ROSEVILLE, Calif., Oct. 27, 2011 /PRNewswire/ -- SureWest Communications (NASDAQ: SURW) today announced operating results for the third quarter ended September 30, 2011.
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Steve Oldham, SureWest's president and chief executive officer, said, "We continue to grow the company effectively by adding new residential and business subscribers, reducing churn and increasing revenues from our existing customers. SureWest maintains a strong presence in our markets due to our anticipation of the demand for high bandwidth Broadband services. As a result, we have been able to overcome the industry-wide decline in revenues from losses in traditional access lines, telephone minutes of use and regulatory support revenues.
"In late July we launched a new residential advertising campaign in the Sacramento market designed to create more awareness in our service area. The campaign helped drive new subscriber and RGU growth that is expected to continue in the fourth quarter. Due to its success in attracting higher margin subscribers with less discounting, we will expand the campaign into the Kansas City market in 2012. We continuously monitor the reaction to our marketing efforts from both our customers and competitors, and will adjust tactics as necessary in order to gain market share.
"Revenue growth from wireless carrier backhaul in the Sacramento market also provided a significant impact, and we are now billing for 280 connections that generate $3.2 million in annualized revenues. We have contracts in place for 390 connections and anticipate over $4 million in annualized revenues when those sites are active. Our business customer growth in the Kansas City market is continuing and we are adding more medium- and large-sized companies, which helped drive a 7% year-over-year increase in ARPU in that region to $685 per month.
"In the first quarter of 2012, after the final phase out of the California High Cost Fund subsidy, we will have reduced revenues from regulatory supports from 56% of adjusted EBITDA in 2005 to roughly 11%. We have greatly reduced the risk to our shareholders from future regulatory and policy changes in the industry without compromising the superior experience we provide to our customers. As we grow, we remain focused on increasing long-term cash flow and shareholder return."
The following table highlights financial results on a consolidated basis (dollars are in thousands):
Y-O-Y comparison Q-O-Q comparison ---------------- ---------------- Consolidated Q3'11 Q3'10 Change % Q2'11 Change % ----- ----- ------ --- ----- ------ --- Broadband Revenue $48,018 $43,861 $4,157 9% $45,959 $2,059 4% Telecom Revenue 14,979 17,256 (2,277) (13%) 15,003 (24) (0%) Total Revenue 62,997 61,117 1,880 3% 60,962 2,035 3% Adjusted EBITDA 20,879 21,335 (456) (2%) 22,229 (1,350) (6%) Net Income 643 1,404 (761) (54%) 1,320 (677) (51%) Capital Expenditures 18,658 12,857 5,801 45% 20,671 (2,013) (10%) Net Cash Provided by Operating Activities 21,255 20,082 1,173 6% 20,562 693 3% Free Cash Flow (2,205) 4,227 (6,432) (152%) (2,994) 789 26% Adjusted Free Cash Flow 5,250 4,556 694 15% 4,026 1,224 30% Net Debt 197,318 205,830 (8,512) (4%) 198,953 (1,635) (1%) ----- ------- ------- ------ ---- ------- ------ ----
Financial Results
Consolidated revenues increased 3% year-over-year to $63 million. Broadband revenues grew by $4.2 million, or 9%, more than offsetting expected Telecom revenue declines of $2.3 million, or 13%. Broadband adjusted EBITDA increased 16% and now represents 56% of total adjusted EBITDA. However, Telecom adjusted EBITDA declined 18% for a total adjusted EBITDA decrease of 2%, or $456,000, year-over-year to $20.9 million.
Operating expenses, exclusive of depreciation and amortization, increased 7%, or $2.8 million, year-over-year to $43.2 million. This increase resulted from a new advertising campaign, and increases related to subscriber growth including video programming and transport fees. Savings from office consolidation helped offset these increases.
Net income for the quarter was $643,000 compared to $1.4 million in the same period last year. Basic and diluted earnings per share was $0.05 compared to $0.10 in the third quarter 2010.
Capital expenditures totaled $18.7 million for the third quarter, a $5.8 million increase compared to $12.9 million in the same period last year. During the quarter, SureWest added 4,200 new marketable homes to its fiber-to-the-home (FTTH) network in Kansas City, completing 9,600 of the scheduled 15,500 additional fiber homes planned for 2011. Also during the quarter, the company upgraded 2,400 ILEC territory copper homes with Advanced Digital TV service, completing 5,800 of the planned 6,800 upgrades. These upgrades have increased the percentage of fiber and copper triple-play marketable homes in the ILEC to 63%, up from 53% in the third quarter 2010.
In relation to these additional marketable homes and network upgrades, the company invested $7.5 million in network expansion capital in the third quarter 2011, compared to $7 million in the second quarter 2011 and $329,000 in the third quarter 2010. The remaining $11.2 million in third quarter 2011 capital spend was driven by residential and business success and core maintenance support. The company will continue to take advantage of growth opportunities and the favorable bonus depreciation tax provision in relation to these new investments. Projected 2011 capital expenditures are expected to be in the $68-72 million range. Projected capital expenditures remain in the $60-70 million range for 2012, with roughly 10-11,000 new fiber homes scheduled in the Kansas City market. Projected 2013 capital expenditures remain in the $55-65 million range.
