249


40,420


40,871


166,480


42,792


852


2%


1,921


5%

Depreciation and amortization


15,106


15,262


15,680


15,777


61,825


15,775


669


4%


(2)


(0%)

Income from operations


$              3,142


$              2,037


$                  5,017


$                  4,998


$                15,194


$              1,988


$      (1,154)


(37%)


$      (3,010)


(60%)











































Consolidated Reconciliation of Adjusted EBITDA to Net Income (Loss)























Twelve Months




Quarter


Sequential



For 2010 Quarters Ended:


Ended December


Quarter Ended


Year-over-Year


Qtr-over-Qtr



March 31


June 30


September 30


December 31


31, 2010


March 31, 2011


$ chg


%


$ chg


%

Net income (loss)


$                 527


$               (527)


$                  1,404


$                  1,951


$                  3,355


$            (1,644)


$      (2,171)


(412%)


$      (3,595)


(184%)

Add: income tax expense


824


190


1,328


1,012


3,354


(562)


(1,386)


(168%)


(1,574)


(156%)

Less: other (income)/expense


1,791


2,374


2,285


2,035


8,485


4,194


2,403


134%


2,159


106%

Income from operations


3,142


2,037


5,017


4,998


15,194


1,988


(1,154)


(37%)


(3,010)


(60%)

Add (subtract):





















Depreciation and amortization


15,106


15,262


15,680


15,777


61,825


15,775


669


4%


(2)


(0%)

Non-cash pension expense


420


341


371


371


1,503


313


(107)


(25%)


(58)


(16%)

Non-cash stock compensation expense


800


1,144


267


634


2,845


1,645


845


106%


1,011


159%

Severance and other related costs (3)


-


1,144


-


-


1,144


-


-


-


-


-

Adjusted EBITDA (2)


$            19,468


$            19,928


$                21,335


$                21,780


$                82,511


$            19,721


$           253


1%


$      (2,059)


(9%)






















Adjusted EBITDA margin


32%


33%


35%


35%


34%


33%



















































Consolidated Free Cash Flow































Twelve Months




Quarter


Sequential



For 2010 Quarters Ended:


Ended December


Quarter Ended


Year-over-Year


Qtr-over-Qtr



March 31


June 30


September 30


December 31


31, 2010


March 31, 2011


$ chg


%


$ chg


%

Net income (loss)


$                 527


$               (527)


$                  1,404


$                  1,951


$                  3,355


$            (1,644)


$      (2,171)


(412%)


$      (3,595)


(184%)

Add: Depreciation and amortization


15,106


15,262


15,680


15,777


61,825


15,775


669


4%


(2)


(0%)

Less: Capital expenditures


(12,536)


(13,878)


(12,857)


(13,289)


(52,560)


(11,452)


1,084


9%


1,837


14%

Free cash flow (4)


$              3,097


$                 857


$                  4,227


$                  4,439


$                12,620


$              2,679


$         (418)


(13%)


$      (1,760)


(40%)











































Consolidated Net Debt Ratio  



































Quarter


Sequential



For 2010 Quarters Ended:




Quarter Ended


Year-over-Year


Qtr-over-Qtr



March 31


June 30


September 30


December 31




March 31, 2011


$ chg


%


$ chg


%

Net Debt:





















Long-term debt, including current maturities


$          215,045


$          219,045


$              209,045


$              205,409




$          210,000


$      (5,045)


(2%)


$        4,591


2%

Less: Cash and cash equivalents


(6,982)


(6,154)


(3,215)


(2,937)




(12,881)


(5,899)


(84%)


(9,944)


(339%)

Net Debt (5)


$          208,063


$          212,891


$              205,830


$              202,472




$          197,119


$    (10,944)


(5%)


$      (5,353)


(3%)






















Ratio of Net Debt to Adjusted EBITDA:





















Net Debt


$          208,063


$          212,891


$              205,830


$              202,472




$          197,119






























Divided by: Adjusted EBITDA (TTM)


$            77,873


$            77,942


$                80,316


$                82,511




$            82,764






























Ratio of net debt to Adjusted EBITDA (6)


2.67


2.73


2.56


2.45




2.38



















































Broadband Results of Operations































Twelve Months




Quarter


Sequential



For 2010 Quarters Ended:


