SURW Surewest Communications (MM)

ROSEVILLE, Calif., Aug. 7 /PRNewswire-FirstCall/ -- Leading independent telecommunications holding company SureWest Communications (NASDAQ:SURW) announced operating results today for the quarter ended June 30, 2007. Highlights for the second quarter of 2007 compared to the second quarter of 2006 include: (Logo: http://www.newscom.com/cgi-bin/prnh/20050908/SFSUREWESTLOGO) * Consolidated revenues from continuing operations increased 2%, with strong revenue growth in broadband offsetting a decline in telecom revenues and stable wireless revenues * Consolidated operating EBITDA decreased 2%, primarily as a result of several ongoing efforts including strategic initiatives * Consolidated income from continuing operations increased by $1.7 million, due primarily to increased broadband revenues and interest income resulting from the proceeds of the sale of SureWest Directories * Total marketable homes increased by 8,612, an increase of 5%, and overall customer penetration of marketable homes increased to 29% from 26% * Video RGUs increased by 19% and Data RGUs increased by 17% "SureWest continues to execute on its network deployment strategy and drive new revenues and efficiencies across those assets," said Steve Oldham, SureWest's president and chief executive officer. "Our highspeed network is not only a differentiator in the market, it provides increased revenue potential from each home we pass by providing an opportunity for a triple play as well as new services as they become available. We are expanding the network in areas that offer the greatest potential for a triple play, and focusing the sales efforts on achieving the greatest penetration in the areas we serve. We believe the strong growth in data and video RGUs, and the fact that over 37 percent of SureWest data customers are taking 10 mbps or higher data speeds, supports our belief that consumers will continue to demand greater bandwidth and the corresponding network performance that bandwidth provides." Operational Highlights Total marketable homes increased to 193,361 in the second quarter of 2007, a 5% increase compared to the second quarter of 2006, while marketable homes served by fiber increased 11% from 93,020 to 103,319. Marketable homes penetration increased to 29% in the second quarter of 2007 from 26% in the second quarter of 2006 reflecting the success of marketing initiatives. Data SureWest generally provides hyper speed connectivity to its fiber customers, across which a triple play of digital voice, Internet, IPTV and associated services are currently provided. SureWest provides two primary forms of data services with varying top speeds: 3, 6 and 10 Mbps DSL offerings across the copper platform; and symmetrical offerings of 10, 20 and 50 Mbps on the FTTP (fiber-to-the-premise) platform. SureWest is the only service provider with a symmetrical offering in its service area which provides the ability to upload data at the same high speed it is downloaded. Data RGUs (revenue generating units) increased 17% year-over-year, to 59,792 in the second quarter of 2007 from 51,038 in the second quarter of 2006, and increased 3% quarter-over-quarter from 58,130 in the first quarter of 2007. These increases are the result of targeted network expansion increasing the number of homes passed, and growth in demand for data and video services increasing the number of homes served. The Company believes the transfer speeds the network is capable of providing will remain a competitive advantage. Video SureWest is a leading provider of IPTV (Internet protocol television) primarily across the FTTP platform. Video RGUs increased 19% year-over-year, to 21,118 in the second quarter of 2007 from 17,759 in the second quarter of 2006, and increased 3% quarter-over-quarter from 20,445 in the first quarter of 2007. As of the end of the second quarter of 2007, SureWest offered its video customers 310 IPTV channels, including 23 HDTV channels. Voice Telecom access lines decreased 5% year-over-year to 120,969 in the second quarter of 2007 from 127,278 in the second quarter of 2006, and decreased 3% quarter-over-quarter from 124,368 in the first quarter of 2007. Business access lines increased 10% year-over-year, to 2,574 in the second quarter of 2007 from 2,345 at the end of the second quarter of 2006, and increased 1% quarter-over-quarter from 2,546. Voice RGUs across the hyper-speed data platform increased 15% year-over-year, to 19,747 at the end of the second quarter of 2007 from 17,110 at the end of the second quarter 2006. Voice RGUs also increased 2% quarter-over-quarter from 19,434 at the end of the first quarter of 2007. As a result, total SureWest access lines decreased by 2% from the second quarter of 2007 from the second quarter of 2006. Competitive cable VoIP (voice