Justin D. Benincasa - Chief Financial Officer, Principal Accounting Officer and Treasurer Michael T. Prior - Chief Executive Officer, President and Director.

Richard H. Prentiss - Raymond James & Associates, Inc., Research Division Barry McCarver - Stephens Inc., Research Division Hamed Khorsand - BWS Financial Inc. Colin King - Kirr, Marbach & Company, LLC.

Good day, ladies and gentlemen, and welcome to the Atlantic Tele-Network second quarter earnings conference call and webcast. [Operator Instructions] As a reminder, this conference call is being recorded. I'll now introduce your host for today's conference, Justin Benincasa, Chief Financial Officer. You may begin..

Great. Thank you, Ashley. Good morning, everyone, and thank you for joining us on our call to review our second quarter and 6 months results. With me here is Michael Prior, ATN's President and Chief Executive Officer.

During this call, I'll be covering the relevant financial information and certain operational data; and Michael, as usual, will be providing an update on the business.

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 the risks and uncertainties that could cause actual results to differ 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 reconciliation to comparable GAAP measures, and for information regarding the factors that may affect our future operating results, please refer to our earnings release on our website at atni.com or to the 8-K filing provided to the SEC. And so, I'll turn the call over to Michael..

It's upgrading our data capacities and 3G capabilities; it's expanding our coverage and number of sites and service; and it's also, of course, the general industry trend of higher data usage per customer.

And to put some hard numbers to that, megabytes billed expanded by about 151% year-on-year, and we increased our 3G base stations and service from approximately 40 last year to 260 this year. Our U.S. wholesale base stations overall grew from 572 to 654, which is about a 14% increase, and voice minutes were flat.

So those are all largely positive factors, but as we noted in our press release, we do not expect to sustain this rate of revenue growth over the second half as declining rates -- by that I mean, prices, particularly data traffic, come into effect. These anticipated rate declines largely come from existing and newly negotiated contracts.

In addition, we are actively involved in other discussions that may trade longer term opportunities for us for lower rates for our customers today, where it makes sense for both us and the customers.

Net-net, we think we are likely to see modest year-on-year revenue growth in the second half of this year for this segment based on our current traffic forecast and anticipated rate declines. There are a few moving parts, however, as you saw from this last quarter, as well as ongoing discussions.

So it's particularly hard at the moment to forecast the precise timing and level of any such changes to these revenue growth rates. Looking further out, we are optimistic that we can continue to improve upon the value proposition for our customers while at the same time growing businesses.

To achieve that though we will need to look a lot further ahead than next quarter. Moving on to international wireless. Revenues there were up 3% over last year. Subscriber results were mixed. In our smaller island markets, we continue to take share and showed healthy subscriber gains.

In Guyana, revenues increased, but subscriber numbers were down, and we believe there is much work to be done to improve our competitive positioning and customer experience there.

In Bermuda, results were largely flat in comparison to a very strong quarter last year, but we continue to slowly expand our subscriber levels and believe we are the clear leader in the market. In wireline operations, the revenues were up slightly as well. As with the previous quarter, this is largely the case of the shifting mix with U.S.

wholesale and enterprise, fiber transport and on-net data services growing strongly, albeit from smaller numbers, and international broadband revenue also continuing its growth rate.

On the other side of the coin, we had some expense control issues in Guyana that go beyond the decline of higher margin voice services, although we think that's correctable in the near term. In the U.S.

wireline area, we have the increased expenses associated with bringing our major fiber network expansion into service; and at the same time, we have tightened margins in our legacy CLEC services over leased copper lines. We expect margins in this business to improve over time as our on-net fiber-related revenues ramp.

So kind of strategically, I always know that, that question is going to come up with our balance sheet. There's really nothing new to add on external strategic investment opportunities.

We still see fairly full values in most areas may be overvalued and have found more interesting potential for the moment in the area of organic investments and existing businesses, such as we've talked about in domestic wholesale wireless, such as some smaller opportunities perhaps in domestic fiber.

So despite that, we will still have substantial capacity to invest in other areas. And we are, despite our sense of the values, we are actively reviewing a number of opportunities, but I just think we have to be aware we may have to wait until asset values come down a bit to more reasonable levels.

So we were -- and I would just say to put that in context, we've learned through both our successes and failures on the investment side that patience is a long-term competitive advantage in the infrastructure investment business.

