OREANDA-NEWS. August 03, 2016. Otelco Inc. (NASDAQ:OTEL), a wireline telecommunications services provider in Alabama, Maine, Massachusetts, Missouri, New Hampshire, Vermont and West Virginia, and a provider of cloud hosting and managed services, today announced results for its second quarter ended June 30, 2016. Key highlights for Otelco include:

  • Total revenues of \\$17.2 million for second quarter 2016.
  • Operating income of \\$4.9 million for second quarter 2016.
  • Consolidated EBITDA (as defined below) of \\$7.1 million for second quarter 2016.

The improvements we have made in our network and operations cost structure offset the decline in revenue this quarter when compared with the same period in 2015, said Rob Souza, President and Chief Executive Officer of Otelco. Operating income increased \\$0.1 million, and Consolidated EBITDA was essentially flat when compared with the prior year period. Top line residential revenue remains under pressure for all telephone companies, and our strategy is focused on both delivering continuous cost improvements across our markets and implementing top-line revenue enhancements, promotions, and, where appropriate, pricing  actions.

Marketing programs, including new speed and pricing options and delivery approaches, helped keep our residential data lines basically flat compared to the end of 2015, continued Souza. We have received a multi-year contract extension for circuits serving Alabama schools in and adjacent to our territory, including orders to increase capacity on the majority of these circuits that will be upgraded during third quarter 2016. In addition, we have added a second 10 gigabit light-wave to our new northern fiber ring project to meet another customers requirement for high-speed connectivity in Northern Maine. Sales of video and security products, which are residentially focused, both grew during second quarter. While sales of our Hosted PBX product continue to grow as our flagship CLEC business product, we saw a slower growth rate in second quarter 2016.

Our capital investment of \\$1.5 million in the business during second quarter 2016 is consistent with our level of investment over the past several years, noted Souza. We continue to increase the reach of fiber in our network to support higher data speeds as required by our customers. We ended second quarter 2016 with \\$8.3 million in cash, or an increase of \\$1.4 million since December 31, 2015. 

Second Quarter 2016 Financial Summary 
(Dollars in thousands, except per share amounts) 
(Unaudited) 
  Three Months Ended June 30, Change 
   2016   2015  Amount Percent  
Revenues\\$17,232  \\$17,892  \\$(660)  (3.7)% 
Operating income\\$4,899  \\$4,765  \\$134   2.8 % 
Interest expense\\$(2,721) \\$(1,991) \\$730   36.7 % 
Net income available to stockholders\\$1,324  \\$1,655  \\$(331)  (20.0)% 
Basic net income per share\\$0.40  \\$0.51  \\$(0.11)  (21.6)% 
Diluted net income per share\\$0.39  \\$0.50  \\$(0.11)  (22.0)% 
           
Consolidated EBITDA(1)\\$7,053  \\$7,104  \\$(51)  (0.7)% 
Capital expenditures\\$1,509  \\$1,528  \\$(19)  (1.2)% 
           
           
  Six Months Ended June 30, Change 
   2016   2015  Amount Percent  
Revenues\\$34,722  \\$35,535  \\$(813)  (2.3)% 
Operating income\\$9,645  \\$9,273  \\$372   4.0 % 
Interest expense\\$(5,203) \\$(4,039) \\$1,164   28.8 % 
Net income available to stockholders\\$3,074  \\$3,790  \\$(716)  (18.9)% 
Basic net income per share\\$0.94  \\$1.17  \\$(0.23)  (19.7)% 
Diluted net income per share\\$0.91  \\$1.15  \\$(0.24)  (20.9)% 
           
Consolidated EBITDA(1)\\$14,680  \\$15,112  \\$(432)  (2.9)% 
Capital expenditures\\$2,215  \\$3,013  \\$(798)  (26.5)% 
           
           
Reconciliation of Consolidated EBITDA to Net Income         
  Three Months Ended June 30, Six Months Ended June 30,  
   2016   2015   2016   2015   
Net income\\$1,324  \\$1,655  \\$3,074  \\$3,790   
Add:Depreciation 1,792   1,929   3,571   3,843   
 Interest expense less interest income 2,400   1,768   4,439   3,590   
 Interest expense - amortize loan cost 321   222   764   447   
 Income tax expense 858   1,102   1,991   2,490   
 Amortization - intangibles 259   335   518   670   
 Stock-based compensation (earn-out) (78)  (54)  -   71   
 Stock-based compensation (Board & senior management) 137   105   199   141   
 Other excluded expense -   17   -   20   
 Loan fees 40   25   124   50   
Consolidated EBITDA(1)\\$7,053  \\$7,104  \\$14,680  \\$15,112   
           

