Justin Benincasa - CFO Michael Prior - CEO.

Ric Prentiss - Raymond James Allen Klee - Maxim Group Hamed Khorsand - BWS Financial.

Good day, ladies and gentlemen, and welcome to the ATN International Second Quarter 2018 Earnings Conference Call and webcast. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Justin Benincasa, Chief Financial. Sir, you may begin..

Thank you, operator. Good morning, everyone and thank you for joining us on our call to review our second quarter and six months results. With me here, as usual, is Michael Prior, ATN's Chairman and Chief Executive Officer.

And during the call, I'll cover the relevant financial information, and Michael will be providing an update and outlook 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 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 reconciliations to comparable GAAP measures and for further information regarding the factors that may affect our future operating results, I'd ask you to refer to our earnings release on our website at atni.com or to the 8-K filing provided to the SEC. And with that, I will turn it over to Michael..

Geoverse, which is an in-building solutions provider based out of Seattle. We've been looking at this space and the related small cells network densification space for a while as we think it is complementary to our experience and history in shared network infrastructure as well as the capabilities of our US Telecom operations.

So we were excited to find a team through ATN Ventures that is talented and has developed some very interesting technical solutions and business model. We are the principal funder of the business, and we are prepared to put a substantial amount of capital to work as we look to develop the opportunity. Next is a company called the DeployCom.

It's essentially build-to-suit, large-scale fiber network business. It's not a large-scale business today, but it will be building large-scale fiber. And it's run by a group of talented veterans of this space. This is another part of our ongoing investments and belief in the shared network infrastructure space.

And like Geoverse, the bulk of the capital required will be invested behind commitments from customers. We see this plan of need created by the growing fiber requirement, capacity, latency, reliability and flexibility for large cell, small cell, data centers and enterprise.

Greater efficiency -- in our view, greater efficiency needs to be brought to the supply side of that equation, and we think this team has come up with a good approach to that. Again, here we are the principal funder of this business, but if it achieves the scale that it's targeting, we would expect to have other capital partners.

Next is more of a sure venture investment in a company called Terano Wireless.

This is a Bay Area technology company that we invested in through ATN Ventures, as it seeks to commercialize a very promising retail and enterprise fixed wireless solution that would represent a major leap forward in that market and has the potential to dramatically increase the competitiveness of fixed wireless in markets largely served by incumbent wireline.

Here we're a minority investor and one of the group of ongoing investors. We believe that these three examples are emblematic of the investments we are making in cutting-edge products and services that we believe can be growth drivers for ATN over time.

Each is aligned with our existing expertise and strategy in domestic telecommunications, and each is addressing unmet needs in the marketplace.

So to sum up, for the quarter, we were pleased with the sequential progress achieved in the second quarter and expect the positive trends in our International Telecom business, supported by a stable performance in domestic telecom, to continue in the second half of the year.

As you know, we continue to explore larger opportunities to put our balance sheet to work, but we remain patient investors.

In the meantime, we've made small investments in early-stage companies, as I've just gone through, that have significant upside, and we are excited about their potential to drive longer-term growth and serve as an attractive platform for continued investments. And that's it for me. Justin, back over to you..

Great. Thank you, Michael. Given the impact of the hurricanes, the sales of various businesses and the contractual changes in the US Wireless business, I thought comparing consecutive quarters this year will be more informative and can provide a better baseline from which to measure future progress.

All the year-over-year comparisons, as you know, can be found on our earnings press release. For the first quarter, total consolidated revenues were 117.8 million, and that's up 13% from the first quarter.

Higher International Telecom segment revenues, which include the impact of special items, were the major contributor to the increase, along with increases in the US Telecom segment. Consolidated EBITDA for the quarter was 36 million compared to 26.3 million in the prior quarter, again, mostly driven by the International Telecom segment.

Adjusted EBITDA margin was 31% for the quarter.

Looking at some specifics around each of our segments, and starting with the US Telecom, revenues for the quarter were 30.3 million, up from 28.5 million, and adjusted EBITDA was 12.7 million, up from 12 million in Q1 2018, both reflecting the contractual changes with our carrier customers that we've discussed in the past.

Looking ahead, the previously disclosed sale of the 100 wholesale wireless sites closed early in July. For modeling purposes, I'd note that in the second quarter, these assets accounted for approximately 1.9 million of revenue, and we expect to record a pretax gain on sale of approximately 13 million to 15 million in the third quarter.

As Michael noted in his comments, we've launched several initiatives to drive new revenue opportunities within this segment that will add to our short-term operating expenses but that we believe can generate significant future cash flows.

