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Press Release -- November 3rd, 2011
Source: AboveNet
Tags: Earnings, Equipment, Exchange

AboveNet Reports Third Quarter 2011 Adjusted EBITDA of $56.4 Million on Revenue of $118.2 Million

WHITE PLAINS, N.Y., Nov 03, 2011 (BUSINESS WIRE) --

AboveNet, Inc. (NYSE:ABVT, news, filings), a leading provider of high bandwidth connectivity solutions, announced results for the third quarter and nine months ended September 30, 2011.

"Our third quarter performance demonstrates the strengths of our recurring revenue model and balance sheet combined with the continued broadening of demand for our high bandwidth infrastructure services," said Bill LaPerch, Chief Executive Officer of AboveNet. "Revenue for the third quarter, excluding one-time equipment sales and contract termination revenue, grew by 14.0% year-over-year and by 3.2% sequentially. Growth was led once again by our WAN services, which leverage the network reach of our metro assets to meet customer requirements for end-to-end connectivity. We remain focused on executing our organic growth strategy to capture opportunities for high capacity transport, expand our addressable market and further leverage our facilities-based network."

Third Quarter 2011 Highlights

  • Revenue for the third quarter of 2011 was $118.2 million, a 14.0% increase from $103.7 million for the third quarter of 2010.
  • Revenue from domestic metro services for the third quarter of 2011 totaled $32.7 million, an increase of 12.0% from $29.2 million for the third quarter of 2010. Revenue from domestic WAN services for the third quarter of 2011 was $26.9 million, an increase of 30.6% over $20.6 million for the third quarter of the prior year.
  • Adjusted EBITDA for the third quarter of 2011 was $56.4 million, compared to $47.2 million for the third quarter of 2010.
  • Cash used for capital expenditures for the third quarter of 2011 was $40.2 million, compared to $30.5 million for the third quarter of last year.
  • Cash and cash equivalents at September 30, 2011 were $101.9 million, compared to $61.6 million at December 31, 2010.

Financial Results for the Three Months Ended September 30, 2011

Revenue for the third quarter of 2011 was $118.2 million, a 14.0% increase from $103.7 million for the third quarter of 2010. Revenue included contract termination revenue of $0.8 million for the third quarter of 2011, compared to $0.7 million for the third quarter of 2010. Also included in revenue was equipment sales of $0.7 million for the third quarter of 2011, compared to $0.6 million for the prior year quarter. Excluding contract termination revenue and equipment sales from each period, revenue would have been $116.7 million for the third quarter of 2011 and $102.4 million for the third quarter of 2010, an increase of $14.3 million, or 14.0%.

For the third quarter of 2011, revenue from domestic operations was $106.8 million, compared to $94.3 million for the third quarter of last year. Revenue from domestic metro services for the third quarter of 2011 totaled $32.7 million, up 12.0% from $29.2 million for the third quarter of 2010. Revenue from domestic WAN services for the third quarter of 2011 was $26.9 million, an increase of 30.6% from $20.6 million for the third quarter of 2010. Revenue from domestic fiber infrastructure services for the third quarter of 2011 totaled $45.8 million, an increase of 6.0% from $43.2 million for the third quarter of the prior year. Revenue from our foreign operations, primarily in the U.K., for the third quarter of 2011 was $11.4 million, an increase of 21.3% from $9.4 million for the third quarter of 2010. This increase is primarily due to the increase in volume of services provisioned combined with the benefit of the strengthening of the British pound versus the U.S. dollar during the third quarter of 2011 compared to the third quarter of 2010.

Costs of revenue for the third quarter of 2011 were $37.8 million, an increase of 5.9% over $35.7 million for the third quarter of the prior year. The increase in costs of revenue primarily reflects increases in costs associated with third party network costs, payroll-related expenses and co-location expenses, partially offset by the reversal of accruals in the U.K. for certain business tax rates on fiber and data telco and third party network costs that are no longer required. Selling, general and administrative expenses for the third quarter of 2011 were $30.1 million, an increase of 30.3% from $23.1 million for the third quarter of last year. This increase is primarily a result of increases in non-cash stock-based compensation, sales commissions, third party commissions, occupancy costs and property taxes. Depreciation and amortization expense for the third quarter of 2011 was $18.9 million, compared to $15.8 million for the three months ended September 30, 2010. This increase is primarily due to the depreciation expense on property and equipment placed into service in 2011 and the full period effect of depreciation on property and equipment placed into service in 2010 subsequent to June 30, 2010.