over Internet protocol) offerings in the SureWest service area began in the second quarter of this year and as yet have had minimal impact on revenue. Wireless Wireless subscribers declined by 3% year-over-year, to 51,568 at the end of the second quarter of 2007 from 52,993 at the end of the second quarter of 2006, and decreased 1% quarter-over-quarter from 52,071 at the end of the first quarter of 2007. The decline in wireless customers resulted primarily from a decision to cease offering pre-paid calling plan options and to migrate customers to term contracts. Despite a decline in total subscribers, access and feature revenues remained approximately consistent with previous periods. Financial Highlights Consolidated revenues from continuing operations increased 2% year-over-year to $52.4 million in the second quarter of 2007 from $51.4 million in the second quarter of 2006, and increased 3% quarter-over-quarter, from $51.0 million in the first quarter of 2007. Broadband segment revenues increased 14% year-over-year, to $17.1 million in the second quarter of 2007 from $15.0 million in the second quarter of 2006, and increased 4% quarter-over-quarter from $16.4 million in the first quarter of 2007. This growth resulted from the continued targeted expansion of the broadband network and growth in demand for data and video services. ARPU for the broadband segment remained essentially unchanged at $77.02. Telecom segment revenues declined 3% year-over-year, inclusive of the impacts of the divestiture of the directories business, to $27.2 million in the second quarter of 2007 from $28.2 million in the second quarter of 2006, but increased by 3% from $26.4 million in the first quarter of 2007. Telecom segment revenues remain under pressure from the migration of landlines to wireless and secondary access lines converting to DSL. Periodic NECA (National Exchange Carrier Association) cost of service studies for the Telecom segment can result in adjustments to revenues for some intrastate services. Second quarter revenues were increased by $688,000 associated with such costs studies. Wireless segment revenues of $8.1 million in the second quarter of 2007 remained unchanged year-over-year from the second quarter of 2006, and decreased by 1% quarter-over-quarter from $8.2 million. Reductions in overall subscribers due to the termination of pre-paid wireless calling plans, and a decrease in handset selling price were offset by an increase in handsets sold and stable access and feature revenues. ARPU for the wireless segment increased 7% year-over-year, to $50.26 in the second quarter of 2007 from $47.05 in the second quarter of 2006, and remained essentially unchanged quarter-over-quarter. Operating expenses, exclusive of depreciation and amortization, increased to $35.7 million in the second quarter of 2007, a 4% increase year-over-year from $34.4 million in second quarter of 2006, but a 1% decrease from $36.2 million in the first quarter of 2007. Expense reductions related to the previously disclosed freeze of the Defined Benefit Pension Plan and other corporate efficiency efforts were offset in part by new expenditures and ongoing strategic initiatives designed to improve customer care systems. Depreciation and amortization decreased by 5% year-over-year, to $14.3 million at the end of the second quarter of 2007 from $15.0 million at the end of the second quarter of 2006, and increased 4% quarter-over-quarter from $13.8 million. Depreciation and amortization reductions resulting from extending the useful lives of some network assets were offset by new investment associated with network expansion. Consolidated operating earnings before interest, taxes, depreciation and amortization (defined as Operating EBITDA and reconciled to GAAP results in the accompanying tables) of $16.7 in the second quarter of 2007 decreased by 2% year-over-year from $17.0 million in the second quarter of 2006, while increasing 13% quarter-over-quarter from $14.8 million in the first quarter of 2007. Income from continuing operations of $1.8 million in the second quarter of 2007 increased by $1.7 million from $91,000 in the second quarter of 2006, and increased by $1.7 million from $52,000 in the first quarter of 2007. Financial results by operating segment are as follows: Quarter ended June 30, 2007 Telecom Broadband Wireless Eliminations Consolidated Operating revenues from external customers $27,249 $17,069 $8,115 $52,433 Intersegment revenues 5,918 475 781 (7,174) -- Total revenues 33,167 17,544 8,896 52,433 Cost of services and products 7,222 10,499 6,147 (6,183) 17,685 Customer operations and selling 3,129 3,418 2,594 (786) 8,355 Contribution margin 22,816 3,627 155 26,393 General and administrative 9,696 Operating EBITDA $16,697 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. Cash contributions to the Defined Benefit Pension Plan have ranged from $3 million to $9 million over the last four years. Annual service cost has averaged approximately $5 million over that same time frame. 