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Press Release -- May 5th, 2010
Source: Neutral Tandem
Tags: Earnings, Equipment, Ethernet, Exchange

Neutral Tandem Announces First Quarter 2010 Financial Results

First Quarter 2010 Highlights , May 5, 2010 (GlobeNewswire via COMTEX News Network) -- Revenue of $44.8 million, an increase of 17.2% from $38.2 million in Q1'09 -- Pretax income of $14.3 million, consistent with Q1'09 -- Net income of $8.5 million, down 6.4% from $9.0 million for Q1'09 -- Adjusted EBITDA (as defined below) of $20.6 million, an increase of 7.8% from $19.1 million in Q1'09 -- Billed minutes of 24.7 billion, an increase of 25.7% over Q1'09

CHICAGO, May 5, 2010 (GLOBE NEWSWIRE) -- Neutral Tandem, Inc. (NASDAQ:TNDM, news, filings), a leading provider of tandem interconnection services, today announced its first quarter 2010 financial results.

"We continue to face pressures due to competition and the general business conditions facing our customer base," said Rian Wren, President and Chief Executive Officer of Neutral Tandem. "As a result, we currently believe that our full year financial results will be towards the lower end of the estimates we announced on February 16, 2010. Despite these headwinds, we believe our position as the leading provider of tandem interconnection services coupled with our strong balance sheet, will allow us respond to these challenges while we continue with our plans to diversify our revenue stream, including through our new Ethernet eXchange offering."

First Quarter Results

Revenue increased 17.2% to $44.8 million for the three months ended March 31, 2010, compared to $38.2 million during the three months ended March 31, 2009. The increase in first quarter 2010 revenue was primarily related to an increase in the number of minutes carried over our network as compared to the first quarter of 2009.

Billed minutes increased 25.7% to 24.7 billion minutes for the three months ended March 31, 2010, compared to 19.7 billion minutes for the three months ended March 31, 2009.

Network and facilities expenses for the three months ended March 31, 2010 were $14.4 million,compared to $11.5 million for the three months ended March 31, 2009. This increase was largely due to greater traffic volumes carried over our network and an increase in the number of markets in which we operate. Combined operating expenses consisting of Operations, Sales and Marketing, and General and Administrative expenses were $12.4 million for the three months ended March 31, 2010, compared to $8.9 million for the three months ended March 31, 2009. The increase primarily resulted from higher employee expenses, including additional headcount, as well as increased professional expenses.

Income from operations for the three months ended March 31, 2010 was $14.1 million, or 31.5% of revenue, compared to $13.9 million for the three months ended March 31, 2009, or 36.4% of revenue.

Pretax income for the three months ended March 31, 2010 was $14.3 million, even with pretax income of $14.3 million for the three months ended March 31, 2009.

Income tax expense for the three months ended March 31, 2010 was $5.8 million, compared to $5.3 million for the three months ended March 31, 2009. The effective tax rate for the three months ended March 31, 2010 was approximately 40.8% compared to an effective tax rate of approximately 36.8% for the three months ended March 31, 2009. The increased tax rate during the first quarter 2010 is related to our establishment of a valuation allowance against deferred tax assets associated with state tax credits.

Net income for the three months ended March 31, 2010 was $8.5 million, or $0.25 per diluted share, compared to $9.0 million, or $0.27 per diluted share, for the three months ended March 31, 2009. The decrease was primarily due to increased network expense, employee expenses, professional fees and taxes.

Adjusted EBITDA, a non-GAAP financial measure, for the three months ended March 31, 2010 was $20.6 million, up 7.8% compared to $19.1 million for the three months ended March 31, 2009. Adjusted EBITDA margin, a non-GAAP financial measure, for the three months ended March 31, 2010 was 45.9%, down from 50.0% for the three months ended March 31, 2009. The decrease in Adjusted EBITDA margin was primarily related to higher professional fees and network expenses. See "Use of Non-GAAP Financial Measures" below for a discussion of the presentation of Adjusted EBITDA and a reconciliation to net income.

We expanded our footprint by commencing operations in 9 new markets for the three months ended March 31, 2010. We operated in 146 markets as of March 31, 2010, as compared to 109 markets as of March 31, 2009.

As of March 31, 2010, we completed 38.2% of our $25.0 million share repurchase program we announced on February 16, 2010, after repurchasing 605,449 shares during the first quarter 2010 at an average purchase price of $15.78 per share. These shares were retired in March 2010.