Operating income for the third quarter of 2011 was $31.4 million, an increase from $29.1 million for the third quarter of 2010, reflecting the changes in the components of operating income discussed above. The provision for income taxes, which is substantially non-cash, was $12.2 million in the third quarter of 2011 and $11.7 million in the third quarter for 2010. Net income for the third quarter of 2011 was $18.0 million, or $0.67 per diluted share, compared to $17.2 million, or $0.66 per diluted share, for the third quarter of the prior year.

Adjusted EBITDA for the third quarter of 2011 was $56.4 million, compared to $47.2 million for the third quarter of last year. Adjusted EBITDA Margin for the third quarter of 2011 was 47.7%, compared to 45.5% for the third quarter of 2010.

Financial Results for the Nine Months Ended September 30, 2011

Revenue for the nine months ended September 30, 2011 was $350.9 million, a 16.3% increase from $301.6 million for the nine months ended September 30, 2010. Revenue included contract termination revenue of $3.9 million for the nine months ended September 30, 2011, compared to $2.3 million for the nine months of the prior year. Also included in revenue was equipment sales of $7.3 million for the first nine months of the year, compared to $2.9 million for the prior year period. Excluding contract termination revenue and equipment sales from each period, revenue would have been $339.7 million for the nine months ended September 30, 2011 and $296.4 million for the nine months ended September 30, 2010, an increase of $43.3 million, or 14.6%.

For the nine months ended September 30, 2011, revenue from domestic operations was $317.8 million, compared to $274.3 million for the nine months of last year. Revenue from domestic metro services for the first nine months of 2011 totaled $96.2 million, up 14.4% from $84.1 million for the nine months ended September 30, 2010. Revenue from domestic WAN services for the nine months ended September 30, 2011 was $74.2 million, an increase of 26.6% from $58.6 million for the nine months ended September 30, 2010. Revenue from domestic fiber infrastructure services for the first nine months of 2011 totaled $136.2 million, an increase of 7.8% from $126.4 million for the nine months ended September 30, 2010. Revenue from our foreign operations, primarily in the U.K., for the nine months ended September 30, 2011 was $33.1 million, an increase of 21.2% from $27.3 million for the first nine months of 2010. This increase is due to the increase in volume of services provisioned combined with the benefit of the strengthening of the British pound versus the U.S. dollar during the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010.

Costs of revenue for the nine months ended September 30, 2011 were $118.7 million, an increase of 15.4% from $102.9 million for the first nine months of 2010. The increase in costs of revenue primarily reflects increases in costs associated with equipment sales, payroll-related expenses, co-location expenses and third party network costs, partially offset by the reversal of accruals in the U.K. for certain business tax rates on fiber and data telco and third party network costs that are no longer required. Selling, general and administrative expenses for the nine months ended September 30, 2011 were $90.3 million, an increase of 29.6% from $69.7 million for the first nine months of 2010. This increase is primarily a result of increases in non-cash stock-based compensation, sales commissions, third party commissions, property taxes and occupancy costs. Depreciation and amortization expense for the nine months ended September 30, 2011 was $56.4 million, compared to $46.5 million for the nine months ended September 30, 2010. This increase is primarily due to the depreciation expense on property and equipment placed into service in 2011 and the full period effect of depreciation on property and equipment placed into service during 2010.

Operating income for the nine months ended September 30, 2011 was $85.5 million, a slight increase over $82.5 million for the first nine months of 2010, reflecting the changes in the components of operating income discussed above. Net income for the nine months ended September 30, 2011 was $48.6 million, or $1.81 per diluted share, compared to $47.1 million, or $1.80 per diluted share, for the nine months ended September 30, 2010.

Adjusted EBITDA for the nine months ended September 30, 2011 was $161.9 million, compared to $135.5 million for the first nine months of 2010. Adjusted EBITDA Margin for the nine months ended September 30, 2011 was 46.1%, compared to 44.9% for the nine months ended September 30, 2010.

