SureWest Reports Second Quarter 2010 Results

- Fifth consecutive quarter of positive free cash flow; $4 million for six months ended June 30, 2010 compared to $500 thousand in same period last year

ROSEVILLE, Calif., July 29 /PRNewswire-FirstCall/ -- SureWest Communications (Nasdaq: SURW) today announced operating results for the second quarter ended June 30, 2010.

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Steve Oldham, SureWest’s president and chief executive officer, said, “Our second quarter results demonstrated our ability to create growth in both business and residential markets with reduced year-to-date capital expenditures. We remain focused on growing revenues, margins and free cash flow through increases in our commercial service offerings and residential triple-play growth while continuing our cost-saving initiatives.

“Expanding our fiber-to-the-home network over the last five years has provided us a significant performance advantage over our competitors. We have a large inventory of marketable homes and therefore do not require further capital expenditures to extend the network. We built momentum in our core Broadband segment during the quarter, highlighted by Advanced Digital TV and wireless carrier backhaul. Advanced Digital TV triggered a sequential increase of 5,200 RGUs, our best results since 2008. Taking advantage of our ubiquitous fiber network, we are working with three major carriers to provide wireless backhaul service to over 200 cell sites and are in negotiations for 100 additional sites. These backhaul projects set the stage for future growth on recurring revenue streams, and can be delivered quickly and cost efficiently due to our high-capacity networks and proximity to cellular sites.”

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

Financial Results

Consolidated revenues decreased 1% year-over-year to $60.5 million as Broadband revenue growth of 7% was offset by Telecom revenue declines of 15%. Excluding estimated severance costs, adjusted EBITDA remained flat year-over-year at $19.9 million. On June 30, 2010, the company reduced its workforce by 60 positions as part of ongoing cost-efficiency reviews. This resulted in an estimated annual expense savings of at least $5.0 million beginning in 2011, with a savings of approximately $1.0 million over the third and fourth quarters of 2010. Additionally, the company will continue with cost-saving initiatives such as the consolidation of office space, which is expected to save $1.3 million annually beginning in 2011, and reductions in professional fees for further annual savings of approximately $1.0 million.

Operating expenses, exclusive of depreciation and amortization, increased 3% year-over-year to $43.2 million due primarily to an estimated $1.6 million in severance costs. The second quarter also saw an increase in transport charges associated with commercial services growth and an increase in video license fees due to higher programming rates and new channel additions.

Net loss for the quarter was $527 thousand compared to net income of $959 thousand in the same period last year. Earnings per share from continuing operations was negative $.04 compared to positive $.06 in the second quarter 2009 and positive $.04 in the first quarter 2010. Excluding estimated severance costs, net income for the quarter was $323 thousand and second quarter adjusted earnings per share was $.02.

Free cash flow, defined as income from continuing operations plus depreciation and amortization less capital expenditures, was positive $857 thousand for the quarter and $4 million for the six months ended June 30, 2010, compared to $500 thousand for the first six months of 2009. SureWest expects that its capital expenditures and associated free cash flow results will vary quarter-to-quarter based on developing commercial sales opportunities such as data center space and wireless carrier backhaul.

Cash and cash equivalents decreased sequentially to $6.2 million from $7.0 million. During the quarter, SureWest repurchased 358 thousand shares of outstanding stock for $2.5 million. Total debt net of cash and cash equivalents (net debt) was $212.9 million, resulting in a net debt to adjusted EBITDA ratio of 2.73.

Capital expenditures totaled $13.9 million for the second quarter and $26.4 million for the six months ended June 30, 2010, compared to $29.5 million for the first six months of 2009. The company is lowering projected 2010 capital expenditures from $55-60 million to $50-55 million due to a more selective success-based capital plan and a reduction in core maintenance expenditures. The 2010 capital plan remains aimed at increasing commercial growth and residential RGUs, with approximately two-thirds of expenditures for success-based investment.

Broadband Segment Results

Broadband revenues increased 7% year-over-year and accounted for 71% of the company’s total revenues, compared to 66% in the second quarter 2009. This continues the company’s long-term trend of offsetting structural declines in the traditional Telecom business with increases in the growing Broadband segment.