Free cash flow, defined as net income (loss) plus depreciation and amortization less capital expenditures, was negative $2.2 million for the quarter compared to positive $4.2 million in the third quarter 2010. This decline was anticipated as a result of the new investment in network expansion. Adjusted free cash flow, defined as free cash flow excluding capital investments in network-based expansion, increased $694,000 year-over-year to $5.3 million. The company expects capital expenditures and associated free cash flow to vary quarter-to-quarter based on fiber network expansion in Kansas City and the resulting opportunities for additional residential and business services growth.
Cash and cash equivalents decreased by $2.1 million sequentially, from $11 million in the second quarter 2011 to $8.9 million. The average cost of debt for the quarter remained low at 3.7%. Total debt net of cash and cash equivalents (net debt) was $197 million, resulting in a net debt to adjusted EBITDA ratio of 2.3x.
Broadband Segment Results
Broadband revenues increased 9% year-over-year and accounted for 76% of the company's total revenues in the quarter. SureWest expects to continue increasing its Broadband revenues and adjusted EBITDA as a result of growth in both residential and business services.
Broadband Residential:
Broadband Residential revenues increased 9% year-over-year to $33.7 million as a result of 3% growth in revenue generating units (RGUs) and a 7% increase in overall average revenue per user (ARPU). New products and features like Advanced Digital TV in Sacramento, and increased Internet speeds, additional HD channels, home networking and Internet security software in both markets, have continued to create enhanced subscriber value and improve SureWest's pricing power. In July 2011, the company implemented video and data price increases positively impacting third quarter ARPU.
Advanced Digital TV continued to drive growth in the Sacramento market, with video RGUs increasing by 9% year-over-year and 1% sequentially. SureWest served 19,688 Advanced Digital TV subscribers in Sacramento through the third quarter, representing 72% of the company's video RGUs in that market. ARPU for these subscribers was $139 with approximately 98% bundling the company's high-performing data service and 81% subscribing to a triple-play. At the end of the third quarter, the average monthly bill of an Advance Digital TV customer subscribing to all three services was $145 compared to $130 at the end of the third quarter 2010.
Growth in the Kansas City market was driven by new fiber marketable homes, with 1,900 subscriber additions and 2,700 RGU additions year-over-year. A penetration rate of 17% has already been achieved on the fiber homes released in the last 3-6 months.
Residential customer churn improved year-over-year from 1.7% to 1.6% in the third quarter, aided in part by new customer retention programs, value-added features and continuously improving customer service levels. In the Sacramento market, churn decreased to 1.6% in the third quarter 2011 from 1.9% in the same period last year. The company attributes this to the strength of its Advanced Digital TV and best-in-class Internet service.
To illustrate growth trends, Broadband RGUs and subscriber counts are detailed both year-over-year and sequentially in the table below:
Q3 '11 vs. Q3 '10 Change Q3 '11 vs. Q2 '11 Change ------------------------ ------------------------ Kansas Kansas Sacramento City Sacramento City Market Market Total Market Market Total ----------- ------ ----- ----------- ------ ----- Broadband Residential RGUs 3% 2% 3% 1% 1% 1% Data RGUs 0% 5% 2% 0% 2% 1% Video RGUs 9% 4% 6% 1% 1% 1% Voice RGUs 5% (2%) 2% 1% 0% 0% Total Residential Subscribers 0% 5% 2% 0% 1% 1%
Broadband Business:
Broadband Business revenues increased by $1.6 million, or 13%, year-over-year to $13.6 million. Business customers increased 4% year-over-year to 8,000 and ARPU grew 8% from the prior year to $570. Broadband Business growth expectations remain high in both Sacramento and Kansas City. The Kansas City market grew ARPU by 7% year-over-year while increasing customer counts by 5%. The Sacramento market grew customer counts by 3% and ARPU increased 10% driven by wireless backhaul and existing customers adding new products and features.
As of September 30, 2011, SureWest was billing for 280 wireless backhaul access points at annualized revenues of $3.2 million. The company is now scheduled to bill for over 360 backhaul connections by the end of 2011 and 390 by the second quarter of 2012, with over $4 million in annualized revenues when those sites are active. Opportunities are currently being pursued to serve additional connections in both the Sacramento and Kansas City markets.
Telecom Segment Results
Telecom revenues declined 13% year-over-year to $15 million, consistent with the industry-wide trend of declines in access lines, minutes of use and access revenues. This was partially due to the anticipated decrease of $1 million in regulatory support revenues that were reduced as scheduled in the first quarter 2011. The company's scheduled regulatory support declines began in 2006 and will be fully phased out in the first quarter 2012 after the final payment in the fourth quarter 2011.
The Telecom segment has consistently produced adjusted EBITDA margins greater than 40% and continues to generate significant free cash flow, which is utilized to reduce debt and fund Broadband segment expansion. The company expects declines in Telecom revenues to flatten over the next two years, due to the phasing out of Telecom support mechanisms and the slowing of access line losses. SureWest has effectively removed regulatory risk from its business by investing in high performing broadband networks that will continue to drive additional revenue and cash flow growth.
As the company focuses on growing its Broadband segment, the Telecom segment is expected to continue accounting for a smaller percentage of total revenues. For the third quarter 2011, Telecom revenues were 24% of total company revenues.
Telecom Residential:
Telecom Residential revenues declined 22% year-over-year to $3.2 million resulting from a 21% decline in Telecom voice RGUs. However, of the 6,500 year-over-year Telecom Residential voice RGU losses, 2,600, or 40%, migrated to the SureWest Broadband VoIP service, which enables the continued preservation of consolidated voice revenues.