Ended December


Quarter Ended


Year-over-Year


Qtr-over-Qtr



March 31


June 30


September 30


December 31


31, 2010


March 31, 2011


$ chg


%


$ chg


%

Data


$            12,248


$            12,145


$                12,100


$                12,385


$                48,878


$            12,516


$           268


2%


$           131


1%

Video


12,219


12,166


12,151


12,603


49,139


12,789


570


5%


186


1%

Voice


6,507


6,600


6,704


6,650


26,461


6,526


19


0%


(124)


(2%)

Total residential revenues


30,974


30,911


30,955


31,638


124,478


31,831


857


3%


193


1%

Business


10,570


11,253


11,979


12,407


46,209


12,614


2,044


19%


207


2%

Access


727


541


481


486


2,235


556


(171)


(24%)


70


14%

Other


306


371


446


501


1,624


378


72


24%


(123)


(25%)

Total operating revenues from external customers


42,577


43,076


43,861


45,032


174,546


45,379


2,802


7%


347


1%

Intersegment revenues


168


145


110


141


564


160


(8)


(5%)


19


13%

Total operating revenues


42,745


43,221


43,971


45,173


175,110


45,539


2,794


7%


366


1%






















Operating expenses without depreciation


35,137


36,003


34,304


34,838


140,282


36,337


1,200


3%


1,499


4%

Depreciation and amortization


12,180


12,140


12,609


12,692


49,621


12,688


508


4%


(4)


(0%)

Loss from operations


$            (4,572)


$            (4,922)


$                 (2,942)


$                (2,357)


$              (14,793)


$            (3,486)


$        1,086


24%


$      (1,129)


(48%)











































Broadband Reconciliation of Adjusted EBITDA to Net Loss

























Twelve Months




Quarter


Sequential



For 2010 Quarters Ended:


Ended December


Quarter Ended


Year-over-Year


Qtr-over-Qtr



March 31


June 30


September 30


December 31


31, 2010


March 31, 2011


$ chg


%


$ chg


%

Net loss


$            (3,720)


$            (4,269)


$                 (3,082)


$                (1,802)


$              (12,873)


$            (4,405)


$         (685)


(18%)


$      (2,603)


(144%)

Add: income tax benefits


(2,504)


(2,867)


(2,066)


(2,456)


(9,893)


(2,928)


(424)


(17%)


(472)


(19%)

Less: other (income)/expense


1,652


2,214


2,206


1,901


7,973


3,847


2,195


133%


1,946


102%

Loss from operations


(4,572)


(4,922)


(2,942)


(2,357)


(14,793)


(3,486)


1,086


24%


(1,129)


(48%)

Add (subtract):





















Depreciation and amortization


12,180


12,140


12,609


12,692


49,621


12,688


508


4%


(4)


(0%)

Non-cash pension expense


205


162


181


179


727


153


(52)


(25%)


(26)


(15%)

Non-cash stock compensation expense


386


560


160


343


1,449


978


592


153%


635


185%

Severance and other related costs (3)


-


469


-


-


469


-


-


-


-


-

Adjusted EBITDA (2)


$              8,199


$              8,409


$                10,008


$                10,857


$                37,473


$            10,333


$        2,134


26%


$         (524)


(5%)






















Adjusted EBITDA margin


19%


19%


23%


24%


21%


23%



















































Broadband Free Cash Flow  































Twelve Months




Quarter


Sequential



For 2010 Quarters Ended:


Ended December


Quarter Ended


Year-over-Year


Qtr-over-Qtr



March 31


June 30


September 30


December 31


31, 2010


March 31, 2011


$ chg


%


$ chg


%

Net loss


$            (3,720)


$            (4,269)


$                 (3,082)


$                (1,802)


$              (12,873)


$            (4,405)


$         (685)


(18%)


$      (2,603)


(144%)

Add: Depreciation and amortization


12,180


12,140


12,609


12,692


49,621


12,688


508


4%


(4)


(0%)

Less: Capital expenditures


(8,723)


(11,805)


(11,370)


(12,046)


(43,944)


(9,574)


(851)


(10%)


2,472


21%

Free cash flow (4)


$               (263)


$            (3,934)


$                 (1,843)


$                (1,156)


$                (7,196)


$            (1,291)


$      (1,028)


(391%)


$         (135)


(12%)











































Telecom Results of Operations































Twelve Months




Quarter


Sequential



For 2010 Quarters Ended:


