Hawaiian Telcom Reports Second Quarter 2016 Results


Delivered strong second quarter revenue growth of 3.5 percent
Achieved business strategic revenue(1) growth of 35.4 percent
Increased consumer strategic revenue(1) by 5.2 percent

HONOLULU, Aug. 01, 2016 (GLOBE NEWSWIRE) -- Hawaiian Telcom Holdco, Inc. (NASDAQ:HCOM) reported financial results for its second quarter ended June 30.  The highlights are as follows:

  • Revenue totaled $99.5 million, up a solid 3.5 percent compared to revenue in the second quarter of 2015.
  • Business revenue increased 9.7 percent year-over-year to $46.7 million, driven by a strong 40.2 percent growth in data services revenue and 15.3 percent growth in data center services revenue.
  • Business strategic revenue increased 35.4 percent year-over-year to $19.8 million.
  • Consumer strategic revenue increased 5.2 percent year-over-year to $17.3 million, driven by a solid 20.7 percent growth in video services revenue.
  • Adjusted EBITDA(2) of $30.8 million, up 3.3 percent year-over-year.
  • Generated net income of $1.4 million, or $0.13 per diluted share for the quarter, up from $0.5 million or $0.04 per diluted share in the same period in the prior year.
  • Enabled 3,000 households with fiber in the second quarter, increasing enabled households on O‘ahu to 198,000.
  • Ended the second quarter with approximately 38,600 Hawaiian Telcom TV subscribers, increasing penetration of households enabled to 19.5 percent.

“I am pleased with Hawaiian Telcom’s solid performance in the quarter, with total revenue growth of 3.5 percent,” said Scott Barber, Hawaiian Telcom’s president and CEO. “Demand for high-bandwidth IP-based data services remains strong, resulting in consistent strategic revenue growth over the past three years. We continued to successfully leverage our strategic asset portfolio, including our robust next-generation fiber network and data center assets to deliver strong growth this quarter. Hawaiian Telcom’s sole focus and rich history in the islands, our critical fiber infrastructure including our 24/7 locally-based state-of-the-art Network Operations Center and our solid positioning as Hawai‘i’s technology leader continues to provide a concrete foundation for organic growth and future sustainable cash flow.”

Second Quarter 2016 Results

Second quarter revenue of $99.5 million represented a 3.5 percent increase compared to $96.2 million in the second quarter of 2015.  Revenue growth in the quarter was mainly driven by strong growth in business data services and consumer video.  Adjusted EBITDA was $30.8 million, up 3.3 percent year-over-year primarily related to the strong increase in revenue.

The Company generated net income of $1.4 million, or $0.13 per diluted share for the quarter, up from $0.5 million or $0.04 per diluted share in the second quarter of 2015.  Net income for last year’s second quarter was impacted by a $1.4 million non-cash pension settlement loss related to a large number of employee retirements during the quarter.

Business Revenue

Second quarter business revenue totaled $46.7 million, up 9.7 percent from the second quarter of 2015, primarily driven by solid growth in data (broadband) services and data center services.  Data services revenue increased 40.2 percent year-over-year, partly due to $2.9 million in non-recurring revenue recognized in the quarter.  This non-recurring revenue resulted from the large government agency contract awarded last year that connected 250 statewide locations.  In addition, customer demand for IP-based data services such as Dedicated Internet Access, Ethernet, IP-VPN and BVoIP continued to rise, as reflected in the growth of BVoIP lines, which grew 17.0 percent year-over-year to approximately 18,100 lines, offsetting nearly half of total legacy voice access line decline.  Revenue from data center services increased 15.3 percent year-over-year for the second quarter, driven by network services and hardware sales.

