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Otelco Inc. (OTT)

Q3 2009 Earnings Call

November 05, 2009; 11:00 am ET

Executives

Michael Weaver - Chairman, President & Chief Executive Officer

Curtis Garner - Chief Financial Officer & Board Secretary

Kevin Enda - Investor Relations

Analysts

Frank Louthan - Raymond James

Dave Coleman - RBC Capital Markets

Tim Horan - Oppenheimer

Presentation

Operator

Good day and welcome to the Otelco Inc. conference call. Today’s conference is being recorded. At this time for opening remarks and introductions, I’d like turn the call over to Mr. Kevin Enda. Please go ahead, sir.

Kevin Enda

Thank you Jason, and welcome to this Otelco conference call, to review the company’s results for the third quarter ended September 30, 2009, which we released yesterday afternoon. Conducting the call today will be Michael Weaver, President and Chief Executive Officer, and Curtis Garner, Chief Financial Officer.

Before we start, let me offer the cautionary note that statements made on this conference call but are not statements of historical or current fact constitute forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties, and other unknown factors that could cause the actual results of the company to be materially different from the historical results or from any future results expressed or implied by such forward-looking statements.

In addition to statements, which explicitly describes such risks and uncertainties, listeners are urged to consider statements labeled with the terms believes, belief, expects, intends, anticipates, plans or similar terms to be uncertain and forward-looking. The forward-looking statements contained herein are also described from time-to-time in the company’s filings with the SEC.

With that stated, I’ll turn the call over to Mike Weaver.

Michael Weaver

Thank you Kevin, and good morning and thanks for joining us on the call. Despite the continuing challenges in the economy, Otelco delivered our best quarter ever, with EBITDA of $ 12.8 million, representing a 3.5% increase over the second quarter of this year.

As in the prior quarter the primary driver for the increase was the continuing growth in our CLEC operations, which increased excess loans by almost 4% over the previous quarter. Similar to the second quarter, EBITDA growth occurred in both our CLEC and RLEC operations, with the majority of the growth coming in the CLEC. Other noteworthy accomplishments in the third quarter include positive growth of access line equivalents. Once again the CLEC operations continue to be the growth vehicle for the third quarter.

This quarter CLEC growth was a bit higher than we expected due to increased activity from customers in the medical field, as well as growth in our existing New Hampshire operations. Wholesale network connections also grew 4% over the second quarter. On the RLEC side we experienced a loan loss of 2% this quarter, with the primary reasons for the decline being economic conditions and the higher disconnect rate for vacation homes in the New England market.

On the cash loan, our position remained strong as we finished the quarter with a cash balance of $16.7 million, after making a voluntary payment of $5 million to reduce our senior debt. On IPTV we continue to expand our service area and we expect to pass 5000 plus homes by the end of this year. Based on the penetration rate to date, we should have approximately 300 to 400 IPTV customers by 12/31/09. Our expansion plans for next year will add another 2000 plus homes, pass for a total of 7500 by the end of 2010.

On another subject, October 31 marked the first anniversary of our acquisition of the Country Road entities, and I am pleased with our progress during this past year. With the successful completion of the billing conversion in October, the integration process is essentially complete.

We were making our acquisition plans, we estimate would be able to realize approximately $2.8 million to $3 million in synergies, and we estimate that the total synergies realized to be $3.1 million. Our CLEC operations continue to experience double-digit growth in both revenue and EBITDA, and now comprise 25% of our total EBITDA as of the end of the third quarter.

On another note, as you are probably aware, Fair Point filed for Chapter 11 bankruptcy protection on October 26. Otelco’s exposures with the accounts receivable barred Fair Point to our various operating entities. We anticipated this filing and worked diligently to keep the accounts receivable from third point in the current status.

At this stage in the proceedings and it isn’t possible to estimate any potential loss that we might incur. Finally, we paid our nineteenth consecutive IDS distribution in September, and remain committed to continuing our policy of returning cash to our shareholders.

With that I’ll now ask Curtis to discuss financial results.

Curtis Garner

Thank you Mike, and thanks to everyone on the call for joining us today. As a reminder, all of our 2009 results include the properties acquired from Country Road Communications LLC on October 31, as Mike mentioned we passed the first year. So therefore, the majority of the change in performance over the same period in 2008 can be attributed to the acquisition.

Mike has already mentioned several improvements when comparing third quarter to second quarter, showing nice growth on a more comparable same store basis. With that backdrop, here is a brief overview of the financial performance for the quarter. We expect to file our 10-Q tomorrow, which will have additional details.

Total revenues grew 44.8% in the third quarter to $26.4 million from $18.2 million in the same quarter last year, and grew 2.4% or $0.6 million from the second quarter 2009. The growth in revenue was primarily associated with the acquisition, and the growth in CLEC subscribers partially offset by fewer RLEC access lines, lower billing and collection fees, and lower switched access revenues.

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