Matt Smith - Treasurer & VP Finance Bob Udell - CEO Steve Childers - CFO.

Barry Sine - Drexel Hamilton Scott Goldman - Jefferies.

Good day, ladies and gentlemen, and welcome to the Consolidated Communications Holdings First Quarter 2015 Results Conference Call. At this time all participants are in a listen-only mode. Later, there will be a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, today's call is being recorded.

I would now like to turn the call over to Matt Smith, Treasurer and Vice President of Finance. Sir, you may begin..

Thank you, Shannon and good morning everyone. We appreciate you joining us today for our first quarter 2015 earnings call. At the conclusion of the prepared remarks, we will open up the call up for questions. Joining me on the call today are Bob Udell, President and Chief Executive Officer; and Steve Childers, Chief Financial Officer.

Please review the Safe Harbor provisions in our press release and then our SEC filings for information about forward-looking statements and related risk factors. This call may contain forward-looking statements within the meaning of the Federal Securities laws.

Such forward-looking statements reflect among other things management's current expectations, plans and strategies and anticipated financial results, all of which are subject to known and unknown risks, uncertainties, and factors that may cause the actual results to differ materially from those expressed or implied by those forward-looking statements.

In addition, today's discussion will include certain non-GAAP financial measures. Our earnings release for this quarter's results which has been posted to the Investor Relations section of our website contains reconciliations of these measures to their nearest GAAP equivalent.

I will now turn the call over to Bob to provide an overview of our first quarter results. Steve Childers will then provide a more detailed review of the financials and discuss our 2015 guidance.

Bob?.

Thanks, Matt and good morning everyone. I appreciate you joining us today for our first quarter earnings call. This is the first full quarter results that include the Enventis acquisitions which we closed on October 16 of last year. We are pleased with how well we started 2015 and the continued progress we are making in our strategic initiatives.

Revenue of $192.6 million was slightly higher, both sequentially and year-over-year when excluding the equipment sales. As a reminder, the equipment sales and service revenue line will fluctuate from quarter-to-quarter. Adjusted EBITDA was $79.7 million, and the payout ratio was a comfortable 71.4%.

Our commercial and carrier sales channels again showed strong growth with the year-over-year revenue increase of 3.7% which was led by our Metro Ethernet and hosted VOIP solutions.

As presented in our new revenue table, in the earnings release, commercial and carrier revenues were $73.7 million in the current quarter and reflect consistent growth in the periods presented. Approximately two-thirds of our investments are success based growth initiatives and we are excited about the opportunities across our markets.

The new metrics we shared in our press release this quarter provides additional details to support the emphasis we have on our fiber and network expansion. We increased our fiber network miles by over 5% in the last year to 13,038, and our late buildings by over 3% to over 4,800.

These fiber expansion efforts are driving value, and our consultative sales and service approach is appealing to the commercial and enterprise customers. Our network footprint and leading fiber based data products are key to the success for our topline growth in strategic sales.

Specific to carrier, we achieved a record quarter in signed agreements for 200 fiber-to-the-tower sites with over $30 million of contract value. This brings our total sites under contract to just under 1,100. We have good relationships with the wireless carriers, and as we have continued to gain scale, the growth opportunities have increased.

On the consumer front, revenues were $69.3 million or essentially flat, consumer broadband revenues increased by 2.1% year-over-year and were offset by ongoing declines in voice services. We continue to focus our marketing efforts on acquiring and securing the internet services into the home.

We've expanded our 1-Gig and 100-Meg offerings and are moving customers to higher speeds which increases ARPU and lowers churn. Consumers taking our internet products of 20-Meg or higher has increased from 8% of the customer base at this time last year to 20% of the customer base today.

This excess reflects the network and product set that allowed us to be very competitive in our markets. In all, we added 3,100 data connections and lost 1,000 video subscribers. As mentioned last quarter, we are focused on growing and securing the broadband connections to the home or passing higher cost of programming on to our video subs.

As a result, we are redeploying the capital dollars from lower video subscribers to higher margin commercial and carrier growth opportunities. Now let me provide an update on the Enventis acquisition. I'm pleased with how well the assets have performed and how well the teams have worked together in completing the initial phases of integration.

We are on plan and on budget with all of our projects, and with respect to synergies we achieved an additional $2 million in annualized savings during the quarter. In total, we achieved $7.5 million in synergies towards our two year target of $14 million.