Telecom Business:
Telecom Business revenues declined 7% year-over-year to $8.1 million as a result of a 4% decrease in business customers in the company's incumbent ILEC territory. Telecom Business revenues represent 54% of total Telecom segment revenues. The company is seeing some competitive pressure in the very small business customer segments; however, medium and large ILEC business customers remain stable.
Telecom Access:
Telecom Access revenues decreased by $715,000 year-over-year to $3.6 million primarily due to the scheduled reduction in the California High Cost Fund (CHCF), the elimination of the transport interconnection charge (TIC) and the decline in switched access revenues related to access line loss and declining minutes of use. The combined annual regulatory support related to the CHCF and TIC will decline by $4 million in 2011 - from $6.1 million in 2010 to $2.0 million in 2011 - and will be fully phased out after the final payment in the fourth quarter 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 adjusted EBITDA, free cash flow, adjusted free cash flow and net debt. Adjusted EBITDA represents net income (loss) 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) plus depreciation and amortization less capital expenditures. Adjusted free cash flow represents free cash flow as defined above, excluding the network expansion capital investments. Free cash flow and adjusted free cash flow are a measure of operating cash flows available for corporate purposes after providing sufficient 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, October 27. 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 November 3, 2011 by calling 888.286.8010 and entering pass code 53755082. Visit www.surw.com for updates prior to the call. To receive SureWest financial news by email, please visit www.surw.com and subscribe to "Email Alerts."
About SureWest
SureWest Communications is a leading integrated communications provider and the bandwidth leader in the markets it serves. Headquartered in Northern California for more than 95 years, SureWest offers bundled residential and commercial services in the greater Sacramento and Kansas City regions 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. For up-to-date information on products and services, visit the company on Facebook and Twitter.
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.
Contacts:
Ron Rogers
Corporate Communications
916-746-3123
r.rogers@surewest.com
Misty Wells
Investor Relations
916-786-1799
m.wells@surewest.com
SUREWEST COMMUNICATIONS CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited; Amounts in thousands, except per share amounts)
Quarters Ended $ % -------------- September 30, June 30, 2011 2011 Change Change -------------- --------- ------ ------ Operating revenues: Broadband $48,018 $45,959 $2,059 4% Telecom 14,979 15,003 (24) (0%) ------ ------ --- ---- Total operating revenues 62,997 60,962 2,035 3% Operating expenses: Cost of services and products (exclusive of depreciation and amortization) 28,566 25,525 3,041 12% Customer operations and selling 7,771 7,392 379 5% General and administrative 6,879 7,392 (513) (7%) Depreciation and amortization 15,810 16,357 (547) (3%) ------ ------ ---- ---- Total operating expenses 59,026 56,666 2,360 4% ------ ------ ----- --- Income from operations 3,971 4,296 (325) (8%) Other income (expense): Interest income 4 17 (13) (76%) Interest expense (2,497) (2,599) 102 4% Other, net (546) 90 (636) (707%) ---- --- ---- ------ Total other income (expense), net (3,039) (2,492) (547) (22%) ------ ------ ---- ----- Income before income taxes 932 1,804 (872) (48%) Income tax expense 289 484 (195) (40%) --- --- ---- ----- Net income $643 $1,320 $(677) (51%) ==== ====== ===== ===== Basic earnings per share $0.05 $0.10 $(0.05) ===== ===== ====== Diluted earnings per share $0.05 $0.09 $(0.04) ===== ===== ====== Shares of common stock used to calculate basic and diluted earnings per share: Basic 13,918 13,849 69 ====== ====== === Diluted 14,023 14,019 4 ====== ====== === Dividends declared per common share $0.08 $- $0.08 ===== === =====
SUREWEST COMMUNICATIONS CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited; Amounts in thousands, except per share amounts)
Quarters Ended September 30, $ % -------------- 2011 2010 Change Change ---- ---- ------ ------ Operating revenues: Broadband $48,018 $43,861 $4,157 9% Telecom 14,979 17,256 (2,277) (13%) ------ ------ ------ ----- Total operating revenues 62,997 61,117 1,880 3% Operating expenses: Cost of services and products (exclusive of depreciation and amortization) 28,566 26,672 1,894 7% Customer operations and selling 7,771 7,028 743 11% General and administrative 6,879 6,720 159 2% Depreciation and amortization 15,810 15,680 130 1% ------ ------ --- --- Total operating expenses 59,026 56,100 2,926 5% ------ ------ ----- --- Income from operations 3,971 5,017 (1,046) (21%) Other income (expense): Interest income 4 16 (12) (75%) Interest expense (2,497) (2,311) (186) (8%) Other, net (546) 10 (556) (5560%) ---- --- ---- ------- Total other income (expense), net (3,039) (2,285) (754) (33%) ------ ------ ---- ----- Income before income taxes 932 2,732 (1,800) (66%) Income tax expense 289 1,328 (1,039) (78%) --- ----- ------ ----- Net income $643 $1,404 $(761) (54%) ==== ====== ===== ===== Basic and diluted earnings per share $0.05 $0.10 $(0.05) ===== ===== ====== Shares of common stock used to calculate basic and diluted earnings per share: Basic 13,918 13,736 182 ====== ====== === Diluted 14,023 13,736 287 ====== ====== === Dividends declared per common share $0.08 $- $0.08 ===== === =====
