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

Scott Goldman - Jefferies Jon Charbonneau - Cowen and Company Barry Sine - Drexel Hamilton Barry McCarver - Stephens Inc. Frank Louthan - Raymond James Peter Kiernan - CBAM Jennifer Fritzsche - Wells Fargo.

Good day, ladies and gentlemen, and welcome to the Consolidated Communications Holdings Third Quarter 2016 Results Conference Call. At this time, all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions].

As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Mr. Matt Smith, Vice President and Treasurer. Sir, you may begin..

Thank you, Skylar. Good morning, everyone. We appreciate you joining us today for our third-quarter earnings call. At the end of the prepared remarks, we will open 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 in 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 these 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 third-quarter results. Steve will then provide a more detailed review of the financials. Bob..

Thanks, Matt, and good morning, everyone. I appreciate you joining us today as we discuss our third-quarter results. I will provide some highlights and then I'll turn it over to Steve for a more detailed review of the financials and an update on our guidance.

We delivered solid results in the quarter, led by the continued growth in our fiber-based commercial and carrier services. Our business in broadband revenues increased to 82.5% of the total. The two transactions we closed in the quarter complemented our efforts in increasing our strategic revenues.

We closed on the acquisition of the Illinois-based Champaign Telephone Company on July the 1st. This business provides high bandwidth and network services exclusively to commercial and enterprise customers, adding over 300 new lit buildings and a robust fiber network to expand our commercial strategy.

At the end of August, we also closed on the sale of our rural ILEC in Iowa, which provides us the opportunity to better allocate capital dollars to higher return markets. Now let me turn to some specifics for the quarter. Total revenues were $191.5 million, and adjusted EBITDA was $77.1 million.

Commercial and carrier revenues increased by 3.1% over last year, led by solid growth of 5.2% in our data and transport services. We had another strong quarter of growth in Metro Ethernet and data connections.

The dividend payout ratio was 74.4% in the quarter, and year-to-date ratio is at 69.2%, which is on target with our plans as we continue to invest for the future. We have flexibility in our capital plans with two thirds tied to success-based opportunities and a continued focus on fiber deployments.

These capital investments have to meet our internal paybacks and return expectations. During the quarter, we made $31.9 million in capital investments and continue to expand our fiber network. We now have 14,000 route miles of fiber deployed and 5,500 lit buildings.

We have seen the highest commercial demand in four key verticals, which are universities, school districts, financial and healthcare. As an example, during the quarter, we were awarded a new contract with a university valued at $10 million over 5 years, delivering dedicated fiber facilities and Ethernet services.

These types of contracts have historically led to new opportunities, including upgrades over time. Also during the third quarter, our carrier business had another solid performance executing agreements for 22 new fiber to the tower sites, bringing our total under contract to 1,280 towers.

On the consumer side, our strategy continues to focus on securing the broadband pipe into the home with competitively priced higher speed options. We can offer nearly 90% of our marketable homes a broadband service greater than 20 meg, including 42% that can receive 100 megabits or more.

The number of customers taking 100 meg or greater speeds offering, greater speed offering increased by 12% compared to last year with the majority of those taking our 1 gig offering. The trend for higher speeds will continue, and our network and product set are well positioned to benefit from the growth.

Finally, before I turn the call over to Steve, let me discuss the refinancing we closed on October the 5th. While we did not have any near-term maturities, the capital markets were strong, and it was a good time for us to improve our secured bank facility.

The transaction allowed us to reduce our ongoing cash interest cost by roughly $2 million per year and to extend our maturities by three years. We also increased our revolver capacity from $75.0 million to $110.0 million, and made several changes to improve our financing flexibility for future acquisitions.

Investor demand was very strong, and we were pleased with the support we received. So in summary, we delivered solid results in the quarter. And the investments we made, and the transactions we closed continued our strategic focus on broadband and business growth. We are well positioned in the marketplace and have a strong balance sheet for the future.

With that, I'll turn the call over to Steve for the financial review. Steve..