Ended December


Quarter Ended


Year-over-Year


Qtr-over-Qtr



March 31


June 30


September 30


December 31


31, 2010


March 31, 2011


$ chg


%


$ chg


%

Residential


$              4,868


$              4,479


$                  4,086


$                  3,843


$                17,276


$              3,592


$      (1,276)


(26%)


$         (251)


(7%)

Business


8,418


8,400


8,750


8,592


34,160


8,394


(24)


(0%)


(198)


(2%)

Access


4,160


4,408


4,274


4,053


16,895


3,054


(1,106)


(27%)


(999)


(25%)

Other


165


185


146


126


622


136


(29)


(18%)


10


8%

Total operating revenues from external customers


17,611


17,472


17,256


16,614


68,953


15,176


(2,435)


(14%)


(1,438)


(9%)

Intersegment revenues


4,919


5,091


5,275


5,352


20,637


5,296


377


8%


(56)


(1%)

Total operating revenues


22,530


22,563


22,531


21,966


89,590


20,472


(2,058)


(9%)


(1,494)


(7%)






















Operating expenses without depreciation


11,890


12,482


11,501


11,526


47,399


11,911


21


0%


385


3%

Depreciation and amortization


2,926


3,122


3,071


3,085


12,204


3,087


161


6%


2


0%

Income from operations


$              7,714


$              6,959


$                  7,959


$                  7,355


$                29,987


$              5,474


$      (2,240)


(29%)


$      (1,881)


(26%)











































Telecom Reconciliation of Adjusted EBITDA to Net Income

























Twelve Months




Quarter


Sequential



For 2010 Quarters Ended:


Ended December


Quarter Ended


Year-over-Year


Qtr-over-Qtr



March 31


June 30


September 30


December 31


31, 2010


March 31, 2011


$ chg


%


$ chg


%

Net income


$              4,247


$              3,742


$                  4,486


$                  3,753


$                16,228


$              2,761


$      (1,486)


(35%)


$         (992)


(26%)

Add: income tax expense


3,328


3,057


3,394


3,468


13,247


2,366


(962)


(29%)


(1,102)


(32%)

Less: other (income)/expense


139


160


79


134


512


347


208


150%


213


159%

Income from operations


7,714


6,959


7,959


7,355


29,987


5,474


(2,240)


(29%)


(1,881)


(26%)

Add (subtract):





















Depreciation and amortization


2,926


3,122


3,071


3,085


12,204


3,087


161


6%


2


0%

Non-cash pension expense


215


179


190


192


776


160


(55)


(26%)


(32)


(17%)

Non-cash stock compensation expense


414


584


107


291


1,396


667


253


61%


376


129%

Severance and other related costs (3)


-


675


-


-


675


-


-


-


-


-

Adjusted EBITDA (2)


$            11,269


$            11,519


$                11,327


$                10,923


$                45,038


$              9,388


$      (1,881)


(17%)


$      (1,535)


(14%)






















Adjusted EBITDA margin


50%


51%


50%


50%


50%


46%



















































Telecom Free Cash Flow  































Twelve Months




Quarter


Sequential



For 2010 Quarters Ended:


Ended December


Quarter Ended


Year-over-Year


Qtr-over-Qtr



March 31


June 30


September 30


December 31


31, 2010


March 31, 2011


$ chg


%


$ chg


%

Net income


$              4,247


$              3,742


$                  4,486


$                  3,753


$                16,228


$              2,761


$      (1,486)


(35%)


$         (992)


(26%)

Add: Depreciation and amortization


2,926


3,122


3,071


3,085


12,204


3,087


161


6%


2


0%

Less: Capital expenditures


(3,218)


(1,729)


(1,442)


(897)


(7,286)


(1,704)


1,514


47%


(807)


(90%)

Free cash flow (4)


$              3,955


$              5,135


$                  6,115


$                  5,941


$                21,146


$              4,144


$           189


5%


$      (1,797)


(30%)





















































































(1) External customers only.










































(2) 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.  Adjusted EBITDA is a common measure of operating performance in the telecommunications industry. Adjusted EBITDA is not a measure of financial performance under United States generally accepted accounting principles and should not be considered in isolation or as a substitute for consolidated net income (loss) as a measure of performance.






























