ROSEVILLE, Calif., Aug. 7 /PRNewswire-FirstCall/ -- Leading independent
communications holding company SureWest Communications (Nasdaq: SURW) today
announced operating results for the quarter ended June 30, 2008. Highlights
for the second quarter include:
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Financial Highlights:
-- Revenues from continuing operations increased 36% year-over-year and
17% sequentially
-- EBITDA from continuing operations increased 29% year-over-year and 35%
sequentially
-- Income from continuing operations decreased to $1.7 million from $2.7
million year-over-year due to depreciation and interest expense related
to the Kansas City acquisition, and increased sequentially from a loss
of $11 thousand due to a full quarter capture of the Kansas City market
earnings compared to six weeks in the first quarter
-- Net income increased to $20.9 million ($0.12 earnings per share) from
$1.5 million year-over-year and $283 thousand sequentially; $19.0
million was due to the sale of SureWest Wireless in the second quarter
Pro Forma Highlights (captures Kansas City results prior to the
acquisition):
-- Broadband revenues increased 11% year-over-year and 3% sequentially to
$35.6 million
-- Consolidated voice revenue generating units (RGUs) decreased just 1%
sequentially (loss of 1,100) compared to 6% year-over-year as 1,400 of
the 3,900 sequential Telecom voice losses migrated to the new Voice
over IP (VoIP) Broadband product resulting in a loss of 2,000 ILEC
voice RGUs and a gain of 900 CLEC voice RGUs
-- Broadband Residential RGUs increased 7% year-over-year and 3%
sequentially, and subscribers grew 6% year-over-year and 2%
sequentially, driven by significant growth in the Sacramento region
-- Broadband Business revenues grew 15% year-over-year and 6%
sequentially, and customers grew 13% year-over-year and 3%
sequentially, driven by solid results in Sacramento and 26% year-over-
year (7% sequential) growth in Kansas City
The following table highlights financial results for continuing operations
on both a Consolidated and Pro Forma basis to include the acquisition of the
Kansas City operations (dollars are in thousands):
Y-O-Y comparison Q-O-Q comparison
Consolidated Q208 Q207Growth Q108Growth
Revenue $60,250 $44,442 36% $51,620 17%
EBITDA $20,086 $15,547 29% $14,825 35%
Income (loss)
from continuing
operations $1,697$2,670-36% ($11)nm
Pro Forma
Revenue $60,250 $59,404 1% $59,177 2%
EBITDA $20,086 $20,388 -1% $17,663 14%
Income (loss)
from operations $5,894$5,730 3% $4,287 37%
See Non-GAAP measure notes near end of release
Steve Oldham, SureWest's president and chief executive officer, said, "It
is clear that the decision we made several years ago to focus SureWest on
Broadband and advanced network services was the correct move, evidenced in
part by our excellent second quarter results. While still in the early stages
of our long-term Broadband growth strategy, we expect continued success moving
forward.
"In the Sacramento market we experienced considerable Broadband segment
growth, demonstrating there is a substantial market for our triple-play bundle
and great demand for our new Voice over IP service. This exciting new product
has created an appetite for higher ARPU services which are peripheral to the
voice product itself. We are working hard to ensure continued success in
coming quarters as we increase VoIP marketing in previously untapped areas of
our ILEC territory in the Sacramento market. We recently began proactively
marketing VoIP to our DSL customers, which make up nearly 50% of the total
ILEC market.
"As predicted, the Kansas City region has proven to be a great growth
opportunity for SureWest and we have achieved immediate success in our efforts
to obtain new Broadband Business customers. With new network expansion and
aggressive marketing campaigns underway in the area, we expect to see sizeable
residential growth in the second half of the year with a goal of improving on
the already high penetration rates and ARPU that made the Kansas City
operations so appealing initially."
