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Atlantic Tele-Network (NASDAQ:ATNI)
Q1 2019 Earnings Call
April 25, 2019 9:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the ATN International first-quarter 2019 conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. [Operator instructions] As a reminder, this conference is being recorded.

I'd now like to turn the call over to Chief Financial Officer Justin Benincasa. You may begin.

Justin Benincasa -- Chief Financial Officer

Great. Thank you, operator. Good morning everyone, thank you for joining us on our call to review our first-quarter 2019 results. With me here is Michael Prior, ATN's chief executive officer.

During the call, I'll cover the relevant financial information, and Michael will provide an update on the business and outlook. Before I turn the call over to Michael for his comments, I'd like to point out that this call and our press release contain forward-looking statements concerning our current expectations, objectives and underlying assumptions regarding our future operating results and are subject to risks and uncertainties that could cause actual results to different materially from those described. Also, in an effort to provide useful information to investors, our comments today include non-GAAP financial measures. For details on these measures and reconciliations to comparable GAAP measures, and for further information regarding the factors that may affect our future operating results, I would refer you to our earnings release on our website at atni.com, or the 8-K filing provided to the SEC.

And I'll turn the call over to Michael.

Michael Prior -- Chief Executive Officer

All right, thank you, Justin. Good morning everyone. My remarks this quarter are going to be relatively brief since it's been only two months since the year-end call. So just as usual, I'll start with the overview and then go quickly through the segments and finish.

When I look at this quarter, I look at it and say the story might best be entitled the tale of two segments. One is very positive and one is not. First, the negative. Our U.S.

telecom segment reported historically low results, with adjusted EBITDA well below levels we have seen for many years. While there is some seasonality in those numbers and the effect of an asset sale and some other items, these results are primarily due to the decline in our core wholesale wireless revenues. Second, the positive. Today, international telecom is by far the largest segment, accounting for roughly three quarters of total revenue for the quarter.

And we are pleased by the progress and future prospects of this part of the portfolio. So I said I was gonna be brief so let's move from that directly into the segment discussion, beginning with international telecom. So while in line with our expectations, it was good to see the growth of both revenues and operating margins in this segment. The reasons for this growth should be familiar.

We returned to a full scale, more normal operating environment after some five quarters of hurricane recovery work, and we are continuing to see broadband and other data service growth following our major network investments. You can see this data growth clearly in the subscriber numbers, with data subscribers ending the quarter at more than 125,000, 12% higher than a year ago. And we do think this sort of organic growth coupled with cost controls will be a recurring theme this year and into next. Lastly, as Justin will cover, so far we are seeing the free cash flow expansion for this segment that we expected and spoke to in our last earnings call.

Moving to the U.S. telecom segment. This was a disappointing quarter, as I said, even after you account for the effect of the transactional and subsidy items that were expected and much discussed. I will assure you that our team is not idle in the face of this adversity, and we are still working diligently to try to reposition the main wholesale business.

And while success is not guaranteed or even completely defined, our goal is to create a sustainable and more predictable stream of revenues and cash flows from those operations moving forward. And I do expect our understanding of that future will become clearer as 2019 progresses. In the meantime, as we stated in the press release, we do anticipate results improving a bit in the next quarter due to a variety of issues that disproportionately affect either the year-on-year or sequential comparisons. Beyond that, we have a number of initiatives involving different businesses and service offerings within this segment outside of wholesale wireless, but there's nothing new of note to report on that since our last call.

In renewable energy, there's also little to add to the update we offered in late February. Segment revenues and adjusted EBITDA are of course down year on year because of the U.S. asset sale. Now that the India business is producing steady revenues and operating cash flow, we are focused mainly on opportunities to increase scale.

In other developments during the quarter, ATN Ventures made a significant new investment in xcom [Sp], a new venture focusing on developing new wireless technologies that was launched last year by members of the former leadership team at Qualcomm. We are excited about this chance to invest in and partner with a very talented group. We share their vision of rapid changes to communications technologies, which we believe will open up the prospect of new business models in the broader sector. So to sum it up, our largest collection of businesses is producing favorable trends and expanding cash flow, but our legacy U.S.

wholesale business is still fighting headwinds, which we are working hard to combat. And we are investing not an insignificant amount of our capital and time pursuing business expansion and investment opportunities. And now I'll hand it back to you, Justin.