Guidance

The Company narrowed and raised 2011 revenue guidance to $468 million - $472 million from the high end of the prior range of $460 million - $470 million. The Company expects Adjusted EBITDA Margin for the full year 2011 to be slightly lower than the Adjusted EBITDA Margin for the nine months ended September 30, 2011 of 46.1%. Prior guidance was for 2011 Adjusted EBITDA Margin to be approximately in-line with 2010 actual Adjusted EBITDA Margin. The Company's guidance for full year 2011 cash used for capital expenditures remains at $140 million - $150 million. Management stated that Adjusted EBITDA is expected to exceed cash used for capital expenditures in full year 2011.

Non-GAAP Financial Measures

"Adjusted EBITDA" is defined as net income before provision for (benefit from) income taxes, other income/expense, interest income/expense, gain on reversal of foreign currency translation adjustments from liquidation of subsidiaries, income/loss from discontinued operations, gain/loss on asset dispositions, depreciation and amortization, and non-cash stock-based compensation. Adjusted EBITDA Margin is defined as Adjusted EBITDA divided by revenue. Adjusted EBITDA and Adjusted EBITDA Margin are not intended to replace operating income (loss), net income (loss), cash flow and other measures of financial performance and liquidity reported in accordance with accounting principles generally accepted in the United States. Rather, Adjusted EBITDA and Adjusted EBITDA Margin are measures of operating performance that investors may consider in addition to such measures. AboveNet's management believes that adjusted or modified EBITDA and its related margin are measures of operating performance that are commonly reported and widely used by analysts, investors and other interested parties in the telecommunications industry because they eliminate many differences in financial, capitalization, and tax structures, as well as certain non-cash and non-operating charges to earnings. AboveNet's management currently uses Adjusted EBITDA and Adjusted EBITDA Margin for these purposes. AboveNet's management believes that Adjusted EBITDA and Adjusted EBITDA Margin trends can be used as indicators of whether the Company's operations are able to produce sufficient operating cash flow to fund working capital needs, service debt obligations and fund capital expenditures.

Adjusted EBITDA is also used by the Company for other purposes, including, management's assessment of ongoing operations and as a measure for performance-based compensation. However, the definition of adjusted EBITDA for other purposes may differ from the definition of Adjusted EBITDA used herein. For example, since 2009 the definition of adjusted EBITDA in the Company's incentive cash bonus plan has excluded certain customer termination revenue. Additionally, Adjusted EBITDA as used in this press release may not be calculated identically to similarly titled measures reported by other companies. The Company also reviews revenue, net of contract termination revenue and revenue, net of contract termination revenue and equipment sales as well as revenue in local currency. Revenue, net of contract termination revenue shows the change in the Company's recurring revenue from period to period excluding the impact of non-recurring contract termination revenue. Revenue, net of contract termination revenue and equipment sales shows the change in the Company's recurring revenue from period to period excluding the impact of non-recurring contract termination revenue and equipment sales. Revenue in local currency shows the changes of foreign subsidiary revenue without the impact of currency fluctuations. Management believes these non-GAAP metrics provide helpful insight into revenue trends.

Conference Call

AboveNet will hold a conference call to report third quarter 2011 results at 10:00 a.m. ET today, November 3, 2011. The dial in number for the call is 866-394-9472, conference ID is 15993844. The call is also being webcast with an accompanying presentation, which can be accessed through the investor relations section of AboveNet's website athttp://investors.above.net. A replay of the call will be available from 1:00 p.m. ET on November 3 until 11:59 p.m. ET on November 9. To listen to the telephone replay in the U.S., please dial 855-859-2056 and for international callers, please dial 404-537-3406. The conference ID is the same as above. The webcast and the slide presentation will also be archived in the investor relations section of AboveNet's website for 90 days.

About AboveNet, Inc.

AboveNet, Inc. is a leading provider of high bandwidth connectivity solutions for businesses and carriers. Its private optical network delivers key network and IP services in and among top U.S. and European markets. AboveNet's network is widely used in demanding markets such as financial and legal services, media, health care, retail and government.

