Exhibit 99.1
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[McLeodUSA
Logo Graphic]
FOR IMMEDIATE RELEASE
McLeodUSA Reports Second Quarter 2004 Results
o Continued strong operational performance in the second quarter
o Significantly reduced ongoing quarterly cash requirements
o Launched Voice-over-Internet-Protocol (VoIP) trial in Chicago, Dallas,
Denver and Detroit
CEDAR RAPIDS, Iowa - July 28, 2004 - McLeodUSA Incorporated (Nasdaq: MCLD), one
of the nation's largest independent, competitive telecommunications services
providers, today reported financial and operating results for the quarter ended
June 30, 2004.
Total revenues for the quarter were $191.9 million and gross margin(1) was
$86.6 million. SG&A expenses for the quarter were $68.5 million. Adjusted
EBITDA(1) for the period was $18.1 million, resulting in the ninth consecutive
quarter of positive Adjusted EBITDA. Reported net loss for the quarter was
$(82.2) million, or a loss per common share of $(0.28).
"In the second quarter, the Company continued to meet or exceed all operational
goals achieving 92% customer satisfaction, 99.7% billing accuracy and 99.999%
network reliability ratings. In addition, we significantly reduced our ongoing
quarterly cash requirements through the execution of our plans to reduce SG&A,
tightly manage capital expenditures and sell available fiber assets," said
Chris A. Davis, Chairman and Chief Executive Officer. "While total revenues
declined in the quarter, retail sales productivity per rep increased
approximately 40 percent. This marked improvement was a direct result of our
implementation of a more rigorous sales process in the first quarter and the
performance based actions we took in April. Also, this quarter we began to see
results from our strategic sales strategy as our strategic sales team closed
eleven contracts that we had bid over the last several months. Our wholesale
sales team had another strong quarter, successfully selling long distance
service and exceeding their sales objective by nearly 25%. Going forward, we
continue to believe that the significant investment we have made to be a
facilities-based communications company gives us a unique opportunity to sell
local wholesale services within our 25-state footprint."
The Company remains focused on revenue growth and sales force productivity. It
expects to continue to realize the benefits of its improvement initiatives, as
well as, the growth opportunity in its wholesale business in the second half of
2004. However, the benefits of these initiatives will be offset in the third
quarter by the final phase of the federally mandated reduction in access rates,
which is expected to negatively impact revenues and gross margin by
approximately $8 million.
On July 6th, the Company proposed principles to the FCC in support of continued
competition in residential and business local phone service. The proposed
principles include an orderly transition from UNE-P to UNE-L and continued
access to unbundled network elements necessary to provide UNE-L, including
access to high capacity (DS1/DS3) loops and transport under fair contract terms
and stable pricing (TELRIC). In addition, the Company has held meetings with
Chairman Powell and the FCC commissioners to discuss this agenda and obtain
concurrence that these principles will be included in any interim or permanent
rules issued by the FCC. Based on these discussions the Company believes that
the interim rules, which are expected to be issued in the next few weeks, will
support true facilities-based competition.
For the quarter ended June 30, 2004, total revenues were $191.9 million
compared to $193.6 million in the first quarter of 2004 and $222.6 million in
the second quarter of 2003. Revenue for the quarter included approximately $6
million of favorable benefit from ongoing rate settlements related to prior
period billings. Gross margin for the second quarter of 2004 was $86.6 million
compared to $86.0 million in the first quarter of 2004 and $94.5 million in the
second quarter of 2003. Gross margin increased slightly from the first quarter
of 2004 as the impact of lower local and long distance revenue was offset by
the above mentioned rate settlement. Gross margin as a percentage of revenue
for the second quarter was 45.1% compared to 44.4% in the first quarter of 2004
and 42.4% in the second quarter of 2003 as a result of more cost effective
network operations.
Private line and data revenue per customer increased 2% and 20% compared to the
first quarter of 2004 and the second quarter of 2003, respectively. Long
distance revenue per customer declined by 5% from the first quarter of 2004 and
18% from the second quarter of 2003 as the Company reduced the cost of service
and offered substantially more competitive pricing. Local service revenue per
customer, excluding the above mentioned rate settlement, was essentially flat
compared to the first quarter of 2004 and declined by approximately 6% as
compared to the second quarter of 2003 as a result of the Company's planned
increased usage of its lower cost, more competitively priced and more
profitable UNE-L platform.
