Hawaiian Telcom Investor Presentation. June 2016

Transcription

1 Hawaiian Telcom Investor Presentation June 2016

2 Presented Information In addition to historical information, this presentation includes certain statements and predictions that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of In particular, any statement, projection or estimate that includes or references the words believes, anticipates, intends, expects, or any similar expression falls within the safe harbor of forward-looking statements contained in the Reform Act. Actual results or outcomes may differ materially from those indicated or suggested by any such forward-looking statement for a variety of reasons, including, but not limited to: failures in Hawaiian Telcom s critical back office systems and IT infrastructure; breach of the our data security systems; increases in the amount of capital expenditures required to execute our business plan; the loss of certain outsourcing agreements, or the failure of any third party to perform under these agreements; our ability to sell capacity on the new submarine fiber cable project; adverse changes to applicable laws and regulations; the failure to adequately adapt to technological changes in the telecommunications industry, including changes in consumer technology preferences; adverse economic conditions in Hawaii; the availability of lump sum distributions under our union pension plan; limitations on the ability to utilize net operating losses due to an ownership change under Internal Revenue Code Section 382; the inability to service our indebtedness; limitations imposed on our business from restrictive covenants in the credit agreements; and severe weather conditions and natural disasters. More information on potential risks and uncertainties is available in recent filings with the Securities and Exchange Commission, including Hawaiian Telcom s Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. The information contained in this presentation is as of June 7, It is possible that subsequent events and developments will cause estimates to change. 2

3 Company Overview Hawaiian Telcom is Hawaii s leading provider of integrated communications and largest business technology partner serving the people of Hawaii as well as global companies for over 130 years. KAUAI OAHU MOLOKAI Headquarters: Honolulu, HI Founded: 1883 Employees: 1,300 LANAI MAUI 10 th Largest Incumbent Local Exchange Carrier in the U.S. Unmatched terrestrial and interisland fiber & IP network statewide HAWAII 2.6TB of Trans-Pacific fiber cable capacity State-of-the-art SystemMetrics Data Center Revenue Adjusted EBITDA ($ in millions) ($ in millions) 1 Note: Adjusted EBITDA includes a $2.5M settlement gain recorded in connection with the acquisition of Wavecom 3

4 Investment Highlights Leading communications provider in Hawaii Most extensive and reliable communications network in the state Only provider able to offer integrated voice, video, data, data center and cloud solutions Strong communications brand with growth-oriented product portfolio Significant video & broadband opportunity New entrant into a monopoly video market with limited satellite capability 195K enabled homes over the last five years; 90%+ Internet pull-through Commercial and cloud services accelerate growth strategy Complete end-to-end solutions leveraging next-generation fiber network & data center assets Capturing ~70% of Fiber-to-the-Tower sites from top 4 wireless carriers Compelling financial profile Growing revenue and stable EBITDA, $100M+ NOL Low leverage: 2.2x net debt vs. 3.5x peer avg. Attractive valuation: 4.2x vs. 5.8x peer avg. Significant capital investments concluding in

5 Strategic Focus Invest in Network & Systems Grow the Business Deliver Superior Service Improve Financial Performance Continue fiber network expansion Trans-Pacific capacity Extend & enhance Internet service to unserved homes using CAF II Grow video & Internet penetration Deliver new & enhanced IP products Grow data center & cloud services Dedicated to exceptional customer service Strengthen Hawaiian Telcom brand as Hawaii s Technology Leader Manage costs to support growth Optimize capital spending Position for long-term sustainable cash flow Grow the Business Increase shareholder value 5

6 Invest in Network & Systems Significant Network & System Investments Over Last 5 Years Expand next-generation fiber network 2x increase in fiber route miles over last 5 years 195K households enabled for video as of 1Q 16 Fiber-to-the-Business over GPON to 3K locations Fiber-to-the-Tower build out for the 4 major wireless carriers Upgrade & optimize systems architecture Improve operational efficiencies Increase level of flow-through automation 6