Justin Benincasa -- Chief Financial Officer

Great. Thank you, Michael. For the first quarter, total consolidated revenues were relatively steady at $103.3 million, down 1% from last year first quarter. Excluding the impact of the U.S.

solar sale, we saw similar trends to the fourth-quarter 2018, with increases in the international telecom segment revenues, more than offsetting lower U.S. telecom segment revenues, which speaks to the benefits of a diversified business model. Consolidated adjusted EBITDA for the quarter was $23.2 million compared to $26.3 million in the prior year, which I'll break down further as I go through the segments. Starting with the international telecom segment, revenues increased 15% to $80.3 million, up from $70.1 million last year.

And adjusted EBITDA was up 51% to $26.9 million from $17.8 million. Much of the year-over-year increase relates to post-hurricane recovery in the U.S. Virgin Islands. And as Michael noted, we continue to see strong subscriber and revenue growth, thanks to our investments in upgrading and expanding our fiber networks.

We expect capital expenditures in this segment to be between $50 million and $55 million for both maintenance and additional growth projects in multiple markets for the year. Including net capital expend, we expect to see a year-on-year improvement of free cash flow in excess of $100 million for the segment. In the U.S. telecom segment, revenues were $21.5 million for the quarter, down from $28.5 million a year ago.

And adjusted EBITDA was $2.3 million, down from $12 million in the first-quarter 2019. '18, sorry. Of the $7 million revenue decline, $4.9 million was due to lower wholesale revenue that Michael mentioned. Breaking down the year-on-year adjusted EBITDA difference, approximately 35% of the decline, or $3.5 million, was accounted for by the sale of 100 wholesale sites, which closed mid-2018, the expiration of the Mobility Fund I grant and related operating expense offsets and the additional operating costs from the early stage business investments we made mid last year.

We currently expect site acceptance and revenue benefit from the $80-million 10-year Connect America II fund award to start late in the second quarter, which will benefit second-half segment results. In the renewable energy segment, revenues were $1.5 million in the first quarter following the sale of the U.S. portfolio in late 2018, accounting for the $4.3-million reduction in the first-quarter results. EBITDA was $0.6 million for the quarter.

Consolidated net loss for the quarter was $1.6 million, or $0.10 per share. And other income state items to note, EBITDA in the U.S. telecom segment for the quarter was negatively impacted by approximately $1.2 million from the inclusion of the early stage initiatives we previously discussed. The effective tax rate for the quarter was 62%, reflecting the impact of some discrete items on a smaller pre-tax item.

But we currently estimate an overall effective tax rate in the high 30% range for the full year. And included in operating income was $1.3 million of non-cash stock-based compensation expense for the quarter. Moving to the balance sheet, in March 31st, we ended the year with total cash and short-term cash investments of $176.8 million and total debt outstanding of $90.1 million. Capital expenditures for the quarter totaled $17.8 million, of which approximately $11.4 million was incurred by our international telecom segment, $3.1 million by the U.S.

telecom operations and $3.3 million in the renewable energy and other segment. And with that operator, we'll open the call up for questions. 

Questions and Answers:

Operator

Thank you. [Operator instructions]And our first question comes from Rick Prentiss with Raymond James. Please proceed.

Rick Prentiss -- Raymond James -- Analyst

Thanks. Good morning guys.

Michael Prior -- Chief Executive Officer

Good morning.

Rick Prentiss -- Raymond James -- Analyst

I think our high school English teachers will be proud because I almost used that tale of two segments as my title for the note last night as well. When we do look at the two segments on the U.S. side, how mechanically will the cap II funding work? Justin, you mentioned it's going to come in late 2Q. But is the $80 million over 10 years, will that all come in spread to revenue? Or is there any contra CAPEX component? And is it kind of level loaded? And is it all incremental versus stuff you've already been booking?

Michael Prior -- Chief Executive Officer

Let me see if I can. It'll all come in as revenue. It might not come in at the full $80 million to start because we reserve, if we don't get an area covered, we may not be accepted, etc. So there will be some conservatism in the 80.

And then if there's any CAPEX needed to meet the requirements, it'll flow through capital expenditures. But it's fairly even in terms of coming through the quarters. And it would be all--

Rick Prentiss -- Raymond James -- Analyst

OK, it's just a matter of how much you reserve for populations.

Michael Prior -- Chief Executive Officer

Right. It would be all incremental if that's, I think you asked me too.

Rick Prentiss -- Raymond James -- Analyst

Right, right, right. And then also within the U.S. wireline business, it's been bouncing around a little bit on the revenue side for wireline. I think last year was about $1 million in revenue, but then it went up closer to $2 million in the latter part of '18.