Consolidated Financial Results
Consolidated revenues for the second quarter of 2008 totaled $60.3
million, an increase of 36% year-over-year and 17% sequentially. Consolidated
EBITDA totaled $20.1 million, an increase of 29% year-over-year and 35%
sequentially. This growth was due to continued Broadband Residential and
Business growth offsetting Telecom revenue declines in Sacramento and the
positive impact of the new market in Kansas City.
Operating expenses, exclusive of depreciation and amortization, increased
39% to $40.2 million in the second quarter of 2008 from $28.9 million in the
second quarter of 2007, and increased 9% sequentially from $36.8 million. Cost
of services and selling expenses increased primarily as a result of the Kansas
City acquisition and increases in programming, sales, advertising and new
product offerings related to the growth in Broadband subscribers. General and
administrative expenses declined primarily due to labor savings associated
with ongoing cost reduction initiatives and a decrease in legal fees related
to certain regulatory matters.
Consolidated income from continuing operations was $1.7 million in the
second quarter of 2008 compared to a gain of $2.7 million in the second
quarter of 2007 and a loss of $11 thousand in the first quarter of 2008. The
year-over-year decline is primarily due to interest expense related to the
Kansas City acquisition and the majority of the sequential quarter improvement
is due to a full quarter capture of the Kansas City earnings compared to only
six weeks in the first quarter of 2008. Earnings per share from continuing
operations for the second quarter was $0.12, compared to $0.18 for the same
period last year and zero earnings per share sequentially.
Capital Expenditures
Consolidated capital expenditures totaled $23 million for the second
quarter, an 86% increase over the same period in the prior year and a 29%
increase sequentially. The company continues to focus its capital expenditures
on its targeted network build and success-based capital associated with
increased penetration and average revenue per user (ARPU) on the existing
network. Capital expenditures for 2008 are expected to be approximately $80
million, which include improvements made to existing facilities to take
advantage of additional demand for leasing data center floor space. As a
result of the capital plan for 2008, the company expects to increase its fiber
marketable homes during the year by 10,000 in the Kansas City region and
approximately 14,000 homes in the Sacramento region.
Pro Forma Consolidated Results (includes Kansas City results in prior
periods)
Revenues for the second quarter of 2008 totaled $60.3 million, a Pro Forma
increase of 1% year-over-year and 2% sequentially. EBITDA for the second
quarter of 2008 totaled $20.1 million, a Pro Forma decrease of 1% due to
consulting and advisory fees related to strategic initiatives and a Pro Forma
increase of 14% sequentially. Income from operations was $5.9 million in the
second quarter of 2008 compared to Pro Forma income of $5.7 million in the
second quarter of 2007 and Pro Forma income of $4.3 million in the first
quarter of 2008.
The significant Pro Forma sequential quarter growth was due to continued
Broadband Residential and Business growth offsetting Telecom revenue declines,
as well as the company's continued focus to successfully drive cost
efficiencies.
Pro Forma Broadband Segment Results
Total Broadband segment revenues were $35.6 million in the second quarter
of 2008, a Pro Forma increase of 11% year-over-year and 3% sequentially. The
Broadband segment accounted for 59% of the company's total revenue during the
quarter and on a Pro Forma year-to-date basis.
Broadband Residential:
Broadband residential revenues increased 8% year-over-year and 1%
sequentially. Broadband RGUs and subscriber counts increased year-over-year
and sequentially, as detailed in the chart below:
Y-O-Y % change Q-O-Q % change
Sacramento Kansas City Sacramento Kansas City
Market MarketTotal Market Market Total
Broadband
Residential
RGUs 12% 3% 7%6% 1% 3%
Data 9% 5% 7%3% 1% 2%
Video RGUs
- Fiber & HFC 18% 4% 9%8% 1% 4%
Voice RGUs 18% 1% 7% 13% 1% 5%
Total
Residential
Subscribers 8% 3% 6%3% 1% 2%
While significantly growing RGUs and subscribers, the company maintained
solid ARPU during the quarter. Triple-play capable marketable homes consisting
of fiber-to-the-home (FTTH) in Sacramento and hybrid fiber coaxial (HFC) in
Kansas City increased ARPU by 2% year-over-year (to $109 from $107) and
remained relatively stable sequentially.