7 Invest in Network & Systems Landmark SEA US Trans-Pacific Cable System Transaction Details Contract-In-Force date March 30, 2015 $25M investment over multi-year construction period As of 3/31/16, $6.3M has been spent on the project 26 x 100GB of capacity, upgradable up to 10x Expected Ready-for-Service in 2017 Transaction Benefits Enables us to cost-effectively meet future bandwidth requirements Strengthens role as a key strategic hub for traffic diversity and redundancy Strong indications of interest from various carriers for purchasing capacity ~$30M of capacity pre-sales to date Already recouped initial investment 7

8 Grow the Business Consumer Market Significant Video and Internet Opportunity Oceanic Time Warner Cable Video $36M 1Q 16 LTM Revenue Opportunity 37K Subscribers ~335K Subscribers Internet $32M 1Q 16 LTM Revenue Opportunity 93K Subscribers ~250K Subscribers Voice $78M 1Q 16 LTM Revenue 147K Lines Retention Opportunity ~90K Lines Opportunity Source: Company reports & estimates 8

9 Grow the Business Consumer Market Hawaiian Telcom TV A Unique Opportunity % of Households Households per Sq. Mile Other Telco Other Hawaiian Telcom Satellite U.S. Oahu Attractive Market + Superior Product = Game Changer 300K household opportunity on Oahu High MDU penetration (43%) Two-player market 100% digital picture & sound quality over Ericsson Mediaroom platform Advanced features, social TV, interactive apps High Internet pullthrough Drive an increase in wallet share per customer Source: U.S. Census Bureau (Honolulu County Occupied Households), SNL Kagan, Nielsen (U.S. TV Households), company reports & estimates. 9

10 Grow the Business Consumer Market Hawaiian Telcom TV Delivers Strong Results Video Revenue & Penetration $38M annualized business & growing HTTV subs grew 25% to ~37,000 over the past year 19% penetration of households enabled 94% of existing video subscribers have TV and Internet Video Subscriber Mix 1 Consumer strategic revenue grew 10% Y/Y in 1Q 16 Representing 47% of total consumer revenue, up from 35% two years ago 195K households enabled as of 1Q 16 Over 60% of households enabled FTTH Launched 1 Gbps Hawaii s fastest Internet service Note: 1. Consumer strategic revenue includes video services and consumer Internet services revenues. 10

11 Grow the Business Business Market 1 Enterprise (100+ employees) Market: 700 firms Small & Medium (5 99 employees) Market: 11,000 firms Micro (<5 employees) Market: 19,000 firms Leveraging next-generation fiber network & data center assets to create and deliver timely, competitive & tailored solutions to help customers deliver business outcomes Educating and bundling flexible services and applications to help customers transition & succeed in the new digital age Offering cost effective bundles of voice and high-speed Internet mixed with cloud solutions designed to help customers solve technology challenges Expanding Fiberto-the-Business connectivity Delivering new & enhanced IP products Growing data center/cloud services Note: 1. Major competitors: Oceanic Time Warner, Level 3. Source: Company brand equity study, Hawaii Workforce Infonet. 11

12 Hawaiian Telcom: SmartBusiness Hawaiian Telcom s Business Product Portfolio IT Services Network Monitoring Managed Equipment Design & Configuration Remote Support Infrastructure Hardware Compute & Storage Desktop as a Service Colocation Security Network Internet Computers & Devices Cloud Applications Microsoft Office 365 Online Backup & Sync Endpoint Security Storage Voice Unified Communications Hosted Voice (Business Allin-One Bundle) Call Center as a Service Trunking ISDN PRI SIP Trunking Legacy Business Line (B1) / PBX Trunks Centrex & Centrex Biz Plus Data Private Networking Enhanced IP Data Service (EIPDS) Routed Network Service (RNS) Broadband Internet High-Speed Internet (HSI) Dedicated Internet Access (DIA) Legacy ATM & Frame Relay Private Line 12

