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| HTCO > SEC Filings for HTCO > Form 10-Q on 5-May-2009 | All Recent SEC Filings |
5-May-2009
Quarterly Report
Forward Looking Statements
The Private Securities Litigation Reform Act of 1995 contains certain safe harbor provisions regarding forward-looking statements. This Quarterly Report on Form 10-Q may include forward-looking statements. These statements may include, without limitation, statements with respect to anticipated future operating and financial performance, growth opportunities and growth rates, acquisition and divestiture opportunities, business strategies, business and competitive outlook, and other similar forecasts and statements of expectation. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," "targets," "projects," "will," "may," "continues," and "should," and variations of these words and similar expressions, are intended to identify these forward-looking statements. Such forward-looking statements are subject to risks and uncertainties that could cause HickoryTech's actual results to differ materially from such statements. Factors that might cause such a difference include, but are not limited to, those contained in Item 1A of Part II, "Risk Factors" of this quarterly report on Form 10-Q and Item 1A, "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2008 which is incorporated herein by reference.
Because of these risks, uncertainties, and assumptions and the fact that any forward-looking statements made by HickoryTech and its management are based on estimates, projections, beliefs, and assumptions of management, they are not guarantees of future performance and you should not place undue reliance on them. In addition, forward-looking statements speak only as of the date they are made. With the exception of the requirements set forth in the federal securities laws or the rules and regulations of the Securities and Exchange Commission, we do not undertake any obligations or update or review any forward-looking information, whether as a result of new information, future events or otherwise.
Critical Accounting Policies
The preparation of our financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. We believe that the application of the accounting policies, which are important to our financial position and results of operations, requires significant judgments and estimates on the part of management. A description of the critical accounting policies that we adhere to is contained in the Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2008.
Results of Operations
Overview-Trends
We operate in two business segments: the Telecom Sector and the Enventis Sector. The Telecom Sector leverages more than 110 years of experience providing communications solutions to business and residential customers in southern Minnesota, and northwestern and central Iowa. We offer local voice, long distance, high-speed internet, Digital TV and high-capacity data transport. Additionally, we offer integrated communication business solutions and own fiber optic infrastructure. The Telecom Sector's National Independent Billing Inc. (NIBI) division develops telecom and carrier access billing and customer management software for our internal operations and external customers. The Enventis Sector specializes in providing integrated voice, data and network communications solutions for businesses of all sizes - from enterprise multi-office organizations to small and medium businesses. In addition to its statewide fiber optic network, Enventis provides Internet protocol ("IP") telephony, transport, data and network integration services that combine voice and data into a single platform - reducing operations costs and enhancing performance. Since 1997, Enventis, a Cisco Gold Certified Partner, has provided Cisco Systems network solutions for a broad spectrum of business clients.
Despite a challenging economic environment our strategy of growing our business to business services has proven instrumental to producing good results. Growth in our Enventis services revenue, combined with growth in our broadband revenue streams, allowed us to lessen the impact of the recession, which has caused our customers to reduce capital equipment expenditures and resulted in lower equipment sales, particularly in our Enventis Sector. Enventis Enterprise Network Services equipment revenue, which is subject to cyclical highs and lows depending upon customer demand, decreased $3,377,000 or 33.2% in the three months ended March 31, 2009 compared to the three months ended March 31, 2008. Services revenue, within all product lines of the Enventis Sector, increased by $1,560,000 or 21.0% over this same period.
Competition and customers substituting other methods for our traditional voice service continues to negatively impact the local service and network access revenue streams within our Telecom Sector. Continued growth in revenue from our broadband services, along with cost controls has allowed us to partially mitigate these industry wide trends. Telecom Sector Net Income decreased $90,000 or 4.3% in the three months ended March 31, 2009 compared to the three months ended March 31, 2008.
Our Enventis Transport Services product line continues to capitalize on our state-of-the-art broadband network providing quality transport products combined with support from our 24X7X365 Network Operations Center. Transport revenue is growing across all customer segments: wholesale, enterprise and Singlelink™ Unified Communications service. Net Income from Enventis Transport Services was $792,000 in the first quarter of 2009, which is $151,000 or 23.6% higher than the same period in 2008.
Our long-term debt balance declined by $1,416,000 in the first quarter of 2009 and represents the lowest level that we can maintain without making permanent reductions in our available borrowing capacity. We continue to be focused on cash flow, reducing accounts receivable and inventory balances by just over $12,800,000 in the first quarter and increasing our working capital ratio from 1.4 at December 31, 2008 to 1.6 at March 31, 2009. Our current liquidity positions, including a cash balance of $6,565,000, allows us to satisfy our short-term liquidity needs, provides a margin of safety in case of prolonged economic challenges, and provides a base for expanding and improving our operations.