Conference Call & Web Cast

The first quarter conference call will be held on Wednesday, May 5, 2010 at 10:00 a.m. (ET). A live web cast of the conference call as well as a replay will be available online on the company's corporate web site at www.neutraltandem.com. Participants can also access the call by dialing 877-941-8632 (within the United States and Canada), or 480-629-9821 (international callers). A replay of the call will be available approximately two hours after the call has ended and will be available until 11:59 p.m. (ET) on Saturday, June 5, 2010. To access the replay, dial 800-406-7325 (within the United States and Canada), or 303-590-3030 (international callers) and enter the conference ID number: 4285147#.

Cautions Concerning Forward Looking Statements

This press release contains "forward-looking statements" that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our actual results to differ materially from those expressed or implied by such forward-looking statements. Such forward-looking statements include any expectations relating to earnings, revenues or other financial items; any statements of the plans, strategies and objectives of management for future operations; factors that may affect our operating results; statements concerning new products or services; statements related to future capital expenditures; statements related to future economic conditions or performance; statements as to industry trends and other matters that do not relate strictly to historical facts or statements of assumptions underlying any of the foregoing. These statements are often identified by the use of words such as "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," or "will," and similar expressions or variations. These statements are based on the beliefs and assumptions of our management based on information currently available to them. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that might cause such differences include, but are not limited to: the impact of current and future regulation affecting the telecommunications industry; the effects of competition, including direct connects; the ability to develop and provide new services; technological developments; natural or man-made disasters; the impact of current or future litigation; the ability to attract, develop and retain executives and other qualified employees; the ability to obtain and protect intellectual property rights; changes in general economic or market conditions; and other important factors included in our reports filed with the Securities and Exchange Commission, particularly in the "Risk Factors" section of our Annual Report on Form 10-K for the period ended December 31, 2009, as such Risk Factors may be updated from time to time in subsequent reports. Furthermore, such forward-looking statements speak only as of the date of this press release. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

About Neutral Tandem, Inc.

Headquartered in Chicago, Neutral Tandem, Inc. is a leading provider of tandem interconnection services to wireless, wireline, cable and broadband telephony companies. Neutral Tandem's solutions build redundancy, security and operational efficiencies into the nation's telecommunications infrastructure. As of March 31, 2010, Neutral Tandem was capable of connecting approximately 488.1 million telephone numbers assigned to carriers. Telephone numbers assigned to a carrier may not necessarily be assigned to, and in use by, an end user. Please visit Neutral Tandem's website at: www.neutraltandem.com.

The Neutral Tandem, Inc. logo is available at http://www.globenewswire.com/newsroom/prs/?pkgid=3797

The condensed consolidated statements of income, balance sheets and statements of cash flows are unaudited and subject to reclassification.

         NEUTRAL TANDEM, INC. AND SUBSIDIARIES
     CONDENSED CONSOLIDATED STATEMENTS OF INCOME
       (In thousands, except per share amounts)
                     (Unaudited)


                                 Three Months Ended
                                     March 31,
                                --------------------

                                   2010       2009
                                ---------  ---------

  Revenue                        $ 44,829   $ 38,249

  Operating expense:
   Network and facilities
    expense (excluding
    depreciation and
    amortization)                  14,361     11,462
   Operations                       5,521      4,955
   Sales and marketing                510        524
   General and administrative       6,400      3,389
   Depreciation and
    amortization                    3,948      4,041
   Gain on disposal of fixed
    assets                           (45)       (25)
                                ---------  ---------

     Total operating expense       30,695     24,346
                                ---------  ---------


  Income from operations           14,134     13,903
                                ---------  ---------

  Other (income) expense:
   Interest expense, including
    debt discount of $0 and
    $22, respectively                   4        133
   Interest income                   (54)      (291)

   Other (income) expense           (125)      (242)
                                ---------  ---------

     Total other (income)
      expense                       (175)      (400)
                                ---------  ---------

  Income before income taxes       14,309     14,303

  Provision for income taxes        5,840      5,259
                                ---------  ---------


  Net income                      $ 8,469    $ 9,044
                                =========  =========

  Net income per share:

   Basic                           $ 0.25     $ 0.28
                                =========  =========

   Diluted                         $ 0.25     $ 0.27
                                =========  =========

  Weighted average number of
   shares outstanding:

   Basic                           33,390     32,529
                                =========  =========

   Diluted                         33,852     33,533
                                =========  =========