As I noted last quarter, we continue to pursue opportunities to reduce capital spending that's not directly tied to revenue growth in domestic telecom, and we do expect spending in this segment to be down significantly in 2018 compared to past years.

In the International segment, revenues were 81.5 million, up 11.8 million from the first quarter levels, and adjusted EBITDA was 27.6 million, up from 17.8 million.

The quarter-over-quarter revenue increases came from an additional advance of 8.2 million of high-class USF money, continued revenue recovery in the US Virgin Islands, and wireline revenue growth related to the upgrades and expansion of our broadband networks in Guyana and Cayman that Michael referenced in his comments.

Although we saw improving EBITDA in the quarter, apart from the additional USF advances, results were still burdened by several hurricane-related one-time expenses. These costs are expected to begin to trail off in the second half of the year and revenue recapture to progressively improve as we move through 2018.

In the Renewable Energy segment, revenues were 6 million in the quarter, comparable to the 5.8 million reported in the first quarter, a slight decrease in production in the U.S. were offset by increases in India. Adjusted EBITDA was steady with the prior quarter at $3.8 million.

For the consolidated company, we had net income of 7.2 million or $0.45 per share. Other items to note outside of revenue and adjusted EBITDA was a $2.3 million gain on the sale of unused spectrum in the US Telecom segment, and 1.1 million of FX losses in India and Guyana.

I should also point out that the effective tax rate for the quarter was 16% and 41% year-to-date, as income and losses in our various jurisdictions in any one quarter can greatly impact the effective rate. Having said that, we still expect the overall tax rate to be in the mid-30s for the full year.

Also, included in operating income was 2.1 million of noncash stock-based compensation expense for the quarter. Looking at the balance sheet at June 30, total cash and short-term investments were 181.7 million. Year-to-date cash from operations was 44 million, and we ended the first half of the year with total debt outstanding of 151 million.

Outside the cost incurred for hurricane repairs, capital expenditures year-to-date totaled 40.6 million, of which approximately 31.9 million was incurred by our International Telecom segment, 7.3 million by our US Telecom operations and 1.4 million in Renewable Energy segment.

We expect that capital expenditures will be at the high end of our guidance of 80 million as we've accelerated some of the 2019 growth capital plans into this year, as we see a strong customer demand related to our fiber network expansions in Guyana and Cayman.

Also, as we noted in the press release, an additional 66 million has been spent this year on network repairs and resiliency in the US Virgin Islands following the 2017 hurricanes. We do expect that the pace of that spending to decline substantially in the second half of the year. And with that operator, we'd like to open the call up for questions..

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

It's Ric. A couple of questions. First, on the Virgin Islands area, obviously great to see the FCC step up and support the effort. You alluded to the additional promise for resiliency, and then you also, I think, talked about that you might spend 15 million in CapEx for that exact kind of item.

Can you help us frame how much and when you might be seeing the additional FCC support come in?.

Yes, there is a proposal out there that FCC has put out there for funding for the Virgin Islands wireline that's paid out of the USF cost -- high-cost fund, I believe, over 10 years. And we've been talking to them about it for quite a long time.

And we believe we are the best company to use those funds and put them to work and make sure it's really spent efficiently, and so that the outcomes or what they want. So that is not a done deal. That is part of a process, and it's kind of really fundamental to our planning over time and the spend and all the rest of it..

Any kind -- I know the government doesn't always work fast, but any kind of thoughts as far as what the time frame is to see if you're the one chosen?.

I think it should be this year, right? I think that's probably the safest way to estimate. I think they understand that the time is of the essence, and so maybe it will be even soon, but sometime this fall, hopefully..

And I think, Justin, you mentioned that some of these we're "advances," so is this stuff that's kind of an upfront payment that really is meant to be a multiyear support mechanism? Just trying to think of how we should think about the financials and the cash coming in around..

The $8 million we recorded our future?.

Yes, both..

Well, the $8 million was an advance that was against the high cost that we were receiving. And then they recharacterized it, I guess. That's the best way to say it. And so that has always been a revenue item for us.

And any other additional support is still -- there's various flavors of it, but the big number Michael is talking about is traditionally a revenue for us..

Okay, okay. And then secondly, thanks for some of the extra color on the new initiatives.

When did they start? Was there any impact in the second quarter? So I'm just trying to think of how we should be expecting those kind of costs coming into the rest of the year before the revenues maybe all start flowing?.

The impact is not significant of the sort of operating spending -- funding the operating spending is not significant in the second quarter for most of them. Some of the stuff we did last year in managed services had some impact in the first of this year on operating spending.

