TMCnet News

ALTEVA, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
[November 10, 2014]

ALTEVA, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


(Edgar Glimpses Via Acquire Media NewsEdge) CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS Certain statements contained in this Quarterly Report on Form 10-Q, including, without limitation, statements containing the words "believes," "anticipates," "intends," "expects" and words of similar import, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions, both nationally and in the geographic regions in which we operate; industry capacity; goodwill and long-lived asset impairment; demographic changes; management turnover; technological changes and changes in consumer demand; existing governmental regulations and changes in or our failure to comply with, governmental regulations; legislative proposals relating to the businesses in which we operate; changes to the USF; changes in the Orange County-Poughkeepsie Limited Partnership ("O-P") distributions; risks associated with the exercise of our option to sell our O-P interest back to Verizon; risks associated with our unfunded pension liability; competition; the loss of any significant ability to attract and retain highly skilled personnel and any other factors that are described in "Risk Factors." Given these uncertainties, current and prospective investors should be cautioned regarding reliance on such forward-looking statements. Except as required by law, we disclaim any obligation to update any such factors or to publicly announce the results of any revision to any of the forward-looking statements contained herein to reflect future events or developments. For a further discussion of the matters described above, see Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2013.



Overview Alteva, Inc. (we, our or us) is a cloud-based communications company that provides Unified Communications ("UC") solutions, including enterprise hosted Voice-over-Internet Protocol ("VoIP") and operates as a regional Incumbent Local Exchange Carrier ("ILEC") in southern Orange County, New York and northern New Jersey. We deliver cloud-based UC solutions including BroadSoft-based VoIP integrated with Microsoft Lync, Microsoft Exchange, Google Apps for Business, leading customer relationship management (CRM) applications such as Salesforce.com and Bring-Your-Own-Device (BYOD) solutions for Mobility, which allows users to take advantage of all of the features available to them no matter where they are located or what device they are using. Our ILEC operations consist of providing local and toll telephone service to residential and business customers, Internet high-speed broadband service, and satellite television services provided by DIRECTV. Our cloud-based Unified Communication as a Service ("UCaaS") solutions are focused on medium, large and enterprise markets. We meet our customers' unique needs for a business communications solution that integrates multi-location, mobility, business productivity and analytics, into a single seamless experience.

This discussion and analysis provides information about the important aspects of our operations and investments, both at the consolidated and segment levels, and includes discussions of our results of operations, financial position and sources and uses of cash.


This discussion and analysis should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and Notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q.

Executive Summary Nine months ended September 30, 2014 Nine months ended September 30, 2013 Change % of Total Operating Operating % of Total Operating Operating Operating ($ in thousands) Revenue Revenue Loss Margin Revenue Revenue Loss Margin Revenue Loss UC $ 12,753 56 % $ (5,142 ) (40 )% $ 11,919 52 % $ (8,903 ) (75 )% $ 834 $ 3,761 Telephone 9,946 44 % (141 ) (1 )% 10,798 48 % (450 ) (4 )% (852 ) 309 Total $ 22,699 100 % $ (5,283 ) (23 )% $ 22,717 100 % $ (9,353 ) (41 )% $ (18 ) $ 4,070 Overall revenues were relatively consistent at $22.7 million for both the nine months ended September 30, 2014 and 2013. We experienced a 7% increase in our UC revenues despite a $1.5 million decrease in revenue from our Syracuse, New York operations that were sold in August 2013. Excluding the Syracuse operations, UC had organic growth of 22% from the sales to new customers and increase in services to existing customers. The decrease in our Telephone segment revenues for the nine months ended September 30, 2014 was primarily due to a $0.6 million decrease in our Universal Service Fund subsidies revenues, due to the expected trend of lower reimbursable costs. In addition, for the past several years, we have experienced declines in telephone access lines within our Telephone segment due to sustained competition and cellular substitution for landline telephone services in our regulated franchise area that have reduced revenue in this segment. We partially offset the decline in telephone access lines by focusing our efforts on identifying and pursuing growth opportunities including fiber deals and expansion of our broadband Internet business.