The Company's excellent operational performance continued in the second quarter
of 2004. The customer satisfaction rating remained in excess of 90%, billing
accuracy was 99.7% and the Company continued to consistently achieve 99.999%
network reliability, all in line with Company goals.
Customer platform mix at the end of the second quarter was 69% UNE-L, 4% resale
and 27% UNE-M/P versus 67%, 5% and 28%, respectively, at the end of the first
quarter of 2004 and 58%, 7% and 35%, respectively, at the end of the second
quarter of 2003 as the Company continued to migrate UNE-P customers to UNE-L
and sell the more profitable UNE-L platform. Business customer line turnover
was 2.2% in the second quarter of 2004 compared to 1.9% in the first quarter of
2004 and 2.2% in the second quarter of 2003. Total customer line turnover in
the second quarter was 2.5% versus 2.3% and 2.4% in the first quarter of 2004
and second quarter of 2003, respectively.
For the second quarter of 2004, SG&A was $68.5 million versus $75.7 million in
the first quarter of 2004 and $73.5 million in the second quarter of 2003.
Included in the second quarter 2004 SG&A is a benefit of approximately $3.6
million related to a reduction in bad debt reserves resulting from improved
performance on receivables collections. In addition, as previously reported,
the second quarter 2003 SG&A of $73.5 million included a one-time WorldCom
receivable recovery of $7.9 million. Excluding the above benefits, SG&A
expenses were approximately $72.1 million in the second quarter of 2004
compared to $81.4 million in the second quarter of 2003. The year-over-year
reduction of SG&A expenses reflects the Company's ongoing process improvement
programs as well as specific actions taken during the quarter to reduce
non-essential expenses. Adjusted EBITDA in the second quarter of 2004 was $18.1
million compared to $10.3 million in the first quarter of 2004 and $21.0
million in the second quarter of 2003. Net loss for the second quarter of 2004
was $(82.2) million compared to $(91.4) million in the first quarter of 2004
and $(72.8) million in the second quarter of 2003.
Total revenues for the six months ended June 30, 2004 were $385.5 million
versus $448.5 million in the comparable 2003 period. Gross margin for the
six-month period ending June 30, 2004 was $172.6 million versus $183.0 million
in 2003. Gross margin as a percent of revenue for the six-month period was
44.8% versus 40.8% in 2003. Total SG&A expenses for the six-month period were
$144.2 million and $155.2 million in the 2004 and 2003 periods, respectively.
Adjusted EBITDA was $28.4 million for the six-month 2004 period versus $27.8
million in 2003.
As discussed in last quarter's earnings release and conference call, the
Company has taken additional steps to conserve cash and improve liquidity while
continuing to focus on its revenue growth plan. All identified actions were
completed, which are expected to result in approximately $8 million of savings
to the quarterly SG&A run-rate by the fourth quarter of 2004. Capital
expenditures for the second quarter were $14 million in line with the Company's
revised plan to spend approximately $50-55 million in 2004 versus its initial
plan of $65 million. The revised capital expenditure plan for the year remains
dedicated to new product introduction, cost savings programs and strategic
growth initiatives. In addition, the Company completed approximately $5 million
of fiber sales in the second quarter. These combined actions resulted in a cash
usage of approximately $18 million in the second quarter, down significantly
from the average usage of about $33 million of cash in the past several
quarters.
The Company ended the quarter with $31.2 million of cash on hand excluding
approximately $7.0 million of rate settlement payments received in early July.
The Company has met all current financial covenants and continues to have full
access to the $110 million exit credit facility. As of June 30, 2004 there was
$35.0 million of cash available from the exit facility. As planned, the Company
made its third quarter withdrawal of $15.0 million from the exit credit
facility. Going forward the Company expects to continue to realize the benefits
of the cash management actions implemented in the second quarter and the
execution of its plan to sell $50 million of fiber in 2004.
Other recent highlights include:
o On July 27, 2004, the Company announced the addition of Preferred
Advantage(SM) Hosted Exchange and Shared Web Hosting for business
customers. With the addition of these new services the Company will
provide businesses with the capabilities of a fully managed messaging and
data communications solution at a lower cost of ownership.
o On July 26, 2004, the Company announced it has begun the market trial for
its next generation Voice-over-Internet Protocol (VoIP) switching
architecture and is now providing Preferred Advantage(SM) Dynamic
Integrated Access service to selected trial business customers in the
Denver, Dallas, Detroit and Chicago markets.
o On July 21, 2004, the Company announced it is now offering Preferred
Advantage(SM) Managed Services for Dedicated Internet Access to its
business customers. The service provides a totally managed outsourced
Internet service which combines Dedicated Internet Access network services
from McLeodUSA with industry-leading customer premises equipment and
network management software.
