SURW Surewest Communications (MM)

Broadband Segment Continues to Improve ROSEVILLE, Calif., March 14 /PRNewswire-FirstCall/ -- Leading independent telecommunications holding company SureWest Communications (NASDAQ:SURW) announced operating results today for the quarter and year ended December 31, 2006. (Logo: http://www.newscom.com/cgi-bin/prnh/20050908/SFSUREWESTLOGO ) Fourth Quarter Highlights *Consolidated revenues increased 2% compared to Q4 2005 *Broadband revenues increased 18% compared to Q4 2005 *Consolidated expenses increased by $1.1 million compared to Q4 2005, including $0.4 million in external costs associated with the sale of the directory publishing subsidiary and $0.6 million in curtailment costs associated with the freeze of the defined benefit pension plan *Broadband segment posted full quarter positive EBITDA for the first time *Product introductions included the roll-out of a 50 Mbps hyper-speed data product on the fiber platform *Penetration of high definition TV subscribers topped 11% of total video customers "We are excited about a number of things that took place during the fourth quarter, especially our synchronous 50 Mbps Internet product launch -- the fastest residential Internet speed in the country," says Steve Oldham, SureWest's president and chief executive officer. "The continued growth of Broadband revenues is a direct result of the superior, state-of-the-art products we are delivering on our fiber platform, such as the 50 Mbps hyper-speed data product and HDTV over IP. We are looking forward to a continuation of industry-leading product developments in 2007." Consolidated Results Consolidated revenues increased 2% in both the fourth quarter of 2006 compared to the fourth quarter of 2005 and for the full year. The Telecom segment generated 58% of consolidated revenues even as it continues to experience slight declines in access lines consistent with national trends. This decrease in revenues was offset by the 20% increase in Broadband revenues driven by strong residential and business subscriber growth. "During 2006 we completed a restructure of the sales organization and released 20 new or upgraded products," added Oldham. "These efforts were instrumental in focusing the sales organization on growth in Broadband service offerings. 2006 was an important transitional year for the company. We continued to achieve solid results while making the changes necessary to position ourselves for future top-line revenue growth." Fourth quarter operating expenses, exclusive of depreciation and amortization, increased by 3% compared to the fourth quarter of 2005 as a result of costs associated with the pension plan freeze and sale of the directory publishing subsidiary. The plan freeze should help set the stage for improved profitability in future years by prompting the development of important new employee compensation plans designed to drive better performance and employee satisfaction. The sale of the directory publishing business allows the Company to focus on the growth of the core network business. Full year operating expenses, exclusive of depreciation and amortization, decreased by 2% as a result of continued efforts to reduce costs and improve employee productivity. Ongoing cost control and reduction remains a key part of 2007 tactical plans. These reductions were offset by increased depreciation expense associated with the investment necessary to add new customers. Consolidated operating earnings before interest, taxes, depreciation and amortization (defined as Operating EBITDA and reconciled to GAAP results in the accompanying tables) increased 5% in the fourth quarter of 2006 compared to the fourth quarter of 2005 and 10% for the full year. Fourth quarter and full year net income decreased compared to 2005, due in part to higher interest costs required to finance network expansion. Segment Results Telecom Segment Telecom segment access lines declined by 1% during the quarter, and 3% compared to the fourth quarter of 2005. Year over year, the segment posted increases in business access lines, offset by declines in residential access lines due to wireless substitution and substitution of industry-leading high-speed data