During the nine months ended September 30, 2014, we had an operating loss of $5.3 million, compared to an operating loss of $9.4 million for the nine months ended September 30, 2013. The decrease in operating loss was attributed to our organic UC growth and lower payroll and operating costs in 2014 due to cost saving initiatives implemented in 2013 and the first half of 2014, severance charges related to management changes and staff rationalization occurring primarily in 2013 and due to the sale of the operations in Syracuse, New York, which had incurred higher operating costs than revenue. During the nine months 19 -------------------------------------------------------------------------------- Table of Contents ended September 30, 2014, we had net income of $30.0 million, compared to a net loss of $0.3 million for the nine months ended September 30, 2013, driven primarily by our exercise of the Orange County-Poughkeepsie Limited Partnership ("O-P") Put for gross proceeds of $50 million and the decrease in operating costs discussed above.

Results of Operations for the three and nine months ended September 30, 2014 and 2013 OPERATING REVENUES Three months ended September 30, 2014 as compared to the three months ended September 30, 2013: For the three months ended September 30, 2014 For the three months ended September 30, 2013 Change % of Total % of Total ($ in thousands) Revenue Revenue Revenue Revenue Revenue UC $ 4,308 57 % $ 4,043 54 % $ 265 Telephone 3,263 43 % 3,487 46 % (224 ) Total $ 7,571 100 % $ 7,530 100 % $ 41 Revenues for our UC segment increased 7% for the three months ended September 30, 2014 as compared to the same period in 2013, despite a $0.3 million decrease in revenue from previous customers within our Syracuse, New York operations that were sold in August 2013. Excluding the Syracuse operations, UC had 16% organic growth primarily driven by a $0.6 million increase in license and usage revenue.

Revenues for our Telephone segment decreased 6% for the three months ended September 30, 2014 compared to the same period in 2013. The decrease was driven by an overall decrease in access line revenue.

Nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013: For the nine months ended September 30, 2014 For the nine months ended September 30, 2013 Change % of Total % of Total ($ in thousands) Revenue Revenue Revenue Revenue Revenue UC $ 12,753 56 % $ 11,919 52 % $ 834 Telephone 9,946 44 % 10,798 48 % (852 ) Total $ 22,699 100 % $ 22,717 100 % $ (18 ) Revenues for our UC segment increased 7% for the nine months ended September 30, 2014 as compared to the same period in 2013 despite a $1.5 million decrease due to our sale of operations in Syracuse, New York in August 2013. Excluding the Syracuse operations, UC had organic growth of 22% primarily driven by a $2.3 million increase in license and usage revenue.

Revenues for our Telephone segment decreased 8% for the nine months ended September 30, 2014 compared to the same period in 2013. The decrease was driven by a $0.6 million decline in USF revenues and a decrease in access line revenue.

OPERATING EXPENSES Three months ended September 30, 2014 as compared to the three months ended September 30, 2013: Unified Communications Telephone Consolidated For the Three Months Ended For the Three Months Ended For the Three Months Ended September 30, September 30, September 30, ($ in thousands) 2014 2013 Change 2014 2013 Change 2014 2013 Change Cost of services and products $ 1,923 $ 2,009 $ (86 ) $ 1,001 $ 1,145 $ (144 ) $ 2,924 $ 3,154 $ (230 ) Selling, general and administrative 3,048 3,546 (498 ) 1,678 1,569 109 4,726 5,115 (389 ) Loss on disposal, restructuring costs and other special charges 336 404 (68 ) 264 - 264 600 404 196 Depreciation and amortization 546 595 (49 ) 385 361 24 931 956 (25 ) Total operating expenses $ 5,853 $ 6,554 $ (701 ) $ 3,328 $ 3,075 $ 253 $ 9,181 $ 9,629 $ (448 ) Cost of Services and Products Cost of services and products for our UC segment decreased 4% for three months ended September 30, 2014 as compared to the same period in 2013 and decreased as a percentage of revenue to 45% from 50%. The decrease was primarily due to leveraging the UC infrastructure over a larger revenue base and lower third-party carrier costs as a part of our cost reduction initiatives, and cost savings from the sale of our operations in Syracuse, New York. These decreases were partially offset by a $0.2 million increase in circuit and usage costs due to increases in customers.