o On July 21, 2004, the Company announced it is now offering new flexible
Preferred Advantage(SM) Local Voice packages for residential and business
customers, which allows customers to bundle services and obtain the
flexibility to customize their communications solutions.
o On July 6, 2004, McLeodUSA and AT&T announced that we have reached a
long-term agreement in principle whereby AT&T would begin an orderly
transition of lines off the Bells' UNE-P platform in selected states and
onto McLeodUSA's UNE-L facilities-based network. Finalization of the
agreement requires regulatory clarity in support of facilities-based
competition.
o On May 10, 2004, the Company announced the expansion of its Preferred
Advantage(SM) DSL services to include home/office networking and wireless
service and selected Netopia to provide the associated hardware to support
the new product.
Conference Call
- ---------------
McLeodUSA will host a conference call on Wednesday, July 28, 2004, at 10 a.m.
Eastern Time to discuss second quarter results and the information contained in
this release. The call may be accessed at 888-271-9098 (U.S.) or 706-634-6027
(International). A replay will be available approximately 2 hours after
completion of the call at 800-642-1687 (U.S.) or 706-645-9291 (International),
Conference ID No. 8790375. The audio replay will be available through midnight
ET on Wednesday, August 4, 2004. The call will also be Webcast live and
available via replay at:
http://www.mcleodusa.com/InvestorRelations/StreamingMedia.do
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About McLeodUSA
- ---------------
McLeodUSA provides integrated communications services, including local
services, in 25 Midwest, Southwest, Northwest and Rocky Mountain states. The
Company is a facilities-based telecommunications provider with, as of June 30,
2004, 38 ATM switches, 39 voice switches, 696 collocations, 435 DSLAMs and
2,510 employees. As of April 16, 2002, Forstmann Little & Co. became a 58%
shareholder in the Company. Visit the Company's Web site at www.mcleodusa.com
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(1) Non-GAAP Financial Measures
- -------------------------------
To provide further clarification, the Company has begun using the term Adjusted
EBITDA as a replacement for EBITDA. Adjusted EBITDA is a non-GAAP financial
measure used by management to evaluate the effectiveness of the Company's
operating performance and to enhance the comparability between periods. EBITDA
is an acronym for earnings before interest, taxes, depreciation and
amortization. Adjusted EBITDA, as defined by McLeodUSA, further removes the
effects of other income and expense and restructuring adjustments. Management
removes the effects of other income and expense and restructuring adjustments
from Adjusted EBITDA because it does not believe that such items are
representative of the core operating results of the Company's ongoing
competitive telecommunications activities. For a facilities-based
telecommunications services provider like McLeodUSA with high initial capital
investments required in order to gain entry to the industry, management
believes that omitting depreciation and amortization from Adjusted EBITDA
provides a relevant and useful measure of the Company's core operating
performance and enhances comparability between periods. Management believes
that non-GAAP measures such as Adjusted EBITDA are commonly reported and used
by analysts, investors and other interested parties in the telecommunications
industry. Adjusted EBITDA is reconciled to net loss, the most comparable GAAP
measure, within the table presented below. McLeodUSA's use of Adjusted EBITDA
may not be comparable to similarly titled measures used by other companies in
the telecommunications industry. The use of Adjusted EBITDA is not intended to
replace measures of financial performance reported in accordance with
accounting principles generally accepted in the United States.
Three months ended
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(In millions) June 30, 2004 March 31, 2004 June 30, 2003
------------------- ------------------- -------------------
Reconciliation of Adjusted EBITDA:
Net loss............................................. $ (82.2) $ (91.4) $ (72.8)
Interest expense..................................... 11.6 11.1 8.3
Other nonoperating expense (income).................. 0.5 0.4 0.4
Restructuring adjustment............................. (0.2) - -
Depreciation and amortization........................ 88.4 90.2 85.1
------------------- ------------------- -------------------
Adjusted EBITDA.................................. $ 18.1 $ 10.3 $ 21.0
=================== =================== ===================
Six months ended
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(In millions) June 30, 2004 June 30, 2003
---------------------- ----------------------
Reconciliation of Adjusted EBITDA:
Net loss.................................................... $ (173.7) $ (156.9)
Interest expense............................................ 22.8 17.0
Other nonoperating expense (income)......................... 0.9 0.4
Restructuring adjustment.................................... (0.2) -
Depreciation and amortization............................... 178.6 167.3
---------------------- ----------------------
Adjusted EBITDA......................................... $ 28.4 $ 27.8
====================== ======================
Gross margin is another financial measure that management uses to evaluate
operating performance. Gross margin, which is calculated as revenues less cost
of service, excludes depreciation and amortization expenses. Cost of service
includes expenses directly associated with providing telecommunications
services to its customers. Costs classified as cost of service include, among
other items, the cost of connecting customers to the McLeodUSA network via
leased facilities, the costs paid to third party providers for interconnect
access and transport services, the costs of leasing components of network
facilities and the cost of fiber related to sales and leases of network
facilities. Gross margin is reconciled to net loss, the most comparable GAAP
measure, within the table presented below.
