Justin D. Benincasa - Chief Financial Officer, Principal Accounting Officer and Treasurer Michael T.

Prior - Chief Executive Officer, President and Director

Barry McCarver - Stephens Inc., Research Division Richard H. Prentiss - Raymond James & Associates, Inc., Research Division Hamed Khorsand - BWS Financial Inc.

Thank you, operator. Good morning, everyone.

And thank you for joining us on our call to review our second quarter 2013 results. As usual, with me here is Michael Prior, ATN's President and Chief Executive Officer.

During the call, I'll be covering the relevant financial information and certain operational data, and Michael will be providing update on the business. Before I turn the call over to Michael for his comments, I'd like to point out that this call and our press release contain forward-looking statements concerning our current expectations, objectives and underlying assumptions regarding our future operating results and are subject to risks and uncertainties that could cause actual results to differ materially from those described.

Also in an effort to provide useful information to investors, our comments today include non-GAAP financial measures. For details on these measures and reconciliations to comparable GAAP measures and for further information regarding the factors that may affect our future operating results, please refer to our earnings release on our website at atni.com or to the 8-K filing provided to the SEC.

And with that, I'll turn the call over to Michael for his comments.

Thank you, Justin. Good morning, everyone.

Before I get into the details, just first, the pre-summary of the quarter. Second quarter results showed trends that are consistent with what we've experienced over the last several quarters, with our non-Alltel businesses performing well overall and in many cases, better than expected.

We had very solid performance in ATN wholesale wireless outside the Alltel markets despite the effects of the Midwest asset sale late last year. Island Wireless is doing well across our entire portfolio, thanks to cost control and some nice subscriber gains.

And we continue to evaluate potential investments in new and existing businesses. Our capital investments in existing businesses increased this quarter, mainly because of the expansion and upgrades to our U.S.

wholesale wireless business. As always, we were prepared to act quickly for the right strategic -- we all are prepared to act quickly for the right strategic opportunity.

And as to Alltel, we've been able to continue to maintain our U.S. wireless and retail subscriber base.

So I've been impressed by the continued focus of our U.S. retail wireless team.

Despite distraction of the pending transaction, the team has not lost sight of its priorities, running a customer-centric business in a very competitive marketplace. So when I -- turning now to the specifics and view of the pending sale.

I'm going to start with the wholesale side of U.S. wireless, the larger part of which involve networks we operate outside of the Alltel markets.

So as reported, U.S. wholesale roaming revenues were down 18% year-on-year.

As we noted in the release, this decline was driven by decreases in the Alltel markets as a major roaming partner has moved significant traffic off of our network. On the other hand, we were pleased to see stable year-on-year revenue in other roaming markets, despite the sale of the Midwest asset.

At sales, just to give you some perspective, involved about 15% of our base station and service. So the close of revenue GAAP in less than 2 quarters was not easy and it was a good upside surprise.

This business is benefiting from increased data volumes. And to meet the rising data demand, we are continuing to expand coverage, capacity and capability in certain areas and therefore expect modest growth in this business in the short term, excluding atypical seasonal effects.

On the retail side of U.S. wireless, it more or less repeated the trends, both positive and negative from the past few quarters.

The overall subscriber base is stable. In fact, we added a little.

So that's a nice run we've had there. But on the other side, postpaid subscribers are still declining.

The rate of that decline did moderate, however, with net postpaid subscriber losses of around 3,800 and growth additions of 28,000. On the prepaid side, we had a little less than 43,000 prepaid subscriber growth adds and nearly 5,000 prepaid net adds.

Prepaid net adds were positive were down from the rate of additions in 2012 and on the first quarter of this year. Postpaid subscriber churn was approximately 2.6%.

While still high, that's down from 3.1% in the first quarter, and it's up from 2.2% a year ago. And the reason for that, we believe, is mainly the benefit of a better device line up, which includes the iPhone, which I think we added in late -- first quarter in March.

So the other thing impacting is we're beginning to emerge from higher rate of contract explorations during the quarter, which reduced voluntary disconnects and that will continue into the third quarter. Blended subscriber churn for the first quarter was nearly 4%, down slightly from the first quarter.

Postpaid ARPU was up slightly at $55.18 for the quarter, compared to $54.49 in the first quarter and $53.96 a year ago. Overall subscriber ARPU was $44.77, compared to $45.34 in the first quarter and $47.63 a year ago.

And not surprising, the reasons for those changes are similar in what you've been seeing, the postpaid ARPU is up because of a higher percentage of smartphones in the base, and the overall subscriber ARPU was down because of shift in the mix to more prepaid in terms of the total percentage of subs. And on the smartphone adoption, we ended the quarter with around 44% of our postpaid base on smartphones.

