Warwick Valley Telephone Company
Duane W. Albro
TWST: Let's start with an introduction to WVT Communications Group.
Mr. Albro: The company began in 1902 as essentially a rural local exchange carrier, what's called an RLEC. It was a regional local exchange carrier for many years, then the company did an IPO in 1998, and it's now traded on Nasdaq. Because of cable competition and wireless substitution for landline service, the company began having some difficulties in the mid-2000s. I joined in 2007 to look at the difficulties and see how we could turn the company around. I had spent considerable time in the telecom sector, not just with telephone companies, regulated companies or incumbent carriers, but also spent some time with what's called a competitive local exchange carrier. These are companies that compete with the incumbents, such as Verizon and AT&T, primarily for business customers. I had also spent some time at a cable company. So when I came into WVT, our focus was to sort through the process of replacing the declining revenue stream.
In a company like Warwick Valley Telephon (WWVY)e, our regulated, landline ILEC business, which operates in the semirural area northwest of New York City, there is not a lot of growth on a demographic basis. So you probably are not going to see a lot of line growth, and in fact, you are likely to see access line decline due to both cable competition and wireless substitution. We determined that our growth would likely not come from this region, and instead began selling outside our regulated region into contiguous areas in the mid-Hudson area in 2007 and 2008. Warwick is in Orange County, N.Y., and so we began selling in regions contiguous to this area.
In 2008, we purchased what was one of the early versions of a hosted communications platform and began selling hosted voice over IP in the mid-Hudson region. We had some success, albeit limited, because we were essentially using former ILEC salespeople to sell this new product. By late 2008, we were already starting to look at companies that we might acquire. Fortuitously, in early 2009, a company that we had been having negotiations with to acquire filed Chapter 11. That company was USA Datanet in Syracuse, and we acquired the company, which had $4.5 million in revenue, for $1.5 million.
So that was a good move for us in a couple of ways. One was that we acquired an additional platform identical to the platform we had in Warwick upon which to sell these hosted voice over IP products. That gave us redundancy, and we also picked up a global network and a nice customer base in the upstate area with customers in Syracuse, Rochester and Binghamton. It diversified our customer base roughly contiguous to areas that we were already selling in. We began seeing some improved sales performance as a result of that acquisition, but not robust sales progress in the way that we had hoped and projected we would get. In some measure, we felt we needed more expertise, and in some measure we felt perhaps we needed to add some territory. In 2010, we began looking for other acquisitions.
Now, let me digress for a second. One of the reasons we could do acquisitions was that many years ago, back in 1983, we invested in a wireless partnership with a company called NYNEX, which, of course, is a predecessor to Verizon. At the time, WVT had a 7.5% partnership interest in this wireless partnership. Over time, that grew to be a fairly significant cash stream for us. In recent years - those being 2007, 2008, 2009 and 2010 - the cash payouts we received as a result of our investment in the wireless partnership have been classified on our income statement as "other income." In 2010, that amount was about $12.5 million. The cash payouts are used in part to pay our dividend. Therefore, the average investor, who looks at our net income and tries to determine our ability to pay a dividend on that basis, would see a good portion of our net income had come from other income, which was the distribution from the wireless partnership. But these cash distributions have been so significant in recent years that it also gave us cash to build a war chest to make acquisitions.
By 2010, we had a fairly sizeable war chest that we could use to acquire companies. We have a very clean balance sheet. Virtually, we have no long-term debt and some short-term debt, and so we were in a very strong position to make an acquisition. In 2010, we began looking for the right acquisition target - one that would complement our existing business communications services using Internet protocol, and more importantly, that would position us to take a leading role in this large and fast-growing market. We looked at a wide range and a large number of companies.
Then, in late 2010, we began having discussions with Alteva's CEO David Cuthbert, who's on this call right now. In our early conversations it was rather astounding how similar our viewpoints are and that we have a similar mindset and a similar culture about our companies. But most importantly, they had demonstrated enormous success in terms of results in their sales processes associated with what is now called unified communications or UC. UC is more than hosted voice over IP because now it's literally cloud communications. We are hosting more than the voice in the cloud. Alteva not only hosted voice over IP, but they hosted Microsoft applications, and they had done an extraordinary job of integrating Microsoft with their telephony platform, which really intrigued us. They averaged 60% annual growth in sales for three years, and that was pretty astounding. What's not to like about 60% average annual growth? They had a team of people who were just amazing at how well they worked together, how well they collaborated and the decisions they made. As we talked more and more, we realized that this was a match made in heaven. I liked David and his team so much and was so impressed with the work they had done that we literally gave our unified communications business to them to run and it was almost a reverse merger, where we acquired them and gave them primary responsibilities for that aspect of the company. In fact, David became Chief Operating Officer with responsibilities for all day-to-day operations in our consolidated company.
We accomplished an extraordinary merger. We literally did our definitive agreement on July 14, and we closed on August 5, which is incredibly fast. What's even better is that David and I collaborated with our senior team, and we fully integrated the entire company by September 25. So within a little over a month, we had all of the company fully integrated with people functioning in their jobs. That's pretty astounding.