How Long Will Acquisition Costs Hurt Atlantic Tele?
Telecommunications provider Atlantic Tele Network (NAS: ATNI) posted a 17% jump in its second-quarter revenue, but its profit fell from a year ago, and shares have been under pressure ever since the report early last month. The company said it expects margins to improve in the next quarter. However, we need to keep in mind other factors that could affect the performance of the stock -- at least in the near term.
Into the numbers
Revenues for the quarter rose 18% to $193.8 million compared with last year's second quarter. But most of the sales gains came from the fact that last year's quarter reflected only two months of sales from the company's acquisition of Alltel on April 26, 2010. In addition, $15 million in acquisition-related costs attributed to this year's quarter had a profound impact on margins. But once the company deals with another $5 million to $6 million in acquisition costs this quarter, Atlantic's financials won't face that headwind any longer.
Operating income declined by almost 20% to $6.3 million because of an increase in depreciation and acquisition costs. Depreciation costs rose probably because of an increase in company assets resulting from the Alltel acquisition, although I expect that this won't affect the company's operations for long.
Now that Atlantic has brought Alltel customers under its own equipment and services umbrella, it won't have the overlapping expenses from the Transition Services Agreement it made with Verizon (NYS: VZ) . Under the agreement, Verizon was paid $200 million in exchange for towers and other network assets, as well as additional costs from Verizon providing certain services during the transition period.
Atlantic will now be free from the burden of expenses incurred under the agreement. Although there could be some aftereffects under the agreement that linger into the current quarter, revenues from wireless operations in the U.S. are expected to rise now that Alltel customers are completing their migration. In addition, the company has merged its business in Bermuda with M3 Wireless, and this merger is expected to generate positive returns before the end of the year.
To see what the future holds, Atlantic will need to wait until the ghosts of acquisition-related costs are exorcised. The trend in the industry, though, is upbeat, as we saw peer Crown Castle (NYS: CCI) post a major turnaround by reversing a year-ago loss in its most recent quarter. Atlantic may follow the trend going forward, but I would rather wait until it proves itself in the next quarter or two.
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At the time this article was published Fool contributor Harsh Chauhan doesn't own any shares in the companies mentioned in this article. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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