(1) Consolidated EBITDA is defined as consolidated net income (loss) plus consolidated net interest expense, depreciation and amortization, income taxes and certain other fees, expenses and non-cash charges reducing consolidated net income. Consolidated EBITDA is a supplemental measure of the Companys performance that is not required by, or presented in accordance with, accounting principles generally accepted in the United States (GAAP). Consolidated EBITDA corresponds to the definition of Consolidated EBITDA in the Companys credit facilities. The lenders under the Companys credit facilities utilize this measure to determine compliance with credit facility requirements. The Company uses Consolidated EBITDA as an operational performance measurement to focus attention on the operational generation of cash which is used for reinvestment into the business; to repay its debt and to pay interest on its debt; to pay income taxes for other corporate requirements. The Company reports Consolidated EBITDA to allow current and potential investors to understand this performance metric and because the Company believes that it provides current and potential investors with helpful information with respect to the Companys operating performance and cash flows. However, Consolidated EBITDA should not be considered as an alternative to net income, operating income or any other performance measures derived in accordance with GAAP or as an alternative to net cash provided by operating activities as a measure of the Companys liquidity. The Companys presentation of Consolidated EBITDA may not be comparable to similarly titled measures used by other companies.

                   
 Otelco Inc. - Key Operating Statistics   
 (Unaudited)   
              % Change   
    As of December 31, March 31, June 30, from   
      2014 2015 2016 2016 March 31, 2016   
 Business/Enterprise               
  CLEC               
   Voice lines  19,324 18,606 18,069 17,650  (2.3)%   
   HPBX seats  10,029 10,740 10,746 10,800  0.5 %   
   Data lines  3,313 3,629 3,621 3,638  0.5 %   
   Wholesale network lines 2,968 2,743 2,680 2,651  (1.1)%   
   Classifax  80 140 158 163  3.2 %   
  RLEC               
   Voice lines  15,506 16,123 16,139 16,030  (0.7)%   
   Data lines  1,587 1,539 1,532 1,652  7.8 %   
  Access line equivalents (1) 52,807 53,520 52,945 52,584  (0.7)%   
                   
 Residential               
  CLEC               
   Voice lines  275 225 221 219  (0.9)%   
   Data lines  363 282 281 278  (1.1)%   
  RLEC               
   Voice lines  25,569 23,143 22,604 22,140  (2.1)%   
   Data lines  20,206 20,089 20,031 20,009  (0.1)%   
  Access line equivalents (1) 46,413 43,739 43,137 42,646  (1.1)%   
                   
 Otelco access line equivalents (1) 99,220 97,259 96,082 95,230  (0.9)%   
                   
 Video   3,852 3,648 3,708 3,671  (1.0)%   
 Security systems  243 326 337 343  1.8 %   
 Other internet lines  3,202 2,840 2,794 2,684  (3.9)%   
                   

(1We define access line equivalents as retail and wholesale voice lines (including Classifax, our virtual faxing solution) and data lines (including cable modems, digital subscriber lines, and dedicated data access trunks).

FINANCIAL DISCUSSION FOR SECOND QUARTER 2016:

Revenues

Total revenues decreased 3.7% in the three months ended June 30, 2016, to \\$17.2 million from \\$17.9 million in the three months ended June 30, 2015. The decrease in residential RLEC voice access lines and access revenue decreases due to the FCCs inter-carrier compensation reform order (the FCCs order) account for the majority of the decline, which was partially offset by an increase in internet, and video and security revenue. The table below provides the components of our revenues for the three months ended June 30, 2016, compared with the same period of 2015.