20 -------------------------------------------------------------------------------- Table of Contents Cost of services and products for our Telephone segment decreased for three months ended September 30, 2014 compared to the same period in 2013 primarily due to a $0.1 million realized cost savings from a reduction in headcount.

Selling, General and Administrative Expenses Selling, general and administrative expenses decreased 8% for the three months ended September 30, 2014 as compared to the same period in 2013 primarily due to a $0.5 million decrease in wages, equity compensation and associated benefits due to staff reductions and management changes over the last year across both segments.

Loss on Disposal, Restructuring Costs and Other Special Charges We incurred a $0.6 million charge in connection with the Settlement Agreement with our former CEO for the three months ended September 30, 2014.

We incurred a $0.4 million loss due to the disposal of our Syracuse, New York operations for the three months ended September 30, 2013.

Depreciation and Amortization Expense Depreciation and amortization expense in the UC segment decreased 8% for the three months ended September 30, 2014 compared to the three months ended September 30, 2013 primarily due to a lower depreciable base due to the sale of our operations in Syracuse, New York in August 2013.

Nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013: Unified Communications Telephone Consolidated For the Nine Months Ended September 30, For the Nine Months Ended September 30, For the Nine Months Ended September 30, ($ in thousands) 2014 2013 Change 2014 2013 Change 2014 2013 Change Cost of services and products $ 5,838 $ 6,594 $ (756 ) $ 3,005 $ 3,564 $ (559 ) $ 8,843 $ 10,158 $ (1,315 ) Selling, general and administrative 10,059 12,047 (1,988 ) 5,627 6,542 (915 ) 15,686 18,589 (2,903 ) Loss on disposal, restructuring costs and other special charges 392 404 (12 ) 308 - 308 700 404 296 Depreciation and amortization 1,606 1,777 (171 ) 1,147 1,142 5 2,753 2,919 (166 ) Total operating expenses $ 17,895 $ 20,822 $ (2,927 ) $ 10,087 $ 11,248 $ (1,161 ) $ 27,982 $ 32,070 $ (4,088 ) Cost of Services and Products Cost of services and products for our UC segment decreased 12% for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013 and decreased as a percentage of revenue to 46% from 55%.

The decrease was primarily due to a reduction in third-party carrier costs as a part of our cost reduction initiatives, cost savings from the sale of our operations in Syracuse, New York and the leveraging of the UC infrastructure over a larger revenue base. The decreases were partially offset by a $0.5 million increase in circuit and usage costs due to new customers.

Cost of services and products for our Telephone segment decreased for the nine months ended September 30, 2014 compared to the same period in 2013 due to $0.5 million in lower wages from staff rationalizations over the last year and $0.3 million reduction in circuit costs as part of our cost reduction initiatives.

Selling, General and Administrative Expenses Selling, general and administrative expenses decreased 16% for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013, primarily due to a $2.1 million decrease in wages, equity compensation, and associated benefits from staff reductions and management changes over the last year across both segments. Selling, general and administrative expenses included $0.3 million and $1.2 million of severance charges for the nine months ended September 30, 2014 and 2013, respectively, related to management changes and staff reductions. In addition, marketing decreased by $0.3 million which was primarily driven by higher costs in 2013 from the rebranding to the Alteva name and cost reduction initiatives put in place in 2014.

Loss on Disposal, Restructuring Costs and Other Special Charges We incurred a $0.7 million charge in connection with the Settlement Agreement with our former CEO for the nine months ended September 30, 2014.