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. First quarter and subsequent quarterly financial statements are adjusted to reflect the impact of discontinued operations. Capital Expenditures Consolidated capital expenditures totaled $12.1 million for the second quarter of 2007, a 2% reduction over the prior year period. The Company continues to focus its capital expenditures on its targeted network build and on success based capital associated with increased penetration and ARPU on the existing network. Capital expenditures in 2007 are expected to be approximately $55 million, in line with full year 2006. Conference Call and Webcast SureWest Communications will provide details about its results and business strategy on Tuesday, August 7, 2007 at 12:00 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 Tuesday, August 14, 2007 by dialing (888) 286-8010 and entering passcode 82840228. 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 wireless PCS. 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 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: Reid Cox Investor Relations 916-786-1799 SUREWEST COMMUNICATIONS CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited) (amounts in thousands, except per share amounts) Quarter Quarter Ended Ended June 30, June 30, % 2007 2006 Change Operating revenues: Telecom $27,249 $28,196 -3% Broadband 17,069 15,024 14% Wireless 8,115 8,144 0% Total operating revenues 52,433 51,364 2% Operating expenses: Cost of services and products (exclusive of depreciation and amortization) 17,685 17,301 2% Customer operations and selling 8,355 8,276 1% General and administrative 9,696 8,816 10% Depreciation and amortization 14,275 15,007 -5% Total operating expenses 50,011 49,400 1% Income from operations 2,422 1,964 23% Other income (expense): Interest income 1,157 109 961% Interest expense (1,699) (1,715) -1% Other, net (69) (271) -75% Total other income (expense), net (611) (1,877) -67% Income (loss) from continuing operations before income taxes 1,811 87 1982% Income tax benefit 26 (4) 750% Income (loss) from continuing operations 1,785 91 1862% Discontinued operations, net of tax (279) 1,313 -121% Net income $1,506 $1,404 7% Basic and diluted earnings (loss) per common share: Income (loss) from continuing operations $0.12 $0.01 1100% Discontinued operations, net of tax (0.02) 0.09 -122% Net income per basic and diluted common share $0.10 $0.10 0% Shares of common stock used to calculate earnings per share: Basic 14,440 14,578 -1% Diluted 14,490 14,609 -1% SUREWEST COMMUNICATIONS CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited) (amounts in thousands, except per share amounts) Six Months Six Months Ended Ended June 30, June 30, % 2007 2006 Change Operating revenues: Telecom $53,610 $55,296 -3% Broadband 33,491 28,906 16% Wireless 16,316 16,538 -1% Total operating revenues 103,417 100,740 3% Operating expenses: Cost of services and products (exclusive of depreciation and amortization) 36,435 34,974 4% Customer operations and selling 17,230 16,847 2% General and administrative 18,277 16,835 9% Depreciation and amortization 28,063 29,470 -5% Total operating expenses 100,005 98,126 2% Income from operations 3,412 2,614 31% Other income (expense): Interest income 1,662 179 828% Interest expense (3,099) (3,308) -6% Other, net (273) (379) -28% Total other income (expense), net (1,710) (3,508) -51% Income (loss) from continuing operations before income taxes 1,702 (894) 290% Income tax benefit (136) (425) 68% Income (loss) from continuing operations 1,838 (469) 492% Discontinued operations, net of tax Income from discontinuted operations 999 3,072 -67% Gain on sale of discontinued operations 59,902 - nm Total discontinued operations 60,901 3,072 1882% Net income $62,739 $2,603 2310% Basic earnings (loss) per common share: Income (loss) from continuing operations $0.13 $(0.03) 533% Discontinued operations, net of tax 4.22 0.21 1910% Net income per basic common share $4.35 $0.18 2317% Diluted earnings (loss) per common share: Income (loss) from continuing operations $0.13 $(0.03) 533% Discontinued operations, net of tax 4.20 0.21 1900% Net income per diluted common share $4.33 $0.18 2306% Shares of common stock used to calculate earnings per share: Basic 14,432 14,578 -1% Diluted 14,484 14,578 -1% SUREWEST COMMUNICATIONS CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (amounts in thousands) June 30, December 31, 2007 2006 ASSETS Current assets: Cash and cash equivalents $36,913 $6,371 Short-term investments 30,522 695 Accounts receivable, net 22,858 22,014 Inventories 5,358 5,348 Prepaid