Thanks, Bob. Good morning to everyone. As Bob said, we did have another solid quarter based on the consistent execution of our organic growth strategy. This morning, I'll review our third quarter financial results compared to results for the same quarter last year. I'll then follow that by updating our 2016 guidance. So, starting with revenues.

Operating revenue for the third quarter was $191.5 million as compared to $194.0 million last year. Equipment sales and services revenues were $2.9 million higher year over year. Additionally, the third quarter of last year included approximately $800,000 in revenue from the Enventis billing company that we sold in October.

Excluding the equipment revenue and the sale of the billing company, revenues declined by $4.6 million, primarily due to continued erosion on legacy voice services and network access, as well as the scheduled step downs from CAF II and Texas USF. These declines were partially offset by our commercial and carrier revenue growth at 3.1% year over year.

Total operating expenses, exclusive depreciation and amortization, were $125.6 million compared to $134.3 million for the same quarter of last year.

The 8.7 million improvement in operating expenses was primarily tied to synergy achievement from the Enventis acquisition and the integration in severance cost tied to these efforts which occurred in the third quarter last year.

These expense reductions were partially offset by the higher cost of equipment associated with the increase in our equipment sales. Net interest expense for the quarter was 19.1 million compared to 19.2 million for the same quarter last year. Other income net was 8.4 million compared to 10.5 million in the third quarter of 2015.

Cash distributions from our Verizon Wireless partnerships in the quarter were 8.6 million as compared to 20.0 million for the third quarter of 2015. As a reminder, last year we received approximately 10 million in a nonrecurring distribution for our share of proceeds for partnership-owned towers that Verizon sold to American Tower.

Weighing all these factors, and adjusting for certain items as outlined in the table on our press release, adjusted net income was 8.2 million, and adjusted net income per share was $0.16. This compares to $8.8 million and $0.18 per share, respectively, for the same period last year.

Adjusted EBITDA was 77.1 million in the quarter compared to 89.4 million for the third quarter last year, which included the additional partnership distribution. Capital expenditures for the quarter were 31.9 million. From a liquidity standpoint, we ended the quarter with approximately 33.4 million in cash and 67 million available in our revolver.

For the quarter, our total net leverage ratio, as calculated in our earnings release, was 4.34 times. Cash available to pay dividends was 26.4 million, resulting in a comfortable dividend payout ratio of 74.4% for the quarter. Now, let me update our 2016 guidance.

We now expect cash interest cost to be in the range of 72 million to 73 million, down from our previous guidance of 73 million to 75 million. And cash income taxes are now expected to be less than 1 million compared to previous guidance of 1 million to 3 million. We continue to expect capital expenditures to be in the range of 125 million to 130.

With respect to our dividend, our Board of Directors has declared the next quarterly dividend of approximately $0.39 per common share, payable on February 1, 2017 to shareholders of record on January 13, 2017. This will represent our 46th consecutive quarterly dividend. With that, I'll now turn the call back over to Bob for closing remarks..

Thanks, Steve. So in summary, we are delivering on our strategic objectives and will continue our focus on investing for the future, expanding our fiber footprint and growing our strategic revenues, all of which provide long-term benefits to our shareholders and our consumer, commercial, and carrier customer groups.

With that, I'd like to open it up for questions.

Operator?.

[Operator Instructions] And our first question comes from the line of Mike McCormack with Jefferies. Your line is now open..

It's actually Scott Goldman from Jefferies. Sorry about the confusion there. I guess just a housekeeping -- or two questions related to Champaign.

Wondering maybe, Steve, just from a housekeeping perspective, if you could just quantify for us what the revenue and or EBITDA impact from Champaign was on this quarter just so we can maybe have a better sense for what the organic business looked like as well.

And then maybe, Bob, maybe just talk a little bit about how you're able to leverage the increased footprint up in Champaign. If you've gotten some headway on some deals early on up there and what that means. And then secondly, on the consumer side of the equation, it looks like revenue declines accelerated a little bit.

