SureWest Reports Fourth Quarter and Full Year 2005 Results

SureWest Reports Fourth Quarter and Full Year 2005 Results

Annual Revenues Top $218 Million; Net Income Reaches $6.4 million

ROSEVILLE, Calif., Feb. 28 /PRNewswire-FirstCall/ -- Leading independent telecommunications holding company SureWest Communications (NASDAQ:SURW) announced operating results today for the quarter and year ended December 31, 2005. Total operating revenues grew from $211.8 million in 2004 to $218.6 million in 2005, yielding net income of $6.4 million in 2005 as compared to a loss of $1.1 million in 2004. In the fourth quarter of 2005, net income was $1.4 million on operating revenues of $53.9 million. In the year earlier quarter, the Company recorded a net loss of $1.5 million on operating revenues of $54.8 million.

(Logo: http://www.newscom.com/cgi-bin/prnh/20050908/SFSUREWESTLOGO )
Other highlights from 2005, with comparisons to 2004 include:

-- Consolidated Operating EBITDA of $69.7 million, up 40%; Broadband
segment up 58%, Wireless segment up 81% and Telecom segment up 5%
-- Broadband revenues of $49.9 million, up 27%; Wireless revenues of
$34.2 million, up 9%
-- Consolidated revenues up 3%; total operating expenses down nearly 4%
-- Capital expenditures of $69.8 million, down 2%

"In 2005 the Company demonstrated its ability to continue to drive top line revenue growth by increasing our subscriber base and by selling more products and services to our existing customers," commented Steve Oldham, president and chief executive officer. "Our Fiber-to-the-Premise (FTTP) customers increased by 28% over 2004 and the demand for subscribed revenue generating products from those customers increased by 30%.

"We will continue to keep a focus on reducing costs and gaining efficiencies in every business segment, while we aggressively pursue revenue growth," continued Oldham. "We are strengthening our position in the market place -- providing superior products at competitive prices. SureWest continues to differentiate itself from competitors by providing superior customer service and reaching out to customers."

Consolidated Results

Consolidated 2005 revenues of $218.6 million represent a 3% increase over 2004 revenues, with Broadband and Wireless revenues contributing 39% of the consolidated total. A regulatory change in accounting estimate increased revenues by $2.9 million in the fourth quarter of 2004, as a result of a shareable earnings settlement agreement approved by the California Public Utilities Commission. This contributed to slightly lower fourth quarter 2005 revenues of $53.9 million compared to the year-earlier quarter.

Total operating expenses decreased by almost 4% on a consolidated basis in 2005, while consolidated operating expenses, exclusive of depreciation and amortization, decreased 8% year-over-year to $148.9 million. Consolidated operating expenses in the fourth quarter of 2005 were down nearly 13% from the fourth quarter of 2004, to $50.3 million. In both reporting periods, the reduction in expenses was due, in part, to the inclusion in 2004 of approximately $3.8 million in costs associated with the Company's early retirement program. The impact of labor cost reductions continues to be the largest factor in operating expense reductions.

Full year operating earnings before interest, taxes, depreciation and amortization (defined as Operating EBITDA and reconciled to GAAP results in the accompanying tables) increased by nearly $20 million, or 40%, to $69.7 million on a consolidated basis. As a percentage of revenue, Operating EBITDA margin was almost 32% for the year. In the fourth quarter of 2005 Operating EBITDA grew to $17.6 million or by more than 78% compared to the prior year quarter.

Fourth quarter and full year 2005 income before income taxes benefited from the resolution of a claim filed in 2003 in the MCI bankruptcy proceeding. SureWest received a distribution of cash and stock with a combined value of approximately $1.4 million which increased revenues and decreased expenses in the fourth quarter of 2005.

Net income for the year totaled $6.4 million, or $0.44 per share, up from a loss of $1.1 million or an $0.08 loss per share in 2004. In the fourth quarter of 2005, net income was $1.4 million, or $0.10 per share compared to a loss of $1.5 million or a $0.10 loss per share in 2004.

Business Segment Results

Telecom Segment

The Telecom segment includes the results of operations for the Company's Directories and Long Distance operations, as well as local, toll and network access service operations in the ILEC service territory. As of December 2005, long distance customers increased 10% compared to December 2004, resulting in a 12% increase in penetration, to just over 40%. The Telecom segment experienced a 2% decline in access lines in 2005, however, consolidated access lines, which include access lines from both the Telecom and Broadband segments, are up 1% over year end 2004.

