SureWest Reports Fourth Quarter and Full Year 2010 Results

ROSEVILLE, Calif., Feb. 24, 2011 /PRNewswire/ -- SureWest Communications (Nasdaq: SURW) today announced operating results for the fourth quarter and full year ended December 31, 2010.

Steve Oldham, SureWest's president and chief executive officer, said, "Our strong 2010 results were driven by top-line business and residential services revenue growth and increased Adjusted EBITDA. We are pleased to report our seventh consecutive quarter of positive free cash flow as we continue to drive down net debt. Our core Broadband segment continues to create growth and now accounts for 73% of the company's total revenues and 50% of total Adjusted EBITDA. We expect Telecom revenue declines to begin flattening out over the next two years, as access line declines soften and our regulatory subsidies become immaterial. As anticipated, our scheduled subsidies will become fully phased out in 2011 with declines of $4 million, including a sequential reduction of $1 million in the first quarter.    

"Broadband Business revenues grew 17% year-over-year. Our business services revenues continue to be an important part of SureWest's strategy to deliver long-term, sustainable growth. In addition to positive trends in Kansas City business services, revenue growth in Sacramento was supported by increased bandwidth demands for backhaul services to wireless carriers. Our Broadband Residential success was highlighted by the continued success of our superior high-speed data packages, and increased take rates for our Advanced Digital TV and Broadband Voice over IP products in the Sacramento market.

"The investments we've made over the last several years to expand our extensive fiber-to-the-home network and enhance our suite of services have delivered excellent returns and offer many opportunities for additional value creation. Our 2011 plan includes ongoing capital investment to take advantage of residential and business opportunities, with the goal of maintaining long-term sustainable free cash flow and creating shareholder value."

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

Fourth Quarter Financial Results

Consolidated revenues increased 2% year-over-year to $61.6 million as Broadband revenues grew by $3.5 million, or 8%, more than offsetting Telecom revenue declines of $2.1 million, or 11%. Adjusted EBITDA increased 11% year-over-year to $21.8 million, with Broadband Adjusted EBITDA increasing 37% to account for 50% of total EBITDA. Consolidated Adjusted EBITDA margin was 35% compared to 32% in the same period last year.

Operating expenses, exclusive of depreciation and amortization, decreased 2% year-over-year to $40.9 million due primarily to reductions in labor and advertising expense offsetting increases in residential video license fees and transport charges associated with commercial services growth. During the year, the company reduced its employee count by 75 to 818 and reduced professional fees, resulting in an estimated annualized savings of over $6 million. Additional cost-saving initiatives included the consolidation of office space, which is expected to save the company $1.3 million annually beginning in the first quarter of 2011.

Net income for the quarter was $1.95 million as a result of revenue and EBITDA growth, compared to a net loss of $100 thousand in the same period last year. Earnings per share from continuing operations were $0.14 compared to zero in the fourth quarter 2009 and $0.10 in the third quarter 2010.

Free cash flow, defined as income from continuing operations plus depreciation and amortization less capital expenditures, was $4.4 million for the quarter and $12.6 million for the full year 2010, compared to $2.1 million in 2009. SureWest expects that capital expenditures and associated free cash flow results will vary quarter-to-quarter based on fiber network expansion in Kansas City and developing business services opportunities such as wireless carrier backhaul, near-net fiber connections and possible data center expansion.

Cash and cash equivalents decreased year-over-year to $2.9 million from $7.5 million. During the year, SureWest paid down $17.6 million in debt and repurchased 430 thousand shares of outstanding stock at an average price of $7.07 for $3 million. Total debt net of cash and cash equivalents (net debt) was $202.5 million, resulting in a net debt to Adjusted EBITDA ratio of 2.45x.

Capital expenditures totaled $13.3 million for the fourth quarter and $52.6 million for the full year 2010, a decrease from $58.3 million in 2009. The company expects to continue taking advantage of high margin growth opportunities, as well as favorable tax treatment, and is targeting its 2011 capital plan at prioritizing spending where it has experienced the greatest return on investment. This includes continued business sales growth opportunities, residential RGU growth and increased residential penetration on current networks. Beginning in the second quarter 2011, the company plans to construct and pass 10,000 additional fiber homes during 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. 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.