About 65% of total postpaid device sales in the first -- -- sorry, in the quarter -- second quarter were smartphones, compared to 55% a year ago and 64% in the first quarter. Approximately 6% of the postpaid sub base upgraded in the quarter.

So in international operations, international wireless revenues repeated the performance of the first quarter, once again showing solid gains year-on-year due to steady subscriber growth in the Island markets. Even better, this modest but steady overall subscriber growth of 2% year-on-year was accompanied by good cost containment and reduction in most of the markets we serve.

These markets are, for the most part, quite mature from the subscriber perspective, and short-term subscriber movements are only part of the picture. We have to continue to work to make businesses more efficient in order to deliver acceptable operating margins in a capital intensive business.

So we were happy to see the work on the cost side with that background. In the Wireline operation, as reported, total wireline was down by about 1%.

Its declines in voice-driven revenue were largely offset by continued growth in data revenue, as well as demand at wholesale voice services. More specifically in the U.S., wholesale wireline revenues, such as carrier backhaul, showed continued strength.

And a recent initiative for service more of our long distance traffic internally provided a small additional boost to wireline revenues and overall profit. In Guyana, local and long distance voice declines were partly offset by broadband growth.

Wireline revenues, we believe, are likely to remain flat to down in that market and less than until there's regulatory reform. In that event, our long distance revenues, which we account for as part of Wireline, are likely to take an additional hit with loss of so-called exclusivity.

But at the same time, there's the possibility of an increase in local calling revenues due to rate changes. In summary, this was a good quarter overall, with most operating trends following the pattern of recent quarters.

Strategically, I recognized the questions that investors had with respect to the use of funds following the Alltel closing. It's obviously a very important consideration.

We are actively looking at opportunities, I can assure you, but we really always are actively looking at opportunities just perhaps have more in our wallet right now. And I don't think we're going to change, we don't intend to change our approach of being disciplined in looking for those investments and making those investments.

And at the same time, while everyone would like to hear more details, I think we're going to continue with our policy of waiting until we have hard news to announce rather than speculating on what we might do. But keep in mind, again, we'll be long-term focused and we'll try to stick with the disciplined approach.

It served us well in the past, it helped us create value, and so we will continue. And lastly, to maybe save your question on the call, we do not have further news on the regulatory approvals necessary to close the Alltel deal.

We are still confident of receiving those approvals and the closing on 2013. As some have noted in the press, the SEC has recently cleared a few more complex deals such as the Alaska deal, and that may be good news for some of the smaller deals like ours that are awaiting further review.

So with that, I'd like to turn over the call to Justin for a more detailed financial review.

Great, thank you, Michael. As noted in our release, the drivers of the second quarter performance were similar to those in the first quarter.

As Michael spoke about, revenues for the quarter were $175 million, 5% below the same quarter in 2012, and adjusted EBITDA was $45.9 million, down 8% over the same period last year, resulting in an adjusted EBITDA margin of approximately 26%. However, the trends are more positive.

Non-Alltel revenue adjusted for the Midwest sales totaled $71.6 million in the second quarter and up -- and are up over last year by approximately 8%. Adjusted EBITDA for these businesses were also up over last year at $28.1 million, which is a 39% margin in 1 of our seasonally strong quarters.

As Michael noted, revenue growth in our legacy wholesale market was primarily driven by increased data traffic, and our comparison to last year in our Island Wireless operations have been benefiting from positive operating leverage as we continue to grow our subscriber base in those markets. Moving down the income statements.

The quarter's total operating expenses of $154.9 million included noncash stock-based compensation expense of $1.2 million. Interest expense in the quarter is down 30% from a year ago as we continue to deleverage the business and lower our borrowing costs.

Earnings for the quarter were $8.9 million, or $0.56 per share, compared to $10.5 million, or $0.67 per share, reported in the second quarter of last year. Our effective tax rate for the quarter was 37%, compared to 40% a year ago, which reflects stronger pretax earnings in our lower tax jurisdictions, particularly in our Bermuda operations.

We do anticipate that this rate will move back into the low 40%s post the Alltel sale. Turning to the balance sheet.

As of June 30, we had -- we ended the quarter with $111 million of cash and total debt outstanding of $263 million. Net cash provided by operating activities was $10.5 million in the quarter.

Cash is down sequentially from the first quarter due to timing -- a timing shift in several working capital accounts and the acceleration of capital expenditures in our legacy wholesale market as we build the coverage and technology expansions Michael mentioned. For the quarter, total capital expenditures were $31.3 million, of which approximately $25.8 million was incurred by our U.S.

