Hawaiian Telcom bleeds $38.6 million

The company blames costs of becoming an independent entity

Hammered by costs associated with becoming a stand-alone company, Hawaiian Telcom Communications Inc. reported a net loss of $38.6 million for the first quarter of this year, compared with earnings of $11.6 million during the same time last year for its predecessor.

The loss came on operating revenue of $141.5 million, a 5 percent decline from the $148.9 million reported in the same quarter last year by Verizon Hawaii.

The swing from solid profits to big losses comes as Hawaiian Telcom struggles with defecting landline customers and technical challenges associated with spinning off from Verizon Communications Inc., which last year sold its Hawaii assets to the Washington, D.C.-based Carlyle Group.

Although the high-powered equity fund has rebranded Verizon Hawaii as Hawaiian Telcom and sought to position it as the kamaaina telecommunications company, that has not stopped local customers from continuing to abandon their landline phones in favor of cellular or VoIP products offered by Hawaiian Telcom's competitors.

The company reported it had approximately 638,900 land lines as of the end of March, continuing a downward slide that has resulted in the loss of about 100,000 landline customers since 2002, when the company had approximately 738,900.

Hawaiian Telcom has partially made up for its lost wireline revenue by adding new high-speed Internet customers, as well as wireless phone service.

In addition, the company says it plans to offer television services transmitted over the phone lines, which would provide another source of revenue.

In the meantime, however, Hawaiian Telcom's transition to its own operations system has resulted in frustration for customers, who have complained of technical and billing glitches followed by long periods on hold waiting for Hawaiian Telcom to help them.

To deal with customer service issues, the company has hired more than 100 temporary call center workers and has waived late fees for customers, said Ann Nishida, a company spokeswoman.

But six weeks after Hawaiian Telcom began its transition, customers are still encountering problems, said Mike Ruley, the company's chief executive.

"There are still deficiencies, and everyone at Hawaiian Telcom is working very hard to make the necessary changes to deliver high-quality customer service," Ruley said in a written statement. "We look forward to getting this transition fully behind us so we can expand our service offerings and increase our service quality."

Hawaiian Telcom attempted to put the best face on its earnings yesterday, burying the net loss number in its earnings release and prominently noting a number for "adjusted EBITDA." The company calculated this figure by adding $27.3 million of transition costs and $700,000 deferred phone book revenue to its $30.4 million in earnings before interest, taxes, depreciation and amortization, which is a measure of cash flow. The resulting figure of $58.4 million is almost $100 million higher than the company's net income for the quarter.

"The shift to full independence, while offering substantial benefits going forward and eliminating very costly payments to Verizon, has presented significant near-term challenges, as expected," Ruley said. "We have not yet realized the type of performance we need from our new systems, but we are aggressively pursuing the necessary refinements."