So in summary, for ATN overall, this was another very strong quarter, and we believe there are many areas to improve upon in our existing businesses that will enable us to continue to achieve profitable growth. So with that, I'll turn the back over to Justin..

Okay, thank you, Michael. So for both the quarter and the 6-month year-to-date, total company revenues were up 16% to $83.3 million and $158.4 million, respectively, which as Michael noted reflected the strong year-on-year growth of the U.S. wireless segment.

Revenues in Guyana were down slightly this quarter as growth in data revenues were offset by continued decline in our local and long-distance revenues. Revenues also in Guyana were negatively impacted in the quarter by approximately $450,000 due to roughly 2.5% devaluation in the local currency, and that's over in comparison to a year ago quarter.

Adjusted EBITDA for the quarter increased 24% to $34.9 million, giving us an adjusted EBITDA margin of 42%. For the 6 months ended June, EBITDA growth and margins were consistent with those of the second quarter as adjusted EBITDA increased 23% to $63.1 million, and the EBITDA margin was 40%. Moving down the income statement.

This quarter's operating income was $21.6 million, up 36% from the same quarter in 2013, outpacing revenue growth by more than twice. This strong performance was driven by a 75% increase in operating income from our domestic wholesale wireless business.

Island Wireless posted 11% growth in operating income, benefiting from revenue growth and market share gains, particularly in our small island markets.

Lower operating income in our International Telephony segment in the second quarter was due to increased expenses in Guyana and, as Michael mentioned, where our attention will be on a balancing cost reduction efforts with upgrading our competitive positioning.

Operating expenses this quarter included $1.3 million of noncash stock-based compensation expense, and that compares to $1.2 million of last year's second quarter. Net income from continuing operations for the quarter was $11.5 million or $0.72 per share. That's up 80% compared to $0.40 per share reported in the second quarter of last year.

And year-to-date, net income totaled $19.4 million or $1.21 per share, up 70% from last year. Looking at the balance sheet, we ended the quarter with cash and cash equivalents of approximately $408 million, and that includes $58.8 million of restricted cash primarily related to an indemnity escrow account as part of the Alltel sale agreement.

Capital expenditures totaled $16.4 million for the quarter and $25.1 million year-to-date. Of the $25.1 million year-to-date, approximately $14.8 million or almost 60% was incurred by our U.S. Wireless wholesale business, and $6.1 million or 24% was incurred by our International Telephony segment.

There's always factors outside our control that could impact the timing of our capital spending within a fiscal year, but we expect capital expenditures for the full year 2014 to be between $60 million and $65 million.

And consistent with past guidance, we still expect 50% to 60% of that total to be allocated to our Domestic wholesale roaming business.

As we mentioned in our press release, we've seen -- we are pleased to see that the investments made in the wholesale roaming business over the last 18 months have shown strong early returns, and we are remain confident that we will continue to sow [ph] returns over the long term. Some additional operating data that -- for the quarter.

Some of this repeats what Michael already said, but I'll give the number. We ended the quarter with 654 wholesale base stations in our U.S. Wireless territories, up from 605 last quarter and 572 1 year ago. International wireless subscribers totaled 320,600 at the end of the quarter, down from 333,300 a year ago. In our U.S.

Wireline segment, business customers decreased 6% from the year ago quarter to approximately 2,600 customers, and business lines increased 62% from 97,600 to 158,000. Internationally, fixed lines ended the quarter at approximately 158,000 access lines; and DSL subscribers ended at 41,000, up 28% from 32,000 a year ago.

And with that, operator, we'd like to turn back the call for questions..

[Operator Instructions] Our first question comes from Ric Prentiss of Raymond James..

Couple of questions, if I could. First, obviously, the increasing number of base stations on the U.S. wireless business really was one of the components that helped drive big year-over-year revenue growth.

When you think about your CapEx guidance, I think it came down $5 million; but, Michael, you also said you like spending money on organic investment. Just trying to square what you're kind of saying to us there..

Yes. I mean most of that down on the $5 million was outside of U.S. wireless, so that number is fairly consistent. In fact probably it's up a little in the total. Most of the stuff is just other small changes in some of our island properties and in Guyana..

Okay. And when you think about continuing to add then base stations, you got the 654 in the quarter.

Any target that you would want to get in the year because you mentioned also some of those upgrading to 3G versus just adding base station? Just trying to think of what else that might help that modest year-over-year revenue growth given the CapEx spend..