Wireless segment, $2 million in our International Telephony segment and $1.5 million in our U.S. Wireless segment as we continue with our fiber build -- network build in the Northeast -- U.S.

Wireline, sorry. For the full year 2013, we now expect capital expenditures to be between $80 million and $90 million, which is down from earlier estimates, mainly due to the timing of some of our network projects in Guyana, which are likely to move into 2014.

Some operational data for the quarter. We ended the quarter with 572 base stations in our legacy wholesale territories.

In our wholesale wireless business, MOUs within the legacy markets adjusted for the Midwest sales were up 12% from last quarter and down 12% from the first quarter 2012. Data traffic was up 38% from last quarter and up 72% from the same quarter last year, again, adjusted for the Midwest sales.

In our Alltel markets, MOUs were down 22% from last quarter and down 52% from Q2 2012, and data traffic was down 11% from last quarter and 23% from the second quarter '12. In our U.S.

Wireline segment, business lines increased 54% from a year ago and 9% from last quarter, ending the quarter at approximately 97,600 access line equivalents, and our international access lines remained flat at about 150,000. To sum up, you can see the year-on-year progress we're making in our international wireless, as well as our domestic legacy wholesale business is somewhat masked by less favorable comparisons from the Alltel markets.

However, we're pleased with the cost management side of that operation. Now operator, we'd like to open the call up for questions.

A couple of questions on your Commnet business, can you give us a little more color on what happened in that segment during the quarter just in terms of anything unusual that drove that higher data revenue? I think you mentioned you may be making some investments there, looking at some investments in that business.

And then, just lastly, the third quarter is usually the strongest quarter of the year for the wholesale business, given that you had a strong 2Q, and obviously, the sale that went on last year, any change in that outlook for 3Q?

Sure, we'll take the last part first. The Q2 and Q3 are the 2 strongest quarters in that business typically from a seasonal perspective and typically, Q3 is stronger than Q2.

And we certainly expect to see that again this year. We haven't not seen it in -- for many years, so it's reasonable to expect.

On the data side, there's nothing unusual in the data revenues. It's really what's going on overall.

And we are adding both capacity and data capabilities. So some really remote sites have been 2G for quite a long time.

Many of those sites were adding 3G capabilities to those places. And we've always said, we will continue to do really what our customers need in those places, and it's really driven by clear demand.

And then, we are also adding coverage, although there was very little coverage added in the first half of this year. That will start to creep up in the second half of the year, and that will explain some of the CapEx numbers in this quarter, which relate to adding both coverage and capacity and data capabilities in the second half.

And then, the only other thing to note as we talked, I think, in the release about, there are some shorter-term revenues, some switching revenues and the like, that make -- should continue a little bit into the third quarter, but are not really long-term and probably will not be there in the fourth quarter, for example. And that's very effective -- but to preempt that question, it's about $1.5 million, we would say, as this sort of not long reoccurring revenue.

Okay. And could you share with us in the quarter what the CapEx was at Commnet?

The majority -- I mean, the U.S. Wireless was -- it was about $25 million, I believe.

What was it? $31 million for the U.S.?

Yes.

The majority of that was Commnet, about $6 million of it was the Alltel market.

Okay, and just last question on GT&T, Michael you mentioned in your prepared remarks the potential for regulatory change and how that could affect your local and long distance business. I think that's probably been the situation for several quarters.

Has there been any change there in 2Q? Or do you expect any big movement from -- on that issue this year?

This has become impossible to predict. I mean, we keep working on that.

We work with both -- with the government, the President and the rest of the government, and we're working with legislative leaders. We are believing that it makes sense to move on with certain changes to the telecommunications regulatory environment there and we're willing participants on that, we just -- but it's really not in our hands, ultimately, the timing of that.

And then, of course, we have a contract that needs to be amended to take into account for that. So we're active participants in trying to make it happen.

And we keep thinking it is close, but it's not fully in our control. Barry, to -- just to go back on the CapEx, just want to run those numbers, the total U.S.

was like $26 million. Of that, $19 million was the Commnet stuff.

Question -- I got a couple of questions, and I apologize if you've answered them. In the prepared -- or in the press release last night, you talked about how Commnet had done, obviously, very well from what we were looking for, but you also mentioned something about short-term service revenue at Commnet.

Can you add a little color on what is that?

Yes, we just answered that from the previous call. It's about -- there was about $1.5 million of revenue in the quarter.

It comes from switching and related fees that we see from time to time in that business, and they tend to come and go. And we think it will last into the third quarter, but not for the year.