13 Grow the Business Business Market Higher margin data & cloud services accelerate growth strategy & drive cash flows Business Data Services Revenue ($ in millions) 1 Business strategic revenue grew 23% Y/Y in 1Q 16 Representing 40% of total business revenue, up from 31% two years ago Strong growth in data services 24% YoY increase in revenue in 1Q 16 Strong growth in data center services 18% YoY increase in revenue in 1Q 16 Data Center Services Revenue Business VoIP Lines ($ in millions) Note: 1. Business strategic revenue includes data services and data center services revenues. 13

14 Grow the Business Wholesale Market Leverage fiber network to drive Ethernet growth in wireless & wireline segments Number of Cell Sites Completed (at quarter end) 462 Fiber-to-the-Tower cell sites completed as of 1Q 16 $6.7M annualized revenue 59 additional sites under contract to build 85% cell sites are 100 Mbps or higher vs. 75% a year ago Wholesale Ethernet Revenue Growth Ethernet driving growth 54% Ethernet revenue increase in the past two years 54% 18% SEA-US undersea cable system on track to go into service mid-2017 Cash available upfront, revenue amortized over life of contracts 14

15 Deliver Superior Service CSAT Results % Customers Satisfied Continue investments in network, systems & people to deliver superior service Survey conducted for every customer transaction allowing real-time feedback on customer satisfaction (CSAT) 30% of at-risk compensation of all non-union employees tying to CSAT targets 15

16 Improve Financial Performance Growth in Total Revenues (ex-equipment & related services) ($ in millions) 1Q 16LTM Total Revenue Mix Other Wholesale Total Consumer Revenue ($ in millions) $136 $142 $146 $146 Total Business Revenue ($ in millions) $175 $174 $175 $177 '13-'15 CAGR 27.4% '13-'15 CAGR 17.2% 16

17 Improve Financial Performance Hawaiian Telcom TV subscriber growth Consumer Internet & TV revenues ($ in millions) $15.7 $16.5 $17.0 $17.3 $17.2 Business data line growth Business data & data center revenues ($ in millions) $14.7 $14.6 $15.1 $16.0 $

18 Improve Financial Performance Stable Adjusted EBITDA ($ in millions) CapEx focused on growth & expansion $78 $86 ($ in millions) $97 $99 $98 incl. $26M CapEx from: NGN fiber expansion SEA-US payments Wireless backhaul Levered Free Cash Flow (Adjusted EBITDA CapEx Cash Interest Expense) ($ in millions) * 2012 Adjusted EBITDA excludes a $2.5M settlement gain recorded in connection with the acquisition of Wavecom 18

19 Leverage & Valuation Net Leverage Ratio vs. Peer Group Adjusted EBITDA Multiple vs. Peer Group Source: FactSet & 1Q 16 company reports (EV as of 6/1/16). Net Leverage Ratio = Net Debt / LTM Adj. EBITDA 19

20 Conclusion Leading end-to-end communications provider in Hawaii Significant market opportunities across three channels Investments in fiber & cloud technology providing growth engine for consumer, business & wholesale Compelling financial profile Growing revenue and stable EBITDA, $100M+ NOL Low leverage: 2.2x net debt vs. 3.5x peer avg. Attractive valuation: 4.2x vs. 5.8x peer avg. Significant capital investments concluding in

21 Appendix

22 Management Name Scott Barber Dan Bessey Title President and CEO Senior Vice President and CFO Years in Industry Industry Experience 33 Years Named President and CEO in June 2015 Vice President of Operations for Consolidated Communications Chief Operating Officer for SureWest Communications Began his career at SureWest in 1994 as an Engineering Manager. Over the years he was promoted to executive-level positions in Outside Plant and Network Operations before being named Chief Operating Officer in Years Named Senior Vice President and CFO in May 2015 Vice President and CFO of SureWest Communications Vice President of Finance, Controller, and Director of Corporate Finance of SureWest Communications Began his career in the technology and communications group of Ernst and Young LLP 22