Sector Results of Operations
Telecom Sector
The following table provides a breakdown of the Telecom Sector operating
results.
TELECOM SECTOR
Three Months Ended
March 31
(Dollars in thousands) 2009 2008
Revenue before intersegment eliminations
Revenue
Local Service $ 3,877 $ 4,131
Network Access 6,210 6,825
Long Distance 1,031 1,190
Data 1,876 1,848
Internet 1,254 1,078
Digital TV 1,008 744
Directory 1,077 1,000
Bill Processing 669 594
Intersegment 243 130
Other 670 884
Total Telecom Revenue $ 17,915 $ 18,424
Total Telecom revenue before intersegment eliminations
Unaffiliated customers $ 17,672 $ 18,294
Intersegment 243 130
17,915 18,424
Cost of services (excluding depreciation and
amortization) 7,576 7,647
Selling, general and administrative expenses 2,834 3,304
Depreciation and amortization 4,120 3,926
Operating Income $ 3,385 $ 3,547
Net income $ 1,978 $ 2,068
Capital expenditures $ 1,435 $ 2,420
Key metrics
Business access lines 25,189 27,318
Residential access lines 32,966 36,713
Total access lines 58,155 64,031
Long distance customers 37,990 40,837
Digital Subscriber Line customers 18,924 18,003
Digital TV customers 8,464 7,107
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Revenue
Local Service. We primarily receive monthly recurring revenue for basic voice telephone service, enhanced calling features, local private lines and circuits, reciprocal compensation from wireless carriers, and miscellaneous local services. Local service revenue was $3,877,000, which is $254,000 or 6.1% lower in the three months ended March 31, 2009 compared to the three months ended March 31, 2008. This decrease was primarily due to a 5,876 or 9.2% decrease in access lines from March 31, 2009 compared to March 31, 2008 offset by a local rate increase that was implemented in January 2009. Our access lines decreased in the later part of 2008 due to a large customer reconfiguring their network causing the removal of 1,332 lines. Our local access line loss from March 31, 2009 compared to March 31, 2008 would have been 4,544 or 7.1% without the removal of these lines.
The number of access lines we serve as an incumbent local exchange carrier has been decreasing, which is consistent with the general trend in our industry. To help offset declines in local service revenue, we implemented a local rate increase in January 2009, our first rate increase since December of 2001. Our overall strategy continues to focus on selling a competitive bundle of services. Our focus on marketing competitive service bundles to our customers creates a compelling value for customers to maintain their local voice line. These bundle packages are customizable and offer competitive discounts as more services, such as features, high-speed DSL and digital TV, are added to the bundle.
Network Access. We receive a variety of fees and settlements to compensate us for the origination, transport, and termination of calls and traffic on our network. These include the fees assessed to interexchange carriers, subscriber line charges imposed on end-users, and settlements from nationally administered pools. The amount of revenue we have received from network access during the past two years has been impacted not only by industry trends of decreasing access lines and minutes of use, but also by periodic settlement of disputes with interexchange carriers settlement agencies.
Network access revenue was $6,210,000, which is $615,000 or 9.0% lower in the three months ended March 31, 2009 compared to the three months ended March 31, 2008. Network access revenues have been negatively impacted by a 9.1% decrease in minutes of use which is the direct result of the decrease in residential and business access lines that we have experienced during the past year along with carriers optimizing their networks lowering the demand for special access circuits. In addition, settlements received from nationally administered pools have decreased by $115,000 in the three months ended March 31, 2009 compared to the three months ended March 31, 2008.
Long Distance. Our end-user customers are billed for toll or long distance service on either a per call or flat-rate basis. This includes the provision of directory assistance, operator service, and long distance private lines. Long distance revenue was $1,031,000, which is $159,000 or 13.4% lower in the three months ended March 31, 2009 compared to the three months ended March 31, 2008. The decrease in revenue is the result of the loss of 2,847 customers, or 7.0% in the customer base from March 31, 2009 compared to March 31, 2008, more residential customers selecting unlimited long distance calling plans and decreased rates per minute charged to customers due to aggressive competition in the markets we serve.
Data. We provide a variety of enhanced data network services on a monthly recurring basis to our end-user customers. This includes the DSL access portion of traditional Telecom DSL service. Data revenue was $1,876,000, which is $28,000 or 1.5% higher in the three months ended March 31, 2009 compared to the three months ended March 31, 2008. This increase is primarily due to an increase of $109,000 or 23.1% in Ethernet revenue offset by a decline in low speed data services.
Internet. We provide internet service to our dial-up and DSL subscribers as well as dedicated internet services for larger business customers. We receive revenue from various usage based and flat-rate packages based on the level of service, data speeds, and volume. Internet revenue was $1,254,000, which is $176,000 or 16.3% higher in the three months ended March 31, 2009 compared to the three months ended March 31, 2008. This increase was primarily due to the growth in high speed internet from DSL and dedicated Internet which is a component of our DSL product that grew by 921 customers or 5.1%.