Wondering if you could maybe parse out one of the line items there. Is this still a function predominantly of video losses filtering through, or is there something else going on in that line item? Thank you..

Sure.

Steve?.

Hey, Scott. This is Steve. I'll take the first part of your question, and Bob can get the last four there. So, with respect to Champaign Telephone Company, basically in the quarter, we would basically say it was $1.9 million in revenue for Champaign. And that's consistent with our internal models that we thought about Champaign coming in.

And then basically, the way to think about the EBITDA from Iowa, or with the divestiture of Iowa, which accounted for about $600,000 of revenue going out in September, we're really looking at the EBITDA margins on that being largely offsetting. And really, over time, for full quarter revenues will be as well..

Okay, Scott. With regards to the performance since we've acquired the asset, it's been a very expeditious tuck-in integration. We're doing it manually on a regional basis, based on the size of it. And boy, would love to find others like that, and probably will in the future. The sales team's performing well. We have overlaid our cloud products.

We've given that customer base some enhanced knock and network surveillance options. And so I would tell you that while it's smaller on scale, it's exceeding our expectations in the first few months of operation. With regards to the consumer, yes, I think you read that right.

Both video and data, as you know, are included in our consumer broadband line item. We're focused on increasing and securing the broadband pipe into the home and deemphasizing the video. The speeds we're realizing significant growth in our 20, 40, and 1 gig products. And with regard to overall video revenue, it is declining.

And the cash flow impacts, although the video revenue is declining, are really positive as we're able to avoid the capital costs associated with the set top box that come with that low margin video growth. So overall, that's been our objective is to balance the profitability on that product and to grow broadband..

Great. Thanks for taking the questions..

Our next question comes from the line of Jon Charbonneau with Cowen and Company. Your line is now open..

Great. Thanks for taking the questions. You saw another quarter of solid growth within your data and transport segment at roughly 5% year over year.

Is there any reason why it wouldn't grow at a similar rate I guess in both the fourth quarter as well as in 2017? And then in terms of equipment revenue, can you just help us, for our models, how should we be thinking about the equipment revenue for both the fourth quarter and next year as well? Thanks..

John, this is Steve. I'll take your question, and Bob can pile on. I think with respect to the commercial revenue for the quarter, that does include, we usually think about it growing around 3% a quarter. That does include a little bit of lift from the Champaign acquisition. So, I probably wouldn't go with the 5%, but 3+ I think would be good.

And then on the equipment sales, again, as we've talked about, you're new to the call, so just as we've talked about in the past, and you can see on our revenue table, the fluctuations in the equipment sales, generally, most of the revenue, about two thirds of the revenue for the year is going to be recognized in the second and third quarter based on timing of when we generate some of the larger equipment sales tied to when Cisco does some of their rebating and promotional efforts.

And I think if you think about second and third quarter being 60% of the revenue, and again, we did, our second quarter this year was below our internal expectations. But I think normally is you think about it 65% roughly second and third quarter, and the first quarter and fourth quarter being maybe down a little bit on that.

Let me know if that helps..

Yes, it does. Thank you very much..

Our next question comes from Barry Sine of Drexel Hamilton. Your line is open..

Just a follow up on equipment outlook.

Directionally longer term, is there any reason to think you'll see more revenue, less revenue, or is that kind of a run rate revenue that we're seeing in 2016 that might be consistent into 2017?.

Barry, the revenue stream, as you know, is primarily driven by reselling Cisco hardware, and it does fluctuate quite a bit. I think the way to look at it going forward is it's probably going to be a bit higher than this year, but not significantly. And really, if you look at Cisco's activity, they're refocusing on transition to the cloud.

That's been the biggest advantage of having this in our portfolio is to jumpstart our cloud service offerings. And so while I see those growing, and the access to the town of being useful for us, we're still assessing how that fits in our long-term portfolio..

And then two revenue line items you guys are usually pretty helpful on are subsidies and network access.