Yes, I mean, we've already -- when we talked about that expectation where you're taking into account, of course, our plan -- and sure, at least, we're already into the third quarter of builds, of course. So we have some pretty good visibility on the build side. As you go farther out in the second half, things could; move a little bit.

But I think the bigger issue than the overall number of base stations is the increase of 3G base stations and the use of those, so I think that's probably what you're referring to. And that program, we'll continue to do that wherever and whenever we can. But when we say we -- there's kind of the separation of the short term and the longer term.

And I mean, in the short term, we have a plan. We've talked about it in that guidance. I think in the longer term we still see opportunities to deliver a very good value proposition for the big carriers, and we're looking at those, but it's hard to handicap how exactly they'll come in over time.

But if we can find opportunities like that to expand this business, we like that..

One of the large carriers out there has got what they call the whitespace program to try and increase 4G LTE but probably also 3G in some more rural settings.

Any thoughts about embracing some of those type programs? Are you on the list to talk to those guys?.

Yes, and I don't want to talk about discussions with any individual carriers. But I think we are -- we talk to all the carriers.

We have -- at times, one carrier may be looking more strategically than another, but I mean -- we really believe in the model of shared infrastructure in these really sparsely populated remote areas that -- we think it's a -- there's a really great value proposition for the big carriers, but they have to embrace it, and they have to fit it in with other plans.

So that's not exactly a straight line. I don't know if that answers your question..

Yes. Yes, it does. And on the expense side, GT&T, addressing the cost side. Obviously, revenues were fairly consistent with what we were looking for, but the EBITDA came in lower on GT&T.

When you say addressing them in the near term, do you think that's something you could get fixed within the third quarter? Or is that something you think may slide into 4Q?.

Yes. Yes, I think that's going to slide in the 4Q. I mean there's some things that we can do quickly but other things that are going to take some time.

An example of that will be postage is up dramatically in the country, and so we're trying to move towards e-billing, if you will, so it's just going to take some time to get adoptions -- adopt -- customers to adopt that practice..

Okay. Final question for you, and then I'll let others in line [ph]. The corporate, kind of the overhead or EBITDA drag was a little bit higher than we were looking for in 2Q. It was certainly up quarter-to-quarter, certainly after quarter-to-quarter quite a bit and up a little bit sequentially.

Any thoughts about what the corporate costs might be doing, or whether there are any unusual items in there?.

Yes. I mean, I think some of that is -- our engineering group in the U.S. wireless business used to a shared -- be more of a shared cost with the Alltel property, so we probably pulled in more of that than not in the past. You know what I mean? In other words, we've got more cost on books for that.

But there's also a lot of shared service cost, so it's not -- I don't that's something that's going to change much moving forward..

Right, so use 2Q more as kind of the more normal rate?.

I believe so, yes..

Our next question comes from Barry McCarver of Stephens Inc..

So I guess a couple of things. On GT&T, again, you mentioned some of the -- what's happening with the subscriber base here and a need for you to improve services.

I guess, first off, what's the consumer spending look like in that market? I mean, economically, how is that country holding up? And then secondly, anything specific that you can point to that you guys are looking at to improve the service there?.

Yes, the economics. Economically, to answer the first part of that question, I think Guyana has been growing. I think the consumer spend has not suffered recently. In fact I would say it's improving. It's not dramatic, and we're starting from smaller numbers, but that's not really hurting us, and it may be helping us.

Ultimately, I think there's more to come because I think there's a greater -- there's a demand, there's a latent demand there for advanced services. And so for us, that's an important thing for the longer term is to rollout more advanced mobile services as well. But in terms of the near term, it's really the whole customer experience.

We think it's not as competitive as it should be, and so that -- that's everything from the retail experience and are -- how effective those channels are to aspects of the -- broader aspect of the customer care envelope. So it's blocking and tackling and -- but I think there's room for improvement, and we will be working hard at it..

Okay. And then on the U.S. wireless business, you had a great first quarter, and you suggested then that you wouldn't be able to maintain this type of growth, and now we've done it again in the second quarter.

In terms of the volume offset by price breaks, it sounds to me like you're either -- you've seen some contract renegotiations or maybe you're in the middle of those right now.

Is that fair?.

I think most of what drives our expectations has already been agreed to and was -- it's a little tricky in terms of timing on how some of these things roll out, and we got that wrong in trying to figure it out for the second quarter, obviously, but -- and there's also always ongoing discussions about bigger things, way to expand the relationship, which can lead to lower prices, because it's a fairly simple equation for us.

