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Otelco Inc. (OTT)

3Q 2010 Earnings Call

November 3, 2010 11:00 a.m. ET

Executives

Kevin Enda – Investor Relations

Michael Weaver – Chairman, President & Chief Executive Office

Curtis Garner – Chief Financial Office

Analysts

Dave Coleman – RBC Capital Markets

Frank Louthan – Raymond James

Tim Horan – Oppenheimer

Neil George – Green Gold Capital

Presentation

Operator

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

Kevin Enda

Thank you and welcome to this Otelco Conference Call to review the company’s results for the third quarter ended September 30th 2010, which were 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 that 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 describe such risks and uncertainties, listeners are urged to consider statements labeled with the terms believes, beliefs, expects, intends, anticipate, plans, or similar terms to be uncertain and forward looking.

The forward-looking statements contained herein are also subject, generally, to other risks and uncertainties that are described from time to time in company’s filings with the SEC.

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

Michael Weaver

Thanks Kevin. Good morning everyone. Welcome to our call.

Our business continues to perform well and we are pleased with the third quarter results as we generated revenue of $26.1 million and EBITDA of $12.7 million. Our third quarter metrics, with an increase of almost 1% in our Access line equivalents, was an encouraging indication of the performance of our operations. This third quarter growth was attributable to cyclical demand for broadband facilities and the introduction of new products.

In this third quarter, we experienced a growth in the number of special circuits that we provide to educational institutions as they begin preparing to open their facilities for the school year. Providing Broadband Access to schools is a particularly attractive business proposition for us as the circuits typically stay in place for pretty long periods of time. In addition to the special circuits, we added the rollout of our Hosted PBX product in the CLEC Operations, which has been successful and we had a couple of large sales of this product in this quarter with one of the customers being a large school facility in Northeastern Maine.

For the quarter, our CLEC Operations experienced a 3.6% growth in Access Lines, which is a result of the new Hosted PBX products and our expansion in the new markets in Northeastern Maine.

On the New Hampshire front, we now have two of the three co-location sites installed and are on schedule to have the third site operational by the end of this year. Probably more importantly, our sales efforts in New Hampshire are just beginning to be productive as we are now receiving some of our first sales orders from this new market.

Likewise, our expansion into Northeastern Maine has been successful and our plans for next year include two additional co-location sites in this area. Frankly, we need these additional sites to meet the demand for our Data and Telephony Services.

On the Cable TV front, we continue to expand the product offerings in our Alabama market and in mid-September we added Video on Demand to our service offerings. In addition to generating additional revenue, we expect this will stimulate additional demand for our IPTV Services. While we remain pleased with the IPTV products, sales of this service lagged behind our expectations. For the quarter, we added 43 net IPTV customers.

We are pleased with our cash decision as we have experienced growth of $5.8 million in 2010 and we plan to use $7.5 million of our cash to make a voluntary pre-payment next week to reduce our senior debt.

Finally, we paid our 23rd consecutive IDS distribution in September and remain committed to continuing our policy of returning cash to our shareholders.

Curtis, if you would, please discuss the financial results.

Curtis Garner

Thank you Mike and thanks to everyone on the call for joining us today as I know there is lots of congestion for earnings calls. Let me provide an overview of the financial performance for the third quarter of this year and then we will take questions.

Total revenue decreased 1% for the quarter to $26.1 million from $26.4 million a year ago, continued CLEC growth in New England, as Mike mentioned, and gained some cable television revenue produced positive results which were offset by declines in RLEC subscriber-driven revenues.

Breaking down the pieces, local service revenues grew slightly, remaining at, basically, $12.4 million. Again, expansion of the CLEC revenue which produced a $0.3 million increase was offset by $0.3 million in lower RLEC Basic Services and Toll revenues.

Network Access revenue decreased 5.2% in the third quarter to $8.1 million from $8.5 million a year ago. Access revenue related to RLEC subscriber usage and lower NECA settlements accounted for the decline.

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