(3) Severance and other related termination costs related to the workforce reduction initiative implemented during the quarter ended June 30, 2010. Amounts exclude the termination costs related to stock compensation expense, which are included in non-cash stock compensation expense of the Adjusted EBITDA reconciliation.






























(4) Free cash flow is a measure of operating cash flows available for corporate purposes after providing sufficient fixed asset additions to maintain current productive capacity. Consolidated free cash flow includes capital expenditures for our corporate operating unit. Free cash flow is not a measure of financial performance under United States generally accepted accounting principles and should not be considered in isolation or as a substitute for consolidated net income (loss) as a measure of performance and net cash provided by operating activities as a measure of liquidity.






























(5) Net debt represents total long-term debt (including current maturities) less cash and cash equivalents.  Net debt can be a component in measuring leverage. Net debt is not a measure determined in accordance with United States generally accepted accounting principles and should not be considered as a substitute for total long-term debt.






























(6) The ratio of net debt to Adjusted EBITDA is calculated as net debt divided by Adjusted EBITDA based on a trailing twelve month (TTM) period.  This measure provides useful information to our investors about our debt level relative to our performance and about our ability to meet our financial obligations.











SUREWEST COMMUNICATIONS

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited; Amounts in thousands)
























March 31,


December 31,


$


%




2011


2010


Change


Change

ASSETS









Current assets:










Cash and cash equivalents

$   12,881


$            2,937


$  9,944


339%



Short-term investments

–


771


(771)


(100%)



Accounts receivable, net

19,865


20,298


(433)


(2%)



Income tax receivable

412


1,782


(1,370)


(77%)



Prepaid expenses

2,749


3,792


(1,043)


(28%)



Deferred income taxes

2,043


2,284


(241)


(11%)



Assets held for sale

6,009


6,009


-


-


Total current assets

43,959


37,873


6,086


16%












Property, plant and equipment, net











510,523


514,639


(4,116)


(1%)


Intangible and other assets:










Customer relationships, net

2,329


2,632


(303)


(12%)



Goodwill

45,814


45,814


-


-



Deferred charges and other assets

5,386


2,223


3,163


142%




53,529


50,669


2,860


6%




$ 608,011


$        603,181


$  4,830


1%











LIABILITIES AND SHAREHOLDERS' EQUITY









Current liabilities:










Current portion of long-term debt

$   11,250


$          15,636


$ (4,386)


(28)%



Accounts payable

1,963


2,885


(922)


(32)%



Other accrued liabilities

15,534


12,847


2,687


21%



Advance billings and deferred revenues

8,225


8,035


190


2%



Accrued compensation

7,186


6,998


188


3%


Total current liabilities

44,158


46,401


(2,243)


(5%)












Long-term debt

198,750


189,773


8,977


5%


Deferred income taxes

55,641


56,661


(1,020)


(2%)


Accrued pension and other post-retirement benefits

34,150


33,815


335


1%


Other liabilities and deferred revenues

4,455


4,473


(18)


(0%)












Commitments and contingencies



















Shareholders' equity:










Common stock, without par value; 100,000 shares authorized, 14,091 and 13,866 shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively

144,953


143,309


1,644


1%



Accumulated other comprehensive loss

(15,141)


(15,081)


(60)


(0%)



Retained earnings

141,045


143,830


(2,785)


(2%)


Total shareholders' equity

270,857


272,058


(1,201)


(0)%




$ 608,011


$        603,181


$  4,830


1%



SUREWEST COMMUNICATIONS

SELECTED OPERATING METRICS

As of and for the Quarter Ended



















BROADBAND


3/31/2011 (1)


3/31/2010 (1)


Change


% Change


12/31/2010 (1)


Change


% Change


Residential

















Video


















Marketable Homes (2)


272,600


261,900


10,700


4%


271,800


800


0%




RGUs


63,100


58,500


4,600


8%


61,800


1,300


2%




Penetration (2)


23.1%


22.3%


0.8%


4%


22.7%


0.4%


2%




ARPU


$68


$70


($2)


(2%)


$68


$0


(0%)



Voice


















Marketable Homes


311,600


309,900


1,700


1%


311,300


300


0%




RGUs


75,600


71,800


3,800


5%


74,900


700


1%




Penetration


24.3%


23.2%


1.1%


5%


24.1%


0.2%


1%




ARPU


$29


$30


($1)


(5%)


$30


($1)


(2%)



