SureWest Reports First Quarter 2011 Results

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

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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):

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:

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
r.rogers@surewest.com

Misty Wells
Investor Relations
916-786-1799
m.wells@surewest.com