SureWest Reports Third Quarter 2011 Results

ROSEVILLE, Calif., Oct. 27, 2011 /PRNewswire/ -- SureWest Communications (NASDAQ: SURW) today announced operating results for the third quarter ended September 30, 2011.

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

Steve Oldham, SureWest’s president and chief executive officer, said, “We continue to grow the company effectively by adding new residential and business subscribers, reducing churn and increasing revenues from our existing customers. SureWest maintains a strong presence in our markets due to our anticipation of the demand for high bandwidth Broadband services. As a result, we have been able to overcome the industry-wide decline in revenues from losses in traditional access lines, telephone minutes of use and regulatory support revenues.

“In late July we launched a new residential advertising campaign in the Sacramento market designed to create more awareness in our service area. The campaign helped drive new subscriber and RGU growth that is expected to continue in the fourth quarter. Due to its success in attracting higher margin subscribers with less discounting, we will expand the campaign into the Kansas City market in 2012. We continuously monitor the reaction to our marketing efforts from both our customers and competitors, and will adjust tactics as necessary in order to gain market share.

“Revenue growth from wireless carrier backhaul in the Sacramento market also provided a significant impact, and we are now billing for 280 connections that generate $3.2 million in annualized revenues. We have contracts in place for 390 connections and anticipate over $4 million in annualized revenues when those sites are active. Our business customer growth in the Kansas City market is continuing and we are adding more medium- and large-sized companies, which helped drive a 7% year-over-year increase in ARPU in that region to $685 per month.

“In the first quarter of 2012, after the final phase out of the California High Cost Fund subsidy, we will have reduced revenues from regulatory supports from 56% of adjusted EBITDA in 2005 to roughly 11%. We have greatly reduced the risk to our shareholders from future regulatory and policy changes in the industry without compromising the superior experience we provide to our customers. As we grow, we remain focused on increasing long-term cash flow and shareholder return.”

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

Financial Results

Consolidated revenues increased 3% year-over-year to $63 million. Broadband revenues grew by $4.2 million, or 9%, more than offsetting expected Telecom revenue declines of $2.3 million, or 13%. Broadband adjusted EBITDA increased 16% and now represents 56% of total adjusted EBITDA. However, Telecom adjusted EBITDA declined 18% for a total adjusted EBITDA decrease of 2%, or $456,000, year-over-year to $20.9 million.

Operating expenses, exclusive of depreciation and amortization, increased 7%, or $2.8 million, year-over-year to $43.2 million. This increase resulted from a new advertising campaign, and increases related to subscriber growth including video programming and transport fees. Savings from office consolidation helped offset these increases.

Net income for the quarter was $643,000 compared to $1.4 million in the same period last year. Basic and diluted earnings per share was $0.05 compared to $0.10 in the third quarter 2010.

Capital expenditures totaled $18.7 million for the third quarter, a $5.8 million increase compared to $12.9 million in the same period last year. During the quarter, SureWest added 4,200 new marketable homes to its fiber-to-the-home (FTTH) network in Kansas City, completing 9,600 of the scheduled 15,500 additional fiber homes planned for 2011. Also during the quarter, the company upgraded 2,400 ILEC territory copper homes with Advanced Digital TV service, completing 5,800 of the planned 6,800 upgrades.  These upgrades have increased the percentage of fiber and copper triple-play marketable homes in the ILEC to 63%, up from 53% in the third quarter 2010.

In relation to these additional marketable homes and network upgrades, the company invested $7.5 million in network expansion capital in the third quarter 2011, compared to $7 million in the second quarter 2011 and $329,000 in the third quarter 2010. The remaining $11.2 million in third quarter 2011 capital spend was driven by residential and business success and core maintenance support. The company will continue to take advantage of growth opportunities and the favorable bonus depreciation tax provision in relation to these new investments. Projected 2011 capital expenditures are expected to be in the $68-72 million range. Projected capital expenditures remain in the $60-70 million range for 2012, with roughly 10-11,000 new fiber homes scheduled in the Kansas City market. Projected 2013 capital expenditures remain in the $55-65 million range.

Free cash flow, defined as net income (loss) plus depreciation and amortization less capital expenditures, was negative $2.2 million for the quarter compared to positive $4.2 million in the third quarter 2010. This decline was anticipated as a result of the new investment in network expansion. Adjusted free cash flow, defined as free cash flow excluding capital investments in network-based expansion, increased $694,000 year-over-year to $5.3 million. The company expects capital expenditures and associated free cash flow to vary quarter-to-quarter based on fiber network expansion in Kansas City and the resulting opportunities for additional residential and business services growth.

Cash and cash equivalents decreased by $2.1 million sequentially, from $11 million in the second quarter 2011 to $8.9 million. The average cost of debt for the quarter remained low at 3.7%. Total debt net of cash and cash equivalents (net debt) was $197 million, resulting in a net debt to adjusted EBITDA ratio of 2.3x.