Data


















Marketable Homes


311,600


309,900


1,700


1%


311,300


300


0%




RGUs


100,300


97,500


2,800


3%


99,400


900


1%




Penetration


32.2%


31.5%


0.7%


2%


31.9%


0.3%


1%




ARPU


$42


$42


$0


(0%)


$42


$0


0%



Total


















RGUs


239,000


227,800


11,200


5%


236,100


2,900


1%





















Subscriber totals


















Subscribers (3)


104,900


102,500


2,400


2%


104,100


800


1%




Penetration


33.7%


33.1%


0.6%


2%


33.4%


0.2%


1%




ARPU (4)


$102


$101


$1


1%


$101


$1


0%




Triple Play ARPU (5)


$114


$116


($2)


(1%)


$115


($1)


(0%)




Triple Play RGUs per Subscriber (5)


2.52


2.53


(0.01)


(0%)


2.53


(0.01)


(0%)




Churn


1.4%


1.6%


-0.2%


(10%)


1.6%


-0.2%


(10%)




















Business (6)


















Customers


7,800


7,400


400


5%


7,800


0


0%




ARPU


$539


$479


$60


13%


$535


$4


1%



















TELECOM


3/31/2011


3/31/2010


Change


% Change


12/31/2010


Change


% Change


Residential

















Voice


















Marketable Homes


91,700


91,100


600


1%


91,500


200


0%




RGUs (7)


27,300


35,500


(8,200)


(23%)


28,900


(1,600)


(6%)




Cumulative Migration to Broadband Voice (8)


16,100


12,900


3,200


25%


15,400


700


5%




Penetration


29.8%


39.0%


-9.2%


(24%)


31.6%


-1.8%


(6%)




ARPU


$43


$44


($1)


(3%)


$43


$0


(1%)




Churn (9)


1.8%


2.3%


-0.6%


(24%)


2.0%


-0.2%


(10%)




















Business (6)


















Customers


7,800


8,300


(500)


(6%)


7,900


(100)


(1%)




ARPU


$356


$334


$22


7%


$359


($3)


(1%)



















CONSOLIDATED RESIDENTIAL VOICE RGUs


3/31/2011 (1)


3/31/2010 (1)


Change


% Change


12/31/2010 (1)


Change


% Change




ILEC Voice RGUs


















Broadband


21,500


17,500


4,000


23%


21,000


500


2%




Telecom


27,300


35,500


(8,200)


(23%)


28,900


(1,600)


(6%)




Total ILEC Voice RGUs (10)


48,800


53,000


(4,200)


(8%)


49,900


(1,100)


(2%)




CLEC Residential Voice RGUs (11)


54,100


54,300


(200)


(0%)


53,900


200


0%




TOTAL Residential Voice RGUs (12)


102,900


107,300


(4,400)


(4%)


103,800


(900)


(1%)



















NETWORK METRICS


3/31/2011


3/31/2010


Change


% Change


12/31/2010


Change


% Change




Marketable Homes - Fiber


148,700


147,700


1,000


1%


148,500


200


0%




Marketable Homes - HFC


93,700


93,000


700


1%


93,600


100


0%




Marketable Homes - Copper 2-Play


39,000


47,900


(8,900)


(19%)


39,600


(600)


(2%)




Marketable Homes - Copper 3-Play


30,200


21,300


8,900


42%


29,600


600


2%




Total


311,600


309,900


1,700


1%


311,300


300


0%





















Note:  The calculation of certain metrics have been revised over time to reflect the current view of our business.  Where necessary prior period metric calculations have been revised to conform with current practice.  All amounts rounded to the nearest 100s, except percents and dollars.


(1) During the third quarter of 2010, we revised our methodology to obtain Broadband residential subscribers, RGUs and business customer counts.  The revised methodology facilitates the consistent application of customer counts within the Broadband segment.  Accordingly, the metrics previously reported for 2010, 2009 & 2008 have been revised to conform to current practice.


(2) Marketable Homes - Prior to Q110, video marketable homes and penetration rate included serviceable homes in Sacramento and Kansas City fiber and hybrid fiber coax (HFC) networks only. With launch of ADTV in Q110, certain copper homes became video serviceable and 3-play capable and are included in marketable home counts. Penetration rates prior to Q110 were not adjusted for small number of video customers on copper network prior to ADTV.