What can you tell us about what you know in terms of regulatory changes and how that may flow through those two line items the rest of this year and into next year?.

Barry, this is Steve. I'll take those. On the subsidy, again, as a reminder, we did have our scheduled, the second stepdown in CAF II, which was effective August 1. And so that's probably worth $400,000 to $450,000; maybe a little bit more than that on a monthly basis. Again, that happened in August. You had two months of that.

Plus, if the stepdown happened in August of last year, you really have a month from that quarter as well. So, the way we think about it is every time we get one of those stepdowns for the transition period, we're going to lose roughly $5 million a year on that.

We also had, and then the second part of that is as we sold Iowa, there's probably another couple hundred thousand dollars coming out from that as a result of the sale of Iowa.

And then we also had this stepdown with respect to the high cost fund for the Texas USF fund that's worth probably $100,000, $120,000 a month, and we'll be in the run rate going forward. Access, I think that's just the general trend on. We did have a stepdown for the switched rate on July 1.

That's probably $1 million for the year on an annualized basis. And then just the continued minutes of use erosion for switched. And then just maybe the kind of cannibalization of special circ that's going to Metro Ethernet and things like that. So what you've seen historically on Access is probably what we'll see going forward..

Okay, that's helpful. My last question. You guys, you break out some operating metrics, for example, the data connection. And that jumped a bit more in the quarter. Presumably that's in the Champaign acquisition.

Are you able to call that out so we can get a sense of what the organic number was?.

Yes, there is a portion of that that's from the Champaign acquisition, Barry. But the way to think about it is we're continuing to see the Metro Ethernet drive a lot of the growth there. And if you look at the lit building counts, that's driving a lot of the Metro Ethernet growth.

So, the way I'd think about it is breaking it down back to 22% year over year on Metro Ethernet and 6.9% quarter over quarter. And that's adjusted for CTC. And that's probably the way I'd think about it..

Hey, Barry, I would -- just to pile onto that since this is the first time we reported Champaign in here. If you look at the last page of the press release with the metrics in there, I would remind you that we have a net 3,000 adds for the quarter.

And then with the footnote, we're trying to call out the tradeoff between Champaign coming in and Iowa going out there. So there's about -- it should be like 7,000 net or 7,000 change in the line item, and 3,000 of that is based on business as usual, net increases, and the difference would be Champaign coming in ..

Okay. That's very helpful. Thank you, gentlemen..

Our next question comes from Barry McCarver with Stephens Inc. Your line is now open..

Just on the margins in the quarter. I think that was probably influenced by the high level of equipment sales, which if memory serves, does carry very low margins.

Would you just confirm that?.

That's correct. You see the cash flow that we generate, and we're generally in the 42% EBITDA margin range. And I would expect our continued efficiency gains with the unified portals that we're investing in to continue to improve that. So, you're going to see a fluctuation with the equipment revenue when it fluctuates..

All right. And then just one more question, I think high level for Bob. Thinking about the recently announced merger with CenturyLink and Level 3, if I look at the map, your network map, looks like there is some overlap with Level 3.

Do you think of any opportunities there on the revenue side that might be good for your company?.

Barry, with any merger comes some potential market confusion. And we're going to watch that carefully. And we think near term that will create some opportunities. We also think there'll be some re-grooming that they do, and we're going to work to be in a position to optimize that.

We've got great relationships with both companies, and so our best avenue is to leverage those relationships and make the combination as easy for them and seek out opportunities for ourselves as those occur. But I think you read it right.

Integrations can create some market confusion, and we'll certainly be there to catch those opportunities as they surface..

Our next question comes from Frank Louthan with Raymond James. Your line is now open..

Try working on a question for Matt on his last call here. Talk to us a little bit about the potential impact from the spectrum auction, your wireless partnership. You probably can't comment too much on the wireless part.

But conceptually in the past, what sort of happened in your distributions as your wireless partner has to pay for spectrum? And would you, how do you expect that to impact if it, would you see that in the same quarter that the auction ends, or how would you think about that? And then secondly, Google fiber often mentioned as sort of a foe here.