           NEUTRAL TANDEM, INC. AND SUBSIDIARIES
           CONDENSED CONSOLIDATED BALANCE SHEETS
    (In thousands, except share and per share amounts)
                       (Unaudited)


                                               December
                                   March 31,     31,
                                     2010        2009
                                  ----------  ----------
  ASSETS
  Current assets:
   Cash and cash equivalents       $ 171,107   $ 161,411
   Receivables                        21,229      24,836
   Deferred income taxes-current         980         800

   Other current assets               15,801      18,912
                                  ----------  ----------
     Total current assets            209,117     205,959
  Property and equipment--net         48,354      49,679
  Restricted cash                        903         440

  Other assets                           511         512
                                  ----------  ----------

  Total assets                     $ 258,885   $ 256,590
                                  ==========  ==========

  LIABILITIES AND SHAREHOLDERS'
   EQUITY
  Current liabilities:
   Accounts payable                  $ 1,421     $ 1,235
   Accrued liabilities:
     Taxes payable                     3,706         429
     Circuit cost                      3,266       4,012
     Rent                              1,058       1,073
     Payroll and related items         1,829       1,914
     Other                             2,326       2,704
  Current installments of
   long-term debt                         --         235
                                  ----------  ----------
     Total current liabilities        13,606      11,602
  Deferred income
   taxes-noncurrent                    3,075       4,157
                                  ----------  ----------
     Total liabilities                16,681      15,759

  Shareholders' equity:
   Preferred stock--par value of
    $.001; 50,000,000 authorized
    shares; no shares issued
   and outstanding  at March 31,
    2010 and December 31, 2009            --          --
   Common stock--par value of
    $.001; 150,000,000
    authorized shares;
    33,031,977
   shares and 33,628,501 shares
    issued and outstanding at
    March 31, 2010 and
   December 31, 2009,
    respectively                          33          34
   Additional paid-in capital        164,286     171,381

   Retained earnings                  77,885      69,416
                                  ----------  ----------

     Total shareholders' equity      242,204     240,831
                                  ----------  ----------
  Total liabilities and
   shareholders' equity            $ 258,885   $ 256,590
                                  ==========  ==========

                NEUTRAL TANDEM, INC. AND SUBSIDIARIES
           CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                           (In thousands)
                             (Unaudited)

                                               Three Months Ended
                                                   March 31,
                                            -----------------------

                                               2010        2009
                                            ----------  -----------

  Cash Flows From Operating Activities:
   Net income                                  $ 8,469     $  9,044
   Adjustments to reconcile net cash flows
    from operating activities:
    Depreciation and amortization                3,948        4,041
    Deferred income taxes                      (1,262)           35
    Gain on disposal of fixed assets              (45)         (25)
    Non-cash share-based compensation            2,391          921
    Amortization of debt discount                   --           22
    Changes in fair value of ARS                  (65)        (433)
    Changes in fair value of ARS rights           (60)          191
    Excess tax benefit associated with
     stock option exercise                        (54)      (2,781)
    Changes in assets and liabilities:
     Receivables                                 3,607        (609)
     Other current assets                        (114)          549
     Other noncurrent assets                         1           75
     Accounts payable                              117          206

     Accrued liabilities                         2,107        5,644
                                            ----------  -----------
      Net cash flows from operating
       activities                               19,040       16,880
                                            ----------  -----------

  Cash Flows From Investing Activities:
   Purchase of equipment                       (2,555)      (1,000)
   Proceeds from sale of equipment                  46           27
   Increase in restricted cash                   (463)           --

   Proceeds from the redemption of ARS           3,350           --
                                            ----------  -----------
      Net cash flows from investing
       activities                                  378        (973)
                                            ----------  -----------

  Cash Flows From Financing Activities:
   Proceeds from the issuance of common
    shares associated with stock option
    exercise                                        15          416
   Excess tax benefit associated with
    stock option exercise                           54        2,781
   Payments made for repurchase of common
    stock                                      (9,556)           --

   Principal payments on long-term debt          (235)        (882)
                                            ----------  -----------
      Net cash flows from financing
       activities                              (9,722)        2,315
                                            ----------  -----------

  Net Increase In Cash And Cash
   Equivalents                                   9,696       18,222

  Cash And Cash Equivalents--Beginning         161,411      110,414
                                            ----------  -----------

  Cash And Cash Equivalents--End             $ 171,107   $  128,636
                                            ==========  ===========