Increasing customer demand for higher bandwidth and integrated communications solutions drove second quarter business strategic revenue growth to 35.4 percent year-over-year and now represents 42 percent of total reported business revenue, compared to 34 percent in the same period a year ago, and 31 percent in the same period two years ago.  Excluding the $2.9 non-recurring revenue discussed above, business strategic revenue for the quarter still grew a solid 15.3 percent year-over-year.  Revenue increases from business strategic services and equipment and managed services more than offset the year-over-year decline in business legacy voice services.

Consumer Revenue

Second quarter consumer revenue totaled $36.0 million, compared to $36.5 million in the second quarter of 2015.  Revenue growth in the quarter from Hawaiian Telcom TV and high-bandwidth Internet services was more than offset by the year-over-year revenue decline in consumer legacy voice and low-bandwidth Internet services.  Second quarter consumer strategic revenue increased 5.2 percent year-over-year and now represents 48 percent of total consumer revenue, up from 45 percent in the same period a year ago, and 37 percent in the same period two years ago.

Video services revenue grew to $10.0 million for the quarter, up 20.7% from $8.3 million in the same period a year ago, driven by the addition of approximately 6,700 subscribers, ending the second quarter with approximately 38,600 subscribers in service.  During the quarter, 3,000 additional households were fiber-enabled, increasing the total number of households enabled to 198,000 with 62 percent of those households capable of utilizing fiber-to-the-premise technology.  Hawaiian Telcom TV penetration of households enabled increased to 19.5 percent at the end of the first quarter, up from 18.2 percent at the end of the second quarter of 2015.

Internet services revenue declined $0.9 million from the same period a year ago mainly due to promotional pricing.  The Company ended the second quarter with approximately 91,800 Internet subscribers and customer adoption of higher speed offerings continued to increase.  The number of customers on 21 Mbps to 1 Gbps speeds increased by 25 percent over the last year and 80 percent over the last two years.  As of June 30, 2016, approximately 94 percent of all video subscribers had double- or triple-play bundles with Internet.

Wholesale Revenue

Second quarter wholesale revenue totaled $13.2 million, compared to $13.8 million in the second quarter 2015.  The decline was due to certain wholesale customers disconnecting lower bandwidth legacy circuits on month-to-month rates and moving to more efficient and cost effective fiber-based, higher bandwidth Ethernet circuits on multi-year contracts.

Operating Expenses

Operating expenses, exclusive of non-cash and non-recurring items which we exclude from our Adjusted EBITDA calculation, increased 3.6 percent to $68.8 million in the second quarter.  The increase was primarily due to higher direct cost of services related to video from rising content costs and increasing number of subscribers, as well as higher periodic pension cost on lower estimated pension trust asset returns.  These increases were partially offset by lower utility rates and reduced usage from energy savings initiatives.

Capital Expenditures and Liquidity

Capital expenditures totaled $52.9 million in the six months ended June 30, 2016, consistent with the same period in the prior year.  Approximately 87 percent of total capital expenditures in the first half of 2016 was directed towards growth and expansion initiatives, which include payments on the trans-Pacific cable system, spending on enabling homes and fiber-to-the-business, Connect America Fund Phase II build out, as well as success-based spending to support the growth of the Company’s next-generation services.  Overall, total capital expenditures for 2016 are expected to be in the high-$90 million range.

At the end of second quarter 2016, the Company had $26.2 million in cash and cash equivalents compared to $30.3 million at the end of 2015.  The use of cash is primarily related to higher levels of expansion-related and success-based capital expenditures.  Net Debt(3) was $259.0 million, resulting in a Net Leverage Ratio(4) as of June 30, 2016 of 2.2x.

Conference Call

The Company will host a conference call to discuss its second quarter 2016 results at 9:00 a.m. (Hawaii Time), or 3:00 p.m. (Eastern Time) on Monday, August 1, 2016.

To access the call, participants should dial (877) 456-0428 (US/Canada), or (615) 247-0082 (International) ten minutes prior to the start of the call and provide passcode 50969955.

A live webcast of the conference call, including a slide presentation, will be available from the Investor Relations section of the Company’s website at http://hawaiiantel.com.  The webcast will be archived at the same location.