products for second home and business lines. Long distance lines increased by 10% over the prior year period and long distance penetration reached 46% at the end of 2006. Revenues from the Telecom segment declined in both the fourth quarter and the full year, compared to fourth quarter and full year 2005, as a result of a decrease in access line revenues due to the decline in access lines and the effects of a depreciating rate base. Operating expenses, exclusive of depreciation and amortization, declined in 2006 compared to 2005, by almost 12% in the Telecom segment. The declines were attributable to reductions in labor and related costs, reductions in allocated corporate overheads and a reduction in estimated pension expenses. In addition, 2005 expenses included one time costs associated with the early retirement program. Fourth quarter expenses increased by 2% compared to the third quarter of 2006, due in part to expenses associated with the sale of the directory publishing subsidiary. The Telecom segment posted strong Operating EBITDA of $82.9 million for the year, over 4% higher than 2005, even with the decline in revenues. For the fourth quarter of 2006, Telecom segment Operating EBITDA was $19.8 million, down 2% compared to the fourth quarter of 2005. Telecom segment net income was $8.1 million for the fourth quarter of 2006, an increase of $1.4 million compared to the fourth quarter of 2005 and a decline of $1.0 million on a sequential basis. Net income for 2006 was $34.0 million, an increase of $4.0 million compared to the prior year. Broadband Segment Total Broadband subscribers passed 57,000 as of the end of the fourth quarter, a 4% increase for the quarter and an increase of almost 16% for the year. Revenue Generating Units (RGUs), which represent individual products or services, increased almost 5% for the quarter and nearly 19% for the year, continuing a steady increase in the average number of products sold per subscriber over prior periods. Video subscribers provided the greatest increase in RGUs with a nearly 6% increase for the quarter and nearly 22% for the year. Total marketable homes in the Broadband segment topped 190,000 and penetration exceeded 27% as of the end of the year. Broadband segment revenues for the fourth quarter of $15.7 million represented a sequential increase of nearly 3% and an increase of 18% compared to the fourth quarter of 2005. Full year 2006 revenues increased 20% over 2005 and represent 27% of consolidated revenues, up from 23% in the year earlier period. Operating expenses, exclusive of depreciation and amortization, increased by less than 1% in the fourth quarter compared to both the prior year quarter and the sequential quarter. Full year expenses in the Broadband segment increased 8% on a 20% increase in revenues compared to 2005, an early indication that the business is beginning to scale. In the fourth quarter of 2006, Broadband generated positive EBITDA for the first full quarter. This compares favorably to negative EBITDA of $0.3 million in the third quarter of 2006 and negative EBITDA of $2.2 million in the fourth quarter of 2005. The fourth quarter net loss of $4.3 million was similar to both the prior year and sequential periods. The Broadband segment full year net loss of $18.6 million includes $22.8 million in depreciation expense and is 20% higher than the 2005 net loss. Depreciation expense increased 39% in 2006 as a result of continuing investment in the segment's fiber network. Wireless Segment The focus on Wireless segment subscribers continues to shift away from pre-paid plans in favor of contract subscribers. Existing pre-paid subscribers can continue on pre-paid plans but new subscribers are not being added to those plans. During the fourth quarter, contract subscribers increased by 2.2%, to more than 97% of total subscribers; net contract additions in the fourth quarter more than doubled net additions in the previous quarter due to fourth quarter promotions. Wireless segment revenues were $8.7 million for the fourth quarter, up 3% compared to the fourth quarter of 2005 and 1% sequentially. Full year 2006 revenues were essentially flat compared to 2005, caused by a slight decline in total