SureWest Reports Third Quarter 2009 Results

ROSEVILLE, Calif., Oct. 29 /PRNewswire-FirstCall/ -- SureWest Communications (Nasdaq: SURW) today announced operating results for the third quarter ended September 30, 2009.

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Steve Oldham, SureWest's president and chief executive officer, said, "This was another solid quarter for SureWest, driven by Broadband growth and a second consecutive quarter of positive free cash flow. Consistent with our strategy to aggressively grow our Broadband segment, we are preparing to launch our highly-anticipated enhanced video product powered by Microsoft Mediaroom in our Sacramento market this December. With this game-changing launch, we are confident that we will generate additional revenue and EBITDA growth in 2010, as we will now offer what we believe is the best triple-play package of voice, video and data available on both our fiber and copper networks in the Sacramento market, with a goal of significantly increasing subscriber penetration.

"While the economy in Northern California has not yet seen much recovery, our results have been solid due to our product diversity, including a thriving business services offering, as well as flexible marketing strategies, the geographic diversity of Kansas City and cost-savings initiatives across the organization."

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

Financial Results

Consolidated revenue decreased 1% year-over-year to $59.5 million resulting from 11% Broadband revenue growth offset by Telecom revenue declines of 19%. EBITDA, which is adjusted for non-cash pension ($642 thousand) and stock compensation ($443 thousand), increased 6% year-over-year to $19 million as the company continued to recognize cost savings from initiatives such as consolidation of office space and reduced employee counts, which decreased 4.5% from the prior year to 899 employees.

Operating expenses, exclusive of depreciation and amortization, decreased 1% year-over-year to $41.7 million due to reductions in labor expense offset by increases in video license fees, transport charges related to commercial business revenue growth, non-cash pension expense, and sales and advertising costs to promote subscriber growth and new product offerings.

Net loss increased to $211 thousand compared to a loss of $101 thousand in the third quarter of 2008 due primarily to an increase in depreciation costs related to broadband network build and success-based capital. Earnings per share from continuing operations was negative $.02 compared to positive $.04 in the third quarter of 2008 and positive $.06 in the second quarter of 2009.

Free cash flow, defined as income from continuing operations plus depreciation and amortization less capital expenditures, increased to positive $1.2 million - a $7.3 million increase year-over-year. The increase is due to lower capital expenditures related to the completion of SureWest's 2009 network expansion plan. The company continues to focus on increasing sales and free cash flow by growing penetration on its existing inventory of homes passed, increasing business services revenues and extending its video service to 25,000 new copper homes in Sacramento to market its triple-play products. SureWest expects that its capital expenditures and associated free cash flow results will vary quarter-to-quarter in order to take advantage of developing business sales opportunities such as additional data center space sales and additional wireless backhaul opportunities.

Cash and cash equivalents increased to $7.1 million from $2.8 million at December 31, 2008. During the quarter, SureWest paid down $10 million in debt resulting in $219.5 million in remaining total debt net of cash and cash equivalents (net debt), and a net debt to adjusted EBITDA ratio of 2.96.

Capital expenditures totaled $13.8 million for the third quarter and $43.4 million for the nine months ended September 30, 2009. For the nine months ended September 30, 2009, the company passed 8,300 additional advanced fiber homes, which completed the planned 2009 network build.

As previously announced, SureWest will extend its video service to 25,000 existing voice and data marketable ILEC homes on the Sacramento copper network, allowing for a superior new IP-based triple-play option to these potential customers. The first 15,000 homes receiving SureWest's extended video service will be available December 2009 and the second phase of 10,000 homes will become available by the second quarter of 2010. SureWest will reach these 25,000 homes with video for just over $3 million, or roughly 10% of the typical cost to pass a home with fiber. SureWest's projected 2009 capital expenditure remains $55-60 million and 2010 projected capital spend is expected to be near that level.

Broadband Segment Results

Broadband revenues increased 11% year-over-year and accounted for 68% of the company's total revenues compared to 60% in the third quarter of 2008 as the company succeeds with its long-term strategy of growing its Broadband operations to counteract declining Telecom segment revenues.

Broadband Residential:

Broadband Residential revenues increased 12% year-over-year to $29.4 million due to 10% growth in average revenue per user (ARPU) and a 6% increase in revenue generating units (RGUs). Data, video and voice RGUs all showed positive growth rates year-over-year and sequentially. To illustrate growth trends, Broadband RGUs, subscriber counts and ARPU are detailed both year-over-year and sequentially in the table and text below:

ARPU for triple-play marketable homes, consisting of the company's fiber-to-the-home (FTTH) and hybrid fiber coaxial (HFC) networks, increased 6% year-over-year to $112 from $106 as customer demand for higher data speeds, HDTV and DVR continued to increase. ARPU was also positively impacted by a first quarter 2009 video price increase.

Broadband Business:

Excluding non-recurring revenue of $540 thousand from equipment lease and Verizon Wireless transitional services in third quarter 2008, Broadband Business revenues increased by $1.3 million (15%) year-over-year. Customer counts increased 11% year-over-year to 7,000 and total Business ARPU, excluding the third quarter 2008 non-recurring items, grew 4% from the prior year to $483.

The commercial market in both Sacramento and Kansas City has begun to experience a positive turn and Broadband Business growth expectations continue to remain high due to aggressive sales and renewal tactics, superior business customer satisfaction levels, catered packages for businesses of all sizes, and a variety of product offerings and solutions.

Telecom Segment Results

Operating only in the Sacramento market, Telecom segment revenues declined 19% year-over-year to $19.4 million due to the industry-wide trend of declines in Telecom Residential access lines and associated access revenues.

Telecom Residential:

Telecom Residential revenues declined 25% year-over-year to $5.9 million resulting from losses in Telecom voice RGUs of 29% year-over-year. The company continues to mitigate Telecom voice line losses through its Broadband VoIP product. Of the 17,200 year-over-year Telecom Residential voice RGU losses, 7,800 (45%) migrated to the SureWest VoIP service.

Telecom Business:

Telecom Business revenues declined 14% year-over-year to $8.7 million due to a decline in small- and medium-sized business customers and some carrier consolidation. Growth opportunities are expected once the Sacramento office market recovers and businesses begin to return.

Telecom Access:

Telecom Access revenues decreased $1.3 million year-over-year to $4.6 million due to scheduled reductions in the California High Cost Fund (CHCF) subsidies and a decline in switched access revenues. The CHCF subsidies are scheduled to decline by $2 million per year through 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 EBITDA and free cash flow. 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, and all other non-operating income/expenses. Free cash flow represents net income (loss) from continuing operations plus depreciation and amortization less capital expenditures. 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 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. Reconciliation to the comparable GAAP measures is 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 about its results and business strategy at 5 p.m. Eastern Time on Thursday, October 29, 2009. Open to the public, a simultaneous live webcast of the call will be available from the company's investor relations Web site at www.surw.com. A telephone replay of the call will be available shortly after completion through Thursday, November 5 by dialing 888.286.8010 and entering pass code 93314295. Visit www.surw.com for updates prior to the call.

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 95 years, the company expanded into the Kansas City region in February 2008 with the acquisition of Everest Broadband, Inc. 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. 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