These are remote areas, and if we are going to invest more or do more, we have to -- there has to be some kind of revenue tie-in to high capital expense business. But if we can get volumes up, we can certainly lower rates, and we need to because I think that's what customers expect..

Our next question comes from Hamed Khorsand of BWS Financial..

Just to build on this U.S. wireless questions you've been getting.

How much of the data growth was coming from the 3G base stations? And can you decipher how much of it was coming from the base stations you added during the quarter?.

No, we can't break it out in more detail. But I think what I said earlier, Hamed, is it definitely -- I think that the expansion of 2G to 3G had a bigger impact than the overall increase in base station numbers..

And then given that we're still on warm climate right now, I would imagine you're trying to add as many base station as possible during this quarter.

So is there a potential where you're going to see a lot more traffic on the network than you're really expecting right now?.

Look, we've baked into what we've said, all the considerations like that. So could it be different than we're forecasting? It could be. But I think certain math, like applying rate decreases against the volume is fairly -- that leads to a big part of our forecast, right? So that shouldn't change. Volumes are harder to grasp, you're right..

Okay. And then the other question I had was, given what the climate for acquiring assets being already expensive as to your comments, what's going to happen now that -- with price expectations from sellers given that Windstream is looking at a REIT kind of situation, where valuations could actually increase even further.

What does that do to what you guys are looking for investment-wise?.

Well, we were in the market for Windstream, but -- joking aside, I think if you are looking at those asset sales some of them may have an opportunity to do that arbitrage and the tax improvement although I think there are many where that would be a lot harder to pull off and not as big of a benefit as it seems to have been at least in the stock price for Windstream.

So I don't -- right now, I'm not sure that has a major impact on things we're looking at..

Our next question comes from Colin King of Kirr, Marbach & Company..

Just curious on the wrap-up of that fiber expansion. Would you guys expect that U.S.

Wireline business to be a positive contributor to operating income sometime over the next few quarters?.

It might be tough over the next few quarters, but I think -- moving into '15, I think it's more likely.

It's just that right now we really got all the infrastructure -- once we turned those network up -- I think I've said in the past -- we've got all the cost of supporting infrastructure on that network, and we're still ramping up revenue, but the ramp up in revenue is going to take quarters, not a quarter.

So I think it's going to take a little bit of time where it has a benefit to operating income..

Okay, great, that makes sense. And then one question on the M&A. I completely understand your comments on the being patient aspect. Love to hear that.

I'm just curious, is there a point where, say, maybe 12 to 18 months out, where you think, hey, we're sitting on half our market cap in cash, and it's been too long, and acquisition prices aren't coming down. Would you start to evaluate other uses of that buyback dividend, what have you? Just curious on if there's a timing aspect to that..

Yes, I mean it is a consideration I think the board has to go through periodically is the best answer. And you can't ever just dismiss and say we'll never, ever do it. I think -- right now, we've indicated that's not something we're looking to do or expect to do. And for special dividend, for example, there's some significant tax inefficiencies there.

And more broadly, I think we think that being patient is also beneficial to be able to move quickly when the right opportunity drags up. So it's hard to say exactly when that period is where you just conclude, this is not going to change for a long time; we're not going to find anything. We are definitely not at that place right now.

I just can't say we could never be. I guess it's theoretically possible..

[Operator Instructions] Our next question comes from Shune Hudget [ph] of GSM Capital..

Most of my questions have been covered by now, specifically to the REIT that Windstream's setting up and the dividend possibility and the timeline of acquisitions, which was good. So I just got one then. You've been prepping the markets for the modest increase in year-over-year growth in U.S. wireless.

Is modest between 10% and 20% or is it single-digits? Compared to 40% growth, there's a big range of modest growth in there.

Could you comment on that?.

I'm not going to quantify further, and it's partly because, look, we were off of our expectations this quarter. So we want to be careful about indicating a degree of science to it that we might not have.

I would say, for me, though it's fair to say that I would think -- if you took that middle ground of 10% to 20% growth, 15% growth, I would not call modest in this business. I would say that's pretty good.

It's not what we saw this quarter, which was almost torrid but -- so if that helps, I can tell you that, but part of what you should take from it too in terms of using a word rather than a number is that it's a little hard to get precisely right..

I'm not showing any further questions in queue. I'd like to turn the call back to management for any further remarks..

No further remarks, operator. Thank you, everyone, and we'll talk to you in another quarter. Take care..

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day..