SureWest posts loss as it tests new market

SureWest Communications reported a loss of $11,000 on its continuing operations during the first quarter of 2008 as it plowed money into its expansion in the Kansas City market. The company posted a gain of $611,000 in the year-earlier period.

The telecommunications company acquired Kansas City-area telecom Everest Broadband in February 2008 and sold off its directory business for $60.2 million in first quarter 2007.

Excluding the one-time gain from that sale, the Roseville-based company earned $1.1 million as a result of increasing its subscriber base in Sacramento and the Kansas City area. By comparison, SureWest reported $283,000 in net income in the most recent quarter.

Company officials have nearly doubled their interest expense in borrowing to fund the Kansas City push and boost market share in a competitive environment.

SureWest is offering its triple-play package of phone, Internet and TV. "The customer demand is there," Oldham said. "We're growing cash flow, building subscribers, going after business customers. These are showing early results that we're pleased with."

Jonathan Levine, an analyst with New York-based investment bank Jefferies Inc., said it may be 2010 before SureWest and its investors see a payoff from the Kansas City market.

"Things are going to be a little bit choppy, but the reality is that they're doing an integration," Levine said. But he didn't quarrel with the strategy.

"They're doing what they're supposed to be doing. They're going to change their business model. They're moving forward. The proof will be in the next 12 to 18 months, but penetration continues to grow," Levine said.

"There's no reason to think that they won't do similarly well in Kansas City." First-quarter revenue soared 20 percent to $51.6 million, boosted by the integration of Everest's business and growth in the local broadband market.

Meanwhile, SureWest expects to close this summer on the $69 million sale of its wireless arm to Verizon Wireless, a deal announced in January.

SureWest plans to use the cash to pay down debt and continue to expand its broadband network, officials said.

SureWest saw declines in its Sacramento- only telecommunications segment as more homes move away from landlines and as state subsidies for rural phone service go away. Officials say they hope to bridge the gap with broadband- facilitated digital phone services.

The earnings report comes ahead of a potentially contentious meeting Tuesday with shareholders over SureWest's decision to end payment of its quarterly dividends. Executives say they will reinvest that money in their expansion.

The final quarterly cash dividend of 25 cents a share will be distributed June 16, officials said. Some 11,000 shareholders hold about 14 million shares of SureWest stock.

"We have to make the case to shareholders that there is value in growing broadband. We need to tap into that high-growth market and it takes money to do that," Oldham said.

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