Looking forward, I'm excited about the prospects we have with the additional scale, growth, and expansion opportunities. We have the people, network, products, and services to continue to be the leading broadband providers in the markets we serve.

We are well positioned to continue to achieve our strategic initiatives and deliver increasing shareholder value through organic growth, synergy savings, and opportunistic M&A, as well as balance sheet improvements. With that, I'll turn the call over to Steve for the financial review.

Steve?.

Thanks Bob. Good morning to everyone. This morning I will review our first quarter financial performance compared to pro forma results from the first quarter of last year which includes the Enventis acquisition. I will hold that with confirmation of our 2015 guidance.

Financial results for the period were as follows; operating revenue for the first quarter was $192.6 million compared to $193.9 million in the first quarter last year. As Bob mentioned, excluding revenues for equipment sales and services, our recurring revenues were slightly higher year-over-year and sequentially.

The increase is primarily driven by continued growth in commercial and carrier's sales, consumer broadband revenues. The growth areas were partially offset by declines in consumer voice and network access services.

Totaling operating expenses exclusive of depreciation and amortization were $122.3 million compared to $120.3 million for the same quarter last year. The increase is primarily driven by $3.5 million in higher video programming cost and approximately $1 million in higher integration and severance expenses.

These are partially offset by realization of cost savings associated with Enventis acquisition. Net interest expense for the quarter was $20.7 million compared to $22 million for the first quarter of 2014.

The improvement was attributable to the fourth quarter of 2014 repurchase of $73 million of our senior notes which were replaced of lower interest rates. Other income net was $6.4 million compared to $7.4 million for the same period last year.

For the quarter we see $7.1 million in cash distributions from our Verizon wireless partnerships, compared to $9.1 million for the first quarter of 2014. The lower distribution are result of continued growth and success Verizon has had on its Edge program where equipment is paid by customers over a period of time versus the time of purchase.

Weighing all these factors and adjusting for certain items that's outlined in the table on our press release, adjusted net income was $10.2 million, and adjusted net income per share was $0.20, an increase compared to $9 million and $0.18 per share for the same period last year.

Adjusted EBITDA was $79.7 million in the quarter compared to $83.4 million for the first quarter of last year. Capital expenditures for the quarter were $32.7 million with roughly two-thirds being driven by success based projects.

From a liquidity standpoint, we ended the quarter with approximately $9.3 million in cash and $31 million available under our revolver. For the first quarter, our total net leverage ratio as calculated in our earnings release was 4.2X. Cash available to pay dividends was $27.1 million resulting in a dividend payout ratio of 71.4%.

Now let me reiterate our 2015 guidance. Capital expenditures are expected to be in the range of $122 million to $129 million. Our CapEx guidance includes $5.2 million of integration CapEx from the Enventis acquisition.

Cash interest costs are expected to be in the range of $78 million to $81 million, and cash income taxes are expected to be in the range of $4 million to $8 million.

With respect to our dividend, our Board of Directors has declared the next quarterly dividend of approximately $0.39 per common share payable on August 1, 2015 to shareholders of record on July 15, 2015. This will represent our 40th consecutive quarterly dividend. With that I'll now turn the call back over to Bob for closing remarks..

Thanks, Steve. So in summary, 2015 is off to a good start as we continue to execute on our strategy. We're excited about the future and confident that achievement of our strategic initiatives will drive increase shareholder value. And so with that, I'd like to open it up for questions.

Shannon?.

Thank you. [Operator Instructions] Our first question comes from Davis Heyworth [ph] with Wells Fargo Securities. You may begin..

Good morning, everyone, thanks for taking the questions.

On the Ethernet growth, I was just curious if you disclosed a percentage of revenue from Metro Ethernet, if that's available?.

Thanks for the question Davis. And let me approach the question this way and then I want to make sure that I have answered what you're asking. Metro Ethernet growth in terms of the increase has grown in units about 21% year-over-year and in revenue about 7.5%.

And as – if the question is in reference to what portion of our revenue that is, we haven't disclosed that but I would think about it as the most significant contributor of revenue growth in our commercial customer group..

Okay, that's helpful.

And a lot of your peers have been talking about the CAF-2 opportunity, I'm just curious of you could possibly size that up for us, and how you're approaching that this year?.