SUREWEST COMMUNICATIONS CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited; Amounts in thousands, except per share amounts)
Nine Months Ended September 30, $ % ----------------- 2011 2010 Change Change ---- ---- ------ ------ Operating revenues: Broadband $139,356 $129,514 $9,842 8% Telecom 45,158 52,339 (7,181) (14%) ------ ------ ------ ----- Total operating revenues 184,514 181,853 2,661 1% Operating expenses: Cost of services and products (exclusive of depreciation and amortization) 81,352 78,771 2,581 3% Customer operations and selling 22,146 22,542 (396) (2%) General and administrative 22,819 24,296 (1,477) (6%) Depreciation and amortization 47,942 46,048 1,894 4% ------ ------ ----- --- Total operating expenses 174,259 171,657 2,602 2% ------- ------- ----- --- Income from operations 10,255 10,196 59 1% Other income (expense): Interest income 36 62 (26) (42%) Interest expense (9,512) (6,189) (3,323) (54%) Other, net (249) (323) 74 23% ---- ---- --- --- Total other income (expense), net (9,725) (6,450) (3,275) (51%) ------ ------ ------ ----- Income before income taxes 530 3,746 (3,216) (86%) Income tax expense 211 2,342 (2,131) (91%) --- ----- ------ ----- Net income $319 $1,404 $(1,085) (77%) ==== ====== ======= ===== Basic and diluted earnings per share $0.02 $0.10 $(0.08) ===== ===== ====== Shares of common stock used to calculate basic and diluted earnings per share: Basic 13,851 13,883 (32) ====== ====== === Diluted 13,944 13,883 61 ====== ====== === Dividends declared per common share $0.16 $- $0.16 ===== === =====
SureWest Communications Quarterly Selected Financial Results & Reconciliations of Non-GAAP Measures (on a consolidated and a segment basis) (Unaudited; Amounts in thousands) Consolidated Results of Operations
Sequential Quarter Year- Qtr-over- For 2010 Quarters Ended: For 2011 Quarters Ended: over-Year Qtr ------------------------ ------------------------ ------------- ---------- Twelve Months Nine Months Ended Ended March September December December March September September 30, 31 June 30 30 31 31, 2010 31 June 30 30 2011 $chg % $chg % ------ ------- ---------- --------- --------- ------ ------- ---------- -------------- ---- --- ---- --- Operating revenues (1) Broadband $42,577 $43,076 $43,861 $45,032 $174,546 $45,379 $45,959 $48,018 $139,356 $4,157 9% $2,059 4% Telecom 17,611 17,472 17,256 16,614 68,953 15,176 15,003 14,979 45,158 (2,277) (13%) (24) (0%) ----- ---- Total operating revenues 60,188 60,548 61,117 61,646 243,499 60,555 60,962 62,997 184,514 1,880 3% 2,035 3% ------ ------ ------ ------ ------- ------ ------ ------ ------- ----- --- ----- --- Operating expenses (1) 41,940 43,249 40,420 40,871 166,480 42,792 40,309 43,216 126,317 2,796 7% 2,907 7% Depreciation and amortization 15,106 15,262 15,680 15,777 61,825 15,775 16,357 15,810 47,942 130 1% (547) (3%) --- ---- Income from operations $3,142 $2,037 $5,017 $4,998 $15,194 $1,988 $4,296 $3,971 $10,255 $(1,046) (21%) $(325) (8%) ====== ====== ====== ====== ======= ====== ====== ====== ======= ======= ===== ===== ==== Consolidated Reconciliation of Adjusted EBITDA to Net Income (Loss) Sequential Quarter Year- Qtr-over- For 2010 Quarters Ended: For 2011 Quarters Ended: over-Year Qtr ------------------------ ------------------------ -------------- ----------- Twelve Months Nine Months Ended Ended March September December December March September September 30, 31 June 30 30 31 31, 2010 31 June 30 30 2011 $chg % $chg % ------ ------- ---------- --------- --------- ------ ------- ---------- -------------- ---- --- ---- --- Net income (loss) $527 $(527) $1,404 $1,951 $3,355 $(1,644) $1,320 $643 $319 $(761) (54%) $(677) (51%) Add: income tax expense 824 190 1,328 1,012 3,354 (562) 484 289 211 (1,039) (78%) (195) (40%) Less: other (income)/expense 1,791 2,374 2,285 2,035 8,485 4,194 2,492 3,039 9,725 754 33% 547 22% ----- ----- ----- ----- ----- ----- ----- ----- ----- --- --- --- --- Income from operations 3,142 2,037 5,017 4,998 15,194 1,988 4,296 3,971 10,255 (1,046) (21%) (325) (8%) Add (subtract): Depreciation and amortization 15,106 15,262 15,680 15,777 61,825 15,775 16,357 15,810 47,942 130 1% (547) (3%) Non-cash pension expense 420 341 371 371 1,503 313 394 351 1,058 (20) (5%) (43) (11%) Non-cash stock compensation expense 800 1,144 267 634 2,845 1,645 1,182 747 3,574 480 180% (435) (37%) Severance and other related costs (3) - 1,144 - - 1,144 - - - - - - - - Adjusted EBITDA (2) $19,468 $19,928 $21,335 $21,780 $82,511 $19,721 $22,229 $20,879 $62,829 $(456) (2%) $(1,350) (6%) ======= ======= ======= ======= ======= ======= ======= ======= ======= ===== ==== ======= ==== Adjusted EBITDA margin 32% 33% 35% 35% 34% 33% 36% 33% 34% Consolidated Free Cash Flow and Adjusted Free Cash Flow Sequential Quarter Year- Qtr-over- For 2010 Quarters Ended: For 2011 Quarters Ended: over-Year Qtr ------------------------ ------------------------