            
   Three Months Ended June 30,  Change   
    2016   2015  Amount Percent  
                
     (dollars in thousands)    
 Local services\\$5,849  \\$6,314  \\$(465)  (7.4)% 
 Network access 5,345   5,614   (269)  (4.8)% 
 Internet 3,879   3,726   153   4.1 % 
 Transport services 1,230   1,328   (98)  (7.4)% 
 Video and security 718   688   30   4.4 % 
 Managed services  211   222   (11)  (5.0)% 
 Total\\$17,232  \\$17,892  \\$(660)  (3.7)% 
            

Local services revenue decreased 7.4% in the quarter ended June 30, 2016, to \\$5.8 million from \\$6.3 million in the quarter ended June 30, 2015. The decline in RLEC residential voice access lines and the impact of the FCCs order, which reduces or eliminates intrastate and local cellular revenue, accounted for a decrease of \\$0.3 million. A portion of the RLEC decrease is recovered through the Connect America Fund, which is categorized as interstate access revenue. The decline in long distance and special line revenue accounted for a decrease of \\$0.2 million. Network access revenue decreased 4.8% in the second quarter 2016 to \\$5.3 million from \\$5.6 million in the second quarter 2015. The Connect America Fund and end user charges increased \\$0.1 million. This increase was offset by declines in special access charges of \\$0.2 million and interstate and intrastate switched access charges of \\$0.2 million. Internet revenue increased 4.1% in the second quarter 2016 to \\$3.9 million from \\$3.7 million in the second quarter 2015. Higher equipment fees, increased broadband speed and pricing accounted for the increase. Transport services revenue decreased 7.4% in the quarter ended June 30, 2016, to \\$1.2 million from \\$1.3 million in the quarter ended June 30, 2015. The decrease was in wide area network revenue, including a one-time customer adjustment. Video and security revenue increased 4.4% in the three months ended June 30, 2016, to just over \\$0.7 million from just under \\$0.7 million in the three months ended June 30, 2015. Increases in security and IPTV deployment and cable pricing were partially offset by decreases in pay per view revenue and digital cable subscribers.  Managed services revenue decreased 5.0% in the quarter ended June 30, 2016, over the comparable period in 2015 to remain at just over \\$0.2 million. The decrease was in equipment sales and groupware services.

Operating Expenses

Operating expenses in the three months ended June 30, 2016, decreased 6.0% to \\$12.3 million from \\$13.1 million in the three months ended June 30, 2015. Cost of services decreased 6.3% to \\$7.9 million in the quarter ended June 30, 2016, from \\$8.4 million in the quarter ended June 30, 2015. Internet, circuit and digital equipment expense decreased \\$0.2 million; access, toll and reciprocal compensation expense decreased by \\$0.1 million; HPBX expense decreased by \\$0.1 million; and marketing, sales and directory expense decreased by \\$0.1 million, reflecting New England operations optimization. Selling, general and administrative expenses decreased 2.0% to \\$2.4 million in the three months ended June 30, 2016, from \\$2.5 million in the three months ended June 30, 2015. Small decreases in external relations, executive, insurance and uncollectible were partially offset by small increases in legal expense and sales concession costs. Depreciation and amortization for second quarter 2016 decreased 9.4% to \\$2.1 million from \\$2.3 million in second quarter 2015. New England CLEC and RLEC and Alabama cable depreciation decreased \\$0.1 million and the amortization of other intangible assets decreased \\$0.1 million.

Operating Income

Operating income in the three months ended June 30, 2016, increased 2.8% to \\$4.9 million from \\$4.8 million in the three months ended June 30, 2015. Cost improvement and expense management savings exceeded the decrease in revenue for the period.

Interest Expense

Interest expense in the three months ended June 30, 2016, increased 36.7% to \\$2.7 million from \\$2.0 million in the three months ended June 30, 2015. Higher interest rates on the Companys new loan facilities accounted for an increase of \\$0.6 million and the increased loan cost amortization accounted for an increase of \\$0.1 million.

Net income

Based on the changes noted above, net income decreased \\$0.3 million to \\$1.3 million for the three months ended June 30, 2016, when compared to just over \\$1.6 million in the same period in 2015.

Consolidated EBITDA

Consolidated EBITDA decreased slightly to just under \\$7.1 million for the three months ended June 30, 2016, when compared to just over \\$7.1 million in the same period in 2015. Stock-based (non-cash) compensation is added back in the calculation of Consolidated EBITDA. See financial tables for a discussion of Consolidated EBITDA (a non-GAAP measurement) and a reconciliation of Consolidated EBITDA to net income.