Davis, this is Steve, I'll try that one. With respect to the CAF-2 we did just recently get the offer – the right of first refusal letter from the FCC, and they were are still going through in evaluating the cost of bill, what that revenue opportunity is and the results were actually a little bit better than what we had been anticipating.

So as you will see disclaimer on 10-Q and that's filed later today, the CAF-2 funding opportunity is $14 million and again, we have until August 27 to make that decision in which states we're accepted in and which states we might go to auction it.

So, again slightly favorable compared to what we have been planning on for the last couple of years, and even though it's probably going to be a step down in total revenue, we continue to be very confident of our ability to manage through the multi-year transition period provided by the plan and also as why we've been so hyper focused on executing our strategy to grow in a carrier in commercial channels of our business and really working hard to diversify more revenue streams..

Alright, it's helpful.

And then I wanted to ask question on the video connections, just a slight decline in connections this quarter, is there something that consumer is switching to other providers or they quote cutting or is it something you're not emphasizing as much given the higher programming cost?.

It's really the latter, and specifically to our strategy around the consumer business, the highest margin opportunity is the value add data connection and internet access, so we've been focused on speed increases, and if you look at the industry as a whole, the transition over the top opportunities is where our strategy as well has shifted, and so with part of the response to 100-Meg and 1-Gig internet launches and our promotions being built around that emphasis, the easiest way to think about it is, we're deemphasizing the video package on a standalone basis and using it as a complement to our bundle to grow the ARPU and the average profit margin of our consumer business..

It's helpful, and last one for me and I'll let someone else jump on. Just a leverage outlook here at 4.2X, I think you want to get under the floors, maybe if you could just clarify your preference for leverage over the next 12 months? Thank you..

Steve?.

Davis, this is Steve. I think our view remains the same and we look forward to take that modestly in the quarter and as we think about capital structure, we don't think we have to get into necessarily the low three or whatever but getting below four times I think would be kind what the target is..

Thank you..

And the only thing I'd add there is, we're going to be opportunistic with the markets being good to continue to look at our capital structure and optimize interest expense and reduce it when possible. So that's something we're always evaluating for the benefit of our shareholders and long term cash flow..

Okay. Thank you very much..

Thank you. Our next question comes from Barry Sine of Drexel Hamilton. You may begin..

Good morning, gentlemen.

I want to start out and ask you, obviously the key to growth driver here is your business of fiber, I wanted to ask about the sales force, what is the current size of the quarter bearing sales force? What are you seeing there in terms of productivity? With the merger is everybody in place or there is still more pieces, hires or systems that you need to put in place to get that sales force ticking at false speed?.

Barry, thanks for the question. That's really where our integration focus has been over the last two quarters, and of course we're only starting with the ERPs this time and get a view of the financial landscape and we started out the year, converted on the common platform, but we also started out the year with a common sales organization.

And that strategy has been getting great traction, we've got roughly 120 right now sales resources, average productivity target is $3,000 plus range but of course you've got some people ramping at different stages, we've had an expansion in Dallas last year which we talked about, we've added a team in a couple of different markets.

And so I think over the last quarter we probably added six new sales people on in total, but to address to your question with regards to the north – which we're calling Enventis to north region, it's fully productive already, we're very happy with our traction in the first quarter feeling quite optimistic about how to mention even that product in the sales strategy or discipline around how we divide up the accounts is quite structured.

It goes from a very focused sober gold/platinum framework that has a very disciplined account management for existing customer's renewal process and then a high touch consultative sales approach for prospects in our hunter group.

So we're feeling really good about both the Metro Ethernet growth of the platform and the new product activity that's in the pipeline to add value and stickiness to that Metro Ethernet relationship with our customers..

Okay, that's helpful. Next question, you've changed the reporting structure in terms of the revenue categories, and I think that's quite informed of that, I think that shows the business the way you guys are really operating it.

As analysts, we don't have a lot of history with that new structure so maybe you could give us some comments to help us thinking about that. On the commercial side you just grew 3.7%, it sounds like that can accelerate a little bit. Consumer, sounds like you're not going to invest there, maybe flattish at best.