A telephonic replay of the conference call will be available two hours after the conclusion of the call until 6:00 p.m. (Eastern Time) August 8, 2016.  Access the replay by dialing (855) 859-2056 or (404) 537-3406 and entering passcode 50969955.

Use of Non-GAAP Financial Measures

This press release contains information about adjusted earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA), Net Debt, Net Leverage Ratio and Levered Free Cash Flow. These are non-GAAP financial measures used by Hawaiian Telcom management when evaluating results of operations. Management believes these measures also provide users of the financial statements with additional and useful comparisons of current results of operations with past and future periods. Non-GAAP financial measures should not be construed as being more important than comparable GAAP measures. Detailed reconciliations of Adjusted EBITDA, Net Debt, Net Leverage Ratio and Levered Free Cash Flow to comparable GAAP financial measures have been included in the tables distributed with this release and are available in the Investor Relations section of www.hawaiiantel.com.

Forward-Looking Statements

In addition to historical information, this release includes certain statements and predictions that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  In particular, any statement, projection or estimate that includes or references the words “believes”, “anticipates”, “intends”, “expected”, or any similar expression falls within the safe harbor of forward-looking statements contained in the Reform Act.  Actual results or outcomes may differ materially from those indicated or suggested by any such forward-looking statement for a variety of reasons, including, but not limited to: failures in Hawaiian Telcom’s critical back office systems and IT infrastructure; breach of the our data security systems; increases in the amount of capital expenditures required to execute our business plan; the loss of certain outsourcing agreements, or the failure of any third party to perform under these agreements; our ability to sell capacity on the new submarine fiber cable project; adverse changes to applicable laws and regulations; the failure to adequately adapt to technological changes in the telecommunications industry, including changes in consumer technology preferences; adverse economic conditions in Hawai‘i; the availability of lump sum distributions under our union pension plan; limitations on the ability to utilize net operating losses due to an ownership change under Internal Revenue Code Section 382; the inability to service our indebtedness; limitations imposed on our business from restrictive covenants in the credit agreements; and severe weather conditions and natural disasters.  More information on potential risks and uncertainties is available in recent filings with the Securities and Exchange Commission, including Hawaiian Telcom’s 2015 Annual Report on Form 10-K. The information contained in this release is as of August 1, 2016. It is anticipated that subsequent events and developments may cause estimates to change, and the Company undertakes no duty to update forward-looking statements.

About Hawaiian Telcom

Hawaiian Telcom (NASDAQ:HCOM), headquartered in Honolulu, is Hawai‘i’s technology leader, providing integrated communications, broadband, data center and entertainment solutions for business and residential customers. With roots in Hawai‘i beginning in 1883, the Company offers a full range of services including Internet, video, voice, wireless, data network solutions and security, colocation, and managed and cloud services supported by the reach and reliability of its next generation fiber network and a 24/7 state-of-the-art network operations center. With employees statewide sharing a commitment to innovation and a passion for delivering superior service, Hawaiian Telcom provides an Always OnSM customer experience. For more information, visit www.hawaiiantel.com.

(1)  Consumer strategic revenue, as defined by the Company, includes video services and consumer Internet services revenues.  Business strategic revenue, as defined by the Company, includes data services and data center services revenues.  Data services include Dedicated Internet Access, Ethernet and other business data services, business Internet, and BVoIP.  Data center services include physical colocation, virtual colocation, network services, security, cloud services, and various related telephony services.

(2)  Adjusted EBITDA is EBITDA plus non-cash stock compensation, SystemMetrics earn-out and other non-recurring costs not expected to occur regularly in the ordinary course of business.  EBITDA is defined as net income plus interest expense (net of interest income and other), income taxes, depreciation and amortization and gain on sale of property.  The Company believes both of these non-GAAP measures, Adjusted EBITDA and EBITDA, are meaningful performance measures for investors because they are used by our Board and management to evaluate performance, enhance comparability between periods and make operating decisions.  Our use of Adjusted EBITDA and EBITDA may not be comparable to similarly titled measures used by other companies in the telecommunications industry.  A detailed reconciliation of Adjusted EBITDA and EBITDA to comparable GAAP financial measures has been included in the tables distributed with this release.