And now in 1Q '19, we're back down to kind of $1 billion of revenue. Is there some seasonality in the base wireline business? I'm not that aware of that so I'm just wondering how it played out.

Michael Prior -- Chief Executive Officer

Yes, that wireline revenue is our wholesale business. It does kind of bounce around a little bit. It's not really seasonal. I think this quarter in particular was a little bit off.

Rick Prentiss -- Raymond James -- Analyst

OK. So some more like what we saw in 2018, maybe more of an expected area?

Michael Prior -- Chief Executive Officer

Yes, it's hard to say. It's the wholesale long distance business we have in there. But this quarter was lower.

Justin Benincasa -- Chief Financial Officer

It's not a major impacting item on EBITDA.

Michael Prior -- Chief Executive Officer

Yes, yes. That's the way I would say that.

Rick Prentiss -- Raymond James -- Analyst

OK.

Michael Prior -- Chief Executive Officer

So the movement shouldn't really have a big impact.

Rick Prentiss -- Raymond James -- Analyst

Got you. Now of course, one of the bigger as it does impact EBITDA, is the second segment, the good segment that's done strong is international. You called out continued organic growth and also cost control. How should we think about the margins in that business now that you've spent a lot of the capital, where the margins might be able to go in that business with the organic revenue growth and the cost controls?

Michael Prior -- Chief Executive Officer

I'm not going to give a target, but we think there is a lot of opportunity to improve margin. It depends on individual markets and businesses, but we think we have to improve the margins [Inaudible] a longer term viability of the individual businesses, but we also think there's ample opportunity to do so. And it won't happen overnight. It's a matter of a number of initiatives.

There's been some good progress in some areas, but I would say we're probably early innings of what we think we can do. And time will tell how well we do it obviously.

Rick Prentiss -- Raymond James -- Analyst

Right. And how about seasonality in that business as far as the international? Obviously it's a mixture of different markets, but how should we think about seasonality on revenues and margins in the international segment?

Michael Prior -- Chief Executive Officer

It's not very pronounced at the moment. In the old days, it used to be more pronounced when there was a smaller group of assets. And a higher piece of the overall revenue was inbound roaming revenue. That's just not that significant.

So if you think about the underlying product, it's really pretty steady throughout the year. There are exceptions. There's some markets that have a little more of an increase, but to some extent, those are at different times of the year for different markets. So net net net, not a real factor.

Rick Prentiss -- Raymond James -- Analyst

Right. Really, it's just being tied to the adoption of broadband and data consumption then.

Michael Prior -- Chief Executive Officer

That's right. That's right. And the core revenue here, both wireless and wireline are domestic recurring revenue stuff and they don't move around a lot throughout the year for any individual customers.

Rick Prentiss -- Raymond James -- Analyst

OK. And the final one from me is on the early stage. Appreciate the call out as far as how much impact they had on the EBITDA within the quarter. How should we think about the ramp curve there from CAPEX or other spending? What's the magnitude it might reach over the next one, three, five years?

Michael Prior -- Chief Executive Officer

It's hard to predict, Rick. I guess what I would say is if we're successful, it could be a fairly significant number in those businesses. But it's really, and we spoke to this before, it's really the business models are very oriented toward success-based CAPEX. So that will be coming at the same time as revenue, commitments and revenue growth.

But today, it's hard to predict the size or the scale because we have a number of different opportunities we're chasing, and it really depends how they pan out.

Rick Prentiss -- Raymond James -- Analyst

And what should we be watching externally as far as the success factors? Is it announcement of buildings as far as wanting to do indoor DAS Systems? Or what should we be looking for as far as milestones along the path to successful?

Michael Prior -- Chief Executive Officer

It's the first part of your tentative answer, which is you'll tend to see announcements of that progress and partnerships and things like that with the other indicators. Because that's really how you measure the progress of businesses.

Rick Prentiss -- Raymond James -- Analyst

Right. OK, perfect. Thanks guys.

Michael Prior -- Chief Executive Officer

Yes.

Operator

Thank you. And our next question comes from Allen Klee with Maxim Group.

Allen Klee -- Maxim Group -- Analyst

All right. Good morning. So the U.S. telecom segment, could you expand on a little bit on what you said, that some of your initiatives could get a little bit of improvement for next quarter, in terms of what that is? And then excluding the benefit you will get in the second half from Connect America Fund.

Do you think that the new run rate of the margin is kind of where it is in the quarter you just had? Or is there some opportunity for that to improve?