Equipment, you guys are all over the place, I'm guessing, presenting on wide – maybe you can give us some near term – is 2Q going to be another drop down? Do you have any big orders there? Usually on subsidies you are able to give pretty good sense of the direction there, down about 2% in the quarter year-over-year and then access with a pretty big tick down, what are you looking for the next – the rest of this year on excess revenue?.

Barry, this is Steve, I'll try and then Bob can jump in if he wants to redirect.

I think your initial thoughts on commercial and carrier growth rate we saw for this quarter is what we expect and again we have a lots of several billed opportunities, some nice expansion opportunities, and we're looking for nice growth on the commercial carrier side, consumer base what Bob described in terms of the strategy change.

We would expect video to be flat to declining, we still expect to see growth in the broadband video on that side.

The equipment sales and services, at the end, if you look at the revenue chart that we have in the earnings release on Page 10, my section says Page 10 of the earnings release, that equipment sales and services like is going to be – I don't know whether to call it lumpy or volatile or whatever, but the number is going to bounce around a little bit.

And just for perspective, what the EIS business for Enventis last year had a high of $22 million in quarter, and a low of $11 million, we're little bit below that for first quarter of '15, and a way to think about that business is kind of based in a relationship with Cisco, when they are running promotions, and the activity is really going to happen in the second and third quarter of the year.

So last year on a standalone basis EIS would have been about $60 million business. We still expect that to be a $60 million business this year, although it was low for Q1 of this year.

Subsidy number, I think you're probably directionally correct, obviously we've been seeing a little bit of a step down with our Texas subsidies which you can – I won't go through that, you can look at the 10-Q for kind of the direction on that and again, numbers will adjust based on CAF-2 funding overtime.

Network access, we would expect that continue to see the decline that we saw first quarter.

We have the step down, every July 1 you're having a step down to match excess rates or just giving costlier 0.0075 or whatever the bottom range is, plus just the deterioration of the minutes of use in network access on special and switched access, it's probably going to continue to modestly decline for us.

I hope that addressed your questions?.

That's great, I get it all, written down, that's very thorough.

Just a follow-up on the equipment revenue, the concern there is, that's so volatile that you can exceed or miss quarters in terms of revenue but what that number does? I'm thinking that maybe – I know you don't have a crystal ball out to on that but just over the next quarter or so, it sounds like you're saying with promotional activity from Cisco that we probably see a little bit stronger quarter for equipment revenue, at least for the second quarter?.

Yes, I would - I'd step up to that..

Okay..

And only thing I'd add Barry is that, you got to remember that's a low margin business, so while the revenue is bit inconsistent, we like the talent pool and we like the conversation, and that it allows us to have with customers and while it's low margin and a high EBITDA contributor, it certainly fits our strategy of the consultative sales approach to hunting and prospecting with new customer..

Okay. And my last question just in terms of the distributions from the Verizon partnerships obviously down and I can understand there having do a finance the Edge program enhance that financing.

Do you have any sense when that introduction of Edge might normalize out so that customer payments of prior Edge commitments start to equalize new Edge commitment and so your distributions can return to prior levels and it would grow again..

Yes, from our point of view that can happen fast enough, I mean just maybe to review those. I think Barry, you're probably really familiar with those but 2013-2014 total distributions were about $35 million from Verizon wireless, [indiscernible] source of diversification or cash flow.

We think 2015 despite saw the elongated collection time on the Edge side, we'll still be in that around the $35 million range. And so again, we're – the plus side is we're seeing a lot of success from subscriber units with the Edge program, obviously it's putting a little pressure on the working capital with the extended payment cycle.

We're optimistic that they might consider factoring some of those receivables, maybe accelerate the payments. Again, I can't give you a specific timeline and when that's going to normalize but we're hopeful that happens sometime later this year..

Okay, those were my questions. Thank you, gentlemen..

Thank you. Our next question is from Scott Goldman with Jefferies. You may begin..

Hi, good morning, guys. I also have a few questions, I guess a couple of follow-ups and then one additional one.

Just following up on the distribution side, I mean it seems as though Verizon was historically forward to adapt the devices in plan versus some of the peers, so it seems like that accelerating a bit more this year than perhaps people had originally intended.

So assuming that they do not factor with that change or outlook for what 2015 distributions would be and maybe 1Q would look like a more normal rate or how does that dynamic work? Secondly, a follow-up on the video side, you talked about sort of deemphasizing the video given the high programming costs.