-- Data: Data growth in Sacramento during the quarter was partially tied
to the success of SureWest VoIP, which requires customers to subscribe
to a data package. Due to VoIP's online interactive services, over 82%
of existing data subscribers who signed up for VoIP increased their
Internet speeds to enhance the overall experience. Data ARPU increased
to $37 from $36 in the second quarter of 2007 and remained stable
sequentially.
-- Video: The significant video results can be attributed to the
acceptance of SureWest's feature-rich HD DVR and the continued growth
of the HD channel lineup. In the Kansas City market, where DVR has been
established since 2004, 48% of all video customers subscribe to DVR
service. In the Sacramento region, SureWest began marketing DVR in
early 2008 and has already achieved a 28% video subscriber penetration
rate, with nearly 50% of all new video customers in the second quarter
taking DVR service. Video ARPU increased to $62 from $60 in the second
quarter of 2007 and remained relatively consistent sequentially.
-- Voice: During the quarter, 2,800 Broadband voice RGUs were added --
1,400 of which migrated from the Telecom segment to Broadband --
offsetting Telecom voice loss by 36%. Of the customer migrations, more
than 25% added a SureWest data subscription to their services and 69%
upgraded their calling plans. While a potentially higher-margin product
when compared with SureWest's traditional land line service due to its
bundling requirements for SureWest data and long-distance, VoIP is a
cost-effective and reliable option for consumers because of the
multiple package options and price flexibility. It includes such online
interactive features as Find Me/Follow Me, Sequential Ringing and
Selective Call Screening. Additionally, certain telephone regulatory
taxes that provide no additional margin are not required with VoIP. At
$32, voice ARPU remained relatively stable year-over-year and
sequentially.
Oldham continued, "In addition to the success of VoIP, we made feature
enhancements to our HD DVR in Sacramento and have seen rapid growth in DVR
penetration rates. Adding to our video growth in both regions is the fact that
more and more consumers are purchasing HD television sets and looking for the
best programming option when it comes to value and channel lineup. We believe
that customers are choosing SureWest because of the value our marketing
bundles offer and the superior HD channel lineup our advanced network
provides."
Residential marketable homes increased 4% to 292,200 year-over-year and 2%
sequentially. The year-over-year increase was comprised of 19,100 new fiber
homes in Sacramento, 7,700 homes upgraded from copper to fiber in Sacramento,
where the expectation is to achieve greater than 35% penetration, and 900 new
HFC homes in Kansas City. Sequentially, 5,800 new fiber homes were added in
Sacramento and 1,100 homes were upgraded from copper to fiber. In Kansas City,
900 HFC homes were added late in the quarter, with plans to pass most new
homes with FTTH.
Broadband Business:
Broadband Business revenues increased 15% year-over-year and 6%
sequentially. Business subscriber counts grew 13% from the prior year and 3%
sequentially. Total Business ARPU grew 1% from the prior year and 3%
sequentially to $458.
Overall Broadband Business growth was substantial, with significant
drivers consisting of new additions of large-sized business customers and the
internal growth of large customers utilizing SureWest's Ethernet and Data
Center services. Kansas City's business operations experienced solid customer
growth rates of 26% year-over-year and 7% sequentially as the company has
allocated more resources in this area to take advantage of significant growth
opportunities.
Telecom Segment Results
Operating only in the Sacramento market, Telecom segment revenues were
$24.7 million in the second quarter of 2008, declining 10% year-over-year and
remaining stable sequentially due to an increase in Telecom Business revenue
offsetting revenue loss in Telecom Residential and Telecom Access.
