Good day, ladies and gentlemen, and welcome to the Consolidated Communications Holdings Incorporated First Quarter 2018 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Ms. Lisa Hood, Treasurer and Vice President of Investor Relations.

You may begin..

Thank you, and good morning, everyone. We appreciate you joining us today for Consolidated Communications first quarter earnings call. On the call with me today are Bob Udell, President and Chief Executive Officer; and Steve Childers, Chief Financial Officer. After our prepared remarks, we will open the call up for questions.

Please review the safe harbor provisions in our press release and in our SEC filings. Today's discussion includes statements about expected future events and financial results that are forward-looking and subject to risks and uncertainties.

A discussion of factors that may affect future results is contained in Consolidated's filings with the SEC, which are available on our website. Today's discussion will include certain non-GAAP financial measures. Our earnings release has been posted on the Investor Relations section of our website at consolidated.com.

It includes reconciliations of these measures to our nearest GAAP equivalent. And with that, I will turn the call over to Bob Udell..

Thank you, Lisa, and good morning, everyone, and thank you for joining Consolidated Communications first quarter call. We've had a busy start to 2018. Our plan and strategy of investing and expanding our fiber network is working, as we upgrade broadband speeds and enhanced product offerings, bringing more robust solutions to our customers.

As examples of our execution, I'd like to begin by highlighting progress within our three customer channels. First, within commercial and carrier channels, we have grown data in transport revenues 1.4% year-over-year. This was driven by a 4.5% growth in legacy Consolidated business, which is partially offset by declines within the FairPoint markets.

We are demonstrating continued success in our legacy markets and are excited by the opportunity we see within the FairPoint markets as we execute on our proven playbook of investment and growth in data and transport revenues.

The commercial channel closed a number of strategic sales during the past quarter, including a 31 site library system in Minnesota and major land installation for a large non-profit in Maine, in several governmental, finance and educational deals across our combined footprint.

These sales represent sizable monthly recurring revenues and contribute to revenue growth in Ethernet, cloud voice, and managed services. In addition, we further enhanced our sales execution plans by completing the roll-out and training of our consultated value-based sales approach in all of our newly acquired FairPoint markets.

This is an important step to position ourselves for future sales performance, and we are making good progress. As an example, our Metro Ethernet revenue on a combined basis has increased 7% year-over-year. This quarter in our small business channel, we launched a new data and voice solution which we brand as BusinessOne.

The BusinessOne product bundles are specifically designed to meet the needs of small and medium-sized businesses giving them options and flexibility for the voice and data services at competitive rates. We're very excited about this new offering, which is generating solid customer interest.

We remain focused on retaining revenue and solving business problems for new and existing customers. We continue to expand and enhance our commercial products and services. This week, we announced the launch of SD-WAN, the technology that provides simplified management and automation of WAN connections.

SD-WAN is an emerging technology that offers businesses more flexibility in connecting to critical branch operations and the central cloud services, as well as optimize network performance by traffic prioritization. We also expanded our security offering by launching our distributed denial of service mitigation solution known as DDoS.

We all know how critical network security, monitoring and detection is to businesses, and our DDoS solution ensures that during cyber attacks, legitimate traffic is still able to reach a customers network, protecting their up-time and mitigating the risks associated with malicious attacks.

Customers are excited about the many benefits we can offer them with these solutions. Consolidated offers a comprehensive approach to network connectivity, managed IT services, security and an expanded suite of cloud services that solve business challenges for our customers and allows us to differentiate ourselves from our competitors.

Now, turning to the carrier channel. We have fully integrated the FairPoint carrier sales team and are excited about the depth of experience and strong business relationships within this combined team. We see continued opportunities for new sales and capacity upgrades, which will help us to offset remaining price compression.

Our carrier team had a strong first quarter, selling 235 new fiber connections for wireless carriers compared to 181 new connections sold during all of 2017, with the majority of these in the first quarter coming from our northern New England markets.

These new sales increased our total number of wireless transport connections to 3,640 under contract as of the end of first quarter March 31, which is a 13% increase. Turning now to consumer. Our legacy Consolidated network enables us to deliver speeds of 50 meg or higher to almost 90% of broadband capable homes.