Michael Prior -- Chief Executive Officer

I think I'll let Justin add if I miss something or misspeak, but I think, first of all, just for the next quarter, it's mainly some [Inaudible] lumped under but not entirely seasonal factors that have us saying that the second quarter should improve a bit over the first. There's nothing, that's not about bigger initiatives and things like that. Those things are a little bit probably farther out, maybe impacting 2019 but farther out. And in terms of margins, it really depends ultimately on the success of that.

I mean, that's what we're working on. So it's a little bit hard to predict margins when the core wholesale revenue line we're working on various things that will impact that.

Justin Benincasa -- Chief Financial Officer

I mean, seasonality alone, Allen, would, in the higher seasonal quarters, expand out margins, right? Because the cost structure right now is kind of steady state. So as we move through, just move through just seasonality, you're going to get expanded margins in the more seasonal quarters being kind of end of second and third. That answer your questions, Allen?

Allen Klee -- Maxim Group -- Analyst

Yes, thank you. In renewables, now it's pure India. What's your thoughts on, what can change this from being kind of a steady-state level of revenue and EBITDA to a higher number?

Michael Prior -- Chief Executive Officer

It's really about building out on our pipeline. And we've said that we need to see additional capital partners, including local lenders, in order to do that. So we still think that's the direction, but that's basically what's required.

Allen Klee -- Maxim Group -- Analyst

OK. And then finally, I guess you've kind of touched on it but is there anything else you would add with emerging investments of how you think about the potential timeframe for the revenues contribution from these investments?

Michael Prior -- Chief Executive Officer

I think I largely covered it. One way to think about it would be that I think that by coming into 2020, those are either starting to really significantly ramp, or there's visibility of that ramp, or they're basically not succeeding in executing on the model, right? So it becomes somewhat binary.

Allen Klee -- Maxim Group -- Analyst

OK. Thank you so much.

Michael Prior -- Chief Executive Officer

Sure.

Operator

Thank you. [Operator instructions] Our next question comes from with BWS Financial. Please proceed.

Hamed Khorsand -- BWS Financial -- Analyst

Hey, good morning. So first off, is there anything you're doing on the U.S. wholesale side to improve the profitability of that business?

Michael Prior -- Chief Executive Officer

We're working on it, but there's only so far you can go. So we're certainly working on that, but I think it's mainly a revenue issue rather than a cost issue.

Hamed Khorsand -- BWS Financial -- Analyst

And then on the early investments you've made, especially the ones you've highlighted in previous calls, is it still too early to talk about monetizing any of those?

Michael Prior -- Chief Executive Officer

Yes. I mean, I think we feel we're not in any rush to do that. In fact, we'd love to build, we like to build bigger businesses for the long term if we can.

Hamed Khorsand -- BWS Financial -- Analyst

And then on the international side, you were talking about the broadband increase. Is that all coming from U.S. Virgin Islands? Or is Guyana in the mix as well?

Michael Prior -- Chief Executive Officer

It's multiple markets. It's those markets and other markets. It's really most of our market.

Hamed Khorsand -- BWS Financial -- Analyst

And is U.S. Virgin Islands back to being profitable or not yet?

Michael Prior -- Chief Executive Officer

It's EBITDA positive.

Hamed Khorsand -- BWS Financial -- Analyst

OK. All right. Great. Thank you.

Michael Prior -- Chief Executive Officer

All right.

Operator

And we have a follow up from Allen Klee with Maxim Group. Please proceed.

Allen Klee -- Maxim Group -- Analyst

Oh, I was just curious if you had any specific color on what the competitive market of how, if you think how you're doing in Guyana and Bermuda.

Michael Prior -- Chief Executive Officer

No, I mean I think we try not to get into those individual markets. But I would say from an overall basis, there are some markets where we think we're more or less where we should be from a competitive standpoint. And there's other markets where we think we can do better.

Allen Klee -- Maxim Group -- Analyst

Thank you.

Michael Prior -- Chief Executive Officer

Yes.

Operator

Thank you. And we have a follow up from Rick Prentiss with Raymond James. Please proceed.

Rick Prentiss -- Raymond James -- Analyst

Yes. Hey guys, two quick follow ups. First, on the metrics. Michael, you mentioned the subscribers broadband up 12% year over year to 125,000.

Were there any changes? I know sometimes you guys recategorize or have updates on the subscriber counts in the different segments and the different markets. Were there any updates in the way the subscriber metrics are calculated?

Michael Prior -- Chief Executive Officer

No, no, those are pretty straightforward. What we've done is taken out markets. If we've exited a market, we might remove them. But for the most part, the numbers are pretty straightforward.