Balance Sheet

As of June 30, 2016, the Company had cash and cash equivalents of \\$8.3 million compared with \\$6.9 million at the end of 2015. As announced during first quarter, the Company entered into new five year senior and five and a half year subordinated loan facilities. The combined \\$100.3 million term loan facilities were used to pay all amounts due under the Companys previous credit facility and, with cash from the balance sheet, to pay loan costs associated with the transaction. A \\$5.0 million revolver under the senior loan facility remains undrawn. Principal payments on the senior term loan facility are \\$1.0 million per quarter, payable on April 1, July 1, October 1 and January 1 of each year. A change in GAAP nets loan costs against the outstanding balance of the term loan facilities. At June 30, 2016, the outstanding senior loan balance is \\$84.0 million and the outstanding subordinated loan balance is \\$15.4 million.

Capital Expenditures

Capital expenditures were \\$1.5 million for both second quarter 2016 and the same period in 2015.   

Second Quarter Earnings Conference Call

Otelco has scheduled a conference call, which will be broadcast live over the internet, on Wednesday, August 3, 2016, at 11:30 a.m. (Eastern Time). To participate in the call, participants should dial (719) 325-2402 and ask for the Otelco call 10 minutes prior to the start time. Investors, analysts and the general public will also have the opportunity to listen to the conference call free over the internet by visiting the Companys website at www.OtelcoInc.com. To listen to the live call online, please visit the website at least 15 minutes early to register, download and install any necessary audio software. For those who cannot listen to the live webcast, a replay of the webcast will be available on the Company's website at www.OtelcoInc.com for 30 days.  A two-week telephonic replay may also be accessed by calling (719) 457-0820 and entering the Confirmation Code 6457216.

ABOUT OTELCO

Otelco Inc. provides wireline telecommunications services in Alabama, Maine, Massachusetts, Missouri, New Hampshire, Vermont and West Virginia. The Companys services include local and long distance telephone, digital high-speed data lines, transport services, network access, cable television and other related services. With approximately 95,000 voice and data access lines, which are collectively referred to as access line equivalents, Otelco is among the top 25 largest local exchange carriers in the United States based on number of access lines. Otelco operates eleven incumbent telephone companies serving rural markets, or rural local exchange carriers. It also provides competitive retail and wholesale communications services and technology consulting, managed services and private/hybrid cloud hosting services through several subsidiaries. For more information, visit the Companys website at www.OtelcoInc.com

FORWARD LOOKING STATEMENTS

Statements in this press release that are not statements of historical or current fact constitute forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties, and other unknown factors that could cause the actual results of the Company to be materially different from the historical results or from any future results expressed or implied by such forward-looking statements. In addition to statements, which explicitly describe such risks and uncertainties, readers are urged to consider statements labeled with the terms believes, belief, expects, intends, anticipates, plans, or similar terms to be uncertain and forward-looking. The forward-looking statements contained herein are also subject generally to other risks and uncertainties that are described from time to time in the Companys filings with the Securities and Exchange Commission.

OTELCO INC. AND SUBSIDIARIES 
CONDENSED CONSOLIDATED BALANCE SHEETS 
(in thousands, except share par value and share amounts) 
(unaudited) 
              
         June 30, December 31,  
          2016   2015   
Assets     
 Current assets         
  Cash and cash equivalents   \\$8,276  \\$6,884   
  Accounts receivable:         
  Due from subscribers, net of allowance for doubtful accounts of \\$183 and \\$258, respectively   3,423   3,575   
  Unbilled receivables     1,610   1,610   
  Other      1,640   1,722   
  Materials and supplies    2,079   1,906   
  Prepaid expenses     1,519   2,775   
  Deferred income taxes    57   57   
   Total current assets    18,604   18,529   
              
 Property and equipment, net    48,274   49,811   
 Goodwill      44,976   44,976   
 Intangible assets, net     2,038   2,363   
 Investments     1,833   1,846   
 Other assets     269   259   
   Total assets    \\$115,994  \\$117,784   
              
Liabilities and Stockholders' Deficit       
 Current liabilities         
  Accounts payable    \\$940  \\$1,818   
  Accrued expenses     5,662   4,567   
  Advance billings and payments    1,377   1,418   
  Customer deposits     72   68   
  Current maturity of long-term notes payable, net of debt issuance cost  2,912   2,203   
   Total current liabilities    10,963   10,074   
              
 Deferred income taxes     26,163   26,163   
 Advance billings and payments    601   628   
 Other liabilities     8   27   
 Long-term notes payable, less current maturities and net of debt issuance costs  91,254   97,052   
   Total liabilities     128,989   133,944   
              