The higher speed availability drives higher adoption of OTT services and increases consumer ARPU. We expect to see similar impacts in the former FairPoint markets, as we complete our fast start initiatives. We have been a leading provider with our premier over-the-top content offerings.

We announced key partnerships with OTT providers as an extension of our broadband strategy, and while our DirecTV partnership is just beginning, we expect to see marketing traction drive adoption. Our strategy to use over-the-top to drive faster speeds through an optimized home experience is showing early success.

Over-the-top customers, who also purchased broadband, subscribe to a data package 50% faster than our network average. Our consumer strategy is to secure the data connection into the home, provide competitive speeds, introduce over-the-top content and other ancillary services, while increasing ARPU.

I will now provide a more specific update on our FairPoint related activities. I'm pleased to report progress on our planned strategy of investing in and expanding on the legacy FairPoint fiber network.

In February, we announced our plans to complete broadband speed increases for 500,000 resident and small businesses across our northern New England service areas. To date, we have already upgraded 62,000 locations or were 12% toward our target and on schedule to complete these upgrades by year-end as planned.

As a reminder, these upgrades will nearly triple the broadband speeds available to most of these locations. We continue to make great progress with our fast start integration initiatives including implementing payment process enhancements offering improved options, enhancing real-time payment capabilities for our customers.

Self service payments made up more than 50% of all live payment transactions, which were previously handled by our call center, and this happened in the first 60 days after deployment.

Also we have implemented CCI standard call management platforms for the non-northern New England legacy FairPoint market, streamlining customer contact methods and allowing for more efficient call handling.

We're proving the customer experience and gaining operational efficiencies as we remain focused on achieving our synergy target of $55 million within 2 years of closing. As of the end of the first quarter, we have recognized over $38 million in cumulative run rate synergies, which is ahead of our original plan.

We continue with our disciplined and proven approach to integration. I'm proud to announce, we declared our 52 consecutive quarterly dividend this week, and are in a great position to support our dividend. We will continue to focus on delivering broadband growth across our commercial, carrier and consumer customer groups.

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

Steve?.

Thanks, Bob, and good morning to everyone. As Bob outlined in his comments, we had a very productive first quarter, and based on our results we are off to the strong start for 2018. Today, I'll review our first quarter financial results compared to the pro forma results for the same quarter last year, as if we've done FairPoint on January 1, 2017.

I'll also provide a brief overview on our 2018 guidance. Operating revenues for the first quarter were $356 million, down 4.3% from $371.8 million last year. As expected, the vast majority of the year-over-year decline, almost 90% continues to come from the pressure on voice and access revenues.

As we will talk more about in a moment, we are pleased with the net growth in data and transport revenue from the commercial and carrier channel. Additionally, in the quarter we recognized $4.9 million in revenue in Local Switching Support based on our recent FCC order. This will have a recurring impact of approximately $1 million per quarter.

Now, let's look at each one of our customer channels. In the first quarter, commercial and carrier revenue decreased $3.4 million or 2.2%. The primary driver of the decline was voice services revenue being down 7.4% with 75% of that coming from FairPoint.

For the second consecutive quarter, we are reporting net growth in data and transport, as the strategic revenues increased $1.2 million or 1.4%. As Bob mentioned, legacy CCI data in transport service grew 4.5%, while FairPoint decreased 3.3%.

The FairPoint decline is largely attributable to price compression and pricing step downs associated with 2 large contracts. It is our view that this price compression continues to slow in our fast start initiatives gain momentum, we expect the FairPoint commercial and data revenue to stabilize and return to grow.

Our expanded cloud and MPLS services generated year-over-year revenue growth, and we are in plan to launch this products -- in the FairPoint markets in 2018. These are in addition to the SD-WAN and DDoS products, we have already launched across all of our markets in 2018.

Other commercial revenue declined 375,000]due to the timing of revenue recognition for equipment sales and special projects. Consumer revenue was down $7.6 million for the quarter, voice revenues were down $6 million with a majority of the decline coming from FairPoint. In the aggregate, consumer broadband increased slightly in the first quarter.

We expect to see improvement in the second quarter consumer revenue trends, as winter seasonality starts to normalize, and we start seeing the early benefits from our fast start initiatives. Video revenues for the quarter declined $1.9 million, as compared to the same quarter of 2017.