subscribers offset by an increase in Average Revenue per User (ARPU) resulting from higher features revenues. Equipment sales were also up, due to an increase in the number of handsets sold. Wireless segment operating expenses, exclusive of depreciation and amortization, were 15% higher in the fourth quarter of 2006 than the fourth quarter of 2005, and 8% higher than the third quarter, due to promotions and phone rebates designed to attract new customers and transfer existing customers to long-term contracts. Year over year, expenses were higher in 2006 because holiday promotions were intentionally scaled back in the fourth quarter of 2005. The increase in subscribers is directly correlated to the higher selling expenses in the fourth quarter of 2006. Operating EBITDA for the Wireless segment was negative $1.5 million for the fourth quarter of 2006 compared to negative $0.4 million for the fourth quarter of 2005. For the full year 2006, Operating EBITDA was negative $2.9 million compared to negative $1.0 million for 2005. The segment net loss also increased, to $2.9 million in the fourth quarter of 2006 and $9.7 million for the full year. Capital Expenditures Consolidated capital expenditures totaled $18 million for the fourth quarter of 2006, an 8% reduction over the prior year period, and $55.4 million for the full year, a decrease of 21% compared to 2005. The Company continues to focus its capital expenditures on success-based projects that increase penetration and ARPU on the existing network, and Greenfield projects expected to build out in a reasonable period of time. Capital expenditures in 2007 are expected to be approximately $55 million, consistent with full year 2006 expenditures. Conference Call and Webcast SureWest Communications will provide details about its results and business strategy on Wednesday, March 14, 2007 at 1:30 p.m. Eastern Time. A simultaneous live Webcast of the call will be available at http://www.surw.com/ and will be archived shortly after the conclusion of the call for replay through the second quarter of 2007. Additionally, a telephone replay of the call will be available through Sunday, March 18, 2007 by dialing 888-286-8010 and entering passcode 83508161. About SureWest Serving the Northern California region for more than 90 years, SureWest Communications (http://www.surewest.com/ ) is one of the nation's leading integrated communications providers. SureWest's bundled offerings include an array of advanced digital video, high-speed Internet, local and long distance telephone, and PCS wireless services. SureWest's fiber-to-the-premise IP-based network features high-definition video and synchronous Internet speeds of up to 50 Mbps. 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 or businesses in which the company operates, adverse circumstances affecting the economy in California in general, and in the Sacramento, California Metropolitan area 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. Contact: Karlyn Oberg Director of Investor Relations 916-786-1799 SUREWEST COMMUNICATIONS CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) (amounts in thousands, except per share amounts) Quarter Ended Quarter Ended December 31, December 31, 2006 2005 % Change Operating revenues: Telecom $31,585 $33,289 -5% Broadband 15,664 13,235 18% Wireless 8,676 8,441 3% Total operating revenues 55,925 54,965 2% Operating expenses: Cost of services and products (exclusive of depreciation and amortization) 19,676 18,989 4% Customer operations and selling 9,557 8,763 9% General and administrative 8,222 9,627 -15% Depreciation and amortization 14,973 13,919 8% Total operating expenses 52,428 51,298 2% Income from operations 3,497 3,667 -5% Other income (expense): Investment income 150 262 -43% Interest expense (1,776) (1,592) 12% Other, net (94) (165) -43% Total other income (expense), net (1,720) (1,495) 15% Income before income taxes 1,777 2,172 -18% Income tax expense 799 744 7% Net income $978 $1,428 -32% Basic and diluted earnings per share $0.06 $0.10 -40% Shares of common stock used to calculate earnings per share: Basic 14,412 14,554 Diluted 14,505 14,659 SUREWEST COMMUNICATIONS CONSOLIDATED STATEMENTS OF OPERATIONS (amounts