23 Selected Financial Data ($ in thousands) For the Three Months Ended For the Year Ended December 31, 3/31/13 6/30/13 9/30/13 12/31/13 3/31/14 6/30/14 9/30/14 12/31/14 3/31/15 6/30/15 9/30/15 12/31/15 3/31/ LTM 3/31/16 Operating revenues: Business Data services... $ 10,061 $ 10,432 $ 10,441 $ 10,899 $ 11,215 $ 11,268 $ 11,162 $ 11,187 $ 12,059 $ 11,838 $ 12,387 $ 13,043 $ 14,968 $ 41,833 $ 44,832 $ 49,327 $ 52,236 Voice services... 26,585 26,115 26,195 25,395 25,414 24,843 24,627 24,051 24,021 23,161 23,657 22,882 22, ,290 98,936 93,722 92,052 Data center services... 2,188 2,405 2,323 2,485 3,524 2,597 2,784 2,762 2,951 3,057 2,188 10,737 11,094 11,554 Equipment and managed services... 5,379 7,117 7,228 7,270 4,489 4,723 4,818 5,294 4,265 4,779 5,993 5,510 4,465 26,994 19,324 20,546 20,747 42,025 43,664 43,864 45,752 43,523 43,157 43,092 44,056 42,942 42,562 44,799 44,386 44, , , , ,589 Consumer Video services... 2,204 2,864 3,717 4,228 4,754 5,474 6,531 7,051 7,522 8,280 8,677 9,187 9,426 13,012 23,810 33,666 35,570 Internet services... 6,669 6,950 7,039 7,230 7,483 7,687 7,815 8,039 8,128 8,187 8,283 8,088 7,725 27,888 31,024 32,687 32,283 Voice services... 24,719 24,050 23,525 23,020 22,642 22,134 21,463 21,024 20,516 20,033 19,683 19,042 19,054 95,315 87,263 79,273 77,812 33,592 33,864 34,281 34,478 34,879 35,295 35,809 36,114 36,166 36,500 36,643 36,317 36, , , , ,665 Wholesale carrier data... 15,464 14,809 14,850 14,406 14,386 14,280 14,416 14,689 14,333 13,789 14,245 14,063 13,762 59,529 57,771 56,430 55,859 Other... 4,883 4,660 4,687 5,871 4,284 4,052 3,935 4,771 3,673 3,336 5,218 4,439 3,985 20,101 17,042 16,668 16,978 Total operating revenues... $ 95,964 $ 96,997 $ 97,682 $ 100,507 $ 97,072 $ 96,784 $ 97,252 $ 99,630 $ 97,114 $ 96,187 $ 100,905 $ 99,205 $ 98,794 $ 391,150 $ 390,739 $ 393,413 $ 395,091 Operating expenses: Cost of revenues (exclusive of depreciation and amortization)... 40,284 39,960 41,829 41,676 40,948 41,288 42,621 41,423 40,183 39,219 41,013 42,059 42, , , , ,770 Selling, general and adminstrative expenses... 28,379 28,516 27,965 30,015 29,266 28,720 28,294 29,694 29,732 29,767 33,146 31,153 29, , , , ,931 Gain on sale of property... (6,546) (6,546) Depreciation and amortization... 