We expect this trend to continue as we encourage our customers to transition from linear video products to over-the-top streaming content -- video content, which complements our broadband strategies. And as a reminder since video is such a low-margin product, the change in revenue mix is accretive to margins and free cash flow.

Transitioning the subsidy revenue, the FCC recently approved our petition to allow recovery of Local Switching Support, that had been [Indiscernible] subtracted from our intercarrier compensation. During May, we expect to receive a cash payment of up to $13.3 million for LSS support for the period from January 1, 2015, through March 31, 2018.

In the quarter, we recognize $4.9 million of revenue from this settlement, and the remaining $8.4 million will be an offset to accounts receivable recorded with the purchase accounting for the FairPoint acquisition. Our ongoing annual recovery of LSS associated with the petition will be approximately $4 million per year.

Operating expenses, exclusive of depreciation and amortization $239.3 million, compared to $255.3 million for the same quarter last year. The $16 million improvement in expenses is primarily result of synergy realization from corporate, network and operational efficiencies associated with the FairPoint merger.

In addition, expense trends benefited by approximately $3 million from the change in the treatment of sales acquisition cost in accordance with the new ASC 606 revenue recognition guidance.

Offsetting these declines were $3 million in storm recovery and weather-related expenses incurred from the multiple northern New England markets during the first three months of 2018. Net interest expense for the quarter was $32.7 million, compared to $28.5 million pro forma interest expense for the first quarter of 2017.

Interest expense increased primarily due to increases in LIBOR, and for the additional non-cash interest costs associated with the new hedge agreement we executed during the first quarter that increased our percentage of fixed debt to approximately 75%.

Other income, net increase $4.5 million to $8.4 million, primarily due to our pro rata share of increased earnings from our ownership interest in the five partnerships with Verizon wireless. In the quarter, we received cash distributions from these partnerships of $9.5 million, as compared to $5.6 million a year ago.

Our first quarter 2018 distribution includes the prior year tariff of $2.4 million associated with the accounting for prepaid data roaming. We expect second quarter distributions to be at least in line with the $9.5 million received in the first quarter. Adjusted EBITDA was up 5.1% to $135.1 million in the first quarter.

The year-over-year increase is primarily due to synergy realization, growth and strategic revenues, as well as the increases in wireless distributions and recognition of the LSS [Indiscernible]. EBITDA growth was diluted due to loss in high margin voice and regulated revenues. In the first quarter, CapEx was $60.8 million or 17% of revenue.

From a liquidity standpoint, we ended the quarter with approximately $11.1 million in cash on hand and $88 million available under our revolver. For the first quarter, our total net leverage ratio on a pro forma basis was 4.31, after adjusting for full -- our full synergy target, the net leverage ratio would have been approximately 4.1.

We do have an attractive capital structure, a low cost of debt and no maturities until 2022. Cash available to pay dividends was $44.3 million, resulting in a strong dividend payout ratio of 61.9% for the quarter, as compared to 80.5% in the first quarter of 2017.

Today, we are affirming our 2018 guidance, which was provided at the time of our fourth quarter earnings call. To recap, we expect cash interest costs to be in the range of $123 million to $128 million. And we expect capital expenditures to be in the range of $235 million to $245 million. Cash income taxes are expected to be less than $3 million.

And as a reminder, based on our NOL position and taking effect through recently enacted tax form legislation, we do not expect to be a federal cash tax and compare until 2022. With that, I'll now turn the call back over to Bob, for closing remarks..

Thank you, Steve. In summary, we are recognizing the financial, operational and capital structure benefits of the merger. We remain confident in our plan and strategy to invest in our network, deliver results and return value to our shareholders through a longstanding dividend, and the integration is progressing quite well.

Thank you for taking the time to join our call today, and we'll now take questions.

Operator?.

[Operator Instructions] And our first question comes from the line of Mike McCormack from Guggenheim..

Maybe just a couple of thoughts on the SD-WAN product. Any concerns regarding -- cannibalization of your existing sort of -- more legacy products there.

And then secondly, with respect to the competitive landscape, any change in the past year in the part of cable, as they all sort of moving more towards deemphasizing the video part of the bundle? Thanks..

Yes, Mike. Good morning. Regarding SD-WAN, with the portfolio of markets we operate, and on product set, we see SD-WAN being not a competing product, but more a complementary product to our other offerings.