We incurred a $0.4 million loss due to the disposal of our Syracuse, New York operations for the nine months ended September 30, 2013.

Depreciation and Amortization Expense Depreciation and amortization expense in the UC segment decreased 10% for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013 primarily due to a lower depreciable base due to the sale of our operations in Syracuse, New York in August 2013.

21 -------------------------------------------------------------------------------- Table of Contents OTHER INCOME (EXPENSE) For the Three Months Ended September 30, ($ in thousands) 2014 2013 Change Interest expense, net $ 20 $ (179 ) $ 199 Income from equity method investment - 3,250 (3,250 ) Other income, net (4 ) 25 (29 ) Total other income $ 16 $ 3,096 $ (3,080 ) Total other income decreased 100% for the three months ended September 30, 2014 as compared to three months ended September 30, 2013, primarily due to the sale of our ownership interest in the O-P in April 2014.

For the Nine Months Ended September 30, ($ in thousands) 2014 2013 Change Interest expense, net $ (173 ) $ (593 ) $ 420 Income from equity method investment 52,373 9,750 42,623 Other income, net 23 162 (139 ) Total other income $ 52,223 $ 9,319 $ 42,904 Total other income increased 460% for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013, due to the $49.8 million gain on the sale of our ownership interest in the O-P. In 2013 we received guaranteed annual distributions of $13 million ($3.25 million each quarter). In 2014, in accordance with the O-P agreement, our guaranteed distribution levels stopped and we received income from the equity investment only for our ownership share of 8.108% of the O-P's net income, which was $2.6 million for the four months ended April 30, 2014.

Interest expense decreased for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013 due to us not having an outstanding balance on our line of credit with TriState since April 2014. On April 30, 2014 we paid off the balance with the proceeds from the sale of our interest in the O-P.

INCOME TAXES For the three months ended September 30, 2014, we had an income tax benefit of $0.3 million or 17% of loss before income taxes as compared to income tax expense of $0.7 million, or 66% of income before income taxes, for the three months ended September 30, 2013. For the nine months ended September 30, 2014, we had an income tax expense of $17.0 million, or 36% of income before income taxes, as compared to income tax benefit of $0.3 million, or 891% of loss before income taxes, for the nine months ended September 30, 2013. The estimated effective tax rate for each period includes projections of tax expense on the expected change in our valuation allowance for deferred tax assets. The estimated annual effective tax rate for the year ended December 31, 2014 excludes the estimated tax effects of the O-P gain on the put exercise, which was treated as a discrete item in the Company's second quarter of 2014. The increase in the effective tax rate is due to exercise of the Put being treated as a discrete item and is taxed at the full federal tax rate of 35% for period ended September 30, 2014. Due to the nature of the gain on the Put, we have nominal state taxes associated with the gain which minimally impacts our effective tax rate.

LIQUIDITY AND CAPITAL RESOURCES We had $28.9 million of cash and cash equivalents at September 30, 2014 as compared with $1.6 million at December 31, 2013. Our increase in cash flows was primarily generated from cash proceeds from the sale of our ownership in the O-P.

We sold all of our ownership interest in the O-P on April 30, 2014 for gross proceeds of $50 million (see Note 6). We have not and will not receive any income from the O-P after April 30, 2014. We used a portion of the proceeds to repay all of the outstanding borrowings under the TriState credit facility and pay taxes on the related gain. We expect the remaining gross proceeds to be used to fund working capital needs and support growth initiatives.

In August 2014, our Board of Directors ("Board") authorized a repurchase program for up to $3.0 million of our common stock. Share purchases may take place in open market transactions or in privately negotiated transaction and may be made from time to time depending on market conditions, share price, trading volume and other factors. The repurchase program authorized our Board does not require us to acquire a specific number of shares, and may be terminated, suspended, or modified at any time. The share repurchase will be funded from available cash on hand. As of September 30, 2014, the Company had not repurchased any shares under the repurchase program.

