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Otelco, Inc. (OTT)

Q2 2011 Earnings Call

August 4, 2011 11:00 am ET

Executives

Kevin Enda - IR

Michael Weaver - President and CEO

Curtis Garner - CFO

Analysts

Frank Louthan - Raymond James

Tim Horan - Oppenheimer

Neil George - Green & Gold LLC

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 would like to turn the call over to Mr. Kevin Enda.

Kevin Enda

Welcome to this Otelco conference call to review the company's results for the second quarter ended June 30, 2011, 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. The 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 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, expects, intends, anticipates, 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'll turn the call over to Mike Weaver.

Michael Weaver

Thanks, Kevin. Good morning, everyone, and welcome to our call. Before I start to review the second quarter results, I'd like to provide updates on a few topics.

First, the acquisition process for Shoreham Telephone, which we announced earlier this year, continues to move forward in a timely manner. We've completed several meetings with the appropriate regulatory authorities. And at this point, we expect to close the transaction early in the fourth quarter.

As we've discussed on prior calls, Shoreham is family-owned RLEC located in Western Vermont offering telephone, long distance and broadband services throughout the rural county area.

Our plans include expanding the existing broadband coverage, adding bundled services to the current offerings and using the existing network as our anchor into the CLEC business in Vermont.

In many ways, the Shoreham acquisition represents the ideal acquisition target for us. It's an established RLEC with predictable and stable revenue streams that also provides an opportunity for further expansion into the non-regulated aspects of our businesses in New England.

The damage to our plant facilities resulting from the late April tornadoes in our Alabama service area has been completely restored. The total cost of the restoration was approximately $700,000 with the majority of the costs has been reimbursed this week by our insurer. The storm negatively affected our broadband subscribers as a number of the subscribers that sustained serious tornado damage have not yet renewed their service with us.

The other impact the storm had was to delay our plans to place our soft switch in service, which caused us to push back the planned service offerings that were provided by the optic switch, thus deferring our expansion in the hosted PBX market in Alabama until the fourth quarter of this year.

In an effort to promote our hosted PBX service and increase our overall service penetration in Alabama, we introduced a $99 bundled service offering that includes telephone service features, 60 minutes of long distance, cable TV and broadband services. Our results from this offering have been encouraging with the addition of approximately 200 customers since the introduction of the plan.

We'd planned to roll this plan out in April. Three weeks later, the tornado hit. So our momentum was disrupted by the storm, but we have recently reintroduced this offering in our markets and are receiving positive results.

For our New England CLEC operations, the process for the additional colocation sites is 90% complete. At the end of June, we had eight of our nine planned sites online and operating. And the final site which is located in Springfield, Missouri, will be in operation by the end of this month.

Originally, we expect these sites to be available to our sales department in the first quarter. And this unexpected delay has hampered our CLEC sales expansion efforts.

Our newest product in the CLEC services area, hosted PBX has been implemented and continues to show great promise. In the first six months of the year, we've installed over 450 lines of this service and generated approximately $200,000 in recurring billings.

We continue to monitor the ongoing discussions and actions at the FCC regarding regulatory reform and the potential impact on Otelco. Yesterday, the FCC issued the Notice of Proposed Rulemaking, seeking comments on three specific proposals for reform. Those three proposals are the plan submitted by the State Members of the Federal-State Universal Service Joint-Board known as the State Member plan, the plan submitted by the Joint Rural Associations known as the RLEC plan, and a plan filed by six Price Cap Companies known as the ABC or America's Broadband Connectivity plan.

From the NPRM, it appears that FCC is attempting to keep this issue on the fast track as comments are due by August 24, and the reply comment date is only a week later at August 31.

Until there is more clarity on the content and timing of the ultimate proposed plan, it's impossible to gage any potential impact on us. However, it is worth noting that the (inaudible) absolute portion of USA represents only 4% of our revenues. Finally, we put our 26th consecutive IDS distribution in June and we remain committed to continuing our policy of returning cash to shareholders.

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