Full-year 2005 Telecom revenues of $134.5 million represent a 5% decrease compared to 2004. Contributing to the decrease were declines in local and network access revenues resulting from competition from wireless (including SureWest Wireless) and wireline competitors in providing local access, a reduction in access lines, and the effects of the previously mentioned shareable earnings settlement agreement. Excluding the effects of the 2004 sharing agreement, Telecom segment revenues decreased less than 3% in 2005 compared to 2004. Fourth quarter 2005 revenues decreased 2% after eliminating the 2004 effect of the shareable earnings settlement agreement.

Operating expenses, exclusive of depreciation and amortization, decreased 17% and 7%, respectively, for the quarter and year ended December 2005. Cost savings in the Telecom segment related primarily to labor cost reductions from the Company's early retirement program, as well as operating efficiencies gained from the integration of customer support systems.

The Telecom segment continues to contribute strong Operating EBITDA and net income to consolidated operations, ending 2005 with Operating EBITDA of $79.0 million, a 5% increase compared to 2004, and net income of $30.0 million, an increase of 6% compared to 2004. For the fourth quarter of 2005, the Telecom segment posted Operating EBITDA of $20.2 million, an increase over the fourth quarter of 2004 of almost 16% and net income of $6.7 million, an increase of nearly 23% over the fourth quarter of 2004.

Broadband Segment

The Broadband segment includes results of operations for the Company's InfinitAccess(TM) bundled services. The combination of new customers and the sale of services to existing customers resulted in FTTP subscribers increasing 28% while revenue generating units from those customers increased 30%, year over year. Full year 2005 revenues increased 27% over 2004, bringing Broadband segment revenues to the $50 million milestone. Fourth quarter 2005 revenues increased 23% over fourth quarter 2004, to $13.2 million.

"The Broadband segment is clearly the fastest growing area of our business and we are very pleased with the segment results for 2005," commented Fred Arcuri, senior vice president and chief operating officer. "Improved customer satisfaction combined with our superior products is evident in the fourth quarter monthly Broadband churn rate of 1.4%, which is down from 1.8% in the fourth quarter of 2004."

Total Broadband segment operating expenses, exclusive of depreciation and amortization, of $59.9 million represents a 2% decrease compared to 2004, due in large part to consolidating billing systems and the resulting elimination of maintenance and service agreements associated with maintaining multiple systems. Total operating expenses, exclusive of depreciation and amortization, decreased 5% to $15.9 million in the fourth quarter of 2005.

Higher Broadband segment revenues coupled with lower overall expenses resulted in Operating EBITDA improvement of $11.6 million, or 58%, in 2005 compared to 2004, and net income improvement of more than 17%.

Wireless Segment

Subscribers in the Wireless segment increased over 2% as of December 2005 compared to December 2004, with a 5.7% increase in contract subscribers. At year-end, 92% of all wireless subscribers were on a one- or two-year contract. To address churn of 3.4% in the fourth quarter of 2005, new roaming packages were introduced late in the quarter.

Revenues for 2005 increased more than 9% over 2004, to $34.2 million; on a quarterly basis, Wireless segment revenues increased 4% to $8.4 million. Higher revenues were the result of the larger subscriber base, higher equipment prices, increases in long distance revenues resulting from the introduction of long distance calling plans and higher feature revenues.

Wireless segment operating expenses, exclusive of depreciation and amortization, declined from 2004 to 2005 by just over 1%, to $37.8 million. For the fourth quarter of 2005, operating expenses, exclusive of depreciation and amortization, decreased 12% over the fourth quarter of 2004 due in large part to reduced sales translating to lower commissions, and operating efficiencies resulting from company-wide contact center integration.

Wireless Operating EBITDA improved approximately 81% for both 2005 and the fourth quarter, for full year improvement in Operating EBITDA of $4.3 million. The net loss for the fourth quarter was reduced from $2.7 million in 2004 to $1.7 million in 2005, and for the full year, the net loss was reduced to $8.2 million from $10.8 million in 2004.

Balance Sheet Summary

Consolidated capital expenditures for 2005 totaled $69.8 million, representing a decrease of nearly 2% over 2004. Cash and equivalents, including short term investments, at December 31, 2005, were $8.3 million compared to $18.1 million at the end of 2004. Long-term obligations excluding the current portion at December 31, 2005, totaled $85.5 million compared to $89.1 million at year-end 2004. Short-term borrowings increased to $30 million at year-end 2005, from $10 million at year-end 2004.

SureWest paid $14.6 million in dividends in 2005, representing a quarterly payment of $0.25 per share. SureWest has paid 209 consecutive quarterly dividends.

