SURW Surewest Communications (MM)

Results Bolstered by Strong Broadband Expansion ROSEVILLE, Calif., May 9 /PRNewswire-FirstCall/ -- Leading independent telecommunications holding company SureWest Communications (NASDAQ:SURW) announced operating results today for the quarter ended March 31, 2007. Highlights for the first quarter of 2007 compared to the first quarter of 2006 include: -- Consolidated revenues from continuing operations increased 3%, due largely to an 18% increase in Broadband segment revenues -- Consolidated net income benefited from a gain on the disposition of the directory publishing business in the amount of $60.2 million after tax -- Consolidated access lines remained essentially flat, continuing a trend of relatively minor access line losses -- Video and data Revenue Generating Units (RGUs) increased by 20% and 18%, respectively -- Wireless pre-paid subscribers continued to decline as that product line is no longer marketed, resulting in a decline in total Wireless subscribers of 2% with 98% of subscribers on contract at quarter end "The sale of SureWest Directories was an important step in the process of refining focus on our core business of designing, building and maintaining a complex, state-of-the-art fiber network," says Steve Oldham, SureWest's president and chief executive officer. "First quarter growth in Broadband segment sales provides continuing confirmation that the effort to deploy a state-of-the-art fiber network several years ago was the right decision. We continue to add homes to the fiber network and at the same time, penetration rates are increasing. The potential uses of a high bandwidth network are almost without limit. As new products and services are developed for high bandwidth networks we expect customer demand to continue to grow." Operational Highlights Marketable homes increased by 6%, an increase of over 10,400 compared to the first quarter of 2006. An increase in marketable homes does not reflect efforts underway to convert homes in the ILEC service area to the fiber platform. Converting homes to the fiber platform makes them serviceable with a full triple-play offering of HDTV and hyper-speed data products, both of which are limited on the copper network. However, since ILEC homes are already reflected in the marketable homes metric, the upgrade to fiber does not change the number of homes available to service. Broadband churn, already low by industry standards, continues to decline. For the first quarter of 2007, churn declined 15% compared to the first quarter of 2006, to 1.1%. Broadband Average Revenue per User (ARPU) increased to $77.06 in the first quarter of 2007; a 3% increase compared to the first quarter of 2006. ARPU includes customers on the copper network subscribing to video and data, as well as customers on the fiber network subscribing to a triple-play of voice, video and data. Data Hyper-speed data products continued to show strong customer acceptance with growth in RGUs to 58,130, an increase of 18% over the first quarter of 2006. Data RGUs increased by 8,701 since the first quarter of 2006 and sequential growth of over 3,035 is indicative of an even stronger trend for 2007. Hyper-speed data products include offerings of up to 3, 6 and 10 Mbps on the copper platform and symmetrical offerings of 10, 20 and 50 Mbps on the fiber platform. Symmetrical service provides the ability to upload data at the same hyper-speed at which it can be downloaded. Roughly 37% of current data customers subscribe to the 10 Mbps symmetrical product or higher. Video Video RGUs posted the highest growth of triple play RGUs, increasing 20% over the first quarter of 2006 to 20,445, representing an increase of 3,369 units. On a sequential basis, video RGUs improved by 4% for a total increase of 788 units. Video service offerings consist of 305 IPTV channels including 19 HDTV channels on the fiber network. Voice Consolidated access lines continue on a relatively flat trend, with a decline of less than one thousand lines over the last year. Declines in primary access lines are less than one half of one percent, while secondary access lines declined almost 12% as a result of high DSL penetration. Business access lines continue on a strong trend increasing 1% in the ILEC and 10% in the CLEC. Competitive cable Voice over IP offerings in the service area are just beginning to appear, with minimal impact during the first quarter. Wireless Wireless subscribers declined by 2%, a result of a decision last year to no longer offer pre-paid calling plan options. Compared to the year earlier period, contract subscribers increased by 2,000, or 4%, while pre-paid subscribers decreased by more than 3,200. Contract churn of 3.1% represents a slight increase compared to the first quarter of 2006 but a sequential reduction over the fourth quarter of 2006. Wireless ARPU increased 2% compared to the first quarter of 2006 but declined 2% on a sequential basis. Financial Highlights Consolidated revenues from continuing operations of $51.0 million represent an increase of $1.6 million, or 3%, over the first quarter of 2006. Broadband segment revenues increased $2.5 million, or 18%, while Telecom segment and Wireless segment revenues both marginally declined over the same