Broadband Residential:

Broadband Residential revenues increased 4% year-over-year to $30.9 million due to 3% growth in ARPU and a 4% increase in RGUs. To illustrate growth trends, Broadband RGUs, subscriber counts and ARPU are detailed both year-over-year and sequentially in the table and text below:

During the second quarter, which was the first full quarter of the Advanced Digital TV offering, 1,700 net video RGUs were added, compared to a loss of 500 video RGUs in the first quarter 2010. Through June, SureWest has added 6,905 Advanced Digital TV subscribers, representing 29% of overall video RGUs in the Sacramento market. Compared to Sacramento’s other video platform, monthly recurring revenues for Advanced Digital TV were 12% higher, premium channel take rates were 34% higher and the high definition (HD) take rate was 27% higher.

ARPU for the company’s fiber-to-the-home (FTTH) and hybrid fiber coaxial (HFC) networks increased 1% year-over-year to $116 from $115 as customer demand for higher data speeds, and HD and DVR services increased from the prior year. Sequentially, ARPU declined by $1 from $117 primarily due to the aggressive promotional activity related to a retention and acquisition campaign regarding the launch of Advanced Digital TV. The launch campaign was designed to drive RGU growth through a short-term discount with an expectation for ARPU increases as the promotional period phases out and customers retain the advanced triple-play bundle due to a superior experience.  

Residential customer churn improved to 1.6% in the second quarter compared to 1.7% in the same period last year as the company continues to execute on churn reduction techniques such as tailored renewal offers, and network and product enhancements to increase customer retention and loyalty.

Broadband Business:

Broadband Business revenues increased by $1.6 million, or 17%, year-over-year to $11.3 million. Customer counts increased 7% year-over-year to 7,300 and ARPU grew 9% from the prior year to $518. Business service growth expectations remain high in both Sacramento and Kansas City. The Kansas City market grew ARPU 6% year-over-year while increasing customer counts by 20%. In Sacramento, sales contracts and activity increased during the first half of 2010 compared to last year. SureWest’s fiber-optic network provides a superior long-term solution for customers in both regions and is driving additional revenue opportunities. For example, the company has commitments to bill over 200 wireless carrier backhaul sites, and is in negotiations for 100 additional sites.

Telecom Segment Results

Telecom revenues declined 15% year-over-year to $17.5 million due to the industry-wide trend of declines in access lines and access revenues. As the company focuses on growing its Broadband segment, the Telecom segment continues to account for a smaller percentage of total company revenues at 29%, compared to 34% in the second quarter 2009. Internal forecasts anticipate the slowing of Telecom declines over the next several years.

Telecom Residential:

Telecom Residential revenues declined 30% year-over-year to $4.5 million resulting from losses in Telecom voice RGUs of 27% year-over-year. Of the 12,300 year-over-year Telecom Residential voice RGU losses, 5,000, or 41%, migrated to the SureWest Broadband Voice over IP service.

Telecom Business:

Telecom Business revenues declined 8% year-over-year to $8.4 million due to a decline in small- and medium-sized business customers, particularly those impacted by California’s depressed real estate industry, as well as a decrease in services from a few large carriers. These declines are related to the economy, not competition, and are expected to flatten out and begin growing as the Sacramento economy recovers and vacancy rates improve.

Telecom Access:

Telecom Access revenues decreased $545 thousand year-over-year to $4.4 million primarily due to the scheduled reduction in the California High Cost Fund (CHCF) subsidy and the decline in switched access revenues related to access line loss. The annual CHCF subsidies are scheduled to be $4.1 million in 2010, a decrease from $6.1 million in 2009, and will continue to decline by $2 million annually through 2011. Additionally, the transport interconnection charge will be eliminated effective January 1, 2011 resulting in an estimated reduction of $2 million in 2011 intrastate access revenues.

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 and net debt. Adjusted 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, severance and other related termination costs, and all other non-operating income/expenses. Free cash flow represents net income (loss) from continuing operations plus depreciation and amortization less capital expenditures. Free cash flow is a measure of operating cash flows available for corporate purposes after providing significant 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, July 29. 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 Thursday, August 5, 2010 by calling 888.286.8010 and entering pass code 61012602. Visit www.surw.com for updates prior to the call.  

About SureWest

SureWest Communications (www.surewest.com) is a leading integrated communications provider and 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.