Digital TV. We receive monthly recurring revenue from our subscribers for the provision of commercial TV programming in competition with local cable TV, satellite dish TV, and on-air TV service providers. Digital TV revenue was $1,008,000, which is $264,000 or 35.5% higher in the three months ended March 31, 2009 compared to the three months ended March 31, 2008. The number of Digital TV customers grew by 1,357 or 19.1% from March 31, 2008 to March 31, 2009.
Directory. We receive monthly recurring revenue from end-user subscribers for the yellow page advertising in our telephone directories. Directory revenue was $1,077,000, which is $77,000 or 7.7% higher in the three months ended March 31, 2009 compared to the three ended March 31, 2008. This increase was the result of a favorable sales cycle of yellow-page advertising in our directory, which went into effect in the beginning of the third quarter of 2008.
Bill Processing. We provide data processing as a service to other telephone service providers. We collect a combination of monthly recurring revenues, software license fees, and integration services revenue from companies with which we have established a long-term data processing relationship. NIBI bill processing revenue was $669,000, which is $75,000 or 12.6% higher in the three months ended March 31, 2009 compared to the three months ended March 31, 2008. This increase was primarily due to an increase of $40,000 in recurring support fees revenue along with an increase of $38,000 in contracted services revenue.
Other. Other revenue was $670,000, which is $214,000 or 24.2% lower in the three months ended March 31, 2009 compared to the three months ended March 31, 2008. This decrease was primarily due to a decrease in revenue from customer premise equipment of $155,000. This decline is due to our decision to phase out sales of Nortel customer premise equipment in favor of the Cisco brand. All Cisco sales are reported within the Enventis Sector.
Cost of Services (excluding Depreciation and Amortization)
Telecom Sector cost of services (excluding depreciation and amortization) was $7,576,000, which is $71,000 or .90% lower in the three months ended March 31, 2009 compared to the three months ended March 31, 2008.
Selling, General and Administrative Expenses
Telecom selling, general and administrative expenses were $2,834,000, which is $470,000 or 14.2% lower in the three months ended March 31, 2009 compared to the three months ended March 31, 2008. This decrease was primarily due to a decrease in customer premise equipment expense, and a decrease in market access fees related to the release of a contingent liability we had established related to a civil suit. In March of 2009, we received a favorable court ruling in a complaint filed by the City of St. Peter in May of 2008. While the issue is not fully resolved, the court concurred with our interpretation of a key provision of the contract which caused us to release our contingency reserve.
Depreciation and Amortization
Telecom Sector depreciation and amortization was $4,120,000, which is $194,000 or 4.9% higher in the three months ended March 31, 2009 compared to the three months ended March 31, 2008. This increase was primarily due to capital expenditures associated with the investment in network upgrades and improvements to support Digital TV deployments.
Operating Income
Telecom Sector operating income was $1,978,000, which is $90,000 or 4.3% lower in the three months ended March 31, 2009 compared to the three months ended March 31, 2008. The decrease was primarily due to decreases in revenue, increases in depreciation and amortization expenses offset by a decrease in selling, general and administrative expenses, all of which are described above.
Enventis Sector
The following table provides a breakdown of the Enventis Sector operating
results.
ENVENTIS SECTOR
Three Months Ended
March 31
(Dollars in thousands) 2009 2008
Revenue before intersegment eliminations
Revenue
ENS equipment $ 6,791 $ 10,168
ENS services 2,341 2,065
ETS services 6,657 5,373
Intersegment 141 138
Total Enventis revenue $ 15,930 $ 17,744
Total Enventis revenue before intersegment eliminations
Unaffiliated customers $ 15,789 $ 17,606
Intersegment 141 138
15,930 17,744
Cost of sales, equipment
(excluding depreciation and amortization) 5,999 8,697
Cost of services
(excluding depreciation and amortization) 5,238 4,279
Selling, general and administrative expenses 2,389 2,327
Depreciation and amortization 1,149 1,020
Operating income $ 1,155 $ 1,421
Net income $ 681 $ 834
Capital expenditures $ 1,191 $ 993
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We manage and evaluate the Enventis operations in their entirety. The following table provides an illustration of the relative contributions and associated trends from each of the Enventis primary product lines. Certain allocations have been made, particularly in the area of selling, general and administrative expenses, in order to develop these tables.
