ESCH Eschelon Telecom (MM)

Eschelon Telecom, Inc. (NASDAQ:ESCH): Highlights for Q1 2007: Record number of lines sold Record line installations Record lines in service Solid customer line churn results 34% year over year revenue growth 48% year over year adjusted EBITDA growth Announced agreement to be acquired by Integra Telecom, Inc. (NASDAQ:ESCH): Eschelon Telecom, Inc., a provider of integrated communications services to small and medium sized businesses in the western United States, today announced results for the quarter ended March 31, 2007. �We had a strong start to 2007; we continue to meet or exceed our financial and operating targets,� stated Richard A. Smith, Eschelon�s President and Chief Executive Officer. �We are seeing the results from the investments we made last year in the expansion of our sales force, new products and synergies from acquired companies. These have proven to be prudent investments allowing us to grow revenue, EBITDA and net income. �We had some great operational successes in the first quarter as well,� continued Smith. �We opened our West Coast Customer Operations Center in Salem, Oregon providing geographic diversity to our customer operations and we completed a complex system integration project that will greatly improve the speed and efficiency of the new order fulfillment process. We also completed the integrations of both the Oregon Telecom and Tel West customer bases and on May 1, 2007, we closed the UNICOM transaction right on schedule. I�m very proud of the Eschelon team of associates and what we have accomplished.� The following table highlights financial and operating results (dollars in thousands, except per unit amounts): 1Q 2007 4Q 2006 1Q 2006 Total Revenue $80,307� $76,744� $59,726� Total Gross Profit (a) $47,142� $44,517� $34,410� Total Gross Margin (%) (a) 59% 58% 58% Adjusted EBITDA $17,793� $16,008� $12,057� Net Income (Loss) $22� $10� $(1,583) Capital Expenditures $17,707� $21,254� $9,021� Cash and Investments (at end of period) $26,503� $39,467� $75,268� � Voice Lines In Service (at end of period) 370,525� 363,375� 273,449� Data Lines In Service (at end of period) 256,972� 234,954� 154,072� Total Lines In Service (at end of period) 627,497� 598,329� 427,521� Lines On-Net (%) (at end of period) 86.0% 85.0% 87.1% Lines Sold 45,582� 44,471� 30,740� Average Monthly Line Churn (%) 1.27% 1.03% 1.56% Average Network Revenue per Line per Month $39.24� $39.77� $41.61� � Total Employees (at end of period) 1,393� 1,385� 1,100� Quota-Carrying Network Service Salespeople (at end of period) 277� 265� 205� (a) Gross profit is defined as revenue less network services expense (excluding depreciation and amortization) and business telephone systems cost of revenue. Total revenues for the first quarter of 2007 were $80.3 million, an increase of $3.6 million from the fourth quarter of 2006 and an increase of $20.6 million from the first quarter of 2006. The increases were primarily due to the inclusion of the companies acquired during 2006 and access line growth. Gross profit for the first quarter of 2007 was $47.1 million, an increase of $2.6 million from the fourth quarter of 2006 and an increase of $12.7 million from the first quarter of 2006. The increases were primarily due to the inclusion of the companies acquired during 2006 and access line growth. Gross profit as presented is defined as revenue less network services expense (excluding depreciation and amortization) and business telephone systems cost of revenue. Gross profit is not intended to replace operating income (loss), net income (loss), cash flow and other measures of financial performance reported in accordance with generally accepted accounting principles (�GAAP�) in the United States. Management uses this definition of gross profit as a measure of operating performance. Below is a schedule reconciling reported GAAP operating income to gross profit as presented. Eschelon Telecom, Inc. Consolidated Operating Income to Gross Profit Reconciliation (In Thousands) � 1Q 2007 � 4Q 2006 � 1Q 2006 Operating Income $ 5,407� $ 4,032� $ 1,535� Sales, general and administrative expense 29,899� 29,048� 22,699� Depreciation and amortization expense 11,836� � 11,437� � 10,176� Gross Profit $ 47,142� � $ 44,517� � $ 34,410� Sales, general and administrative expenses for the first quarter of 2007 were $29.9 million, an increase of $0.9 million from the fourth quarter of 2006 and an increase of $7.2 million from the first quarter of 2006. The increase from 2006 was primarily due to the inclusion of companies acquired during 2006 and an increase in costs associated with the sales force expansion. The increase from the fourth