So it's a fairly short-term phenomenon.

And the $1.5 million in the 2Q should be a similar level in third quarter maybe?

Could be -- could be a little less, it's just -- it's hard to predict entirely. So you provide infrastructure help to various customers, and then, it's up to them when they move off.

Okay. And then, it seemed like the corporate/transaction line was a little heavier this time.

Have you provided how much was -- I assume there were some transaction costs that are hitting you?

Yes, I mean, there are -- the most of that is the -- I think is the noncash, the stock comp, which was $1.2 million in this quarter, which was up from our typical run rate on that is. And then, we did have some kind of one-time legal cost that flow through there as well.

And then, the stock comp should go back down more toward normal levels?

No, that actually probably will stay at about that level, I think, as we go. And some of that is the -- I think, we've moved more restricted units from off of the options.

And that way they get the price and expense.

And did you talk about the reduction in the CapEx kind of where it was coming from?

Yes, I did. And that is almost all coming out of Guyana rec, and it's more probably a timing issue, that stuff going to get pushed into '14.

And what were you -- what's the plan to spend in Guyana? Is it for broadband?

Is it any more with the international side?

The main part is in broadband data network, upgrade network. It's mainly related to wireline, and it can be lumpy, right?

So we're on a -- periodically, we build a larger upgrade to the wireline plan, and that's part of what's involved and what was anticipated.

There's also some -- we've been in the process of upgrading billing systems down there from some really old legacy systems, and the new stuff that's flowing through there as well.

That makes sense. And then, kind of give us -- I know you probably can't tell us a whole lot about what you want to do with the money when it closes.

But, obviously, a flurry of M&A in the U.S., actually kind of frantic. What are your thoughts as far as what valuations are looking like?

And are there any attractive areas around the world that you look at or attractive sectors that might catch your eyes as opposed what you're seeing in the U.S.?

Yes, I think in the U.S., quickly, I mean, a lot of that is clearly spectrum need for the big, but Tier 1 carriers, and some shuffling around, obviously, with that. And so I -- it looks to me like the elements of that will continue and it's not -- there's not really a seat in the table for us because we don't have any real synergy with that.

And looking around the world, I would say some sectors are more heated, but others are not, right? So if you look outside the U.S., there's -- there are -- a lot of the bigger carriers have balance sheet issues and therefore, there looked to be some potential opportunities outside the U.S.

And then, in the U.S., we're investing a lot organically, obviously, both from the fiber side and on the wholesale wireless side, and we'll continue to look for nooks and crannies like that, that makes sense from a return perspective.

Or did you look around the world, probably still stick to kind of the reasons you've been in before or is it actually something that you would go further afield for?

I think it would have to be quite big. And we'd have that -- the right partners to go outside of our historical regions, the Caribbean, Bermuda and the U.S.

rural areas.

First question is, what's been going on in International Wireless segment for you? It seems that for the last couple of quarters now, the subscriber numbers have been flat.

Well, it's actually tale of 2 things. So International Wireline has been a good story for us.

We've been improving revenues and profitability kind of across the board there, and there's a couple of components to that. There's increasing sub in a lot of the wireless -- Island Markets.

There was the Bermuda integration and cost improvement, and there is -- as Justin mentioned, I think, in his remarks, there's a little bit of kind of in some of these markets, we're kind of tipping the scale now where we're starting to get operating leverage. So we're starting to see the cost, the revenue flow at higher margins, down to the bottom line to start to improve it.

And we've got our ways to go there. I don't -- I wouldn't say it's fully rosy.

We've got our ways to go on a lot of those markets to be were where we want to be, but we're -- it's been nice growth. And then, on the other side, in Guyana, the sub number, which is a larger sub number overall, has been down a little bit -- not a lot -- it's been down a little bit, but that hasn't really impacted margins because it's really been weeding out some unprofitable subscribers and practices, and so, again, the cost discipline has worked in our favor there.

So I would say we're fairly pleased with international wireless. There's -- we always would like to see better and hope to do better, but it's been a decent story.

Okay. And then, what percentage of the CapEx in legacy wholesale is now generating revenue for you?

Well, the CapEx in the second quarter is not really -- very little of that will be generating revenue.

Yes, probably very little.

So there weren't any like new base stations or anything like that put into place?

Not many.

Yes. We have small uptick in base stations.

And the large uptick in CapEx, most of that is work in progress, if you will.

Okay. And then, when are you going to be adding any more base stations to that segment?

Yes, we expect add base stations by year end, maybe into 2014.

Okay. So it's more like a 2014 revenue?

Yes, it might start the benefit a little bit before that, but, yes.

Thank you.