ENVENTIS PRODUCT LINE REPORTING
Three Months Ended March 31
Enterpise Network Services (ENS) Enventis Transport Services (ETS)
(Dollars in thousands) 2009 2008 2009 2008
Revenue before intersegment eliminations:
Equipment $ 6,791 $ 10,168 $ - $ -
Service 2,341 2,065 6,657 5,373
Intersegment - - 141 138
Total Enventis revenue $ 9,132 $ 12,233 $ 6,798 $ 5,511
Cost of sales, equipment
(excluding depreciation and amortization) 5,998 8,692 1 5
Cost of services
(excluding depreciation and amortization) 1,952 1,832 3,286 2,447
Selling, general and administrative expenses 1,288 1,259 1,101 1,068
Depreciation and amortization 82 121 1,067 899
Operating income $ (188 ) $ 329 $ 1,343 $ 1,092
Net income $ (111 ) $ 193 $ 792 $ 641
Capital expenditures $ 143 $ 133 $ 1,048 $ 860
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Revenue
Enterprise Network Services (ENS) - Equipment. This revenue is primarily from
the sale of telecommunications and data products provided by third party
manufacturers. The customers are generally businesses of medium to Enterprise
size. ENS equipment revenue in the three months ended March 31, 2009 was
$6,791,000, which is $3,377,000 or 33.2% lower than the three months ended March
31, 2008. Timing of delivery and performance related to large equipment sales
and installations significantly impact quarterly operating results. Periods of
increased sales and system implementation - and the related revenue recognition
- can lead to uneven results on a quarter-to-quarter basis. Due to the
"one-time" nature of equipment sales, the ENS equipment growth from
period-to-period is dependent upon the addition of new customers to replace and
exceed revenue received from existing customers. Sales slowed significantly
beginning in the second half of 2008 as a result of a nationwide economic
slowdown and the resulting hesitancy of our customers' to invest in capital
equipment. The nationwide economic downturn has increasingly affected our
clients and those of other telecommunications distributors and likewise sales
declines are being reported by major suppliers within our industry.
Enterprise Network Services (ENS) - Services. This revenue includes services such as network and equipment monitoring, maintenance, and equipment consulting and installation. ENS services revenue earned in the three months ended March 31, 2009 was $2,341,000, which is $276,000 or 13.4% higher than ENS services revenue earned in the three months ended March 31, 2008. This increase in revenue was primarily due to a $359,000 increase in contract services revenue associated with the design, configuration, and installation services of voice and data equipment and a $172,000 increase in monthly recurring support fees revenue offset by a $210,000 decrease in maintenance contract revenue. This service can experience periods of increased sales and service implementation and the related revenue recognition - and can lead to uneven results on a quarter-to-quarter basis.
Enventis Transport Services (ETS). This revenue is primarily of a recurring monthly basis and consists of billing for the use of our fiber network and network connections as well as our Hosted voice over internet protocol ("VOIP) Singlelink™ product. It is primarily under multi-year contracts with either interexchange carriers or end-user businesses. ETS revenue was $6,657,000 in the three months ended March 31, 2009, which is $1,284,000 or 23.9% higher than revenue earned in the three months ended March 31, 2008. Increased demand across all ETS lines of business, especially our managed transport services, are driving new recurring revenue streams. Broadened availability of the Enventis Singlelink™ Unified Communications solution, our centrally managed and hosted VoIP-based communications system, is driving monthly recurring revenue from both the hosted and transport components of this service.
Cost of Sales - Equipment (excluding Depreciation and Amortization)
Enventis Sector cost of sales (excluding depreciation and amortization) associated with equipment revenue was $5,999,000 in the three months ended March 31, 2009, which is $2,698,000 or 31.0% lower than cost of sales in the three months ended March 31, 2008. Cost of sales for the Enventis Sector includes costs of equipment and materials associated with procurement and installation of products for customers. Labor associated with installation work is not included in this category, but is included in cost of services (excluding depreciation and amortization). Timing of delivery and performance related to large equipment sales and installations significantly impact quarterly material costs.
Cost of Services (excluding Depreciation and Amortization)
Enventis Sector cost of services (excluding depreciation and amortization) was $5,238,000 in the three months ended March 31, 2009, which is $959,000 or 22.4% higher compared to cost of services in the three months ended March 31, 2008. The increases seen in the three month period were primarily due to the following items: 1) a $357,000 increase in wages and benefits due to increased staffing levels, 2) a $322,000 increase in circuit expenses, which supported the increase in off-net transport revenue, and 3) a $124,000 increase contract labor costs related to external project support.
The increased staffing and contract labor costs reflect our investment in the growth of the managed service business. We are striving to increase our recurring revenue service capability in the Enventis Sector and the success in the service level increase has brought increases in the cost of services for Enventis. This continues a trend which started in June of 2008. Increased efforts are underway to moderate the growth in this expense for the rest of 2009.
Selling, General and Administrative Expenses
Enventis Sector selling, general and administrative expenses were $2,389,000 in the three months ended March 31, 2009, which is $62,000 or 2.7% higher than selling, general, and administrative expenses in the three months ended March 31, 2008.
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