Broadband Segment Results

Broadband revenues increased 8% year-over-year and accounted for 73% of the company's total revenues, compared to 69% in the fourth quarter 2009. Broadband Adjusted EBITDA increased 37% year-over-year and now represents 50% of the company's total EBITDA. SureWest expects to continue increasing its Broadband revenues and Adjusted EBITDA through expansion of both residential and business product offerings. The long-term strategy remains growing the Broadband segment while continuing to successfully offset industry-wide structural declines in the traditional Telecom segment. 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 4% year-over-year to $31.6 million as a result of 3% growth in ARPU and a 3% 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:

The Sacramento region's Advanced Digital TV product continued to drive growth, increasing net video RGUs by 2,900 year-over-year and 600 sequentially. SureWest had 13,186 Advanced Digital TV subscribers through the fourth quarter, representing 52% of the company's overall video RGUs in the Sacramento market. Approximately 98% of the Advanced Digital TV subscribers bundle Internet and 85% subscribe to a triple-play.

ARPU for the company's fiber-to-the-home (FTTH) and HFC networks increased 1% year-over-year and 2% sequentially to $115 due to a video price increase of $3 and a data price increase of $1 on September 1, 2010. 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.

Residential customer churn improved sequentially to 1.6% in the fourth quarter as a result of churn reduction programs, value-added features and ongoing superior service levels. Churn increased slightly from 1.5% in the same period last year.  

Broadband Business:

Broadband Business revenues increased by $2.1 million, or 20%, year-over-year to $12.4 million. Business customers increased 7% year-over-year to 7,800 and ARPU grew 12% from the prior year to $535. 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 11%. The Sacramento market grew customer counts by 4%, while ARPU grew by 16% driven by wireless carrier backhaul and existing customers taking additional products such as data center services.

SureWest's extensive fiber network provides the capacity to capture new sales without significant additional capital expenditures, as evidenced by contracts to serve over 350 wireless carrier backhaul sites in Sacramento and Kansas City. Opportunities exist and are currently being pursued to serve several hundred additional sites in each region. As of December 31, 2010, SureWest was billing for 169 sites at annualized revenues of $2 million and expects to be billing for over 300 sites by the end of 2011.

Telecom Segment Results

Telecom revenues declined 11% year-over-year to $16.6 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 of approximately 50% or higher, 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. Fourth quarter 2010 year-over-year consolidated ILEC voice RGU loss was 4,800, compared to loss of 6,400 in the fourth quarter 2009. In addition, fourth quarter 2010 consolidated year-over-year loss in ILEC and CLEC voice RGUs combined was 6,000, compared to a loss of 7,400 in the fourth quarter 2009. Also, the migration of existing Telecom ILEC access lines to Broadband VoIP enables the continued preservation of voice revenues on a consolidated basis. 

As the company focuses on growing its Broadband segment, the Telecom segment continues to account for a smaller percentage of total revenues at 27%, compared to 31% in the fourth quarter 2010.

Telecom Residential:

Telecom Residential revenues declined 29% year-over-year to $3.8 million resulting from a 25% decline in Telecom voice RGUs. However, of the 9,600 year-over-year Telecom Residential voice RGU losses, 3,600, or 38%, migrated to the SureWest Broadband Voice over IP service.

Telecom Business:

Telecom Business revenues remained steady year-over-year at $8.6 million as the climate for small- and medium-sized businesses in the Sacramento region, particularly those impacted by California's real estate market, began to stabilize. Customer counts declined 7% to 7,900 due to small companies going out of business for economic reasons, which is reflected in the 8% increase in ARPU from the prior year to $359 as the company retained existing customers with higher ARPU.

Telecom Access:

Telecom Access revenues decreased $470 thousand year-over-year to $4.1 million primarily due to the scheduled reduction in the California High Cost Fund (CHCF) subsidy and the decline in switched access revenues related to access line loss. The annual CHCF subsidies were $4.1 million in 2010, a decrease from $6.1 million in 2009, and will be $2 million in 2011 and zero in 2012. Additionally, the transport interconnection charges have been eliminated effective January 1, 2011 resulting in an estimated reduction of $2 million in 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) from continuing operations 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) 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 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 11 a.m. Eastern Time on Thursday, February 24. 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 March 3, 2011 by calling 888.286.8010 and entering pass code 56637457. 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, 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.

SOURCE SureWest Communications