Otelco Reports First Quarter 2011 Results

Otelco Inc. (NASDAQ: OTT) (TSX: OTT.un), a wireline telecommunications services provider in Alabama, Maine, Massachusetts, Missouri, New Hampshire and West Virginia, today announced results for its first quarter ended March 31, 2011. Key highlights for Otelco include:

• Total revenues of $25.4 million for first quarter 2011.
• Operating income of $5.3 million for first quarter 2011.
• Adjusted EBITDA (as defined below) of $11.4 million for first quarter 2011.

"After record breaking performance in 2010, we had a challenging start for 2011,” said Mike Weaver, President and Chief Executive Officer of Otelco. "While the expansion of our sales and marketing department is now complete, the process of hiring and training new staff was more time consuming than anticipated. In addition, the planned expansion of our CLEC services in Massachusetts and New Hampshire was delayed but is now in progress. As a result of these delays and the increased costs associated with the expanded sales staff, first quarter results were below our expectations.

"Our cash position remains strong,” continued Weaver. "We increased our cash for the quarter by $0.2 million while at the same time making significant capital investments of $2.8 million in our business infrastructure in all of our service territories. This investment included a new soft switch in Alabama and the initial investments in Massachusetts for our CLEC expansion. In May, we intend to make another voluntary repayment of senior debt of $0.4 million representing a reduction of $11.5 million in the past two years.

"We remain committed to continuing the expansion of our CLEC services in New England, including our planned acquisition of Shoreham Telephone Company in Vermont,” added Weaver. "In addition to the increase of approximately 5,000 access line equivalents, this acquisition will anchor our CLEC expansion into the fourth New England state. Our investment in the existing sales organization anticipated this addition.

"The recent outbreak of tornadoes in Alabama inflicted some damage to our outside plant facilities but we do not anticipate any significant long-term effects on our operations,” noted Weaver. "Restoration efforts were underway immediately after the storm subsided. We supplemented our Alabama work force with crews from our Missouri and Maine operations, as well as outside contractors, and were able to restore service to most of our customers within a week. The costs for the restoration should generally be covered by our insurance.

"The strength of our commitment to building value for and returning cash to our shareholders is unwavering, as evidenced by our twenty-fifth consecutive IDS dividend,” Weaver concluded.

Distribution to Income Deposit Security Holders

Each quarter, the Board will consider the declaration of dividends during its normally scheduled meeting. For this quarter, the Board is meeting on May 12, 2011. The scheduled interest and any dividend declared will be paid on June 30, 2011, to holders of record as of the close of business on June 15, 2011. The interest payment will cover the period from March 30, 2011 through June 29, 2011. Currently, it is anticipated that the Company’s dividends in 2011 will continue to be treated as a return of capital for tax purposes. The Company has made twenty-five successive quarterly distributions of dividends and interest since its IDS units were originally offered to the public in December 2004.

FINANCIAL DISCUSSION FOR FIRST QUARTER 2011:

Revenues

Total revenues decreased 1.6% in the three months ended March 31, 2011, to $25.4 million from $25.8 million in the three months ended March 31, 2010. Declines from the traditional loss of RLEC voice access line related revenues were not fully offset by continued growth in CLEC and cable television revenues.

Local services revenue decreased 1.9% in the first quarter to $12.0 from $12.2 million in the quarter ended March 31, 2010. A decrease of $0.3 million in basic services revenue and an increase of $0.1 million in hosted private branch exchange revenue comprised the change. Network access revenue decreased 1.6% in the first quarter to $7.9 million from $8.0 million in the quarter ended March 31, 2010. The decrease of $0.1 million relates to lower NECA settlements. Cable television revenue in the three months ended March 31, 2011, increased 13.1% to $0.8 million from $0.7 million in the same period in 2010. Growth in digital family packages of $0.1 million and revenue of $0.1 million associated with the conversion of our Missouri cable customers to satellite services was partially offset by a $0.1 million decrease in basic cable. Internet revenue for the first quarter 2011 decreased 1.6% to stay at $3.5 million in both quarters ended March 31, 2011 and 2010. Growth in broadband data lines offset the loss of dial-up subscribers. Transport services revenue decreased 5.5% to $1.3 million in the three months ended March 31, 2011 from $1.4 million for the same period in 2010. The decrease of $0.1 million is due to pricing changes in the WAN transport market.