quarter was primarily due to the inclusion of OneEighty Communications and Mountain Telecommunications for a full quarter in 2007. Adjusted EBITDA for the first quarter of 2007 was $17.8 million, an increase of $1.8 million from the fourth quarter of 2006 and an increase of $5.7 million from the first quarter of 2006. Adjusted EBITDA is a non-GAAP measure. Below is a schedule reconciling reported GAAP net income (loss) to EBITDA and Adjusted EBITDA. Eschelon Telecom, Inc. Consolidated Net Income (Loss) to EBITDA and Adjusted EBITDA Reconciliation (In Thousands) � 1Q 2007 � 4Q 2006 � 1Q 2006 Net Income (Loss) $ 22� $ 10� $ (1,583) Interest expense, net 4,382� 4,011� 3,167� Depreciation and amortization 11,836� � 11,437� � 10,176� EBITDA 16,240� 15,458� 11,760� Share-based compensation expense 550� 538� 346� Loss (gain) on disposal of assets (5) 2� 29� Loss (gain) on sale of available-for-sale securities -� 19� (78) Other (income) expense, net 1,008� � (9) � -� Adjusted EBITDA $ 17,793� � $ 16,008� � $ 12,057� Capital expenditures for the first quarter of 2007 were $17.7 million, a decrease of $3.5 million from the fourth quarter of 2006 and an increase of $8.7 million from the first quarter of 2006. Capital expenditures typically fluctuate by quarter depending upon timing of major equipment purchases. The primary drivers for the increase from first quarter of 2006 are the collocation expansion and line/customer growth. Net income for the first quarter of 2007 was $0.02 million, an increase of $0.01 million from the fourth quarter of 2006 and an increase of $1.6 million compared to a net loss of $1.6 million in the first quarter of 2006. The improvement from the first quarter of 2006 was primarily due to the inclusion of the companies acquired during 2006 and higher access lines in service. Net income for the first quarter of 2007 compared to the fourth of 2006 was relatively flat. First quarter operating income increased by $1.4 million from the previous quarter however, the company incurred approximately $1.0 million of expenses related to the pending merger with Integra Telecom announced on March 20, 2007. Interest income was also lower in the first quarter due to the lower level of available-for-sale securities. Cash, restricted cash and available-for-sale securities at March 31, 2007 were $26.5 million, a decrease of $13.0 million from December 31, 2006. The decrease is primarily due to the $6.5 million semi-annual senior note interest payment in March, $1.9 million of costs related to acquiring Tel West lines, escrowing $3.5 million for the acquisition of UNICOM and paying $1.0 million in costs related to the pending merger with Integra. Supplemental Information Supplemental information with additional detail for the quarter ended March 31, 2007 as well as 2007 guidance is available on Eschelon�s web site at www.eschelon.com. Investor Call Management is holding an investor conference call today, May 4, 2007 at 10:00 a.m. (CT) to discuss quarterly results. Investors are invited to participate by dialing (800) 218-8862. A replay will be available through May 11, 2007 by dialing (800) 405-2236 (pass code 11088692#). About Eschelon Telecom, Inc. Eschelon Telecom, Inc. is a facilities-based competitive communications services provider of voice and data services and business telephone systems in 52 markets in the western United States. Headquartered in Minneapolis, Minnesota, the company currently employs approximately 1,470 telecommunications/Internet professionals, serves over 65,000 business customers and has approximately 655,000 access lines in service throughout its markets in Arizona, California, Colorado, Minnesota, Montana, Nevada, Oregon, Utah and Washington. For more information, please visit our web site at www.eschelon.com. Forward Looking Statements This announcement contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The forward-looking statements are based on Eschelon Telecom�s current intent, belief and expectations. These statements are not guarantees of future performance and are subject to certain risks and uncertainties that are difficult to predict. Actual results may differ materially from these forward-looking statements because of the company�s history of losses, ability to maintain relationships with RBOCs, substantial indebtedness, difficulties inherent in making and integrating acquisitions, intense competition, dependence on key management, changes in government regulations, and other risks that may be described in the company�s filings with the Securities and Exchange Commission. Existing and prospective investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today�s date. Eschelon