period. Operating expenses, exclusive of depreciation and amortization, increased $1.9 million, or 6%, compared to the first quarter of 2006. This is due, in part, to higher video content costs resulting from increased video subscriber counts, and indirect costs to explore various strategic initiatives. Depreciation and amortization decreased by $0.7 million over the same time period due to the life extension of certain customer premise equipment and some network assets being fully depreciated but still in service. These changes resulted in a decrease in depreciation expense of $2.0 million in the first quarter of 2007. Consolidated operating earnings before interest, taxes, depreciation and amortization (defined as Operating EBITDA and reconciled to GAAP results in the accompanying tables) of $14.8 million represents a decrease of $0.3 million, or 2%, compared to the first quarter of 2006. Net income of $61.2 million includes a gain on the sale of the directory publishing business of $60.2 million after tax; net income from continuing operations was $52 thousand versus a loss of $0.6 million for the same period last year. Financial results by operating segment are as follows: Selected Unaudited Financial Data (amounts in thousands) Quarter ended March 31, 2007 Telecom Broadband Wireless Eliminations Consolidated Operating revenues from external customers $26,361 $16,422 $8,201 $50,984 Intersegment revenues 6,972 520 784 (8,276) -- Total Revenues 33,333 16,942 8,985 50,984 Cost of services and products 9,109 10,776 6,179 (7,314) 18,750 Customer operations and selling 3,121 3,514 2,998 (758) 8,875 Contribution Margin 21,103 2,652 (192) 23,359 General and administrative 8,581 Operating EBITDA $14,778 During the first quarter of 2007, the Company announced plans to amend and freeze its Defined Benefit Pension Plan effective April 1, 2007. The amendment closes the plan to future employees and discontinues future benefit accruals for current employees. The Company has also introduced its Total Rewards Program, connect2success, which is putting in place other forms of employee benefits such as enhanced educational reimbursement options, enhanced employee recognition programs and revisions to certain compensation policies. The goal of connect2success is to attract and retain the talented employees needed to succeed. Cash contributions to the Defined Benefit Pension Plan have ranged from $3 million to $12 million over the last five years. Annual service cost has averaged approximately $5 million over that same time frame. During the first quarter of 2007, $0.7 million in pension expense was recorded although service costs will not be incurred in future quarters due to the plan curtailment effective April 1, 2007. Sale of SureWest Directories On February 28, 2007 the Company closed a transaction announced earlier in the quarter to sell its directory publishing subsidiary to GateHouse Media, Inc. Under the agreement, GateHouse Media acquired 100% of the stock of SureWest Directories, a wholly owned subsidiary of SureWest Communications, for an aggregate cash purchase price of $110.1 million. As part of the transaction, GateHouse Media became the publisher of the official directory of SureWest Telephone. An after-tax gain of $60.2 million was recorded in the first quarter of 2007 and the first quarter financial statements have been adjusted to reflect the impact of discontinued operations. Capital Expenditures Consolidated capital expenditures totaled $10.3 million for the first quarter of 2007, a 13% reduction over the prior year period. 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, May 9, 2007 at 11:00 a.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, May 13, 2007 by dialing (888) 286-8010 and entering passcode 47564638. 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 symmetrical 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. (Logo: http://www.newscom.com/cgi-bin/prnh/20050908/SFSUREWESTLOGO) 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 Quarter Ended Ended March 31, March 31, % 2007 2006 Change Operating revenues: Telecom $26,361 $27,101 -3% Broadband 16,422 13,881 18% Wireless 8,201 8,394 -2% Total operating revenues 50,984 49,376 3% Operating expenses: Cost of services and products (exclusive of depreciation and amortization) 18,750 17,673 6% Customer operations and selling 8,875 8,571 4% General and administrative 8,581 8,018 7% Depreciation and amortization 13,788 14,463 -5% Total operating expenses 49,994 48,725 3% Income from operations 990 651 52% Other income (expense): Interest income 506 70 623% Interest expense (1,401) (1,593) -12% Other, net (204) (109) 87% Total other income (expense), net (1,099) (1,632) -33% Loss from continuing operations before income taxes (109) (981) 89% Income tax benefit (161) (421) 62% Income (loss) from continuing operations 52 (560) 109% Discontinued operations, net of tax Income from discontinued operations 999 1,759 -43% Gain on sale of discontinued operations 60,182 - nm Total discontinued operations 61,181 1,759 3378% Net income $61,233 $1,199 5007% Basic earnings (loss) per common share: Income (loss) from continuing operations $- $(0.04) nm Discontinued operations, net of tax 4.24 0.12 3433% Net income per basic