Operating Expenses

Operating expenses in the three months ended March 31, 2011, increased 0.7% to $20.1 million from $19.9 million in the three months ended March 31, 2010. Cost of services and products increased 3.9% to $11.0 in the quarter ended March 31, 2011, from $10.6 million in the quarter ended March 31, 2010. A non-recurring accrual for the Universal Service Fund costs, start-up network costs in New Hampshire, and increased employee and benefit costs accounted for the $0.4 million increase in this category. Selling, general and administrative expenses increased 3.0% to $3.3 million in the three months ended March 31, 2011, from $3.2 million in the three months ended March 31, 2010, primarily related to increased employee and benefit costs. Depreciation and amortization for first quarter 2011 decreased 5.9% to $5.7 million from $6.1 million in first quarter 2010. Amortization of intangible assets associated with the Country Road acquisition decreased $0.3 million, including contract and customer base intangible assets. The remaining decrease of $0.1 million reflected lower depreciation of plant assets in Alabama partially offset by an increase in depreciation in Missouri.

Interest Expense

Interest expense increased 3.0% to $6.2 million in the quarter ended March 31, 2011, from $6.0 million a year ago. The increase in interest expense is primarily driven by interest on the additional senior subordinated notes issued in the exchange of our Class B shares that occurred in June 2010.

Change in Fair Value of Derivatives

As a requirement of the existing senior debt, the Company has two interest rate swap agreements intended to hedge changes in interest rates on its senior debt. The swap agreements do not qualify for hedge accounting under the technical requirements of Accounting Standards Codification 815. Changes in value for the two swaps are reflected in change in the fair value of derivatives on the income statement and have no impact on cash. Over the life of the swaps, the change in value will be zero, with no impact on Adjusted EBITDA or operations. The value of the swap liability decreased $0.5 million in first quarter 2011 compared to an increase in the value of the swap liability of $0.9 million in the first quarter of 2010.

Adjusted EBITDA

Adjusted EBITDA for the three months ended March 31, 2011, was $11.4 million compared to $12.3 million for the same period in 2010 and $12.8 million in the fourth quarter of 2010. See financial tables for a reconciliation of Adjusted EBITDA to net income (loss).

Balance Sheet

As of March 31, 2011, the Company had cash and cash equivalents of $18.5 million compared to $18.2 million at the end of 2010. The Company intends to make a $0.4 million voluntary prepayment in May 2011 on its senior long-term notes payable, reducing the balance to $162.0 million. This represents a combined reduction of $11.5 million since October 2008. The first quarter distribution of $5.6 million in interest and dividends to our shareowners, and $0.3 million in interest to our bond holders, occurred on March 30, 2011. This represents the twenty-fifth consecutive quarterly distribution since going public in December 2004.

Capital Expenditures

Capital expenditures were $2.8 million for the quarter as the Company continues to grow and invest in its infrastructure. The Company is adding a softswitch in Alabama, while continuing to expand its CLEC capabilities in Maine, Massachusetts and New Hampshire; enhancing DSL and wireless broadband capacity; and expanding IPTV capability in Alabama.

First Quarter Earnings Conference Call

Otelco has scheduled a conference call, which will be broadcast live over the internet, on Thursday, May 5, 2011, at 11:00 a.m. ET. To participate in the call, participants should dial (719) 325-2363 and ask for the Otelco call 10 minutes prior to the start time. Investors, analysts and the general public will also have the opportunity to listen to the conference call free over the internet by visiting the Company's website at www.OtelcoInc.com or www.earnings.com. To listen to the live call online, please visit the website at least 15 minutes early to register, download and install any necessary audio software. For those who cannot listen to the live webcast, a replay of the webcast will be available on the Company's website at www.OtelcoInc.com or www.earnings.com for 30 days. A one-week telephonic replay may also be accessed by calling (719) 457-0820 and using the passcode 1353922.

ABOUT OTELCO

Otelco Inc. provides wireline telecommunications services in Alabama, Maine, Massachusetts, Missouri, New Hampshire and West Virginia. The Company’s services include local and long distance telephone, network access, transport, digital high-speed data lines and dial-up internet access, cable television and other telephone related services. With more than 99,000 voice and data access lines, which are collectively referred to as access line equivalents, Otelco is among the top 25 largest local exchange carriers in the United States based on number of access lines. Otelco operates ten incumbent telephone companies serving rural markets, or rural local exchange carriers. It also provides competitive retail and wholesale communications services through several subsidiaries. For more information, visit the Company’s website at www.OtelcoInc.com.

FORWARD LOOKING STATEMENTS

Statements in this press release that are not statements of historical or current fact constitute forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties, and other unknown factors that could cause the actual results of the Company to be materially different from the historical results or from any future results expressed or implied by such forward-looking statements. In addition to statements which explicitly describe such risks and uncertainties, readers are urged to consider statements labeled with the terms "believes”, "belief,” "expects,” ‘intends,” "anticipates,” "plans,” or similar terms to be uncertain and forward-looking. The forward-looking statements contained herein are also subject generally to other risks and uncertainties that are described from time to time in the Company’s filings with the Securities and Exchange Commission.