(1) External customers only. (2) Adjusted EBITDA represents net income (loss) 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. Adjusted EBITDA is a common measure of operating performance in the telecommunications industry. Adjusted EBITDA is not a measure of financial performance under United States generally accepted accounting principles and should not be considered in isolation or as a substitute for consolidated net income (loss) as a measure of performance. (3) Severance and other related termination costs related to the workforce reduction initiative implemented during the quarter ended June 30, 2010. Amounts exclude the termination costs related to stock compensation expense, which are included in non-cash stock compensation expense of the adjusted EBITDA reconciliation. (4) Free cash flow is a measure of operating cash flows available for corporate purposes after providing sufficient fixed asset additions to maintain current productive capacity. Consolidated free cash flow includes capital expenditures for our corporate operating unit. Adjusted free cash flow represents free cash flow excluding capital expenditures for network expansion. Free cash flow and adjusted free cash flow are not measures of financial performance under United States generally accepted accounting principles and should not be considered in isolation or as a substitute for consolidated net income (loss) as a measure of performance and net cash provided by operating activities as a measure of liquidity. (5) Net debt represents total long-term debt (including current maturities) less cash and cash equivalents. Net debt can be a component in measuring leverage. Net debt is not a measure determined in accordance with United States generally accepted accounting principles and should not be considered as a substitute for total long-term debt. (6) The ratio of net debt to adjusted EBITDA is calculated as net debt divided by adjusted EBITDA based on a trailing twelve month (TTM) period. This measure provides useful information to our investors about our debt level relative to our performance and about our ability to meet our financial obligations.
SUREWEST COMMUNICATIONS CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited; Amounts in thousands)
September December 30, 31, $ % 2011 2010 Change Change ---- ---- ------ ------ ASSETS Current assets: Cash and cash equivalents $8,932 $2,937 $5,995 204% Short-term investments - 771 (771) (100%) Accounts receivable, net 19,896 20,298 (402) (2%) Income tax receivable 177 1,782 (1,605) (90%) Prepaid expenses 2,875 3,792 (917) (24%) Deferred income taxes 2,052 2,284 (232) (10%) Assets held for sale 5,743 6,009 (266) (4)% ----- ----- ---- --- Total current assets 39,675 37,873 1,802 5% Property, plant and equipment, net 517,751 514,639 3,112 1% Intangible and other assets: Customer relationships, net 1,721 2,632 (911) (35%) Goodwill 45,814 45,814 - - Deferred charges and other assets 5,031 2,223 2,808 126% ----- ----- ----- --- 52,566 50,669 1,897 4% ------ ------ ----- --- $609,992 $603,181 $6,811 1% ======== ======== ====== === LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $15,000 $15,636 $(636) (4)% Accounts payable 2,349 2,885 (536) (19)% Other accrued liabilities 17,217 12,847 4,370 34% Advance billings and deferred revenues 8,148 8,035 113 1% Accrued compensation 8,192 6,998 1,194 17% ----- ----- ----- --- Total current liabilities 50,906 46,401 4,505 10% Long-term debt 191,250 189,773 1,477 1% Deferred income taxes 55,311 56,661 (1,350) (2%) Accrued pension and other post- retirement benefits 34,960 33,815 1,145 3% Other liabilities and deferred revenues 5,978 4,473 1,505 34% Commitments and contingencies Shareholders' equity: Common stock, without par value; 100,000 shares authorized, 14,091 and 13,866 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively 146,177 143,309 2,868 2% Accumulated other comprehensive loss (16,359) (15,081) (1,278) (8%) Retained earnings 141,769 143,830 (2,061) (1%) ------- ------- ------ ---- Total shareholders' equity 271,587 272,058 (471) (0)% ------- ------- ---- --- $609,992 $603,181 $6,811 1% ======== ======== ====== ===
SUREWEST COMMUNICATIONS SELECTED OPERATING METRICS As of and for the Quarter Ended