(3)  Net Debt provides a useful measure of liquidity and financial health. The Company defines Net Debt as the sum of the face amount of short-term and long-term debt and unamortized premium and/or discount, offset by cash and cash equivalents.  A detailed reconciliation of Net Debt has been included in the tables distributed with this release.

(4)  Net Leverage Ratio is defined by the Company as Net Debt divided by Last Twelve Months Adjusted EBITDA.  A detailed reconciliation of Net Leverage Ratio has been included in the tables distributed with this release.

(5)  In the fourth quarter 2015, we revised the presentation of volume information and operating revenue to provide more meaningful information.  Prior period information has been revised to reflect the current presentation.  Total revenue has not changed from that previously reported but the classification by channel has been modified and we now present product information by channel as well.

(6)  Levered Free Cash Flow provides a useful measure of operational performance and liquidity.  The Company defines Levered Free Cash Flow as Adjusted EBITDA less cash interest expense and capital expenditures.  A detailed reconciliation of Levered Free Cash Flow has been included in the tables distributed with this release.


Hawaiian Telcom Holdco, Inc.
Consolidated Statements of Income
(Unaudited, dollars in thousands, except per share amounts)
 
  Three Months Ended  Six Months Ended
  June 30,  June 30,
  2016 2015 2016 2015
Operating revenues $  99,541  $  96,187  $  198,335  $  193,303 
Operating expenses:            
Cost of revenues (exclusive of depreciation and amortization)    40,605     39,219     83,084     79,402 
Selling, general and administrative    29,554     29,767     59,419     59,499 
Depreciation and amortization    22,493     21,941     44,443     43,221 
Total operating expenses    92,652     90,927     186,946     182,122 
Operating income    6,889     5,260     11,389     11,181 
Other income (expense):            
Interest expense    (4,484)    (4,166)    (8,724)    (8,503)
Interest income and other        4     —     11 
Total other expense    (4,484)    (4,162)    (8,724)    (8,492)
Income before income tax provision    2,405     1,098     2,665     2,689 
Income tax provision    960     643     1,066     1,257 
Net income $  1,445  $  455  $  1,599  $  1,432 
Net income per common share -            
Basic $  0.13  $  0.04  $  0.14  $  0.13 
Diluted $  0.13  $  0.04  $  0.14  $  0.13 
Weighted average shares used to compute net income per common share -            
Basic    11,511,591     10,797,111     11,493,712     10,744,944 
Diluted    11,525,850     11,258,178     11,523,215     11,261,535 
 


Hawaiian Telcom Holdco, Inc.
Consolidated Balance Sheets
(Unaudited, dollars in thousands, except per share amounts)
 
  June 30,  December 31,
  2016 2015
Assets      
Current assets      
Cash and cash equivalents $  26,155  $  30,312 
Receivables, net    29,120     32,736 
Material and supplies    8,603     8,499 
Prepaid expenses    5,580     4,068 
Other current assets    3,184     2,102 
Total current assets    72,642     77,717 
Property, plant and equipment, net    589,551     579,107 
Intangible assets, net    33,779     34,828 
Goodwill    12,104     12,104 
Deferred income taxes, net    88,331     89,896 
Other assets    6,193     6,043 
Total assets $  802,600  $  799,695 
Liabilities and Stockholders’ Equity      
Current liabilities      
Current portion of long-term debt $  3,000  $  3,000 
Accounts payable    50,546     44,841 
Accrued expenses    16,561     14,491 
Advance billings and customer deposits    15,958     17,551 
Other current liabilities    6,305     5,932 
Total current liabilities    92,370     85,815 
Long-term debt    282,161     283,046 
Employee benefit obligations    100,207     104,597 
Other liabilities    17,468     18,538 
Total liabilities    492,206     491,996 
Commitments and contingencies (Note 11)      
Stockholders’ equity      
Common stock, par value of $0.01 per share, 245,000,000 shares authorized and 11,511,591 and 11,466,398 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively    115     115 
Additional paid-in capital    178,809     178,019 
Accumulated other comprehensive loss    (29,082)    (29,388)
Retained earnings    160,552     158,953 
Total stockholders’ equity    310,394     307,699 
Total liabilities and stockholders’ equity $  802,600  $  799,695 
 


