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ILEC 3Q11 Results Summary: SureWest

Positive Connections and Revenue Trends; Bottom Line Still Struggling

SureWest Communications was one of the first publicly-traded ILECs (not including the RBOCs) to wholly embrace a fiber strategy and commit large dollars to rolling out FTTH, first in its home market of Sacramento, California and later in Kansas City, Missouri (following the 2008 buy of Everest Broadband). Thanks to the depressed cash flows and high debt ratios that resulted from these aggressive investments, investors stayed away for several years and the stock traded as low as $5.61/share just over a year ago…Fast forward a year and SureWest has since seen its share price double and SURW gained 10% the day after its third quarter earnings announcement October 27.

One factor in the resurgence in investor confidence was the company’s reinstatement of a dividend. Last March SureWest announced it would pay an $0.08/share quarterly cash dividend. High dividend yields had been attracting investors to many ILEC stocks for years, but SureWest's expansion plans prevented it from doing so. At the time, pres/ceo Steve Oldham said, “Our employees have executed extremely well on our strategy, providing significant and sustained growth over the last several years. Our growing Broadband segment now accounts for 72% of total company revenues. In addition, we have added high quality and sustainable commercial services revenues, such as wireless backhaul, and our Broadband commercial services revenues grew 17% year-over-year, with notable growth of 26% in our Kansas City market. A superior offering of predictable commercial services and the successful launch of our enhanced residential video service has convinced the Board that we can begin paying a modest cash dividend to our shareholders while we continue to grow revenues and cash flows. Additionally, the recent refinancing of our balance sheet at favorable rates and conditions has helped us take this significant step to increase shareholder value. We remain confident that we have the right products and services in the market delivered by the most skilled employees in the industry."

SureWest reported another quarter of relatively impressive operating results in 3Q11, and although its free cash flow was negative and earnings fell YoY, my sense is that SureWest’s long-planned strategy is poised to begin paying off.

Overall revenue grew by 3% YoY despite a 21% YoY decline in home voice connections—and the company was quick to point out that despite a loss of 6,500 access lines in the past year, an impressive 40% have migrated to its broadband/VoIP service. Broadband revenue from business customers increased by 13% while residential broadband revenue grew 9%, thanks to both an increase in the number of customers as well as higher ARPUs. SureWest generated 76% of its overall revenue via its broadband product in the quarter and said that monthly ARPU for residential triple-play customers was $145, up from $130 a year ago. Growing wireless backhaul revenue also contributed to the growth in broadband revenue and the company said that it should connect 390 sites and generate $4m in annual revenue with its backhaul service by the end of next year.

Free cash flow and net income were down, however, due both to increased spending on advertising to raise market awareness as well as higher programming costs for its Advanced Digital TV service and higher spending on network expansion. Also affecting the bottom line was the ongoing phase out of California High Cost Support, which will be completely eliminated following 4Q11, down from $6.1m in support in 2010. 


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