Forward Looking Statements

Statements made in this press release that are not historical in nature constitute forward-looking statements within the meaning of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. We cannot assure you that the future results expressed or implied by the forward-looking statements will be achieved. Such statements are based on the current expectations and beliefs of the management of AboveNet, Inc. and are subject to a number of risks and uncertainties that could cause actual results to differ materially from the future results expressed or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to, industry competition, pricing and macro-economic conditions and the Company's financial and operating prospects. The Company's business could be materially adversely affected and the trading price of the Company's common stock could decline if these risks and uncertainties develop into actual events. The Company cautions you not to place undue reliance on these forward-looking statements, which speak only as of their respective dates. The Company undertakes no obligation to publicly update or revise forward-looking statements to reflect events or circumstances after the date of this press release or to reflect the occurrence of unanticipated events. A more detailed discussion of factors that may affect the Company's business and future financial results is included in the Company's SEC filings, including, but not limited to, those described in "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the year ended December 31, 2010 and subsequently filed Quarterly Reports on Form 10-Q. We discuss certain non-GAAP financial measures in this press release and provide the GAAP financial measures that correspond to such non-GAAP measures, as well as the reconciliation between the two.

ABOVENET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share information)
September 30, December 31,
2011 2010
(Unaudited)
ASSETS:
Current assets:
Cash and cash equivalents $101.9 $61.6
Restricted cash and cash equivalents 4.7 3.7
Accounts receivable, net of allowances for doubtful accounts of $2.1 and $1.8 at
September 30, 2011 and December 31, 2010, respectively 32.4 27.5
Prepaid costs and other current assets 14.2 14.8
Total current assets 153.2 107.6
Property and equipment, net of accumulated depreciation and amortization of $337.3 and
$285.3 at September 30, 2011 and December 31, 2010, respectively 590.9 540.8
Deferred tax assets 117.8 149.7
Other assets 15.0 9.7
Total assets $876.9 $807.8
LIABILITIES:
Current liabilities:
Accounts payable $9.0 $9.4
Accrued expenses 75.3 71.8
Deferred revenue - current portion 25.9 27.3
Note payable - current portion -- 7.6
Total current liabilities 110.2 116.1
Note payable 55.0 42.1
Deferred revenue 80.2 87.0
Other long-term liabilities 10.3 10.1
Total liabilities 255.7 255.3
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Preferred stock, 9,500,000 shares authorized, $0.01 par value, none issued or outstanding -- --
Junior preferred stock, 500,000 shares authorized, $0.01 par value, none issued or
outstanding -- --
Common stock, 200,000,000 shares authorized, $0.01 par value, 26,451,871 issued and
25,822,393 outstanding at September 30, 2011 and 26,422,885 issued and 25,799,358
outstanding at December 31, 2010 0.3 0.3
Additional paid-in capital 352.6 332.4
Treasury stock, at cost, 629,478 and 623,527 shares at September 30, 2011 and
December 31, 2010, respectively (23.1) (22.8)
Accumulated other comprehensive loss (9.0) (9.2)
Retained earnings 300.4 251.8
Total shareholders' equity 621.2 552.5
Total liabilities and shareholders' equity $876.9 $807.8
ABOVENET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except share and per share information)
(Unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
2011 2010 2011 2010
Revenue $118.2 $103.7 $350.9 $301.6
Costs of revenue (excluding depreciation and
amortization, shown separately below) 37.8 35.7 118.7 102.9
Selling, general and administrative expenses 30.1 23.1 90.3 69.7
Depreciation and amortization 18.9 15.8 56.4 46.5
Operating income 31.4 29.1 85.5 82.5
Other income (expense):
Interest income 0.1 0.1 0.1 0.1