With it's software-based nature, the market need that it's feeling for us is for multi-location customers, who have mixed technology environment, and therefore are not easily serve today.

So what SD-WAN is doing for us is it's allowing us more ways to win with our customers connecting locations that weren't previously part of their wide area network to importing cloud products or their host [offices]. So simply it gives us more ways to win.

With regards to the competitive landscape, the most active cable competition is beyond consumers in the small business space, and we provide a better secure bandwidth alternative, we believed in the cable competitors-- and while they continue to be active in that space, we continue to be very effective in keeping our fair share.

And so, the speed increases we're investing in, the BusinessOne product, that's well positioned to make a hosted voice and data package easier for small business to digest and for us to implement. It's getting great traction, and so we feel very well equipped to compete with the consistent competition we've seen in that space..

And our next question comes from the line of Davis Hebert from Wells Fargo. Your line is now open..

I wanted to ask about some of the speed upgrades you discussed in your prepared remarks, I know maybe early, but are you seeing any improvement in the FairPoint footprint from a broadband growth perspective?.

Yes, it is early, Davis. What I can say is the increase in order activity is hitting new records in the northern New England property especially, upstate New York is with the direct builds also seeing some early traction. So, well, it's too early.

I would tell you that we processed a record number over 7,000 speed upgrades in the first quarter, and 40% of those alone were coming from the former FairPoint markets, primarily northern New England. So that's a good indicator.

And you know there's a lag to gain of installments in the revenue hit, and in the 60,000 to 67,000 that we brought online came in later in the first quarter. So as you can imagine order volumes heavy, and it's nice to have that problem, and we're going to keep finishing the upgrade projects and feel real optimistic..

And your remarks on the competitive landscape, I think we're more targeted to the business side of things.

But on the broadband side, cable seems to be finding growth a little bit [or] difficult to find, do you see any change in behavior from the cable competitors, in terms of broadband prices or speed offerings, anything that could maybe slow your progress?.

No. I have to say that we've completed with aggressive, and even some smaller cable competitors that could move fairly quickly for years, and it's a constant focus on a market-by-market basis, which allows our portfolio markets to serve us well.

I would say specifically, not all bandwidth is created equal, and we all know that there is a desire to push people to higher speeds, because it helps ARPU, but actual utilization is what we guide through our consultative sales approach in our call centers by asking customers how many IP-enabled devices they have, and reinforce giving them the bandwidth amount that they need, and that's why our 50 meg product is growing so strongly.

So we feel very well equipped, our dedicated port, oriented bandwidth allows us to compete quite effectively, and the QoS that prioritizes traffic inside our bandwidth for real-time applications like Skype and FaceTime and things like that being higher in stack, allows us to ride a quality experience.

So, if you look at our legacy Consolidated markets, we've been able to realize great penetration, and we see the same opportunity in the legacy FairPoint markets..

Last question and I will throw this one to Steve. Your leverage at 4.3x, and I know you've talked about getting below 4x overtime.

Any interest in repurchasing bonds, which are still trading below par to sort of get that on a more aggressive trajectory?.

That's capital allocation, best use of cash is something that we continuously talk about between Bob and I, and with our Board and that certainly, I mean, we're preserving all options on the best use of cash.

But I think for right now the way we're thinking about it is that we're going through a period of heavy integration, we just acquired a company, we're doubling in size. So we're very focused on the investment to make sure we're successful on the integration path and extracting all the synergies at least up to the $55 million level, if not more.

We're also investing into the fast start initiatives that are involved in our 17% investment in the business, and we're focused on execution. We will continue to evaluate all options in terms of the best use of cash, and we will see where we go from there..

And our next question comes from the line of Frank Louthan from Raymond James..

Yes, Alex Sklar on for Frank. Could you just give a little bit more color on the marketing initiatives in the FairPoint market as it relates to your fast start plan.

And have you started materially marketing in those -- in that market or are you waiting to do get more of the speed upgrades?.

We're doing some very targeted marketing.

Two things; one, let me back up, February 20th, we did the brand launch, and that created a wave of activity and generated call volume in just curiosity, for what things might change for customers, and so that's been great for the commercial teams, it's created an uplift there, and it's certainly have been good for the consumer marketing effort.