BROADBAND 9/30/2011 9/30/2010 Change % Change 6/30/2011 Change % Change --------- --------- --------- ------ -------- --------- ------ -------- Residential Video Marketable Homes (2) 287,900 268,500 19,400 7% 281,200 6,700 2% RGUs 64,900 61,200 3,700 6% 64,100 800 1% Penetration (2) 22.5% 22.8% -0.3% (1%) 22.8% -0.3% (1%) ARPU $69 $67 $2 4% $67 $2 2% Voice Marketable Homes 321,700 311,200 10,500 3% 317,400 4,300 1% RGUs 76,100 74,900 1,200 2% 75,900 200 0% Penetration 23.7% 24.1% -0.4% (2%) 23.9% -0.3% (1%) ARPU $29 $30 ($1) (3%) $29 $0 1% Data Marketable Homes 321,700 311,200 10,500 3% 317,400 4,300 1% RGUs 101,300 99,200 2,100 2% 100,600 700 1% Penetration 31.5% 31.9% -0.4% (1%) 31.7% -0.2% (1%) ARPU $45 $41 $4 11% $42 $3 8% Total RGUs 242,300 235,300 7,000 3% 240,600 1,700 1% Subscriber totals Subscribers (3) 105,800 104,000 1,800 2% 105,100 700 1% Penetration 32.9% 33.4% -0.5% (2%) 33.1% -0.2% (1%) ARPU (4) $107 $99 $8 7% $102 $5 5% Triple Play ARPU (5) $118 $113 $5 4% $114 $4 4% Triple Play RGUs per Subscriber (5) 2.50 2.53 (0.04) (1%) 2.51 (0.01) (0%) Churn 1.6% 1.7% -0.1% (6%) 1.5% 0.1% 5% Business (6) Customers 8,000 7,700 300 4% 7,900 100 1% ARPU $570 $526 $44 8% $551 $19 3% TELECOM 9/30/2011 9/30/2010 Change % Change 6/30/2011 Change % Change ------- --------- --------- ------ -------- --------- ------ -------- Residential Voice Marketable Homes 91,800 91,400 400 0% 91,800 0 0% RGUs (7) 24,200 30,700 (6,500) (21%) 25,600 (1,400) (5%) Cumulative Migration to Broadband Voice (8) 17,500 14,900 2,600 17% 16,900 600 4% Penetration 26.4% 33.6% -7.2% (22%) 27.9% -1.5% (5%) ARPU $43 $43 ($0) (0%) $43 $0 (0%) Churn (9) 1.8% 2.1% -0.3% (13%) 1.8% 0.0% 2% Business (6) Customers 7,700 8,000 (300) (4%) 7,700 0 0% ARPU $351 $360 ($9) (2%) $357 ($6) (2%) CONSOLIDATED RESIDENTIAL VOICE RGUs 9/30/2011 9/30/2010 Change % Change 6/30/2011 Change % Change ------------------------------ --------- --------- ------ -------- --------- ------ -------- ILEC Voice RGUs Broadband 22,700 20,400 2,300 11% 22,300 400 2% Telecom 24,200 30,700 (6,500) (21%) 25,600 (1,400) (5%) ------ ------ ------ ----- ------ ------ ---- Total ILEC Voice RGUs (10) 46,900 51,100 (4,200) (8%) 47,900 (1,000) (2%) CLEC Residential Voice RGUs (11) 53,400 54,500 (1,100) (2%) 53,600 (200) (0%) ------ ------ ------ ---- ------ ---- ---- TOTAL Residential Voice RGUs (12) 100,300 105,600 (5,300) (5%) 101,500 (1,200) (1%) NETWORK METRICS 9/30/2011 9/30/2010 Change % Change 6/30/2011 Change % Change --------------- --------- --------- ------ -------- --------- ------ -------- Marketable Homes - Fiber 158,500 148,300 10,200 7% 154,300 4,200 3% Marketable Homes - HFC 94,000 93,600 400 0% 93,900 100 0% Marketable Homes -Copper 2-Play 33,800 42,700 (8,900) (21%) 36,200 (2,400) (7%) Marketable Homes -Copper 3-Play 35,400 26,600 8,800 33% 33,000 2,400 7% ------ ------ ----- --- ------ ----- --- Total 321,700 310,400 11,300 4% 317,400 4,300 1%
Note: The calculation of certain metrics have been revised over time to reflect the current view of our business. Where necessary prior period metric calculations have been revised to conform with current practice. All amounts rounded to the nearest 100s, except percents and dollars. (1) During the third quarter of 2010, we revised our methodology to obtain Broadband residential subscribers, RGUs and business customer counts. The revised methodology facilitates the consistent application of customer counts within the Broadband segment. Accordingly, the metrics previously reported for 2010, 2009 & 2008 have been revised to conform to current practice. (2) Marketable Homes -Prior to Q110, video marketable homes and penetration rate included serviceable homes in Sacramento and Kansas City fiber and hybrid fiber coax (HFC) networks only. With launch of ADTV in Q110, certain copper homes became video serviceable and 3-play capable and are included in marketable home counts. Penetration rates prior to Q110 were not adjusted for small number of video customers on copper network prior to ADTV. (3) A residential subscriber is a customer who subscribes to one or more residential RGUs. (4) ARPU is the total residential revenue per average subscriber. (5) Triple play ARPU includes the total residential revenue per average subscriber and Triple play RGUs per Subscriber includes ending RGUs per ending subscriber, for the triple play markets, excluding the ILEC market. (6) A business customer is a customer who subscribes to business data, voice or video and represents a unique customer account. ARPU is the total business revenue per average customer. (7) A voice RGU is a residential customer who subscribers to one or more voice access line. (8) Telecom Voice RGU Migration to Broadband Voice are residential Telecom voice RGUs in Line (7) that have ported their Telecom primary access line service to Broadband VoIP. (9) Telecom Churn excludes disconnects in Line (8) that have ported their Telecom primary access line service to Broadband VoIP. (10) ILEC Voice RGUs are the total residential voice RGUs in the ILEC franchise market area that are either a Telecom primary access line or Broadband VoIP subscriber. (11) CLEC Voice RGUs are the total residential voice RGUs in the Kansas City and Sacramento markets, excluding the ILEC market. (12) Total Voice RGUs are the total of ILEC and CLEC residential voice RGUs, and represent the total company residential voice RGUs of both the Broadband and Telecom Segments.