Conference Call and Webcast

SureWest Communications will provide details about its results and business strategy on Wednesday, March 1, 2006 at 11:00 a.m. Eastern Time. A simultaneous live webcast of the call will be available at www.surw.com and will be archived shortly after the conclusion of the call for replay through the second quarter of 2006. Additionally, a telephone replay of the call will be available through Saturday, March 4, 2006 by dialing 888-286-8010 and entering passcode 26452794.

About SureWest

With more than 90 years in Northern California, SureWest and its family of companies together provide a wide variety of highly reliable advanced communications products and services. SureWest provides digital TV, fiber optics, PCS wireless, DSL, high-speed Internet access, data transport, local and long distance telephone service, and directories with the highest standards of customer care. For more information, visit the SureWest web site at www.surewest.com.

Safe Harbor Statement

Statements made in this news release that are not historical facts are forward-looking statements and are made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995. In some cases, these forward-looking statements may be identified by the use of words such as may, will, should, expect, plan, anticipate, or project or the negative of those words or other comparable words. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Such forward-looking statements are subject to a number of risks, assumptions and uncertainties that could cause the company's actual results to differ from those projected in such forward-looking statements.

Important factors that could cause actual results to differ from those set forth in the forward-looking statements include, but are not limited to: advances in telecommunications technology, changes in the telecommunications regulatory environment, changes in the financial stability of other telecommunications providers who are customers of the company, changes in competition in markets in which the company operates, adverse circumstances affecting the economy in California in general, and in the Sacramento, California Metropolitan area in particular, the availability of future financing, changes in the demand for services and products, new product and service development and introductions, pending and future litigation, and unanticipated changes in the growth of the company's emerging businesses, including the wireless, Internet, video and Competitive Local Exchange Carrier operating entities.

Contact: Karlyn Oberg
Director of Investor Relations
916-786-1799
k.oberg@surewest.com

SUREWEST COMMUNICATIONS
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Amounts in thousands, except per share amounts)

Quarter Quarter
Ended Ended
December 31, December 31, %
2005 2004 Change
Operating Revenues:
Local service $15,691 $19,160 -18.1%
Network access service 10,205 10,851 -6.0%
Directory advertising 4,338 4,091 6.0%
Long distance service 1,513 1,223 23.7%
Wireless service 8,441 8,091 4.3%
Internet service 4,599 4,218 9.0%
Residential broadband service 6,395 5,013 27.6%
Business broadband service 2,241 1,530 46.5%
Other 526 644 -18.3%
Total operating revenues 53,949 54,821 -1.6%

Operating expenses:
Cost of services and products
(exclusive of depreciation and
amortization) 17,973 22,956 -21.7%
Customer operations and selling 8,763 10,917 -19.7%
General and administrative 9,627 11,106 -13.3%
Depreciation and amortization 13,919 12,535 11.0%
Total operating expenses 50,282 57,514 -12.6%

Income (loss) from operations 3,667 (2,693) 236.2%

Other income (expense):
Investment income 262 36 627.8%
Interest expense (1,592) (1,211) 31.5%
Corporate treasury loss recovery -- 1,803
Other, net (165) (198) -16.7%
Total other expense, net (1,495) 430 -447.7%

Income (loss) before income taxes 2,172 (2,263) 196.0%

Income tax expense (benefit) 744 (795) 193.6%
Net income (loss) $1,428 $(1,468) 197.3%

Earnings per share:
Basic and diluted earnings (loss)
per share $0.10 $(0.10) 200.0%

Shares of common stock used to
calculate earnings (loss) per share:
Basic 14,552 14,534 0.1%
Diluted 14,631 14,534 0.7%

SUREWEST COMMUNICATIONS
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share amounts)

Year Ended Year Ended
December 31, December 31, %
2005 2004 Change
Operating Revenues:
Local service $63,522 $69,560 -8.7%
Network access service 44,214 46,161 -4.2%
Directory advertising 17,383 16,283 6.8%
Long distance service 6,016 5,184 16.0%
Wireless service 34,205 31,261 9.4%
Internet service 17,829 16,679 6.9%
Residential broadband service 23,991 17,077 40.5%
Business broadband service 8,095 5,660 43.0%
Other 3,333 3,898 -14.5%
Total operating revenues 218,588 211,763 3.2%

Operating expenses:
Cost of services and products
(exclusive of depreciation and
amortization) 77,071 80,853 -4.7%
Customer operations and selling 34,595 37,175 -6.9%
General and administrative 37,222 43,820 -15.1%
Depreciation and amortization 53,770 48,596 10.6%
Total operating expenses 202,658 210,444 -3.7%