And fortunately, we've been pressing that upgrade process with the amount of sites we brought on already.

But in terms of additional marketing, we're being very measured and specific on a buy almost neighborhood area, our basis, as we upgrade nodes, we're going specifically after those streets and neighborhoods to get a lift there, and also doing that to help the ops team to keep up with order volume.

So it's a nice problem to have, but it's natural that we're working through that process of more workload and doing in a measured way, so we can have a good install experience for the customer..

And then following up on the wireless backhaul commentary you had, and particularly in those FairPoint markets, is this just a result of them being relatively underpenetrated before or is this just being driven by new small cell and 5G type backhaul wins, and then any difference in what the carriers are buying from you? Thanks..

Three parts to that, to the first part, it's really both. It's a bit of going through the transaction towards the middle of July last year. There was an emphasis in the FairPoint management to appropriately focused on shoring up the FairPoint ILEC territories. And we're more interested in expanding the facilities.

And so, we'll invest in projects that even extend beyond the FairPoint legacy ILEC boundaries. And so bottom line is, there is some opportunity that we're willing to fund that the former management process didn't support, which certainly invigorates the sales team.

And second, carriers are starting to spend again, they're letting more projects, the bids that we were getting, they were more research oriented turned into proposals that get signed, and so the volumes picked up.

So we see it across both the legacy FairPoint markets and the legacy Consolidated markets, but certainly the opportunity, pent up demand opportunity was bigger on the FairPoint side.

What did I miss?.

Just on, if they're taking anything different from you in terms of types of network or speeds, subscriber [Indiscernible].

Yes. We're doing more on -- a future proofing, if we will, it allows them to grow into higher speed, that's good for them, and it's good for us, because it secures a longer-term arrangement and gives them a path to increasing speed as their demand in traffic wants it..

[Operator Instructions] And our next question comes from the line of Jennifer Fritzsche from Wells Fargo..

Two -- can I ask Bob and Steve about the Verizon partnership. Steve, if I heard you right, you said the second quarter distribution you expect to be at least with what it would be in the first quarter -- what it was in the first quarter, which puts it almost $20 million for the first half.

Have you changed your guidance for the year -- there -- and then maybe any discussion about Verizon, clearly they are taking on a pretty big fiber build, is that affecting any of your five JVs, and were they're spending on fiber?.

So, thanks for the question, Jennifer. So, you're absolutely right. We are off to a very fast start with the Verizon settlements. Part of that is due to their internal change on how they're accounting for prepaid roaming, we are benefiting from that. So part of first quarter and second quarter is kind of catching up with their internal process changes.

So, I think, in the past, we've said for this year expect kind of 30 to 32, I think what, again, we don't have -- based on the information that we have to date with our conversations with Verizon being on the partnership boards, we would probably change our guidance to 33 to 35 for the full year, but again, that's -- a little bit of hesitation, because with your comment on 5G and their build outs, we don't miss, again, based on what we know today, we don't expect that to have a huge change -- huge impact in 2018 on us directly.

But again, we are limited partnerships, we're happy to cash the checks as they come to us on those distributions..

And then on the topic of 5G, if I could, it seems our check would show there is strong sense of urgency in terms of moving to back -- fiber backhaul or maybe even dark fiber backhaul, buyout for carriers, even though four might be going to three depending on our news earlier this week.

What are your -- are you seeing that, is that consistent with what you're seeing, are you seeing any kind of squeezing or trying a compressed prices by the wireless carriers?.

Well, I think, Jennifer, as we talked about in the past, we've seen that price compression through the beginning or late '16 through '17, and really, since we've done our first small cell implementations, we've been doing a hybrid dark fiber fronthaul, and service backhaul type just as an example, implementation.

So there's going to be more mix in those solutions, but they're starting in the more urban or densely populated areas, and we think we're in a good position to help enable that in our size markets, and we're working hard on create solutions to be in front of their need and offer proposals to the wireless guys.

So we see this as a net uptick and opportunity for us, and we're all over business development activities to figure out how we maximize it for both them and us..

Thank you. Now let's turn the call back over for any closing remarks..

Great. Well. I appreciate you all joining us for our first quarter 2018 results, and we look forward to updating you on our second quarter financial results next time. Have a great day, and thanks for joining us..

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