in thousands, except per share amounts) Year Ended Year Ended December 31, December 31, 2006 2005 % Change Operating revenues: Telecom $128,758 $134,468 -4% Broadband 59,794 49,915 20% Wireless 34,193 34,205 0% Total operating revenues 222,745 218,588 2% Operating expenses: Cost of services and products (exclusive of depreciation and amortization) 77,123 77,071 0% Customer operations and selling 36,101 34,595 4% General and administrative 33,084 37,222 -11% Depreciation and amortization 59,778 53,770 11% Total operating expenses 206,086 202,658 2% Income from operations 16,659 15,930 5% Other income (expense): Investment income 504 445 13% Interest expense (6,882) (5,675) 21% Other, net (613) (414) 48% Total other income (expense), net (6,991) (5,644) 24% Income before income taxes 9,668 10,286 -6% Income tax expense 3,930 3,908 1% Net income $5,738 $6,378 -10% Basic and diluted earnings per share $0.39 $0.44 -11% Shares of common stock used to calculate earnings per share: Basic 14,531 14,552 Diluted 14,615 14,631 SUREWEST COMMUNICATIONS CONSOLIDATED BALANCE SHEETS (amounts in thousands) December 31, December 31, 2006 2005 ASSETS Current assets: Cash and cash equivalents $6,371 $7,633 Short-term investments 695 617 Accounts receivable, less allowances of $ 5,451 and $ 5,219 at December 31, 2006 and 2005, respectively) 22,791 23,234 Inventories 5,348 5,626 Deferred directory costs 4,888 5,130 Prepaid expenses 4,285 3,918 Deferred income taxes 7,685 14,502 Total current assets 52,063 60,660 Property, plant and equipment, net 376,421 381,075 Intangible and other assets: Wireless licenses, net 13,566 13,566 Goodwill 2,171 2,171 Intangible asset relating to pension plans -- 456 Intangible asset relating to favorable operating leases, net 309 393 Deferred charges and other assets 1,220 708 17,266 17,294 $445,750 $459,029 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term borrowings $ -- $30,000 Current portion of long-term debt and capital lease obligations 3,642 3,669 Accounts payable 3,069 3,634 Other accrued liabilities 21,766 20,496 Current portion of contractual shareable earnings obligations 1,707 2,932 Estimated shareable earnings obligations 73 293 Advance billings and deferred revenues 9,435 9,730 Accrued income taxes 345 1,015 Accrued pension benefits 215 7,615 Accrued compensation 5,301 5,772 Total current liabilities 45,553 85,156 Long-term debt and capital lease obligations 121,831 85,473 Long-term contractual shareable earnings obligations 1,891 3,695 Deferred income taxes 37,785 40,398 Other liabilities and deferred revenues 12,914 12,556 Commitments and contingencies Shareholders' equity: Common stock, without par value; 100,000 shares authorized, 14,465 and 14,629 shares issued and outstanding at December 31, 2006 and December 31, 2005, respectively 157,926 164,598 Deferred stock-based compensation -- (2,255) Accumulated other comprehensive loss 565 (4,909) Retained earnings 67,285 74,317 Total shareholders' equity 225,776 231,751 $445,750 $459,029 OPERATING EBITDA RECONCILIATION TO NET INCOME (unaudited) (amounts in thousands) Quarter Ended December 31, 2006 Telecom Broadband Wireless Consol Net income/(loss) $8,115 $(4,264) $(2,873) $978 Add back: Income Taxes 5,616 (2,861) (1,956) 799 Less: Other Income/(Expense) (23) (1,316) (380) (1,719) Add back: Depreciation & Amortization 6,076 5,923 2,974 14,973 Operating EBITDA (1) $19,830 $114 $(1,475) $18,469 Quarter Ended December 31, 2005 Telecom Broadband Wireless Consol Net income/(loss) $6,701 $(3,605) $(1,668) $1,428 Add back: Income Taxes 6,956 (4,300) (1,912) 744 Less: Other Income/(Expense) (37) (1,052) (406) (1,495) Add back: Depreciation & Amortization 6,518 4,605 2,796 13,919 Operating EBITDA (1) $20,212 $(2,248) $(378) $17,586 (1) Operating EBITDA represents net income (loss) excluding amounts for income taxes, depreciation and amortization and all other non-operating income/expenses, and is a common measure of operating performance in the telecommunications industry. Operating EBITDA is not a measure of financial performance under generally accepted accounting principles and should not be construed as a substitute for consolidated net income as a measure of performance. OPERATING