And the sort of operating funding dollars will be larger in the second half of this year. There will be more significant, and Justin, I don't know if want to add..

Yes. I mean, they're in the low single millions range..

All those initiatives?.

Yes. Excluding capital spending..

Yes, yes..

So for example, the Terano dollars are capital investment, right?.

And then on Geoverse, you mentioned there could be a substantial amount of capital put to work on the in-building systems..

That's right..

Yes, what does that mean? Is that substantial compared to what the U.S.

had spent traditionally or what your total budget might be looking at?.

I mean, look, we think it's -- we think the solution, if it gains traction, we could be putting -- building it in a lot of sites. And that's our hope, that's our target. I don't want to try to quantify that, but that would be a pretty large spend for us, kind of comparable to the types of spends we've seen in US Telecom before, potentially.

But that's very unlikely. That's not going to be in the next couple of quarters..

Right, right.

And what do think you guys bring to the table then as far as the fiber business and the in-building business? Who are you competing against really out there when you say you want to bring greater efficiencies? But who are you competing against? And then what do you guys bring to the table to win the contracts, if you will?.

Yes, I think it's a little different for each, but I think the common thing we bring to the table are two things. We're sort of -- we have capital. It's long-term capital. It's a sufficient capital that's good for a lot of groups that are looking to build kind of longer-term networks.

And we have capabilities -- a lot of capabilities and credibility with carriers from all the 15 -- more than 15 years of providing sort of critical network needs for them and working with regional network teams, national network teams. And just having a good sense of that, how to operate, how to get these builds done.

So I think that's more broadly what we bring to the table. And then individual, we brought in new people in addition to ours, who really are leading these different investments.

And on the in-building side, the team there, which includes the former CTO from AT&T wireless, has developed a pretty interesting approach to the technology and the solution as well as the business model, as I said.

So I think that could be very interesting to carriers but not just the carriers, but to the real estate owners, which is a major focus point for us.

And similarly, on the DeployCom side, on the fiber side, you have a group that has great credibility and relationships in terms of building intercity fiber in the past for large carriers, whether they're wireless or wireline, and some of the really big enterprise buyers of capacity. And I'll take the competition one on that first.

On that one, it's interesting because there's so much that needs to be done. I'm not sure there's direct competition for a lot of it. And indeed, we think that some of the big providers of those solutions could very well be customers.

It's just there -- the big build that happened first almost 20 years ago, and then -- and the acquisitions that pulled things together, pretty fragmented. So there's routes with plenty of fiber and relatively new fiber and relatively low latency, but there are a lot of routes that don't have all of those things and sometimes none of them.

So we've just -- there is a massive need, and I think it's going to take multiple players to address those needs. And what we like about it is it feeds into our shared infrastructure thesis, which is it's just not tenable for -- on the carriers side or even the big, big enterprise side, to just build all these things themselves.

The capital amount is very large and it's tough to justify from a return standpoint. So I think -- where am I next? The competition on in-building side, there's a lot of players talking about it, small cells. There is big players like Crown that are looking at it. There's all kinds of people who have been doing DaaS and so on.

We think we're approaching it from a different angle, but I think there will be plenty of competition..

Okay. It sounds interesting. And then -- but you still have a bigger balance sheet to take a look at as well.

It sounds like you're still watching for opportunities and staying disciplined?.

Yes, that's right. I mean, look, it's possible if one of these things takes off, that we could put quite a bit capital to work there. But I think we also have appetite for other things and continue to look..

And our next question comes from Allen Klee with Maxim Group..

I was curious on the international telecom sector.

How do you think about, as you're improving the network and the services, the opportunity to improve the margins from where they are today?.

Allen, I'll speak first. Maybe Justin, you want to add to it. But I think it's really -- there's a couple of different things. One is the kind of a chipping away, nothing dramatic, but it's in all cases, we see businesses that can be operated more efficiently just on what's there today. That's one aspect.

The second aspect is, I think we could do a better job of taking advantage of technology to improve productivity and improve margins. And we've got a number of efforts on the way there to reduce customer care costs and improve customer care experience, but at the same time having economic benefits or network monitoring, maintenance and provisioning.

So there's a lot of tools out there that we think we can make better use of. So it's chipping away. I don't think it's anything dramatic in the near term. And then of course, there are efforts underway to add additional revenue streams off of that installed base, which can be margin-enhancing.

Justin, do you have anything to add?.