Income from operations 15,930 1,319 1107.7%

Other income (expense):
Investment income 445 201 121.4%
Interest expense (5,675) (4,505) 26.0%
Corporate treasury loss recovery 1,803
Other, net (414) (443) -6.5%
Total other expense, net (5,644) (2,944) 91.7%

Income (loss) before income taxes 10,286 (1,625) 733.0%

Income tax expense (benefit) 3,908 (497) 886.3%
Net income (loss) $6,378 $(1,128) 665.4%

Earnings per share:
Basic and diluted earnings (loss)
per share $0.44 $(0.08) 650.0%

Shares of common stock used to
calculate earnings (loss) per share:
Basic 14,552 14,531 0.1%
Diluted 14,631 14,531 0.7%

SUREWEST COMMUNICATIONS
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)

December 31, December 31,
2005 2004
ASSETS
Current assets:
Cash and cash equivalents $7,633 $18,119
Short-term investments 617 --
Accounts receivable, less
allowances of $5,219 and $3,850
at December 31, 2005 and 2004,
respectively) 23,234 20,155
Inventories 5,626 5,578
Deferred directory costs 5,130 5,599
Prepaid expenses 3,918 2,359
Deferred income tax benefit 14,502 13,721
Total current assets 60,660 65,531

Property, plant and equipment, net 381,075 365,613

Intangible and other assets:
Wireless spectrum licenses, net 13,566 13,566
Goodwill 2,171 2,171
Intangible asset relating to
pension plans 456 802
Intangible asset relating to
favorable operating leases, net 393 506
Deferred charges and other assets 708 714
17,294 17,759
$459,029 $448,903

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $30,000 $10,000
Current portion of long-term debt
and capital lease obligations 3,669 3,991
Accounts payable 3,634 2,886
Other accrued liabilities 20,496 22,038
Current portion of contractual
shareable earnings obligations 2,932 3,040
Estimated shareable earnings
obligations 293 396
Advance billings and deferred
revenues 9,730 9,883
Accrued income taxes 1,015 1,549
Accrued pension benefits 7,615 3,216
Accrued compensation 5,772 5,830
Total current liabilities 85,156 62,829

Long-term debt and capital leae
obligations 85,473 89,143
Long-term contractual shareable
earnings obligations 3,695 6,202
Deferred income taxes 40,398 37,855
Other liabilities and deferred
revenues 12,556 11,537

Commitments and contingencies

Shareholders' equity:
Common stock, without par value;
100,000 shares authorized, 14,629 and
14,591 shares issued and
outstanding at December 31, 2005
and 2004 respectively 164,598 161,824
Deferred stock-based compensation (2,255) (949)
Accumulated other comprehensive loss (4,909) (2,126)
Retained earnings 74,317 82,588
Total shareholders' equity 231,751 241,337
$459,029 $448,903

OPERATING EBITDA RECONCILIATION TO NET INCOME
(Unaudited)
(Amounts in thousands)

Quarter Ended December 31, 2005
Telecom Broadband Wireless Consol

Net income/(loss) $6,701 $(3,605) $(1,668) $1,428

Add back : Income Taxes 6,956 (4,300) (1,912) 744

Less : Other Income/(Expense) (37) (1,052) (406) (1,495)

Add back : Depreciation & Amortization 6,518 4,605 2,796 13,919

Operating EBITDA (1) $20,212 $(2,248) $(378) $17,586

Quarter Ended December 31, 2004
Telecom Broadband Wireless Consol

Net income/(loss) $5,451 $(4,181) $(2,738) $(1,468)

Add back : Income Taxes 6,528 (4,655) (2,668) (795)

Less : Other Income/(Expense) 989 (197) (362) 430

Add back : Depreciation & Amortization 6,507 3,127 2,901 12,535

Operating EBITDA (1) $17,497 $(5,512) $(2,143) $9,842

(1) Operating EBITDA represents net income (loss) excluding amounts for
income taxes, depreciation and amortization and all other non-operating
income/expenses, and is a common measure of operating performance in the
telecommunications industry. Operating EBITDA is not a measure of
financial performance under generally accepted accounting principles and
should not be construed as a substitute for consolidated net income as a
measure of performance.