18,717 19,841 19,974 18,769 18,720 18,884 19,717 20,693 21,280 21,941 22,551 22,107 21,950 77,301 78,014 87,879 88,549 Total operating expenses... $ 87,380 $ 81,771 $ 89,768 $ 90,460 $ 88,934 $ 88,892 $ 90,632 $ 91,810 $ 91,195 $ 90,927 $ 96,710 $ 95,319 $ 94,294 $ 349,379 $ 360,268 $ 374,151 $ 377,250 EBITDA (1)... 27,301 28,521 27,888 28,816 26,858 26,776 26,337 28,512 27,199 27,201 26,746 25,994 26, , , , ,392 Non-cash stock and other performance-based compensation ,074 1, , ,736 4,174 1,584 1,988 SystemMetrics earn-out (350) , Non-recurring... 1, ,378 1, , ,326 1,791 4,668 2, ,608 4,061 10,552 9,616 Adjusted EBITDA (1)... $ 29,169 $ 29,965 $ 30,001 $ 30,735 $ 29,057 $ 29,042 $ 28,994 $ 30,712 $ 29,172 $ 29,789 $ 31,250 $ 29,322 $ 28,134 $ 119,869 $ 117,807 $ 119,535 $ 118,497 Capital expenditures... $ 23,254 $ 21,724 $ 24,831 $ 16,481 $ 23,939 $ 27,376 $ 25,159 $ 20,232 $ 29,172 $ 23,744 $ 23,816 $ 22,302 $ 28,139 $ 86,290 $ 96,706 $ 99,034 $ 98,001 Levered Free Cash Flow (2)... $ 679 $ 1,160 $ 3,071 $ 10,576 $ 1,294 $ (1,943) $ 235 $ 6,846 $ (3,953) $ 2,394 $ 3,804 $ 2,076 $ (2,497) $ 15,485 $ 6,434 $ 4,323 $ 5,779 (1) EBITDA and Adjusted EBITDA are non-gaap financial measures used by management to evaluate the effectiveness of the Company's operating performance. EBITDA is defined as net income plus interest expense (net of interest income and other), income taxes, depreciation and amortization and gain on sale of property. Adjusted EBITDA is EBITDA plus non-cash stock compensation, SystemMetrics earn-out and other non-recurring costs not expected to occur regularly in the ordinary course of business. The Company believes both of these non-gaap measures, Adjusted EBITDA and EBITDA, are meaningful performance measures for investors because they are used by our Board and management to evaluate performance, enhance comparability between periods and make operating decisions. Our use of EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures used by other companies in the telecommunications industry. (2) Levered Free Cash Flow provides a useful measure useful measure of operational performance and liquidity. The Company defines Levered Free Cash Flow as Adjusted EBITDA less cash interest expense and capital expenditures. 23