In August 2013, we announced the discontinuation of dividends on our common stock to support future growth initiatives and strengthen our financial position.

On March 11, 2013, we entered into a credit agreement with TriState to provide for borrowings up to $17.0 million with the ability to increase the facility for borrowings up to $20.0 million with the participation of another lender. On March 11, 2013, we 22 -------------------------------------------------------------------------------- Table of Contents borrowed $15.2 million to repay all borrowings outstanding under the CoBank, Provident and prior TriState credit facilities and retired those facilities. On April 30, 2014, upon receiving proceeds for the exercise of the O-P Put, we repaid all $11.6 million of the then outstanding debt on the credit facility.

On June 1, 2014, the credit agreement was amended to reduce the borrowing capacity from a ceiling of $17.0 million to a ceiling of $5.0 million. On June 30, 2014, the credit agreement was amended to extend the expiration of the Credit Agreement from June 30, 2014 to October 8, 2014 (see Note 7). The TriState borrowings incur interest at a variable rate based on either LIBOR or a Base Rate, as defined in the credit agreement, plus an applicable margin 3.50% or 2.00%, respectively. As of September 30, 2014, the Company had $5.0 million available under the Credit Agreement.

Under the terms of the TriState credit agreement, we are required to comply with certain loan covenants, which include, but are not limited to, the achievement of certain financial ratios as well as certain financial reporting requirements.

We have to maintain a Consolidated Liquidity Ratio, as defined in the TriState credit agreement, in excess of 1.0 to 1.0. Our obligations under the TriState credit facility are secured by all of our assets and guaranteed by all of our wholly-owned subsidiaries except for the subsidiary that is operating as an ILEC. The ILEC subsidiary entered into a negative pledge agreement with TriState whereby the ILEC subsidiary agreed not to pledge any of its assets as collateral or lien to be placed on any of its assets. These terms did not change when the credit agreement was amended on June 30, 2014.

Our Credit Agreement expired on October 8, 2014. On November 7, 2014, we entered into a demand line of credit with TriState to allow for borrowings up to $5.0 million. We borrow or repay our debt as needed based upon our working capital obligations. It is up to the discretion of TriState to approve borrowings within the allowed line of credit limit and may, at any time, demand that we make payment on an outstanding balance. We were previously required to comply with certain loan covenants and restrictions under our prior Credit Agreement. There are no measured financial covenants under the new demand line of credit.

CASH FROM OPERATING ACTIVITIES Net cash used in operating activities was $11.6 million for the nine months ended September 30, 2014 as compared to net cash provided by operating activities of $0.7 million for the nine months ended September 30, 2013. The change in cash from operating activities was primarily due to payments of taxes associated with the gain on the sale of our ownership interest in the O-P.

CASH FROM INVESTING ACTIVITIES Net cash provided by investing activities was $49.5 million for the nine months ended September 30, 2014, primarily due to the $49.8 million proceeds from the sale of our ownership interest in the O-P. Net cash provided by investing activities was $3.3 million for the nine months ended September 30, 2013 was primarily due to distributions of $4.2 million we received from the O-P in excess of our share of the O-P's income.

CASH FROM FINANCING ACTIVITIES Net cash used in financing activities during the nine months ended September 30, 2014 was $10.6 million, as compared to $5.1 million for the nine months ended September 30, 2013. We repaid our outstanding balance of $11.6 million on our TriState credit facility from the proceeds received for the sale of our ownership interest in the O-P. Dividends declared on our common shares by the Board of Directors were $0.54 per share for the nine months ended September 30, 2013. The total amount of dividends paid on our common shares by us for the nine months ended September 30, 2013 was $3.3 million. The additional financing activities for the nine months ended September 30, 2013 were attributable to the repayment of debt of $20.3 million offset by $18.0 million proceeds from our debt with TriState.

[ Back To TMCnet.com's Homepage ]