  Supplemental Disclosure Of Cash Flow
   Information:

   Cash paid for interest                        $ 242         $ 69
                                            ==========  ===========

   Cash paid for taxes                         $ 1,595     $    198
                                            ==========  ===========

  Supplemental Disclosure Of Noncash Flow
   Items:
   Investing Activity--Accrued purchases
    of equipment                               $ 1,115      $ 1,041
                                            ==========  ===========

                   Use of Non-GAAP Financial Measures

In this press release we disclose "Adjusted EBITDA", which is a non-GAAP financial measure. For purposes of SEC rules, a non-GAAP financial measure is a numerical measure of a company's performance, financial position, or cash flows that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure, calculated and prepared in accordance with generally accepted accounting principles in the United Sates (GAAP).

EBITDA is defined as net income before (a) interest expense, net (b) income tax expense and (c) depreciation and amortization. Adjusted EBITDA is defined as EBITDA as further adjusted to eliminate non-cash share-based compensation. We believe that the presentation of Adjusted EBITDA included in this press release provides useful information to investors regarding our results of operations because it assists in analyzing and benchmarking the performance and value of our business. We believe that presenting Adjusted EBITDA facilitates company-to-company operating performance comparisons of companies within the same or similar industries by backing out differences caused by variations in capital structure, taxation and depreciation of facilities and equipment (affecting relative depreciation expense), which may vary for different companies for reasons unrelated to operating performance. These measures provide an assessment of controllable operating expenses and afford management the ability to make decisions which are expected to facilitate meeting current financial goals as well as achieve optimal financial performance. They provide an indicator for management to determine if adjustments to current spending decisions are needed. Furthermore, we believe that the presentation of Adjusted EBITDA has economic substance because it provides important insight into our profitability trends, as a component of net income, and allows management and investors to analyze operating results with and without the impact of depreciation and amortization, interest and income tax expense and non-cash share-based compensation. Accordingly, these metrics measure our financial performance based on operational factors that management can impact in the short-term, namely the operational cost structure and expenses of our business. In addition, we believe Adjusted EBITDA is used by securities analysts, investors and other interested parties in evaluating companies, many of which present an EBITDA measure when reporting their results. Although we use Adjusted EBITDA as a financial measure to assess the performance of our business, the use of Adjusted EBITDA is limited because it does not include certain material costs, such as depreciation, amortization and interest, necessary to operate our business. We disclose the reconciliation between EBITDA and Adjusted EBITDA and net income below to compensate for this limitation. While we use net income as a significant measure of profitability, we also believe that Adjusted EBITDA, when presented along with net income, provides balanced disclosure which, for the reasons set forth above, is useful to investors in evaluating our operating performance and profitability. Adjusted EBITDA included in this press release should be considered in addition to, and not as a substitute for, net income as calculated in accordance with generally accepted accounting principles as a measure of performance.

The following is a reconciliation of net income to EBITDA and Adjusted EBITDA:

                  NEUTRAL TANDEM, INC. AND SUBSIDIARIES
     Reconciliation of Non-GAAP Financial Measures to GAAP Financial
                                 Measures
                               (Unaudited)
                         (Dollars in thousands)



                                      --------------------

                                       Three Months Ended
                                           March 31,
                                      --------------------

                                         2010       2009     2010 (1)
                                      ---------  ---------  -----------

  Net income                            $ 8,469    $ 9,044    $  39,500
  Interest expense (income), net           (50)      (158)        (500)
  Provision for income taxes              5,840      5,259       22,000

  Depreciation and amortization           3,948      4,041       16,500
                                      ---------  ---------  -----------
  EBITDA                               $ 18,207   $ 18,186    $  77,500

  Non-cash share-based compensation       2,391        921       11,000
                                      ---------  ---------  -----------

  Adjusted EBITDA                      $ 20,598   $ 19,107   $   88,500
                                      =========  =========  ===========

  (1) The amounts expressed in this column are based on current
   estimates as of the date of this press release.
  This reconciliation is based on the midpoint of the range of
   financial estimates announced by the company
  on February 16, 2010.

This news release was distributed by GlobeNewswire, www.globenewswire.com

SOURCE: Neutral Tandem, Inc.

CONTACT:  Neutral Tandem, Inc.
MEDIA CONTACT:
Gerard Laurain
(312) 384-8041
INVESTOR CONTACT:
Jim Polson
1-866-268-4744

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