Three months ended
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(In millions) June 30, 2004 March 31, 2004 June 30, 2003
------------------- ------------------- -------------------
Reconciliation of Gross Margin:
Net loss............................................. $ (82.2) $ (91.4) $ (72.8)
Interest expense..................................... 11.6 11.1 8.3
Other nonoperating expense (income).................. 0.5 0.4 0.4
Restructuring adjustment............................. (0.2) - -
Depreciation and amortization........................ 88.4 90.2 85.1
Selling, general and administrative.................. 68.5 75.7 73.5
------------------- ------------------- -------------------
Gross Margin..................................... $ 86.6 $ 86.0 $ 94.5
=================== =================== ===================
Six months ended
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(In millions) June 30, 2004 June 30, 2003
---------------------- ----------------------
Reconciliation of Gross Margin:
Net loss.................................................... $ (173.7) $ (156.9)
Interest expense............................................ 22.8 17.0
Other nonoperating expense (income)......................... 0.9 0.4
Restructuring adjustment.................................... (0.2) -
Depreciation and amortization............................... 178.6 167.3
Selling, general and administrative......................... 144.2 155.2
---------------------- ----------------------
Gross Margin............................................ $ 172.6 $ 183.0
====================== ======================
Some of the statements in this press release include statements about our
future expectations. Statements that are not historical facts are
"forward-looking statements" for the purpose of the safe harbor provided by
Section 21E of the Exchange Act and Section 27A of the Securities Act. Such
statements may include projections of financial and operational results and
goals, including revenue, EBITDA, Adjusted EBITDA, profitability, savings and
cash. In some cases, you can identify these so-called "forward-looking
statements" by our use of words such as "may," "will," "should," "expect,"
"plan," "anticipate," "believe," "estimate," "predict," "project," "intend" or
"potential" or the negative of those words and other comparable words. These
forward-looking statements are subject to known as well as unknown risks and
uncertainties that may cause actual results to differ materially from our
expectations. Our expectations are based on various factors and assumptions and
reflect only our predictions. Factors that could cause actual results to differ
materially from the forward-looking statement include technological,
regulatory, public policy or other developments in our industry, availability
and adequacy of capital resources, current and future economic conditions, the
existence of strategic alliances, our ability to generate cash, our ability to
implement process and network improvements, our ability to attract and retain
customers, our ability to migrate traffic to appropriate platforms and changes
in the competitive climate in which we operate. These and other risks are
described in more detail in our most recent Annual Report on Form 10-K filed
with the SEC. The Company undertakes no obligation to update publicly any
forward-looking statements, whether as a result of future events, new
information or otherwise.