(3) A residential subscriber is a customer who subscribes to one or more residential RGUs.


(4) ARPU is the total residential revenue per average subscriber.


(5) Triple play ARPU includes the total residential revenue per average subscriber and Triple play RGUs per Subscriber includes ending RGUs per ending subscriber, for the triple play markets, excluding the ILEC market.


(6) A business customer is a customer who subscribes to business data, voice or video and represents a unique customer account.  ARPU is the total business revenue per average customer.


(7) A voice RGU is a residential customer who subscribers to one or more voice access line.


(8) Telecom Voice RGU Migration to Broadband Voice are residential Telecom voice RGUs in Line (7) that have ported their Telecom primary access line service to Broadband VoIP.


(9) Telecom Churn excludes disconnects in Line (8) that have ported their Telecom primary access line service to Broadband VoIP.


(10) ILEC Voice RGUs are the total residential voice RGUs in the ILEC franchise market area that are either a Telecom primary access line or Broadband VoIP subscriber.


(11) CLEC Voice RGUs are the total residential voice RGUs in the Kansas City and Sacramento markets, excluding the ILEC market.


(12) Total Voice RGUs are the total of ILEC and CLEC residential voice RGUs, and represent the total company residential voice RGUs of both the Broadband and Telecom Segments.



SUREWEST COMMUNICATIONS

SELECTED OPERATING METRICS (inc KC results from periods prior to acquisition)

As of and for the Quarter Ended



























BROADBAND

3/31/2008 (1)


6/30/2008 (1)


9/30/2008 (1)


12/31/2008 (1)


3/31/2009 (1)


6/30/2009 (1)


9/30/2009 (1)


12/31/2009 (1)


3/31/2010 (1)


6/30/2010 (1)


9/30/2010 (1)


12/31/2010 (1)


3/31/2011 (1)


Residential




























Video





























Marketable Homes (2)

211,000


217,700


221,700


232,400


236,500


239,800


240,000


240,500


261,900


265,100


268,500


271,800


272,600




RGUs

55,100


57,000


58,400


60,000


59,900


59,000


59,000


58,900


58,500


60,200


61,200


61,800


63,100




Quarterly change

600


1,900


1,400


1,600


(100)


(900)


0


(100)


(400)


1,700


1,000


600


1,300




Year-over-Year change

2,700


4,000


4,600


5,500


4,800


2,000


600


(1,100)


(1,400)


1,200


2,200


2,900


4,600




Penetration (2)

24.9%


25.0%


25.2%


24.7%


24.4%


23.7%


23.8%


23.7%


22.3%


22.7%


22.8%


22.7%


23.1%




ARPU

$64


$62


$59


$59


$65


$67


$66


$68


$70


$68


$67


$68


$68



Voice





























Marketable Homes

286,600


292,200


296,600


304,200


308,200


309,300


309,400


309,700


309,900


310,400


311,200


311,300


311,600




RGUs

53,500


56,300


59,700


63,200


66,000


67,700


70,000


71,300


71,800


73,900


74,900


74,900


75,600




Quarterly change

300


2,800


3,400


3,500


2,800


1,700


2,300


1,300


500


2,100


1,000


0


700




Year-over-Year change

1,500


3,800


6,900


9,900


12,500


11,400


10,300


8,100


5,800


6,200


4,900


3,600


3,800




Penetration

18.8%


19.4%


20.2%


20.9%


21.5%


22.0%


22.7%


23.1%


23.2%


23.8%


24.1%


24.1%


24.3%




ARPU

$33


$33


$32


$32


$33


$33


$31


$30


$30


$30


$30


$30


$29



Data





























Marketable Homes

286,600


292,200


296,600


304,200


308,200


309,300


309,400


309,700


309,900


310,400


311,200


311,300


311,600




RGUs

91,500


93,700


95,400


97,100


97,800


97,400


97,600


98,300


97,500


98,900


99,200


99,400


100,300




Quarterly change

1,400


2,200


1,700


1,700


700


(400)


200


700


(800)


1,400


300


200


900




Year-over-Year change

6,000


6,500


6,600


7,000


6,300


3,700


2,200


1,200


(300)