OPERATING EBITDA RECONCILIATION TO NET INCOME
(Unaudited)
(Amounts in thousands)

Year Ended December 31, 2005
Telecom Broadband Wireless Consol

Net income/(loss) $30,033 $(15,438) $(8,217) $6,378

Add back : Income Taxes 22,951 (12,579) (6,464) 3,908

Less : Other Income/(Expense) (609) (3,232) (1,803) (5,644)

Add back : Depreciation &
Amortization 25,428 16,451 11,891 53,770

Operating EBITDA (1) $79,021 $(8,334) $(987) $69,700

Year Ended December 31, 2004
Telecom Broadband Wireless Consol

Net income/(loss) $28,322 $(18,627) $(10,823) $(1,128)

Add back : Income Taxes 22,347 (14,558) (8,286) (497)

Less : Other Income/(Expense) 732 (1,845) (1,831) (2,944)

Add back : Depreciation &
Amortization 25,227 11,397 11,972 48,596

Operating EBITDA (1) $75,164 $(19,943) $(5,306) $49,915

(1) Operating EBITDA represents net income (loss) excluding amounts for
income taxes, depreciation and amortization and all other non-operating
income/expenses, and is a common measure of operating performance in the
telecommunications industry. Operating EBITDA is not a measure of
financial performance under generally accepted accounting principles and
should not be construed as a substitute for consolidated net income as a
measure of performance.

SUREWEST COMMUNICATIONS
SELECTED OPERATING METRICS

As of and for the quarter ended
December 31, December 31, Pct
2005 2004 Change
LINE SUMMARY
ILEC access lines 129,291 131,905 -2.0%
Broadband access lines (1) 17,729 13,224 34.1%
Total SureWest access lines 147,020 145,129 1.3%

TELECOM
ILEC access lines 129,291 131,905 -2.0%
ILEC voice-grade equivalents (2) 378,600 441,100 -14.2%
Long distance lines 52,288 47,512 10.1%
Long distance penetration 40.4% 36.0% 12.3%

BROADBAND
DSL subscribers 27,876 23,811 17.1%
DSL ARPU $51.08 $51.50 -0.8%
DSL revenue-generating units (RGUs) (3) 29,819 24,739 20.5%
Video RGUs 2,090 1,097 90.5%
Data RGUs 27,729 23,642 17.3%
FTTP subscribers 20,039 15,689 27.7%
FTTP ARPU $99.62 $104.44 -4.6%
FTTP revenue-generating units (RGUs) (4) 47,110 36,319 29.7%
Voice RGUs 15,526 11,345 36.9%
Video RGUs 14,048 11,894 18.1%
Data RGUs 17,536 13,080 34.1%
FTTP marketable homes 88,700 67,700 31.0%
FTTP marketable homes penetration (5) 22.3% 23.0% -3.0%
FTTP churn 1.4% 1.8% -22.2%
CLEC access lines 2,203 1,879 17.2%
CLEC voice-grade equivalents (2) 295,500 148,600 98.9%

WIRELESS
Total subscribers 53,858 52,657 2.3%
Contract subscribers 49,539 46,861 5.7%
POPs 3,532,000 3,477,000 1.6%
POPs covered 2,759,000 2,710,000 1.8%
Net contract additions 165 4,964 -96.7%
Net non-contract additions -125 -1,379 -90.9%
Contract churn (6) 3.4% 3.1% 9.7%
ARPU $47.60 $49.56 -4.0%

(1) The sum of CLEC access lines and FTTP voice RGUs.
(2) Voice-grade equivalents (VGEs) are calculated by dividing the
capacity of all circuits in use by 64 kilobits (bandwidth representing a
voice access line), excluding ethernet service and Broadband FTTP data
RGUs. DSL VGEs are counted as two 64 kbps channels.
(3) DSL revenue-generating units (RGUs) are the sum of all primary
digital video and high-speed data connections, excluding additional
units. Telephony units are included in ILEC Access Lines.
(4) FTTP revenue-generating units (RGUs) are the sum of all primary
digital video, telephony and high-speed data connections, excluding
additional units.
(5) FTTP marketable home penetration is calculated on residential
marketable homes passed and residential FTTP subscribers. The total FTTP
subscribers also includes 257 and 127 Small-Medium Enterprise customers
in 2005 and 2004, respectively, which are not included in the penetration
rate.
(6) Quarterly turnover in contract customers (total contract customer
disconnects divided by sum of monthly average contract subscribers).

Photo: http://www.newscom.com/cgi-bin/prnh/20050908/SFSUREWESTLOGO
AP Archive: http://photoarchive.ap.org/
PRN Photo Desk photodesk@prnewswire.com
Source: SureWest Communications

CONTACT: Karlyn Oberg, Director of Investor Relations of SureWest
Communications, +1-916-786-1799, or k.oberg@surewest.com

Web site: http://www.surewest.com/

-------
Profile: intent