I'm wondering what you're doing strategically to focus more on the OTT side, are there opportunities for you to partner with the likes of NetFlix or I think we saw Cable Vision announced, something was who in the last couple of weeks spotify thing just this morning, talked about maybe getting into web video services or – are there opportunities for you to partner with some of these guys and maybe make for a little bit more compelling offer where you could sort of promote the higher speed broadband to Tiers that you have.

And then lastly, just if you could provide any commentary about what you're seeing from broadband inside, the 1-Gigabit market that you have today, I think you probably had them for a few months so. Any commentary there, either from a competitive reaction or level of demand in those market for broadband will be great. Thank you..

Great. We'll take those three questions in order, at least it will attempt to. Steve, you can't to start off, distribution follow up..

Sure, on the distribution follow-up Scott, you question about it if they would factor or normalize whatever with that – only in the distribution.

It we're still thinking about the $35 million, being sort odd an – basis assuming no improvement in the collections or data collections, the adoption of aspirin or whatever, we would actually see some potentially upside for 2015 if they did do that. So again we think 35,000 is still a pretty decent number of 2015..

And the only thing I'd add on the distribution side that they don't dividend to themselves, separately from us. So they want to realize the cash distribution, and so their motivation is the same.

With regards to the video question, the opportunity to partner at our size with NetFlix and Wholose [ph] isn't quite the same as Verizon and we know that but however, those discussions are starting to pick up momentum through our NCPC relationships which is the source for roughly 25% to 80% of our broadcast content today.

It's also been a resource to help leverage, the HPO on the go and Showtime, things that are part of our TV anywhere, everywhere product at this stage.

So I expect that what you're hearing from Spotify [ph] and others is going to cause that momentum to increase, and we hope later this year it gives us more product flexibility for our consumer bundle and enhances the value of the portal which has a unified log in capability that has allowed us to differentiate our consumer product from some of our competitors in the marketplace.

The last point, with respect to take rates on 1-Gigabit or the benefit that it brought us, it's really early, we're really about the quarter and a half, maybe 4 months into that and it's getting traction nicely, and let me tell you what is really the benefit. It's caused in other conversation with our customers.

And so while the Gig is of interest, few people really need that kind of speed and we're staying at uptick and our 100-Meg or 50-Meg or 20-Meg products, and so the conversation with the customer has really been the initial best benefit from the launch but I'm sure that we'll see take rates on the Gig pick up two in the short term future..

And just remind me, what percentage of your households can get the 1-Gig and sort of where you expect it to be at year end?.

Yes, it's roughly 5% now because it's so early and at this stage I would have to get back to you on year end. I think with the momentum we're building in video capacity add, that should more than triple by the end of the year but more to come on that as we have new market launches..

Thanks..

Great, thanks for taking my questions guys..

Thank you. [Operator Instructions] Our next question comes from Frank Lucin [ph] with Raymond James, you may begin..

Great, thank you. I just wanted to circle back on the CAF-2 you offered, just over $14 billion.

Can you walk us through what your federal exposure is here? I'm looking at your subsidies, I know there are some state subsidies as well, this let us know remind us what that is and are there any properties that you might consider walking away from, I was thinking given your throughput and speeds of the you have maybe not but is there anything that you might not want to be able to take?.

Frank, this is Steve.

In terms of the overall impact, CAF-1 funding is about $34 million, and so we've been planning on the step down, roughly $5 million a year through our model year since this plan got introduced and again we remind you that prior when the high cost support was frozen, we typically saw roughly a $5 million to $6 million reduction and always managed our way through that.

In terms of – which properties that we would expect, based on our initial analysis, we would expect to accept it most stake, all over our – there is at least one that will cause us to think about it as we evaluate the billed cost, going forward.

So again, I think – it's probably safe to say, most states we want stop and there is one, maybe two that we want to strongly evaluate going to auction now..

Thank you. I'm showing no further questions at this time. Now I'd like to turn the call back over to Bob Udell for closing remarks..

Well, in summary, thank you again for joining us today and for your continued interest in and in support of Consolidated Communications. We're very excited about the future, confident in our strategy, and I hope you will join us again next quarter. Thanks and have a great day..

Ladies and gentlemen, this concludes today's conference. Thanks for your participation. And have a wonderful day..