Broadband Segment Results

Broadband revenues increased 9% year-over-year and accounted for 76% of the company’s total revenues in the quarter. SureWest expects to continue increasing its Broadband revenues and adjusted EBITDA as a result of growth in both residential and business services.

Broadband Residential:

Broadband Residential revenues increased 9% year-over-year to $33.7 million as a result of 3% growth in revenue generating units (RGUs) and a 7% increase in overall average revenue per user (ARPU). New products and features like Advanced Digital TV in Sacramento, and increased Internet speeds, additional HD channels, home networking and Internet security software in both markets, have continued to create enhanced subscriber value and improve SureWest’s pricing power. In July 2011, the company implemented video and data price increases positively impacting third quarter ARPU.  

Advanced Digital TV continued to drive growth in the Sacramento market, with video RGUs increasing by 9% year-over-year and 1% sequentially. SureWest served 19,688 Advanced Digital TV subscribers in Sacramento through the third quarter, representing 72% of the company’s video RGUs in that market. ARPU for these subscribers was $139 with approximately 98% bundling the company’s high-performing data service and 81% subscribing to a triple-play. At the end of the third quarter, the average monthly bill of an Advance Digital TV customer subscribing to all three services was $145 compared to $130 at the end of the third quarter 2010.

Growth in the Kansas City market was driven by new fiber marketable homes, with 1,900 subscriber additions and 2,700 RGU additions year-over-year. A penetration rate of 17% has already been achieved on the fiber homes released in the last 3-6 months.

Residential customer churn improved year-over-year from 1.7% to 1.6% in the third quarter, aided in part by new customer retention programs, value-added features and continuously improving customer service levels.  In the Sacramento market, churn decreased to 1.6% in the third quarter 2011 from 1.9% in the same period last year. The company attributes this to the strength of its Advanced Digital TV and best-in-class Internet service.

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 $1.6 million, or 13%, year-over-year to $13.6 million. Business customers increased 4% year-over-year to 8,000 and ARPU grew 8% from the prior year to $570. 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 5%. The Sacramento market grew customer counts by 3% and ARPU increased 10% driven by wireless backhaul and existing customers adding new products and features.

As of September 30, 2011, SureWest was billing for 280 wireless backhaul access points at annualized revenues of $3.2 million. The company is now scheduled to bill for over 360 backhaul connections by the end of 2011 and 390 by the second quarter of 2012, with over $4 million in annualized revenues when those sites are active. Opportunities are currently being pursued to serve additional connections in both the Sacramento and Kansas City markets.

Telecom Segment Results

Telecom revenues declined 13% year-over-year to $15 million, consistent with the industry-wide trend of declines in access lines, minutes of use and access revenues. This was partially due to the anticipated decrease of $1 million in regulatory support revenues that were reduced as scheduled in the first quarter 2011. The company’s scheduled regulatory support declines began in 2006 and will be fully phased out in the first quarter 2012 after the final payment in the fourth quarter 2011.

The Telecom segment has consistently produced 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. SureWest has effectively removed regulatory risk from its business by investing in high performing broadband networks that will continue to drive additional revenue and cash flow growth.

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 third quarter 2011, Telecom revenues were 24% of total company revenues.

Telecom Residential:
Telecom Residential revenues declined 22% year-over-year to $3.2 million resulting from a 21% decline in Telecom voice RGUs. However, of the 6,500 year-over-year Telecom Residential voice RGU losses, 2,600, or 40%, migrated to the SureWest Broadband VoIP service, which enables the continued preservation of consolidated voice revenues.

Telecom Business:
Telecom Business revenues declined 7% year-over-year to $8.1 million as a result of a 4% decrease in business customers in the company’s incumbent ILEC territory. Telecom Business revenues represent 54% of total Telecom segment revenues. The company is seeing some competitive pressure in the very small business customer segments; however, medium and large ILEC business customers remain stable.

Telecom Access:
Telecom Access revenues decreased by $715,000 year-over-year to $3.6 million primarily due to the scheduled reduction in the California High Cost Fund (CHCF), the elimination of the transport interconnection charge (TIC) and the decline in switched access revenues related to access line loss and declining minutes of use. The combined annual regulatory support related to the CHCF and TIC will decline by $4 million in 2011 - from $6.1 million in 2010 to $2.0 million in 2011 - and will be fully phased out after the final payment in the fourth quarter 2011.

Non-GAAP Measures

In addition to the results presented in accordance with generally accepted accounting principles (GAAP) throughout this press release, the company has presented non-GAAP financial measures such as adjusted EBITDA, free cash flow, adjusted 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. Adjusted free cash flow represents free cash flow as defined above, excluding the network expansion capital investments. Free cash flow and adjusted free cash flow are 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, October 27. 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 November 3, 2011 by calling 888.286.8010 and entering pass code 53755082. 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 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. For up-to-date information on products and services, visit the company on Facebook and Twitter.

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]

SOURCE SureWest Communications