Telecom Residential:
Telecom Residential was impacted by anticipated losses in Telecom voice
RGUs of 16% year-over-year and 6% sequentially. The company continues to
mitigate access line loss through its new VoIP product, which allows Broadband
to offer voice services in the ILEC territory. As a result of the company's
VoIP launch in the ILEC service territory, 1,400 voice RGUs from the Telecom
segment chose to switch their traditional voice service to the newly-offered
VoIP product -- a 36% migration of the 3,900 sequential Telecom Residential
voice RGU losses.
Telecom Residential will continue to see an increase in the movement of
voice RGUs to the Broadband segment as existing and new voice customers demand
SureWest VoIP and its feature-rich capabilities. This demand is expected to
continue to reduce the trend of ILEC and consolidated voice loss as shown in
the consolidated 1% decline of voice RGUs sequentially compared to 6% year-
over-year.
Telecom Business:
Telecom Business revenues increased 2% in the second quarter compared to
the prior year quarter and 8% sequentially. While Telecom Business subscriber
counts decreased 3% from the prior year, they were unchanged sequentially
while ARPU grew 6% from the prior year and 10% sequentially to $341. ARPU
growth was due to significant revenue created by connecting multiple business
locations to each other to share data.
The company derives a significant portion of its revenue streams from its
business service offerings and continues to aggressively pursue Telecom
Business customers by utilizing its advanced fiber network to offer customized
voice and data services.
During the quarter, Verizon Wireless purchased approximately $450 thousand
in long distance and backhaul support services previously recorded as
intersegment revenue. These services are expected to continue through the
latter part of 2008 and will have a minimal impact on EBITDA when
discontinued.
Telecom Access:
Telecom Access consists of the company's switched access revenues and
California High Cost Fund (CHCF) subsidies. Revenues decreased 14% year-over-
year and 5% sequentially due to scheduled reductions in the CHCF subsidies of
$510 thousand in the second quarter as well as a decline in switched access
revenues due to access line loss.
Wireless
In January 2008 the company entered into a definitive agreement to sell
the operating assets of its Wireless business to Verizon Wireless for an
aggregate purchase price of $69 million. The sale closed in the second quarter
of 2008. The company has reported the results of its Wireless segment as
discontinued operations in the attached financial statements for all periods
presented. The company is currently providing certain transition services to
Verizon through a transition agreement which is expected to expire in the
latter part of 2008. The company used $46 million of the net cash proceeds of
the Wireless sale to repay certain amounts of its outstanding debt facilities
and the remaining balance will be utilized to fund other corporate operations
including the expansion of its Broadband network.
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 EBITDA, ARPU and Pro Forma. The
company believes these non-GAAP measures, viewed in addition to and not in
lieu of its reported GAAP results, provide useful information to investors
because they are an integral part of its internal evaluation of operating
performance. In addition, they are measures that the company uses to evaluate
management's effectiveness. A reconciliation to the comparable GAAP measures
is provided in the attached 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 Communications will provide details about its results and
business strategy on Thursday, August 7, 2008 at 11:00 a.m. Eastern Time. A
simultaneous live webcast of the call will be available at www.surw.com and
will be archived shortly after the conclusion of the call. Additionally, a
telephone replay of the call will be available through Thursday, August 14,
2008 by dialing (888) 286-8010 and entering passcode 25440442.
About SureWest
SureWest Communications (www.surewest.com) is one of the nation's leading
integrated communications providers and is the bandwidth leader in the markets
it serves. Headquartered in Northern California for more than 90 years, the
company expanded into the Kansas City region in February 2008 and offers
bundled residential and commercial services that include IP-based digital and
high-definition television, high-speed Internet, Voice over IP, and local and
long distance telephone. Its fiber-to-the-premise IP-based network in the
Sacramento region features the fastest symmetrical Internet speeds in the
nation at up to 50 Mbps. In its Kansas City market (www.everestkc.com), 75
percent of the company's customers subscribe to at least three services.