Interest expense (1.2) (1.3) (3.5) (3.7)
Other income (expense), net (0.1) 1.0 (0.5) 0.6
Income before income taxes 30.2 28.9 81.6 79.5
Provision for income taxes 12.2 11.7 33.0 32.4
Net income $18.0 $17.2 $48.6 $47.1
Income per share, basic:
Basic income per share $0.69 $0.68 $1.88 $1.88
Weighted average number of common shares 25,821,643 25,340,842 25,814,810 25,144,979
Income per share, diluted:
Diluted income per share $0.67 $0.66 $1.81 $1.80
Weighted average number of common shares 26,776,938 26,249,408 26,795,700 26,225,131
ABOVENET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(Unaudited)
Nine Months Ended September 30,
2011 2010
Cash flows provided by operating activities:
Net income $48.6 $47.1
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization 56.4 46.5
Loss on sale or disposition of property and equipment, net 0.2 0.1
Provision for equipment impairment 0.1 0.4
Provision for bad debts 0.4 0.4
Non-cash stock-based compensation expense for restricted stock units 19.9 6.5
Non-cash stock-based compensation expense for employee stock purchase plan 0.1 --
Change in deferred tax assets 32.1 31.6
Changes in operating working capital:
Accounts receivable (5.2 ) 0.9
Prepaid costs and other current assets 0.6 (5.4 )
Other assets 1.6 (2.2 )
Accounts payable (0.5 ) (4.8 )
Accrued expenses 2.6 2.6
Deferred revenue (7.3 ) (6.7 )
Other long-term liabilities -- 0.3
Net cash provided by operating activities 149.6 117.3
Cash flows used in investing activities:
Proceeds from sales of property and equipment 0.1 0.3
Purchases of property and equipment (108.6 ) (88.0 )
Net cash used in investing activities (108.5 ) (87.7 )
Cash flows used in financing activities:
Proceeds from borrowing under $250 Million Secured Revolving Credit Facility, net of debt issuance costs 50.0 --
Proceeds from exercise of options to purchase shares of common stock 0.2 0.6
Proceeds from exercise of warrants -- 5.0
Change in restricted cash and cash equivalents (1.0 ) 0.1
Principal payment - note payable (49.7 ) (5.6 )
Principal payment - capital lease obligation (0.2 ) --
Purchase of treasury stock (0.3 ) (0.3 )
Net cash used in financing activities (1.0 ) (0.2 )
Effect of exchange rates on cash 0.2 0.1
Net increase in cash and cash equivalents 40.3 29.5
Cash and cash equivalents, beginning of period 61.6 165.3
Cash and cash equivalents, end of period $101.9 $194.8
Supplemental cash flow information:
Cash paid for interest $1.7 $2.3
Cash paid for income taxes $1.6 $0.4
Supplemental non-cash financing activities:
Issuance of shares of common stock in cashless exercise of stock purchase warrants $-- $5.3
Non-cash purchase of shares into treasury in cashless exercise of stock purchase warrants $-- $5.3
ABOVENET, INC. AND SUBSIDIARIES
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
(dollars in millions)
(Unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
2011 2010 2011 2010
Reconciliation of Net Income to Adjusted EBITDA
NET INCOME $18.0 $17.2 $48.6 $47.1
Interest income (0.1) (0.1) (0.1) (0.1)
Interest expense 1.2 1.3 3.5 3.7
Other (income) expense, net 0.1 (1.0) 0.5 (0.6)
Provision for income taxes 12.2 11.7 33.0 32.4
OPERATING INCOME 31.4 29.1 85.5 82.5
Depreciation and amortization 18.9 15.8 56.4 46.5
Non-cash stock-based compensation 6.1 2.3 20.0 6.5
Adjusted EBITDA $56.4 $47.2 $161.9 $135.5
Calculation of Adjusted EBITDA Margins
Adjusted EBITDA $56.4 $47.2 $161.9 $135.5
Revenue $118.2 $103.7 $350.9 $301.6
Adjusted EBITDA Margin 47.7% 45.5% 46.1% 44.9%
Reconciliation of Revenue to Revenue, Net of Contract Termination Revenue and Equipment Sales
Revenue $118.2 $103.7 $350.9 $301.6
Less: Contract Termination Revenue (0.8) (0.7) (3.9) (2.3)
Revenue, Net of Contract Termination Revenue 117.4 103.0 347.0 299.3
Less: Equipment Sales (0.7) (0.6) (7.3) (2.9)
Revenue, Net of Contract Termination Revenue
and Equipment Sales $116.7 $102.4 $339.7 $296.4

SOURCE: AboveNet, Inc.

AboveNet, Inc.
Jeffrey Garte, 914-421-6700
Vice President, Finance
jgarte@above.net
or
Investor:
Lippert/Heilshorn & Associates, Inc
Jody Burfening, 212-838-3777
jburfening@lhai.com

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