SUREWEST COMMUNICATIONS SELECTED OPERATING METRICS (inc KC results from periods prior to acquisition) As of and for the Quarter Ended
6/30/2008 9/30/2008 12/31/2008 3/31/2009 6/30/2009 9/30/2009 12/31/2009 3/31/2010 6/30/2010 BROADBAND (1) (1) (1) (1) (1) (1) (1) (1) (1) 9/30/2010 12/31/2010 3/31/2011 6/30/2011 9/30/2011 --------- ---------- ---------- ----------- ---------- ---------- ---------- ----------- ---------- ---------- --------- ---------- --------- --------- --------- Residential Video Marketable Homes (2) 217,700 221,700 232,400 236,500 239,800 240,000 240,500 261,900 265,100 268,500 271,800 272,600 281,200 287,900 RGUs 57,000 58,400 60,000 59,900 59,000 59,000 58,900 58,500 60,200 61,200 61,800 63,100 64,100 64,900 Quarterly change 1,900 1,400 1,600 (100) (900) 0 (100) (400) 1,700 1,000 600 1,300 1,000 800 Year-over-Year change 4,000 4,600 5,500 4,800 2,000 600 (1,100) (1,400) 1,200 2,200 2,900 4,600 3,900 3,700 Penetration (2) 25.0% 25.2% 24.7% 24.4% 23.7% 23.8% 23.7% 22.3% 22.7% 22.8% 22.7% 23.1% 22.8% 22.5% ARPU $62 $59 $59 $65 $67 $66 $68 $70 $68 $67 $68 $68 $67 $69 Voice Marketable Homes 292,200 296,600 304,200 308,200 309,300 309,400 309,700 309,900 310,400 311,200 311,300 311,600 317,400 321,700 RGUs 56,300 59,700 63,200 66,000 67,700 70,000 71,300 71,800 73,900 74,900 74,900 75,600 75,900 76,100 Quarterly change 2,800 3,400 3,500 2,800 1,700 2,300 1,300 500 2,100 1,000 0 700 300 200 Year-over-Year change 3,800 6,900 9,900 12,500 11,400 10,300 8,100 5,800 6,200 4,900 3,600 3,800 2,000 1,200 Penetration 19.4% 20.2% 20.9% 21.5% 22.0% 22.7% 23.1% 23.2% 23.8% 24.1% 24.1% 24.3% 23.9% 23.7% ARPU $33 $32 $32 $33 $33 $31 $30 $30 $30 $30 $30 $29 $29 $29 Data Marketable Homes 292,200 296,600 304,200 308,200 309,300 309,400 309,700 309,900 310,400 311,200 311,300 311,600 317,400 321,700 RGUs 93,700 95,400 97,100 97,800 97,400 97,600 98,300 97,500 98,900 99,200 99,400 100,300 100,600 101,300 Quarterly change 2,200 1,700 1,700 700 (400) 200 700 (800) 1,400 300 200 900 300 700 Year-over-Year change 6,500 6,600 7,000 6,300 3,700 2,200 1,200 (300) 1,500 1,600 1,100 2,800 1,700 2,100 Penetration 32.2% 32.3% 32.0% 31.8% 31.6% 31.6% 31.8% 31.5% 31.9% 31.9% 31.9% 32.2% 31.7% 31.5% ARPU $37 $36 $36 $37 $38 $38 $40 $42 $41 $41 $42 $42 $42 $45 Total RGUs 207,000 213,500 220,300 223,700 224,100 226,600 228,500 227,800 233,000 235,300 236,100 239,000 240,600 242,300 Quarterly change 6,900 6,500 6,800 3,400 400 2,500 1,900 (700) 5,200 2,300 800 2,900 1,600 1,700 Year-over-Year change 14,300 18,100 22,400 23,600 17,100 13,100 8,200 4,100 8,900 8,700 7,600 11,200 7,600 7,000 Subscriber totals Subscribers (3) 99,500 101,100 103,000 103,300 102,400 103,000 103,100 102,500 103,600 104,000 104,100 104,900 105,100 105,800 Quarterly change 2,000 1,600 1,900 300 (900) 600 100 (600) 1,100 400 100 800 200 700 Year-over-Year change 5,700 6,100 6,600 5,800 2,900 1,900 100 (800) 1,200 1,000 1,000 2,400 1,500 1,800 Penetration 34.1% 34.1% 33.9% 33.5% 33.1% 33.3% 33.3% 33.1% 33.4% 33.4% 33.4% 33.7% 33.1% 32.9% ARPU (4) $88 $87 $88 $93 $97 $95 $99 $101 $100 $99 $101 $102 $102 $107 Triple Play ARPU (5) $108 $105 $106 $111 $114 $111 $114 $116 $115 $113 $115 $114 $114 $118 Triple Play RGUs per Subscriber (5) 2.56 2.56 2.56 2.56 2.55 2.54 2.54 2.53 2.54 2.53 2.53 2.52 2.51 2.50 Churn 1.4% 1.7% 1.4% 1.4% 1.7% 1.8% 1.5% 1.6% 1.6% 1.7% 1.6% 1.4% 1.5% 1.6% Business (6) Customers 6,400 6,600 6,800 6,900 7,000 7,200 7,300 7,400 7,500 7,700 7,800 7,800 7,900 8,000 ARPU $441 $477 $451 $467 $459 $467 $476 $479 $502 $526 $535 $539 $551 $570 TELECOM 6/30/2008 9/30/2008 12/31/2008 3/31/2009 6/30/2009 9/30/2009 12/31/2009 3/31/2010 6/30/2010 9/30/2010 12/31/2010 3/31/2011 6/30/2011 9/30/2011 ------- --------- --------- ---------- --------- --------- --------- ---------- --------- --------- --------- ---------- --------- --------- --------- Residential Voice Marketable Homes 90,000 