Telecom undertakes no obligation to update or revise the information contained in this announcement, whether as a result of new information, future events or circumstances or otherwise. Eschelon Telecom, Inc. Unaudited Consolidated Statements of Operations (Dollars In Thousands, Except per Share Amounts) � 1Q 2007 � 4Q 2006 � 1Q 2006 Revenue: Network services $ 72,754� $ 68,624� $ 52,785� Business telephone systems 7,553� � 8,120� � 6,941� Total revenue 80,307� 76,744� 59,726� � Costs and expenses: Network services expense (excluding depreciation and amortization) 28,541� 27,386� 20,763� Business telephone systems cost of revenue 4,624� 4,841� 4,553� Sales, general and administrative 29,899� 29,048� 22,699� Depreciation and amortization 11,836� � 11,437� � 10,176� Operating income 5,407� 4,032� 1,535� � Other income (expense): Interest income 391� 691� 233� Interest expense (4,773) (4,702) (3,400) Other income (expense), net (1,003) � (11) � 49� Income (loss) before taxes 22� 10� (1,583) Income taxes -� � -� � -� Net income (loss) $ 22� � $ 10� � $ (1,583) � Net income (loss) per share: Basic and diluted $ 0.00� � $ 0.00� � $ (0.11) � Weighted average shares outstanding: Basic 17,648,167� � 17,568,620� � 14,680,783� Diluted 18,320,919� � 18,155,609� � 14,680,783� Eschelon Telecom, Inc. Consolidated Balance Sheets (In Thousands) � March 31, December 31, 2007 � 2006 � Assets Current assets: Cash and cash equivalents $ 21,155� $ 21,146� Restricted cash 650� 1,224� Available-for-sale securities 4,698� 17,097� Accounts receivable, net 27,232� 27,592� Other receivables 4,737� 4,025� Inventories 3,322� 3,552� Prepaid expenses 6,955� � 2,314� Total current assets 68,749� 76,950� � Property and equipment, net 149,385� 145,785� � Other assets 1,528� 2,185� Goodwill 59,670� 59,670� Intangible assets, net 47,870� � 45,931� Total assets $ 327,202� � $ 330,521� � Liabilities and stockholders' equity Current liabilities: Accounts payable $ 16,564� $ 17,641� Accrued telecommunication costs 3,870� 5,730� Accrued office rent 2,471� 2,521� Accrued interest expense 601� 3,829� Other accrued expenses 7,660� 7,433� Deferred revenue 10,337� 10,109� Accrued compensation expenses 5,700� 4,174� Capital lease obligations, current maturities 2,334� � 3,131� Total current liabilities 49,537� 54,568� � Long-term liabilities: Other long-term liabilities 1,256� 1,262� Capital lease obligations, less current maturities 2,215� 2,201� Notes payable 141,951� � 141,040� Total liabilities 194,959� 199,071� � Stockholders' equity: Common stock 177� 176� Additional paid-in capital 289,871� 289,101� Accumulated other comprehensive income -� -� Accumulated deficit (157,805) � (157,827) Total stockholders' equity 132,243� � 131,450� Total liabilities and stockholders' equity $ 327,202� � $ 330,521� Eschelon Telecom, Inc. Consolidated Statements of Cash Flows (In Thousands) � Three months ended March 31, 2007 � 2006 Operating activities Net income (loss) $ 22� $ (1,583) Adjustments to reconcile net income (loss) to net�cash provided by operating activities: Depreciation and amortization expense 11,836� 10,176� Provision for bad debt expense 265� 275� Non-cash interest expense, net of non-cash interest income 1,220� 916� Non-cash shared-based compensation expense 550� 346� Other non-cash items (5) (49) Changes in operating assets and liabilities: Accounts receivable 95� 961� Inventories 230� (331) Prepaid expenses and other assets (4,696) (1,416) Accounts payable and accrued expenses (5,987) (1,775) Deferred revenue 228� 11� Accrued compensation expense 1,526� � 737� Net cash provided by operating activities 5,284� 8,268� � Investing activities Purchases of available-for-sale securities (3,750) -� Proceeds from sales of available-for-sale securities 16,150� 4,000� Purchases of property and equipment (11,152) (5,360) Cash paid for customer installation costs (6,521) (3,640) Proceeds from sales of assets 9� 28� Decrease in restricted cash 574� � 103� Net cash used in investing activities (4,690) (4,869) � Financing activities Proceeds from issuance of notes payable -� 45,600� Payments made on notes and capital lease obligations (806) (638) Proceeds from issuance of stock, net of fees 221� 153� Increase in debt issuance costs -� � (996) Net cash (used in) provided by financing activities (585) � 44,119� � Net increase in cash and cash equivalents 9� 47,518� Cash and cash equivalents at beginning of period 21,146� � 26,062� Cash and cash equivalents at end of period $ 21,155� � $ 73,580� � Supplemental cash flow information Cash paid for interest $ 3,552� � $ 2,485� � Supplemental non-cash activities Equipment purchases under capital leases $ 34� � $ 21