common share $4.24 $0.08 5200% Diluted earnings (loss) per common share: Income (loss) from continuing operations $- $(0.04) nm Discontinued operations, net of tax 4.21 0.12 3408% Net income per diluted common share $4.21 $0.08 5163% Shares of common stock used to calculate earnings per share: Basic 14,423 14,575 -1% Diluted 14,545 14,575 0% SUREWEST COMMUNICATIONS CONSOLIDATED BALANCE SHEETS (Unaudited) (amounts in thousands) March 31, December 31, 2007 2006 ASSETS Current assets: Cash and cash equivalents $62,091 $6,371 Short-term investments 53,363 695 Accounts receivable, net 20,103 22,014 Inventories 5,766 5,348 Prepaid expenses 3,949 4,275 Deferred income taxes 7,348 7,685 Assets of discontinued operations - 5,732 Total current assets 152,620 52,120 Property, plant and equipment, net 372,803 376,364 Intangible and other assets: Wireless licenses, net 13,566 13,566 Goodwill 2,171 2,171 Intangible asset relating to favorable operating leases, net 288 309 Deferred charges and other assets 1,273 1,220 17,298 17,266 $542,721 $445,750 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt and capital lease obligations $3,642 $3,642 Accounts payable 2,569 3,069 Other accrued liabilities 19,557 21,663 Current portion of contractual shareable earnings obligations 1,720 1,707 Estimated shareable earnings obligations 73 73 Advance billings and deferred revenues 9,635 9,374 Accrued income taxes 44,094 345 Accrued pension benefits 215 215 Accrued compensation 5,456 5,167 Liabilities of discontinued operations - 298 Total current liabilities 86,961 45,553 Long-term debt and capital lease obligations 121,830 121,831 Long-term contractual shareable earnings obligations 1,208 1,891 Deferred income taxes 34,302 36,777 Other liabilities and deferred revenues 14,844 13,922 Commitments and contingencies Shareholders' equity: Common stock, without par value; 100,000 shares authorized, 14,466 and 14,465 shares issued and outstanding at March 31, 2007 and December 31, 2006, respectively 158,119 157,926 Accumulated other comprehensive income 576 565 Retained earnings 124,881 67,285 Total shareholders' equity 283,576 225,776 $542,721 $445,750 OPERATING EBITDA RECONCILIATION TO NET INCOME (unaudited) (amounts in thousands) Quarter Ended March 31, 2007 Telecom Broadband Wireless Consol Income/(loss) from continuing operations $6,977 $(4,094) $(2,831) $52 Add back : Income Taxes 4,665 (2,859) (1,967) (161) Less : Other Income/(Expense) 305 (931) (473) (1,099) Add back : Depreciation & Amortization 5,565 5,186 3,037 13,788 Operating EBITDA (1) $16,902 $(836) $(1,288) $14,778 OPERATING EBITDA RECONCILIATION TO NET INCOME (unaudited) (amounts in thousands) Quarter Ended March 31, 2006 Telecom Broadband Wireless Consol Income/(loss) from continuing operations $6,461 $(5,089) $(1,932) $(560) Add back : Income Taxes 4,478 (3,556) (1,343) (421) Less : Other Income/(Expense) (169) (1,083) (380) (1,632) Add back : Depreciation & Amortization 6,303 5,197 2,963 14,463 Operating EBITDA (1) $17,411 $(2,365) $68 $15,114 (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 March 31, March 31, Pct 2007 2006 Change LINE SUMMARY Telecom access lines 124,368 128,459 -3.2% Broadband access lines (1), (4) 21,980 18,793 17.0% Total SureWest access lines 146,348 147,252 -0.6% TELECOM Access lines 124,368 128,459 -3.2% Voice-grade equivalents (2), (4) 542,115 468,347 15.8% Long distance lines 58,364 54,106 7.9% Long distance penetration 46.9% 42.1% 11.4% BROADBAND Total subscribers (4) 60,480 51,946 16.4% Revenue-generating units (RGUs) (3),(4) 98,009 82,987 18.1% Data RGUs (4) 58,130 49,429 17.6% Voice RGUs 19,434 16,482 17.9% Video RGUs 20,445 17,076 19.7% Average revenue per customer (4) $77.06 $74.81 3.0% Total marketable homes 191,616 181,201 5.7% Total marketable homes penetration 28.6% 25.7% 11.3% Total churn 1.1% 1.3% -15.4% Fiber churn 1.2% 1.2% 0.0% Business access lines (4) 2,546 2,311 10.2% Business voice-grade equivalents (2),(4) 851,700 683,500 24.6% WIRELESS Total subscribers 52,071 53,286 -2.3% Contract subscribers 51,166 49,166 4.1% POPs (4) 3,642,000 3,587,000 1.5% POPs covered (4) 2,844,000 2,801,000 1.5% Net contract additions -349 -373 -6.4% Net non-contract additions -529 -199 -165.8% Contract churn 3.1% 3.0% 4.3% ARPU $50.09 $48.98 2.3% (1) The sum of Business access lines and fiber voice Revenue-generating units (RGUs). (2) Business Voice-grade equivalents ("VGEs") are calculated by dividing the capacity of all circuits in use by 64 kilobits (bandwidth representing a voice access line). DSL VGEs are counted as two 64 kbps channels. (3) The Broadband segment can deliver multiple services to a customer. Accordingly, the Company maintains statistical data regarding Revenue- generating units for digital video, voice and data, in addition to the number of subscribers. For example, a single subscriber who purchases digital video, voice and data services would be reflected as three Revenue-generating units. (4) The calculation of certain metrics have been revised over time to reflect current view of our business. Where necessary prior period metric calculations have been revised to conform with current practice. 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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