EBITDA RECONCILIATION TO NET INCOME (unaudited) (amounts in thousands) Year Ended December 31, 2006 Telecom Broadband Wireless Consol Net income/(loss) $34,022 $(18,597) $(9,687) $5,738 Add back: Income Taxes 23,496 (12,875) (6,691) 3,930 Less: Other Income/(Expense) (315) (5,135) (1,541) (6,991) Add back: Depreciation & Amortization 25,041 22,827 11,910 59,778 Operating EBITDA (1) $82,874 $(3,510) $(2,927) $76,437 Year Ended December 31, 2005 Telecom Broadband Wireless Consol Net income/(loss) $30,033 $(15,438) $(8,217) $6,378 Add back: Income Taxes 22,951 (12,579) (6,464) 3,908 Less: Other Income/(Expense) (609) (3,232) (1,803) (5,644) Add back: Depreciation & Amortization 25,428 16,451 11,891 53,770 Operating EBITDA (1) $79,021 $(8,334) $(987) $69,700 (1) Operating EBITDA represents net income (loss) excluding amounts for income taxes, depreciation and amortization and all other non-operating income/expenses, and is a common measure of operating performance in the telecommunications industry. Operating EBITDA is not a measure of financial performance under generally accepted accounting principles and should not be construed as a substitute for consolidated net income as a measure of performance. SUREWEST COMMUNICATIONS SELECTED OPERATING METRICS As of and for the quarter ended December 31, December 31, Pct 2006 2005 Change LINE SUMMARY Telecom access lines 125,195 129,291 -3.2% Broadband access lines (1) 21,124 17,729 19.1% Total SureWest access lines 146,319 147,020 -0.5% TELECOM Access lines 125,195 129,291 -3.2% Voice-grade equivalents (2) 520,500 432,900 20.2% Long distance lines 57,605 52,288 10.2% Long distance penetration 46.0% 40.4% 13.8% BROADBAND Total subscribers 57,498 49,743 15.6% Revenue-generating units (RGUs) (3) 93,473 78,757 18.7% Data RGUs 55,095 47,093 17.0% Voice RGUs 18,721 15,526 20.6% Video RGUs 19,657 16,138 21.8% Average revenue per customer $76.00 $73.70 3.1% Fiber marketable homes 98,900 88,764 11.4% Fiber marketable homes penetration (4) 23.5% 22.3% 5.4% DSL marketable homes (5) 91,604 na nm DSL marketable homes penetration (5) 34.8% na nm Total marketable homes (5) 190,504 na nm Total marketable homes penetration (5) 27.3% na nm Total churn 1.1% 1.4% -21.4% Business access lines 2,403 2,203 9.1% Business voice-grade equivalents (2) 741,900 685,600 8.2% WIRELESS Total subscribers 52,946 53,858 -1.7% Contract subscribers 51,515 49,539 4.0% POPs 3,587,000 3,532,000 1.6% POPs covered 2,801,000 2,759,000 1.5% Net contract additions 1,126 165 582.4% Net non-contract additions -573 -125 -358.4% Contract churn (6) 3.28% 3.15% 4.1% ARPU $51.28 $47.60 7.7% (1) The sum of Broadband Business access lines and Fiber voice RGUs. (2) Voice-grade equivalents (VGEs) are calculated by dividing the capacity of all circuits in use by 64 kilobits (bandwidth representing a voice access line), excluding Broadband Fiber Data RGUs. DSL VGEs are counted as two 64 kbps channels. (3) Revenue-generating units (RGUs) are the sum of all primary digital video, telephony and high-speed data connections, excluding additional units, with the exception of DSL subscribers for which telephony units are included in Telecom Access Lines. (4) Fiber marketable home penetration is calculated on residential marketable homes passed and residential Fiber subscribers. The total Fiber subscribers also includes 382 and 257 Small-Medium Enterprise customers in 2006 and 2005, respectively, which are not included in the penetration rate. (5) na indicates information is not available; nm indicates information is not measurable (6) Quarterly turnover in contract customers (total contract customer disconnects divided by sum of monthly average contract subscribers). The methodology used to calculate contract churn was revised in 2006. Accordingly, the contract churn for the quarter ended December 31, 2005 has been restated to conform to the current methodology. http://www.newscom.com/cgi-bin/prnh/20050908/SFSUREWESTLOGO http://photoarchive.ap.org/ DATASOURCE: SureWest Communications CONTACT: Karlyn Oberg, Director of Investor Relations of SureWest Communications, +1-916-786-1799, or Web site: http://www.surewest.com/

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