24 Selected Financial & Operating Data RECONCILIATION OF NON-GAAP FINANCIAL MEASURES--EBITDA & ADJUSTED EBITDA (1) & (2) (UNAUDITED) (Dollars in thousands) For the Three Months Ended For the Year Ended December 31, 3/31/13 6/30/13 9/30/13 12/31/13 3/31/14 6/30/14 9/30/14 12/31/14 3/31/15 6/30/15 9/30/15 12/31/15 3/31/ LTM Adjusted EBITDA (1) $ 29,169 $ 29,965 $ 30,001 $ 30,735 $ 29,057 $ 29,042 $ 28,994 $ 30,712 $ 29,172 $ 29,789 $ 31,250 $ 29,322 $ 28,134 $ 119,869 $ 117,807 $ 119,535 $ 118,497 Less: Non-recurring costs 1, ,378 1, , ,326 1,791 4,668 2, ,608 4,061 10,552 9,616 Non-cash stock compensation ,074 1, , ,736 4,174 1,584 1,988 SystemMetrics earn-out (350) , EBITDA (1) 27,301 28,521 27,888 28,816 26,858 26,776 26,337 28,512 27,199 27,201 26,746 25,994 26, , , , ,392 Depreciation and amortization... 18,717 19,841 19,974 18,769 18,720 18,884 19,717 20,693 21,280 21,941 22,551 22,107 21,950 77,301 78,014 87,879 88,549 Income tax provision (benefit)... 1,212 2,538 1,771 3,261 1,592 1,549 1,014 1, (54) ,782 5,910 1, Interest expense & other income & expense, net... 5,525 8,737 4,082 4,157 4,178 4,104 4,090 4,088 4,330 4,162 4,144 4,169 4,240 22,501 16,462 16,805 16,715 Reorganization... Gain on sale of property... (6,546) (6,546) Net income (loss)... $ 1,847 $ 3,951 $ 2,061 $ 2,629 $ 2,368 $ 2,239 $ 1,516 $ 1,976 $ 975 $ 455 $ 105 $ (435) $ 154 $ 10,487 $ 8,099 $ 1,100 $ 279 3/31/16 VOLUME INFORMATION 3/31/13 6/30/13 9/30/13 12/31/13 3/31/14 6/30/14 9/30/14 12/31/14 3/31/15 6/30/15 9/30/15 12/31/15 3/31/16 Business Data lines... 18,810 18,986 19,163 19,320 19,404 19,465 19,552 19,589 19,624 19,759 19,835 20,081 19,954 BVoIP lines... 6,874 7,628 8,442 9,517 11,008 11,600 12,143 12,898 13,875 15,469 16,273 16,749 17,281 Voice access lines , , , , , , , , , , , , ,073 Consumer Video subscribers... 11,671 13,618 15,796 18,393 20,279 23,101 25,766 28,124 29,721 31,921 34,009 35,876 37,108 Internet lines... 89,464 89,737 90,253 91,437 91,429 91,405 92,265 92,875 93,090 93,338 93,202 93,002 92,820 Voice access lines , , , , , , , , , , , , ,375 Homes enabled for video... 83, , , , , , , , , , , , ,000 (1) EBITDA and Adjusted EBITDA are non-gaap financial measures used by management to evaluate the effectiveness of the Company's operating performance. EBITDA is defined as net income plus interest expense (net of interest income and other), income taxes, depreciation and amortization and gain on sale of property. Adjusted EBITDA is EBITDA plus non-cash stock compensation, SystemMetrics earn-out and other non-recurring costs not expected to occur regularly in the ordinary course of business. The Company believes both of these non-gaap measures, Adjusted EBITDA and EBITDA, are meaningful performance measures for investors because they are used by our Board and management to evaluate performance, enhance comparability between periods and make operating decisions. Our use of EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures used by other companies in the telecommunications industry. (2) In connection with its emergence from bankruptcy on October 28, 2010, the Company adopted fresh-start reporting in accordance with generally accepted accounting principles. The adoption of fresh-start reporting results in the Company becoming a new entity for financial reporting purposes. Accordingly, the Company s financial condition and results of operations after October 31, 2010 are not comparable to its financial condition and results of operations for periods prior to and on October 31, However, to provide a basis for comparison to prior year results, the Company has combined the results for (a) the one month ended October 31, 2010 with the two months ended December 31, 2010 and (b) the ten months ended October 31, 2010 with the two months ended December 31, 2010 to aid in the understanding of the Company's financial performance. 24

25 Hawaii Marketplace A Majority of Hawaiian Telcom s Business is Focused on Oahu U.S. Hawaii Oahu Kauai Oahu Lanai Molokai Maui Total Population 308.7M 1.36M 0.95M Households 116.7M 0.46M 0.31M Land Area (sq. miles) 3.5M 6, Population per Sq. Mile ,594 Hawaii (Big Island) Households per Sq. Mile % of Multi-Dwelling Units 22% 37% 43% Access Lines per Sq. Mile 22 (1) 49 (2) 341 (2) Median Household Income $50,221 $64,098 $68,058 Unemployment Rate 5.0% 3.2% 3.0% Source: U.S. Census Bureau: 2010 Census Results, 2009 American Community Survey, U.S. Bureau of Labor Statistics, Department of Business, Economic Development & Tourism (1) Total U.S. access lines as of 06/30/13 per FCC report released in June 2014 (2) Access lines as of 3/31/16 Real GDP (2016 Forecast) +2.3% to $72B Visitor Spending (2016 Forecast) +2.5% to $16B 25