No. I mean, I think you said it. It's really -- it's the discipline, I would say, and we're saying it already in some of our markets where we're on network management, where we set -- we're setting metric targets and we're managing to them and how we run those networks. And we're starting to see some of that success already in markets in Bermuda..

And then on renewables, what should we be looking for thinking about in terms of timing and related to increasing your India assets or getting the financings that you're looking for?.

I'm kind of, Allen, reluctant to predict right now. I think we're looking at number of things, but we've been wrong on the timing there before. And really, our focus in the last six months, maybe long -- probably nine months has been about getting what's there more streamlined, structured correctly.

And kind of there was a lot of housekeeping and things that we felt we needed to do. I'm hopeful that on the debt side, we will have opportunities soon. There are some different structures. There's certainly a lot of conversations going on there.

And that in turn has a lot to do with whether we expand and at what pace because we're not going to expand with pure equity funding. That's just not -- it just doesn't make sense..

[Operator Instructions] Our next question comes from Hamed Khorsand with BWS Financial..

First question, on the U.S.

market, if you could just give a little detail on the impacts on your revenue and cost structure with the sale?.

So sales, did you say?.

Yes..

Oh, yes. So it was -- we had $1.9 million in the quarter revenue, so you can analyze that on the -- and then -- and that revenue has margins pretty much in line with the overall business..

But I have a second one.

In terms of your asset sales and the small kind of impact, what do you see from that?.

That's how it is. So in the -- it goes away in the third quarter and in the second quarter, it was 1.9 million of revenues..

Got it, okay.

And then skipping over to Guyana, what kind of pricing power do you have in that market right now?.

I don't think we think of it as pricing power, honestly. I think it's more about putting out a product that's got a reasonable return for us and has a price that's attractive in the market. So I would say that we've been pleasantly surprised by the demand for higher-speed products, higher-priced product for the market.

Still, it's not at levels we would see in some of the other markets, like Cayman, but it's still been good and better than we expected..

Okay. And then if you could talk a little bit about how much cash do you think you're going to need for the rest of the year..

How much cash? I don't think we forecast that other than the update on CapEx, which we've given..

And we do have a follow-up question from Ric Prentiss with Raymond James..

Two quick follow-ups. In the US.

Virgin Islands, do you think it would be fourth quarter then when you kind of get the sense of reconnected to the homes and the businesses, now we can actually find out, are the customer still there? Do they have money? When do you think you recognize kind of the, what's the revenue really look like now that we've got the network put back in place? Is that fourth quarter? Is that first quarter? How should we think about that coming back online on the revenue side of things?.

I think certainly fourth quarter, we would have a much better sense than now. In the third quarter, we'll have a better sense than now. And I think it's going to be sequential from there. Ric, really. There are certain questions we can answer as we get to the fourth quarter for sure, but others that may take time.

So just to give you a way to think about that, if you go and you look online, many of the biggest resorts in the Virgin Islands are not planning on opening until the 2019 season, so it's clear that there will be lingering impacts for a while.

But before the time from a regular household residential, we’ll at least have a sense of what the takeup is from people who are still in their homes and all that and be able to quantify that.

And as we've said before, look, it's logical to assume, in everything we see now, to assume that it's going to be a while before it comes back to pre-storm levels. We don't expect that for, say, the fourth quarter..

Sure. Right. It makes sense. And then going back on the Guyana question. Obviously, a lot of excitement in that market with the oil boom that's going on down there.

How do you see that playing out as far as helping the economy and what it might mean for your particular segment?.

Well, I think -- honesty, I think it's going to be a rising tide event. The extent of it is hard to predict. Right now, it's excitement, but it's not a lot of dollars in terms of the revenue. The oil revenue is not slowing.

But if you look at the 2020s, right, between kind of 2020 to 2025 and things will start -- things are starting to perk up, economic activity definitely perking up in anticipation of that, you're going to start to see just a tremendous difference in the overall size of that economy, from the dollars that are going to flow to the government alone, and then all the things that will need to be done to support it.

And so how big a boost is, there are all sorts of conjecture. And everybody, you can look around the world and when there's great change in fortunes in terms of exploitation of mineral, wells, like oil signs like this, sometimes it has a massive impact that goes down to a high percentage of the population and broadly across the economy.

And sometimes it doesn't. But I would say no matter what, it's just hard to see that economy not quite a bit larger. And right now, it's -- and part of that is because the size of the fine against that relatively small population, there's only 750,000 people or so in Guyana. So that's what's makes it's pretty interesting..

Thank you. This concludes today's Q&A session. I would now like to turn the call back over to management for closing remarks..

Just thank you, everybody, and we will see you in the next quarter. Take care..

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