 Stockholders' deficit         
  Class A Common Stock, \\$.01 par value-authorized 10,000,000 shares; issued and outstanding 3,283,177 and 3,015,099 shares, respectively  33   30   
  Class B Common Stock, \\$.01 par value-authorized 250,000 shares; issued and outstanding 0 and 232,780 shares, respectively  -   2   
  Additional paid in capital    3,971   3,881   
  Retained deficit     (16,999)  (20,073)  
   Total stockholders' deficit    (12,995)  (16,160)  
   Total liabilities and stockholders' deficit  \\$115,994  \\$117,784   
              
The accompanying notes are an integral part of these condensed consolidated financial statements.  
              
 OTELCO INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands, except share and per share amounts)
 (unaudited)
               
        Three Months Ended June 30, Six Months Ended June 30,
         2016   2015   2016   2015 
               
 Revenues    \\$17,232  \\$17,892  \\$34,722  \\$35,535 
               
 Operating expenses         
  Cost of services   7,875   8,406   16,005   16,663 
  Selling, general and administrative expenses  2,407   2,457   4,983   5,086 
  Depreciation and amortization  2,051   2,264   4,089   4,513 
   Total operating expenses  12,333   13,127   25,077   26,262 
               
 Income from operations  4,899   4,765   9,645   9,273 
               
 Other income (expense)        
  Interest expense   (2,721)  (1,991)  (5,203)  (4,039)
  Other income (expense)  4   (17)  623   1,046 
   Total other expenses  (2,717)  (2,008)  (4,580)  (2,993)
               
 Income before income tax expense  2,182   2,757   5,065   6,280 
 Income tax expense   (858)  (1,102)  (1,991)  (2,490)
               
 Net income    \\$1,324  \\$1,655  \\$3,074  \\$3,790 
               
               
 Weighted average number of common shares outstanding:      
   Basic    3,283,177   3,239,306   3,283,177   3,239,306 
   Diluted    3,380,445   3,285,534   3,378,090   3,283,332 
               
 Basic net income per common share \\$0.40  \\$0.51  \\$0.94  \\$1.17 
               
 Diluted net income per common share \\$0.39  \\$0.50  \\$0.91  \\$1.15 
               
OTELCO INC. AND SUBSIDIARIES 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 
(in thousands) 
(unaudited) 
             
          Six Months Ended June 30,  
          2016   2015  
Cash flows from operating activities:     
 Net income   \\$3,074  \\$3,790  
 Adjustments to reconcile net income to cash flows provided by operating activities:       
   Depreciation   3,571   3,843  
   Amortization   518   670  
   Amortization of loan costs  609   447  
   Loss on extinguishment of debt  155   -  
   Provision for uncollectible accounts receivable  119   175  
   Stock-based compensation  199   211  
   Payment in kind interest - subordinated debt  115   -  
   Changes in operating assets and liabilities     
     Accounts receivable  115   (1) 
     Material and supplies  (173)  (221) 
     Prepaid expenses and other assets  1,246   2,076  
     Accounts payable and accrued expenses  217   905  
     Advance billings and payments  (67)  (27) 
     Other liabilities   (14)  (13) 
      Net cash from operating activities  9,684   11,855  
             
Cash flows used in investing activities:     
 Acquisition and construction of property and equipment  (2,215)  (3,013) 
      Net cash used in investing activities  (2,215)  (3,013) 
             
Cash flows used in financing activities:     
 Loan origination costs   (5,215)  (15) 
 Principal repayment of long-term notes payable  (101,053)  (7,046) 
 Proceeds from loan refinancing  100,300   -  
 Tax withholdings paid on behalf of employees for restricted stock units  (109)  -  
      Net cash used in financing activities  (6,077)  (7,061) 
             
Net increase in cash and cash equivalents  1,392   1,781  
Cash and cash equivalents, beginning of period  6,884   5,082  
Cash and cash equivalents, end of period \\$8,276  \\$6,863  
             
Supplemental disclosures of cash flow information:     
 Interest paid   \\$3,728  \\$3,591  
             
 Income taxes paid  \\$685  \\$11  
             
 Conversion of Class B common stock to Class A common stock \\$2  \\$-  
             
 Issuance of Class A common stock \\$1  \\$-