expenses 4,689 4,275 Deferred income taxes 5,335 7,685 Assets of discontinued operations - 5,732 Total current assets 105,675 52,120 Property, plant and equipment, net 370,794 376,364 Intangible and other assets: Wireless licenses, net 13,566 13,566 Goodwill 2,171 2,171 Deferred charges and other assets 1,466 1,529 17,203 17,266 $493,672 $445,750 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt and capital lease obligations $3,642 $3,642 Accounts payable 2,920 3,069 Other accrued liabilities 18,966 21,736 Current portion of contractual shareable earnings obligations 1,734 1,707 Advance billings and deferred revenues 9,459 9,374 Accrued income taxes - 345 Accrued compensation and pension benefits 6,780 5,382 Liabilities of discontinued operations - 298 Total current liabilities 43,501 45,553 Long-term debt and capital lease obligations 121,828 121,831 Long-term contractual shareable earnings obligations 742 1,891 Deferred income taxes 31,880 36,777 Other liabilities and deferred revenues 13,745 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 June 30, 2007 and December 31, 2006, respectively 158,618 157,926 Accumulated other comprehensive income 611 565 Retained earnings 122,747 67,285 Total shareholders' equity 281,976 225,776 $493,672 $445,750 SUREWEST COMMUNICATIONS OPERATING EBITDA RECONCILIATION TO NET INCOME (unaudited) (amounts in thousands) Quarter Ended June 30, 2007 Telecom Broadband Wireless Consol Income/(loss) from continuing operations $8,047 $(3,435) $(2,827) $1,785 Add back : Income Taxes 4,395 (2,404) (1,965) 26 Less : Other Income/(Expense) 961 (1,291) (281) (611) Add back : Depreciation & Amortization 5,678 5,431 3,166 14,275 Operating EBITDA (1) $17,159 $883 $(1,345) $16,697 Quarter Ended June 30, 2006 Telecom Broadband Wireless Consol Income/(loss) from continuing operations $7,286 $(4,777) $(2,418) $91 Add back : Income Taxes 5,013 (3,338) (1,679) (4) Less : Other Income/(Expense) (88) (1,402) (387) (1,877) Add back : Depreciation & Amortization 6,309 5,721 2,977 15,007 Operating EBITDA (1) $18,696 $(992) $(733) $16,971 (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 OPERATING EBITDA RECONCILIATION TO NET INCOME (unaudited) (amounts in thousands) Six Months Ended June 30, 2007 Telecom Broadband Wireless Consol Income/(loss) from continuing operations $15,025 $(7,530) $(5,657) $1,838 Add back : Income Taxes 9,060 (5,263) (3,932) (135) Less : Other Income/(Expense) 1,266 (2,222) (754) (1,710) Add back : Depreciation & Amortization 11,243 10,618 6,202 28,063 Operating EBITDA (1) $34,062 $47 $(2,633) $31,476 Six Months Ended June 30, 2006 Telecom Broadband Wireless Consol Income/(loss) from continuing operations $13,747 $(9,866) $(4,350) $(469) Add back : Income Taxes 9,491 (6,894) (3,022) (425) Less : Other Income/(Expense) (257) (2,485) (766) (3,508) Add back : Depreciation & Amortization 12,612 10,918 5,940 29,470 Operating EBITDA (1) $36,107 $(3,357) $(666) $32,084 (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 June 30, June 30, Pct 2007 2006 Change LINE SUMMARY Telecom access lines 120,969 127,278 -5.0% Broadband access lines (1), (5) 22,321 19,455 14.7% Total SureWest access lines 143,290 146,733 -2.3% TELECOM Access lines 120,969 127,278 -5.0% Voice-grade equivalents (2), (5) 542,126 472,376 14.8% Long distance lines 58,175 55,637 4.6% Long distance penetration 48.1% 43.7% 10.0% BROADBAND Total subscribers (5) 62,130 53,505 16.1% Revenue-generating units (RGUs) (3),(5) 100,657 85,907 17.2% Data RGUs (5) 59,792 51,038 17.2% Voice RGUs 19,747 17,110 15.4% Video RGUs 21,118 17,759 18.9% Average revenue per customer (5) $77.02 $77.00 0.0% Total marketable homes 193,361 184,749 4.7% Total marketable homes penetration 29.0% 25.9% 12.0% Fiber marketable homes 103,319 93,020 11.1% Fiber marketable homes penetration(4) 24.8% 22.8% 8.8% Total churn 1.2% 1.4% -14.3% Fiber churn 1.3% 1.3% 0.0% Business access lines (5) 2,574 2,345 9.8% Business voice-grade equivalents (2),(5) 946,900 696,500 36.0% WIRELESS Total subscribers 51,568 52,993 -2.7% Contract subscribers 50,962 49,835 2.3% POPs (5) 3,642,000 3,532,000 3.1% POPs covered (5) 2,844,000 2,759,000 3.1% Net contract additions -204 669 -130.5% Net non-contract additions -299 -962 68.9% Contract churn 2.9% 2.8% 3.6% ARPU $50.26 $47.05 6.8% (1) The sum of Business access lines and fiber voice Revenue-generating units (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) 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 447 and 333 Small-Medium Enterprise customers in 2007 and 2006, respectively, which are not included in the penetration rate. (5) 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: Reid Cox, Investor Relations of SureWest Communications, +1-916-786-1799, Web site: http://www.surw.com/

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