1,500


1,600


1,100


2,800




Penetration

32.0%


32.2%


32.3%


32.0%


31.8%


31.6%


31.6%


31.8%


31.5%


31.9%


31.9%


31.9%


32.2%




ARPU

$39


$37


$36


$36


$37


$38


$38


$40


$42


$41


$41


$42


$42



Total





























RGUs

200,100


207,000


213,500


220,300


223,700


224,100


226,600


228,500


227,800


233,000


235,300


236,100


239,000




Quarterly change

2,300


6,900


6,500


6,800


3,400


400


2,500


1,900


(700)


5,200


2,300


800


2,900




Year-over-Year change

10,200


14,300


18,100


22,400


23,600


17,100


13,100


8,200


4,100


8,900


8,700


7,600


11,200




Subscriber totals





























Subscribers (3)

97,500


99,500


101,100


103,000


103,300


102,400


103,000


103,100


102,500


103,600


104,000


104,100


104,900




Penetration

34.0%


34.1%


34.1%


33.9%


33.5%


33.1%


33.3%


33.3%


33.1%


33.4%


33.4%


33.4%


33.7%




ARPU (4)

$85


$88


$87


$88


$93


$97


$95


$99


$101


$100


$99


$101


$102




Triple Play ARPU (5)

$110


$108


$105


$106


$111


$114


$111


$114


$116


$115


$113


$115


$114




Triple Play RGUs per Subscriber (5)

2.55


2.56


2.56


2.56


2.56


2.55


2.54


2.54


2.53


2.54


2.53


2.53


2.52




Churn

1.4%


1.4%


1.7%


1.4%


1.4%


1.7%


1.8%


1.5%


1.6%


1.6%


1.7%


1.6%


1.4%































Business (6)





























Customers

6,200


6,400


6,600


6,800


6,900


7,000


7,200


7,300


7,400


7,500


7,700


7,800


7,800




ARPU

$403


$441


$477


$451


$467


$459


$467


$476


$479


$502


$526


$535


$539


TELECOM 

3/31/2008


6/30/2008


9/30/2008


12/31/2008


3/31/2009


6/30/2009


9/30/2009


12/31/2009


3/31/2010


6/30/2010


9/30/2010


12/31/2010


3/31/2011


Residential




























Voice





























Marketable Homes

89,900


90,000


90,500


90,800


90,800


90,900


90,900


91,000


91,100


91,200


91,400


91,500


91,700




RGUs (7)

66,800


62,900


58,500


54,000


49,500


45,100


41,300


38,500


35,500


32,800


30,700


28,900


27,300




Cumulative Migration to Broadband Voice (8)

0


1,400


2,900


4,700


6,900


9,000


10,700


11,800


12,900


14,000


14,900


15,400


16,100




Penetration

74.3%


69.9%


64.6%


59.5%


54.5%


49.6%


45.4%


42.3%


39.0%


36.0%


33.6%


31.6%


29.8%




ARPU

$44


$44


$43


$43


$44


$45


$45


$45


$44


$44


$43


$43


$43




Churn (9)

2.3%


2.1%


2.4%


2.2%


2.1%


2.3%


2.3%


2.0%


2.3%


2.1%


2.1%


2.0%


1.8%































Business (6)





























Customers

9,600


9,600


9,400


9,200


9,000


8,900


8,700


8,500


8,300


8,200


8,000


7,900


7,800




ARPU

$311


$341


$354


$327


$332


$339


$329


$334


$334


$340


$360


$359


$356


CONSOLIDATED RESIDENTIAL VOICE RGUs

3/31/2008 (1)


6/30/2008 (1)


9/30/2008 (1)


12/31/2008 (1)


3/31/2009 (1)


6/30/2009 (1)


9/30/2009 (1)


12/31/2009 (1)


3/31/2010 (1)


6/30/2010 (1)


9/30/2010 (1)


12/31/2010 (1)


3/31/2011 (1)




ILEC Voice RGUs





























Broadband

100


2,000


4,400


7,100


9,900


12,400


14,700


16,200


17,500


19,000


20,400


21,000


21,500




Telecom

66,800


62,900


58,500


54,000


49,500


45,100


41,300


38,500


35,500


32,800


30,700


28,900


27,300




Total ILEC Voice RGUs (10)

66,900


64,900


62,900


61,100


59,400


57,500


56,000


54,700


53,000


51,800


51,100


49,900


48,800




Quarterly change

(2,300)


(2,000)


(2,000)


(1,800)


(1,700)


(1,900)


(1,500)