Hawaiian Telcom Holdco, Inc.
Consolidated Statements of Cash Flows
(Unaudited, dollars in thousands)
 
  Six Months Ended
  June 30,
  2016 2015
Cash flows from operating activities:      
Net income $  1,599  $  1,432 
Adjustments to reconcile net income to net cash provided by operating activities:      
Depreciation and amortization    44,443     43,221 
Deferred financing amortization    1,005     953 
Employee retirement benefits    (3,896)    (3,565)
Provision for uncollectible receivables    2,139     1,634 
Stock based compensation    1,141     900 
Deferred income taxes    1,377     1,621 
Changes in operating assets and liabilities:      
Receivables    1,477     (3,025)
Material and supplies    (104)    (92)
Prepaid expenses and other current assets    (2,594)    (1,944)
Accounts payable and accrued expenses    6,837     (2,037)
Advance billings and customer deposits    (1,593)    668 
Other current liabilities    (385)    (465)
Other    (157)    492 
Net cash provided by operating activities    51,289     39,793 
Cash flows from investing activities:      
Capital expenditures    (52,898)    (52,916)
Funds released from restricted cash account        400 
Net cash used in investing activities    (52,898)    (52,516)
Cash flows from financing activities:      
Proceeds from exercise of warrant        3,341 
Proceeds from installment financing    1,698     2,279 
Repayment of capital lease and installment financing    (1,707)    (1,976)
Repayment of debt    (1,500)    (1,500)
Refinancing and loan amendment costs    (688)    (150)
Taxes paid related to net share settlement of equity awards    (351)    (928)
Net cash used in financing activities    (2,548)    1,066 
Net change in cash and cash equivalents    (4,157)    (11,657)
Cash and cash equivalents, beginning of period    30,312     39,885 
Cash and cash equivalents, end of period $  26,155  $  28,228 
Supplemental disclosure of cash flow information:      
Interest paid, net of amounts capitalized $  6,350  $  7,604 
 


Hawaiian Telcom Holdco, Inc.
Revenue by Category and Channel (5)
(Unaudited, dollars in thousands)
 
  Three Months Ended       
  June 30,  Change 
  2016 2015 Amount Percentage 
Business            
Data services $ 16,593 $ 11,838 $  4,755    40.2 %
Voice services   21,690   23,161    (1,471)   (6.4)%
Data center services   3,211   2,784    427    15.3 %
Equipment and managed services   5,178   4,779    399    8.3 %
    46,672   42,562    4,110    9.7 %
Consumer            
Video services   9,997   8,280    1,717    20.7 %
Internet services   7,328   8,187    (859)   (10.5)%
Voice services   18,627   20,033    (1,406)   (7.0)%
    35,952   36,500    (548)   (1.5)%
Wholesale carrier data   13,172   13,789    (617)   (4.5)%
Other   3,745   3,336    409    12.3 %
  $ 99,541 $ 96,187 $  3,354    3.5 %