Contact:
McLeodUSA Incorporated, Cedar Rapids, IA
Investor Contact: Bryce E. Nemitz
Press Contact: Bruce A. Tiemann
Phone: (319) 790-7800
Mcleodusa_ir@mcleodusa.com
MCLEODUSA INCORPORATED AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(In millions, except per share data)
(UNAUDITED)
Three months ended
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June 30, 2004 June 30, 2003
-------------------- -------------------
Revenue $ 191.9 $ 222.6
Operating expenses:
Cost of service (exclusive of depreciation and
amortization shown separately below) 105.3 128.1
Selling, general and administrative 68.5 73.5
Depreciation and amortization 88.4 85.1
Restructuring adjustment (0.2) -
-------------------- -------------------
TOTAL OPERATING EXPENSES 262.0 286.7
-------------------- -------------------
OPERATING LOSS (70.1) (64.1)
-------------------- -------------------
Nonoperating income (expense):
Interest expense, net of amounts capitalized (11.6) (8.3)
Other expense (0.5) (0.4)
-------------------- -------------------
TOTAL NONOPERATING EXPENSE (12.1) (8.7)
-------------------- -------------------
NET LOSS $ (82.2) $ (72.8)
-------------------- -------------------
Preferred stock dividend (0.8) (1.2)
-------------------- -------------------
NET LOSS APPLICABLE TO COMMON SHARES $ (83.0) $ (74.0)
==================== ===================
Basic and diluted loss per common share $ (0.28) $ (0.27)
==================== ===================
Weighted average common shares outstanding 292.2 276.9
==================== ===================
MCLEODUSA INCORPORATED AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(In millions, except per share data)
(UNAUDITED)
Six months ended
--------------------------------------------
June 30, 2004 June 30, 2003
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Revenue $ 385.5 $ 448.5
Operating expenses:
Cost of service (exclusive of depreciation and
amortization shown separately below) 212.9 265.5
Selling, general and administrative 144.2 155.2
Depreciation and amortization 178.6 167.3
Restructuring adjustment (0.2) -
------------------ -------------------
TOTAL OPERATING EXPENSES 535.5 588.0
------------------ -------------------
OPERATING LOSS (150.0) (139.5)
------------------ -------------------
Nonoperating income (expense):
Interest expense, net of amounts capitalized (22.8) (17.0)
Other expense (0.9) (0.4)
------------------ -------------------
TOTAL NONOPERATING EXPENSE (23.7) (17.4)
------------------ -------------------
NET LOSS $ (173.7) $ (156.9)
------------------ -------------------
Preferred stock dividend (1.6) (2.4)
------------------ -------------------
NET LOSS APPLICABLE TO COMMON SHARES $ (175.3) $ (159.3)
================== ===================
Basic and diluted loss per common share $ (0.60) $ (0.58)
================== ===================
Weighted average common shares outstanding 291.6 276.6
================== ===================
MCLEODUSA INCORPORATED AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In millions)
June 30, 2004 December 31, 2003
---------------------- -----------------------
(unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 31.2 $ 56.5
Trade receivables, net 68.0 65.6
Prepaid expense and other 22.5 22.4
Assets held for sale 2.0 2.0
---------------------- -----------------------
Total Current Assets 123.7 146.5
---------------------- -----------------------
Non-current Assets
Property and equipment, net 884.1 1,007.7
Goodwill and other intangibles, net 428.2 446.9
Other non-current assets 25.3 29.5
---------------------- -----------------------
Total Non-current Assets 1,337.6 1,484.1
---------------------- -----------------------
Total Assets $ 1,461.3 $ 1,630.6
====================== =======================
LIABILITIES AND EQUITY
Current Liabilities
Current maturities of long-term debt $ 31.3 $ 27.1
Accounts payable 39.0 30.5
Deferred revenue, current portion 6.2 6.9
Other current liabilities 101.6 121.5
Liabilities related to discontinued operations 0.3 1.1
---------------------- -----------------------
Total Current Liabilities 178.4 187.1
---------------------- -----------------------
Long-term Liabilities
Long-term debt, excluding current maturities 726.7 717.3
Deferred revenue less current portion 17.0 15.1
Other long-term liabilities 60.0 58.3
---------------------- -----------------------
Total Long-term Liabilities 803.7 790.7
---------------------- -----------------------
Redeemable Convertible Preferred Stock 121.7 131.1
Stockholders' Equity 357.5 521.7
---------------------- -----------------------
Total Liabilities and Equity $ 1,461.3 $ 1,630.6
====================== =======================
MCLEODUSA INCORPORATED AND SUBSIDIARIES
Selected Telecommunications Statistical Data
------------------ ------------------- -------------------
6/30/03 3/31/04 6/30/04
------------------ ------------------- -------------------
Active central offices 1,722 1,708 1,692
Collocations 584 667 696
Switches owned
CO / LD 45 40 39
ATM / Frame Relay 38 38 38
DSLAMs installed 435 435 435
Total Competitive:
Customers 414,767 381,791 369,282
Access Units / Customer 2.7 2.8 2.8
Revenue per Customer / Month
Local $ 112.10 $ 106.55 $ 111.97*
Long distance 36.92 31.56 30.11
Private line & data 26.82 31.61 32.11
------------------ ------------------- -------------------
Total $ 175.84 $ 169.72 $ 174.19
================== =================== ===================
Platform Distribution
Resale 7% 5% 4%
UNE-M/P 35% 28% 27%
UNE-L 58% 67% 69%
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Total 100% 100% 100%
================== =================== ===================
* Excluding second quarter rate settlement local revenue per customer was $105.67