SureWest Reports Third Quarter 2010 Results

ROSEVILLE, Calif., Oct. 28 /PRNewswire-FirstCall/ -- SureWest Communications (Nasdaq: SURW) today announced operating results for the third quarter ended September 30, 2010.

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Steve Oldham, SureWest's president and chief executive officer, said, "SureWest's strong third quarter results demonstrate the wisdom of our long-term strategy to invest in and grow our Broadband segment. Broadband Business revenues grew 20% compared to the year-ago quarter, and business services will continue to be meaningful to our growth strategy. Our Broadband Residential success is highlighted by a 4% increase in both ARPU and RGUs, sparked by customer demand for our new Advanced Digital TV product in the Sacramento market and continued success in migrating Telecom access lines to our Broadband Voice over IP product.

"The momentum of the last several quarters is continuing as we are reaping the benefits of investments made in our network-based facilities over the last several years and the leveling off of declines in the Telecom segment. Additionally, I am pleased that new revenue-generating opportunities over our fiber networks have exceeded our expectations. For example, our current efforts to secure additional wireless carrier backhaul contracts have proven very successful. We now have agreements in place for over 300 wireless sites with 100 additional sites in negotiation. We will continue to take advantage of opportunities to meet customer demand for enhanced residential and business services."

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

Financial Results

Consolidated revenues increased 3% year-over-year to $61.1 million as Broadband revenues grew by $3.7 million, or 9%, more than offsetting Telecom revenue declines of $2.1 million, or 11%. Adjusted EBITDA increased 13% year-over-year to $21.3 million, with Broadband Adjusted EBITDA increasing 65% to account for 47% of total EBITDA. As announced in the second quarter, the company reduced its workforce by 60 positions and reduced professional fees, resulting in third quarter labor expense savings of $1.5 million and an estimated annualized savings of over $6 million. In addition, the company will continue with cost-saving initiatives, such as the consolidation of office space, which is expected to save $1.3 million annually beginning in 2011.

Operating expenses, exclusive of depreciation and amortization, decreased 3% year-over-year to $40.4 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.

Net income for the quarter was $1.4 million as a result of revenue and EBITDA growth, compared to net loss of $211 thousand in the same period last year. Earnings per share from continuing operations was positive $.10 compared to negative $.02 in the third quarter 2009 and negative $.04 in the second quarter 2010.

Free cash flow, defined as income from continuing operations plus depreciation and amortization less capital expenditures, was positive $4.2 million for the quarter and $8.2 million for the nine months ended September 30, 2010, compared to $1.7 million for the first nine months of 2009. SureWest expects that its capital expenditures and associated free cash flow results will vary quarter-to-quarter based on developing commercial sales opportunities such as wireless carrier backhaul, near-net fiber connections and possible data center expansion.

Cash and cash equivalents decreased sequentially to $3.2 million from $6.2 million. During the quarter, SureWest paid down $10 million in debt and repurchased 55 thousand shares of outstanding stock at an average price of $7.07 for $388 thousand. Total debt net of cash and cash equivalents (net debt) was $205.8 million, resulting in a net debt to Adjusted EBITDA ratio of 2.6x.

Capital expenditures totaled $12.9 million for the third quarter and $39.3 million for the nine months ended September 30, 2010, compared to $43.4 million for the first nine months of 2009. The company is reiterating projected 2010 capital expenditures of $50-55 million. The 2011 capital plan is targeted at prioritizing capital spending to those opportunities where the company has experienced the greatest return on investment, including continued business sales growth opportunities, and residential RGU growth and increased penetration on current networks. SureWest expects to allocate 2011 capital to increase residential fiber marketable homes 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 late 2008 and 2009 have already reached 33% penetration. Approximately 25% of 2011 expenditures are planned for network expansion and over 55% are for success-based investment. Capital spending for 2011 is estimated to be $60-70 million to take advantage of growth opportunities.

Broadband Segment Results

Broadband revenues increased 9% year-over-year and accounted for 72% of the company's total revenues, compared to 67% in the third quarter 2009. Consistent with its long-term strategy, the company continues to successfully offset industry-wide structural declines in the traditional Telecom segment with increases in the growing Broadband segment.

Broadband Residential:

Broadband Residential revenues increased 5% year-over-year to $31 million as a result of 4% growth in average revenue per user (ARPU) and a 4% increase in revenue generating units (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 new Advanced Digital TV product continued to drive growth, increasing net video RGUs by 2,200 year-over-year and 1,000 sequentially. SureWest had 10,140 Advanced Digital TV subscribers through the third quarter, representing 41% of the company's overall video RGUs in the Sacramento market. Triple-play take rate for Advanced Digital TV was 87%.

ARPU for the company's fiber-to-the-home (FTTH) and HFC networks increased 2% year-over-year to $113 from $111 as customer demand for higher data speeds, and HD and DVR services increased from the prior year. Sequentially, ARPU declined $2 from $115 primarily due to promotional sales activity, front loaded discounts and retention efforts aimed at mitigating the third quarter's seasonally higher churn rates. The campaign was designed to drive RGU growth through a short-term discount with an expectation of future ARPU increases as the promotional period phases out.

Residential customer churn improved to 1.7% in the third quarter compared to 1.8% in the same period last year as a result of churn reduction programs and ongoing superior service levels.

Broadband Business:

Broadband Business revenues increased by $2 million, or 20%, year-over-year to $12 million. Customer counts increased 7% year-over-year to 7,700 and ARPU grew 13% from the prior year to $526. 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 14%. In Sacramento, sales contracts and activity continued to increase compared to 2009.

SureWest's extensive fiber-optic network provides the capacity to capture new sales without significant additional capital expenditures, as evidenced by contracts to serve over 300 wireless carrier backhaul sites in Sacramento. One hundred additional sites are currently in negotiations. SureWest is presently billing for 129 sites at annualized revenues of $1.4 million and by the end of the year will be billing for at least 170 sites, representing annualized revenues of $1.9 million.

Telecom Segment Results

Telecom revenues declined 11% year-over-year to $17.3 million due to the industry-wide trend of declines in access lines and access revenues. 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.

As the company focuses on growing its Broadband segment, the Telecom segment continues to account for a smaller percentage of total revenues at 28%, compared to 33% in the third quarter 2009. Internal forecasts anticipate the slowing of Telecom declines over the next several years, both due to the slowing of access line losses and the phasing out of Telecom support mechanisms by the end of 2011.

Telecom Residential:

Telecom Residential revenues declined 30% year-over-year to $4.1 million resulting from a 26% decline in Telecom voice RGUs. However, of the 10,600 year-over-year Telecom Residential voice RGU losses, 4,200, or 40%, migrated to the SureWest Broadband Voice over IP service.

Telecom Business:

Telecom Business revenues increased 1% year-over-year to $8.8 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 8% to 8,000; however, ARPU increased 9% from the prior year to $360 due to retaining existing customers with higher ARPU. The customer count declines are mostly related to contraction in the economy, not from competition, and are expected to flatten out and begin growing as the Sacramento economy recovers and office vacancy rates decline.

Telecom Access:

Telecom Access revenues decreased $330 thousand year-over-year to $4.3 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 are scheduled to be $4.1 million in 2010, a decrease from $6.1 million in 2009, and will be $2.1 million in 2011 and zero in 2012. Additionally, the transport interconnection charge will be 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 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 11 a.m. Eastern Time on Thursday, October 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 Thursday, November 4, 2010 by calling 888.286.8010 and entering pass code 96721927. 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