But with their pullback, are you seeing any change in the market? I think most of the pullback is really related to new markets they might go into.

But have you seen them decrease any of their activity or anything in your markets? How do you think that affects you?.

Frank, thanks for the question. When I think about the wireless partnerships, and Matt can pile on here because he's sat on those boards for us, they hold the licenses in a separate structure. And in many cases lease those back. So we see them more as an operating expense when they actually start to utilize them.

So I don't expect to see in the partnerships we hold anything like you saw happen out in the West when they stopped distributions in order to pay for spectrum. That's not anything we've realized in the past, nor do we expect in the future.

Anything to add there, Matt?.

No, you covered it..

And so with regards to the --..

Google..

With the Google fiber situation, like you mentioned, those are new markets that I think they're pulling back from. I don't think they'll be doing a lot more expansion in Kansas City. We haven't seen them move very quickly since their last announcement in I think it was Overland Park, and even that hasn't moved very fast.

So, I don't expect it to have a ton of impact on us in terms of new overlap..

Our next question comes from Peter Kiernan with CBAM. Your line is now open..

Just quick question on CapEx.

Of the $31.9 million for the quarter, how much would you break out as maintenance CapEx versus growth?.

Peter, the way to think about CapEx is two thirds of it is typically for us success based, and a sizeable portion of that is demand driven. So we've got a lot of flexibility in our CapEx. And we have the benefit of a very well invested network, having average around 17% of revenue invested back into the assets. So, there's a lot of flexibility there..

Our next question comes from Jennifer Fritzsche with Wells Fargo. .

I just want to expand on maybe the competition question. And just maybe, Bob, a bigger question for you. We're seeing beyond Google fiber backing away, we're seeing what seems to be like cable putting its pedal on the metal even harder. More, Comcast right now, there's not as much overlap.

But can you talk a little bit about the cable environment and what you're seeing or what you expect to see? The way I see it, you've done a lot of the heavy lifting to be proactive here.

Do you feel that's correct? And then if I could, just with so much happening in the last 10 days with M&A on a larger scale than I know you all, but I does seem there is a need that to be bigger here, and scale is required.

How, as you sit in your seat, are you thinking on the M&A opportunity? Is now the time? You're about two years from Enventis, et cetera. Thanks a lot..

Thanks, Jennifer. Let me start with the commercial competition question or competition in general from cable companies. You're right; they continue to be our primary competitors. They've been pretty aggressive with pricing in the very small business area. And their success has really been where we see customers that are most price sensitive.

Having said that, we've adjusted some of our bundles to really differentiate ourselves on delivering a superior service.

And as the cable cost have deployed their consumer-like products for businesses, we tend to win some of those, if not many of those, customers back because of the quality of service that we built into the prioritization of voice and other traffic inside our broadband service.

And so we still feel like we've got an edge there, especially with our hosted voice and unified portal for commercial customers.

The Metro Ethernet and cloud services layered on continue to be something that differentiates our offering and certainly our shift to a more solutions-based sales approach, which we transitioned in first quarter and we talked about in past calls has really been something that's allowed us to continue to grow our position there.

So we're not discounting them as competitors, but we're watching it closely and I think addressing that fairly well. With regards to M&A, you know the landscape as well or better than any of us. And we've been very pleased with the Enventis acquisition. We're past the two-year anniversary.

And we've got we think great capacity both from a capital structure and our integration to turn our sights toward another opportunity. We're always going to be disciplined.

So while we're in a good position to pursue something, we're going to look at fiber-rich assets which are accretive and fit well in our ability to apply our strategy to that target property. So you can never say when those things can happen, but I think you read us right. We're in a good position to look at things..

At this time, I'm showing no further questions. I would like to turn the call back over to Bob Udell for closing remarks..

Well, thank you all again for joining us today. I feel good about our strategic position, and I'm very excited about the future. We hope you'll join us again for next quarter, and we thank you and have a great day..

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