Justin Benincasa -- Chief Financial Officer

But the one thing to point out though, Rick, is that if you look at the footnotes to the subscribers, that is the second footnote is important. So the growth in revenue is larger than that subscriber line might imply. And that's really because, as the footnote points out, in the Virgin Islands, well, the network was down. We just kept our pre-hurricane subscriber levels where they were unless and until we were able to offer them service and they declined.

Michael Prior -- Chief Executive Officer

So there were still active customers, but we weren't able to provide the service so we credit it back.

Rick Prentiss -- Raymond James -- Analyst

Right. And are you at now where you think most of the customers have come back and you're either offering them service or the address is no longer there? Just wondering how cleaned out is that number then on the USVI.

Michael Prior -- Chief Executive Officer

So it's clean from the perspective of the people who are back in their houses, with some exceptions. There are some exceptions. But the people who are back, we were able to offer them service. And so that's relatively clean.

There are still not an insignificant number of houses. I've seen estimates as high as 10% of the households that are not rebuilt, that are waiting particularly under the federal fund plan for rebuild. Now some of those may be occupied and capable of service so I wouldn't expect that to be a number you can rely on precisely. But there's still some there.

There's definitely still some winback opportunity for us. But you can look at this. If you look at the video subs for example, right, it's down in that period. But our actual revenue-generating video subs are up because of virtually none of them who were in the Virgin Islands were generating revenue a year ago.

Rick Prentiss -- Raymond James -- Analyst

And is there any further FCC support that you might be able to get in the islands?

Michael Prior -- Chief Executive Officer

Yes, absolutely. There is a long-term plan that's pretty significant that partly replaces existing support under the old high-cost plan, which was frozen in this market, like a lot of markets for a period of time. That's continuing while they wait to administer this new plan and decide on the final grants. So they identified $186 million over 10 years for this market but did made the awards at this point.

Rick Prentiss -- Raymond James -- Analyst

Any thought of, obviously it's political and regulatory wise, but is it something you think might happen this calendar year? Or is it slipping into next year?

Michael Prior -- Chief Executive Officer

We certainly hope so. I know the FCC has got a lot on their plate and they've been doing everything they can, but for us, it's really difficult to operate without some certainty there. And some of the things we want to do, additional things we want to do in terms of expanding the network and hardening it and all those things, we're really waiting to hear here. A way to look at that number is it's not, if all of that was awarded to us, it's not $18.6 million a year additive because there is roughly $16 million a year that we're getting today.

Rick Prentiss -- Raymond James -- Analyst

OK. All right. And then last one from me. You kind of talked on the FCC being busy.

Obviously they've got a lot on their plate. How do you think about the different spectrum bands that are being identified for 5G? I think you guys did not participate in the 28, 24 gigahertz auction. But how do you think about spectrum and what might be coming available with the FCC focused on trying to find more?

Michael Prior -- Chief Executive Officer

Yes, I think we're watching all those. I think it's possible, maybe even probable that we'd participate in some that are being identified. But we're still trying to decide that. In certain places, so in our biggest retail operation in the U.S., is really the Virgin Islands, and we have very good spectrum assets there and depth there.

But you're watching other things to try to understand how they might augment what you have and different technologies that are coming. So it's probably too soon to tell. I don't think it's a huge coming expenditure for us overall, just given where our businesses are located. I think it's relatively smaller.

And then in the wholesale business and some other businesses, it'll tend to be much more success-oriented what we do. So if there's a customer need that is identified, or enterprise, other types of uses.

Rick Prentiss -- Raymond James -- Analyst

OK. And the CBRS stuff would fall into that same discussion that you're having?

Michael Prior -- Chief Executive Officer

Exactly.

Rick Prentiss -- Raymond James -- Analyst

Yes. OK. Thanks.

Michael Prior -- Chief Executive Officer

Yes.

Operator

Thank you. And this ends our Q&A session for today. I'd like to turn the call back over to management for closing remarks.

Michael Prior -- Chief Executive Officer

Thank you everybody, and we look forward to speaking to you in July. Take care.

Operator

[Operator signoff]

Duration: 33 minutes

Call Participants:

Justin Benincasa -- Chief Financial Officer

Michael Prior -- Chief Executive Officer

Rick Prentiss -- Raymond James -- Analyst

Michael Prior -- Chief Executive Officer

Justin Benincasa -- Chief Financial Officer

Allen Klee -- Maxim Group -- Analyst

Hamed Khorsand -- BWS Financial -- Analyst

Rick Prentiss -- Raymond James -- Analyst

More ATNI analysis

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