  Six Months Ended       
  June 30,  Change 
  2016 2015 Amount Percentage 
Business            
Data services $ 31,561 $ 23,897 $  7,664    32.1 %
Voice services   44,043   47,183    (3,140)   (6.7)%
Data center services   6,268   5,381    887    16.5 %
Equipment and managed services   9,643   9,043    600    6.6 %
    91,515   85,504    6,011    7.0 %
Consumer            
Video services   19,424   15,802    3,622    22.9 %
Internet services   15,053   16,315    (1,262)   (7.7)%
Voice services   37,682   40,548    (2,866)   (7.1)%
    72,159   72,665    (506)   (0.7)%
Wholesale carrier data   26,934   28,122    (1,188)   (4.2)%
Other   7,727   7,012    715    10.2 %
  $ 198,335 $ 193,303 $  5,032    2.6 %
 


Hawaiian Telcom Holdco, Inc.
Schedule of Adjusted EBITDA Calculation
(Unaudited, dollars in thousands)
 
  Three Months Ended  Six Months Ended  LTM Ended
  June 30,  June 30,  June 30,
  2016 2015 2016 2015 2016
Net income $ 1,445 $ 455 $ 1,599 $ 1,432 $ 1,267
Income tax provision   960   643   1,066   1,257   1,166
Interest expense and other income and expense, net   4,484   4,162   8,724   8,492   17,037
Depreciation and amortization   22,493   21,941   44,443   43,221   89,101
EBITDA   29,382   27,201   55,832   54,402   108,571
Non-cash stock and other performance-based compensation   789   525   1,568   900   2,252
SystemMetrics earn-out   216   272   731   544   445
Non-recurring costs   396   394   786   869   2,381
Pension settlement loss   —   1,397   —   2,248   5,840
Adjusted EBITDA $ 30,783 $ 29,789 $ 58,917 $ 58,963 $ 119,489
 


Hawaiian Telcom Holdco, Inc.
Schedule of Levered Free Cash Flow (6)
(Unaudited, dollars in thousands)
 
  Three Months Ended  Six Months Ended  LTM Ended
  June 30,  June 30,  June 30,
  2016 2015 2016 2015 2016
Adjusted EBITDA $  30,783  $  29,789  $  58,917  $  58,963  $  119,489 
Cash interest expense    (3,858)    (3,651)    (6,350)    (7,604)    (14,924)
Capital expenditures    (24,759)    (23,744)    (52,898)    (52,916)    (99,016)
Levered Free Cash Flow $  2,166  $  2,394  $  (331) $  (1,557) $  5,549 
 


Hawaiian Telcom Holdco, Inc.
Schedule of Net Leverage Ratio
(Unaudited, dollars in thousands)
 
Long-term debt as of June 30, 2016 $  285,161  
Less cash on hand    (26,155) 
Total net debt as of June 30, 2016 $  259,006  
     
LTM Adjusted EBITDA as of June 30, 2016 $  119,489  
Net leverage ratio as of June 30, 2016    2.2 x
 


Hawaiian Telcom Holdco, Inc.
Volume Information (5)
(Unaudited)
 
  June 30,  Change 
  2016 2015 Number Percentage 
Business         
Data lines  19,851  19,759   92    0.5 %
BVoIP lines  18,101  15,469   2,632    17.0 %
Voice access lines  163,860  170,506   (6,646)   (3.9)%
          
Consumer         
Video subscribers  38,593  31,921   6,672    20.9 %
Internet lines  91,820  93,338   (1,518)   (1.6)%
Voice access lines  143,441  160,819   (17,378)   (10.8)%
Homes enabled for video  198,000  175,000   23,000    13.1 %


  June 30,  March 31, Change 
  2016 2016 Number Percentage 
Business         
Data lines  19,851  19,954   (103)   (0.5)%
BVoIP lines  18,101  17,281   820    4.7 %
Voice access lines  163,860  166,073   (2,213)   (1.3)%
          
Consumer         
Video subscribers  38,593  37,108   1,485    4.0 %
Internet lines  91,820  92,820   (1,000)   (1.1)%
Voice access lines  143,441  147,375   (3,934)   (2.7)%
Homes enabled for video  198,000  195,000   3,000    1.5 %



            

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