90,500 90,800 90,800 90,900 90,900 91,000 91,100 91,200 91,400 91,500 91,700 91,800 91,800 RGUs (7) 62,900 58,500 54,000 49,500 45,100 41,300 38,500 35,500 32,800 30,700 28,900 27,300 25,600 24,200 Cumulative Migration to Broadband Voice (8) 1,400 2,900 4,700 6,900 9,000 10,700 11,800 12,900 14,000 14,900 15,400 16,100 16,900 17,500 Penetration 69.9% 64.6% 59.5% 54.5% 49.6% 45.4% 42.3% 39.0% 36.0% 33.6% 31.6% 29.8% 27.9% 26.4% ARPU $44 $43 $43 $44 $45 $45 $45 $44 $44 $43 $43 $43 $43 $43 Churn (9) 2.1% 2.4% 2.2% 2.1% 2.3% 2.3% 2.0% 2.3% 2.1% 2.1% 2.0% 1.8% 1.8% 1.8% Business (6) Customers 9,600 9,400 9,200 9,000 8,900 8,700 8,500 8,300 8,200 8,000 7,900 7,800 7,700 7,700 ARPU $341 $354 $327 $332 $339 $329 $334 $334 $340 $360 $359 $356 $357 $351 CONSOLIDATED RESIDENTIAL 6/30/2008 9/30/2008 12/31/2008 3/31/2009 6/30/2009 9/30/2009 12/31/2009 3/31/2010 6/30/2010 VOICE RGUs (1) (1) (1) (1) (1) (1) (1) (1) (1) 9/30/2010 12/31/2010 3/31/2011 6/30/2011 9/30/2011 ------------------------ ---------- ---------- ----------- ---------- ---------- ---------- ----------- ---------- ---------- --------- ---------- --------- --------- --------- ILEC Voice RGUs Broadband 2,000 4,400 7,100 9,900 12,400 14,700 16,200 17,500 19,000 20,400 21,000 21,500 22,300 22,700 Telecom 62,900 58,500 54,000 49,500 45,100 41,300 38,500 35,500 32,800 30,700 28,900 27,300 25,600 24,200 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Total ILEC Voice RGUs (10) 64,900 62,900 61,100 59,400 57,500 56,000 54,700 53,000 51,800 51,100 49,900 48,800 47,900 46,900 Quarterly change (2,000) (2,000) (1,800) (1,700) (1,900) (1,500) (1,300) (1,700) (1,200) (700) (1,200) (1,100) (900) (1,000) Year-over-Year change 64,900 (679,300) (16,200) (7,500) (7,400) (6,900) (6,400) (6,400) (5,700) (4,900) (4,800) (4,200) (3,900) (4,200) CLEC Residential Voice RGUs (11) 54,300 55,300 56,100 56,100 55,300 55,300 55,100 54,300 54,900 54,500 53,900 54,100 53,600 53,400 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Quarterly change 900 1,000 800 0 (800) 0 (200) (800) 600 (400) (600) 200 (500) (200) Year-over-Year change 1,800 2,500 2,800 2,700 1,000 0 (1,000) (1,800) (400) (800) (1,200) (200) (1,300) (1,100) TOTAL Residential Voice RGUs (12) 119,200 118,200 117,200 115,500 112,800 111,300 109,800 107,300 106,700 105,600 103,800 102,900 101,500 100,300 Quarterly change (1,100) (1,000) (1,000) (1,700) (2,700) (1,500) (1,500) (2,500) (600) (1,100) (1,800) (900) (1,400) (1,200) Year-over-Year change 66,700 (676,800) (13,400) (4,800) (6,400) (6,900) (7,400) (8,200) (6,100) (5,700) (6,000) (4,400) (5,200) (5,300) NETWORK METRICS 6/30/2008 9/30/2008 12/31/2008 3/31/2009 6/30/2009 9/30/2009 12/31/2009 3/31/2010 6/30/2010 9/30/2010 12/31/2010 3/31/2011 6/30/2011 9/30/2011 --------------- --------- --------- ---------- --------- --------- --------- ---------- --------- --------- --------- ---------- --------- --------- --------- Marketable Homes -Fiber 125,700 129,000 138,800 142,900 146,900 147,100 147,600 147,700 147,900 148,300 148,500 148,700 154,300 158,500 Marketable Homes -HFC 92,000 92,700 93,600 93,600 92,900 92,900 92,900 93,000 93,200 93,600 93,600 93,700 93,900 94,000 Marketable Homes -Copper 2-Play 74,500 74,900 71,800 71,700 69,500 69,400 69,200 47,900 45,300 42,700 39,600 39,000 36,200 33,800 Marketable Homes -Copper 3-Play 0 0 0 0 0 0 0 21,300 24,000 26,600 29,600 30,200 33,000 35,400 --- --- --- --- --- --- --- ------ ------ ------ ------ ------ ------ ------ Total 292,200 296,600 304,200 308,200 309,300 309,400 309,700 309,900 310,400 311,200 311,300 311,600 317,400 321,700 Quarterly change 5,600 4,400 7,600 4,000 1,100 100 300 200 500 800 100 300 5,800 4,300 Year-over-Year change 12,300 15,600 20,200 21,600 17,100 12,800 5,500 1,700 1,100 1,800 1,600 1,700 7,000 10,500
(1-12) See all notes on Selected Operating Metrics Actuals Quarterly and Year-over-Year comparison
SOURCE SureWest Communications