Teletouch Reports 2Q Results on Form 10-Q

Jun 18, 2009 (Close-Up Media via COMTEX) -- TLLE | Quote | Chart | News | PowerRating -- Teletouch Communications, a U.S. provider of AT&T and T-Mobile cellular services, two-way radio, mobile electronics and related products and services, has reported its consolidated results for the 2nd Quarter 2009 fiscal year on Form 10-Q.

"Comparing this year's second quarter operating results to that of the prior year shows a stark contrast and real improvement in the company's operating performance," said T. A. "Kip" Hyde, Jr., President, COO and Director of Teletouch. "Operating income for the second quarter 2009 was approximately $305,000 vs. an operating loss of approximately $61,000 in the same prior year period. EBITDA for the period more than doubled to approximately $660,000 from $326,000 in the comparative prior year period.

"However, during this period and as expected given the ongoing difficulties in the U.S. macro-economic climate, we began to see significant top-line degradation in our auto-related wholesale business units, as well as a more modest decline in our cellular service revenues. The lower contribution margins from the automotive segments had little impact on our overall operating income, as the gross profit percentage of sales generated from these wholesale business units is relatively low. But, given the challenges posed by continued cellular customer migration to the iPhone, we also saw a decline in our AT&T-related cellular service billing revenues, as the impact of losses in our subscriber base year-over-year became more apparent. While related cost reductions were such that the overall impact to operating earnings was substantially mitigated, the trends going into the holiday season were not favorable."

In a release dated June 15, the company stated:

- As disclosed previously, since the launch of the iPhone in the summer of 2007, the company has experienced higher subscriber attrition rates due to customers wanting to acquire the iPhone. The company has been prohibited from selling the iPhone or servicing its own subscribers desiring an iPhone by AT&T, which has required any of the company's customers desiring an iPhone to move their company-provided billing services to AT&T's own billing platform. The company believes that these restrictions on the company and their further requirement to make the company's customers change their billing services to AT&T may be in violation of its agreements with AT&T, including specifically the bilateral non-solicitation provision contained in such agreements that provides for a $1,000 per Subscriber (cellular number) penalty for these actions. The company is currently in discussions with AT&T on a resolution to this issue, including appropriate compensation for such AT&T generated customer attrition.

- The company is party to six (6) distribution agreements with AT&T Mobility, its successors and assigns, which provide for the company to distribute AT&T wireless services, on an exclusive basis, in major markets in Texas and Arkansas. The AT&T distribution agreements authorize the company to exclusively offer AT&T cellular phone service and provide billing customer services to its customers on behalf of AT&T, with identical pricing characteristics in exchange for certain compensation and fees, that are primarily in the form of revenue sharing for the core wireless services that the company bills on behalf of AT&T, and whereby the company retains all of the revenue and income from products and services it sells on its own behalf. The company is responsible for all of the billing and collection of cellular charges from its customers, and remains liable to AT&T for a set percentage of all AT&T-related cellular service customer billings. These distribution agreements with AT&T have varying expiration dates from August 31, through October 31, 2012.

- The company believes that because of the volume of business transacted with AT&T, as well as the revenue generated from AT&T, there is a significant concentration of credit and business risk involved with having AT&T as a primary vendor. The company's largest distribution agreement with AT&T, for the Dallas/Fort Worth, Texas MSA was amended effective September 1, 1999 with an initial term of 10 years (the "DFW Agreement"). The DFW Agreement provides for two 5 year extensions unless either party provides written notice to the other party at least 6 months prior to the expiration of the initial term or the additional renewal term, although certain billing services and other obligations continue for many years after the initial term expires, in some cases in perpetuity.

- That is, specifically, under the terms of its distribution agreement with AT&T, the company is allowed to continue to service its existing subscriber base until the subscribers themselves terminate service with the company; AT&T has no direct control over when or if a subscriber terminates its service agreements with the company; AT&T is obligated to continue to provide its services, and, AT&T is prohibited from soliciting the company's customers, with substantial penalties for each violation incurred (i.e., $1,000 per instance as discussed regarding the iPhone above). The initial term of the DFW Agreement expires in September 2009, and the company received the required 6 month notice from AT&T in February 2009, stating that they will not extend the DFW Agreement with the company beyond the expiration date.

- As a result of the natural expiration of the DFW Agreement, the current AT&T-exclusivity requirements under such agreement will terminate at the beginning of September 2009, which will allow the company to expand its cellular offerings in the previously AT&T exclusive areas, under new agreements with one or more carriers. However, AT&T has indicated to the company that it would like to maintain a long-term relationship with the company, under a new agreement(s) that would, at a minimum maintain the company's exclusivity with AT&T in all of the markets that the company currently serves under its various AT&T agreements. The company and AT&T are currently in discussions on how to structure such new agreements, and the company may or may not determine that maintaining an exclusive relationship with AT&T is in its best interests. Most importantly, with respect to the company's primary distribution agreement with AT&T, Management believes that there will be no material affect on these revenues for the foreseeable future, i.e., above the impact on revenues already being recognized through current customer attrition.

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