S&P cuts outlook for Hawaiian Telcom

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Standard & Poor's Rating Services cut its outlook on Hawaiian Telcom Communications Inc. from stable to negative yesterday.

The national rating agency revised its outlook due to Hawaiian Telcom's continuing operational difficulties as well as increased competition from Oceanic Time Warner Cable.

These two factors were blamed for larger-than-expected drops in both land line and digital line subscriptions in the second quarter of this year, S&P said.

But Hawaiian Telcom, which has posted profits for the first two quarters of this year, says it is making improvements, and anticipates a strong performance in the second half of this year, with the launch of new products and services.

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Standard & Poor's Rating Services yesterday downgraded its outlook on Hawaiian Telcom Communications Inc. from stable to negative.

While S&P affirmed all ratings on the company, including the 'B-' corporate credit rating, it said service problems as well as increased competition led it to revise its outlook for the isle phone company.

"Ongoing billing and back-office system delays, combined with heightened competition in Hawaii for voice and data telecommunication services, resulted in greater-than-expected residential voice access-line and digital subscriber line losses in the second quarter of 2007," said S&P credit analyst Susan Madison.

Consequently, according to S&P, Hawaiian Telcom's revenue and EBITDA (earnings before interest expense, taxes, depreciation and amortization) were lower than expected.

The number of residential voice access lines declined 11.5 percent annually and 3.4 percent sequentially during the second quarter, reflecting an acceleration from the first quarter's line losses of 10.6 percent and 3.1 percent, respectively, according to S&P.

But Hawaiian Telcom remains confident it will pull out of its troubled past.

"We understand why the S&P Rating Services has revised its outlook for the company, but we want to assure our customers and employees that we continue to make progress in our ongoing operational challenges," said Hawaiian Telcom spokesman Ron Mizutani. "We do know they exist, but progress is being made."

Hawaiian Telcom's net income for the three months ending June 30 jumped to $21.4 million, a significant improvement from the net loss of $32.2 million during the same period last year.

Second-quarter revenue declined 5 percent to $121.4 million.

Since its spinoff from Verizon Communications two years ago, Hawaiian Telcom had never recorded a quarterly profit until the first quarter of this year.

Several one-time events that quarter helped it into the black, including a settlement with BearingPoint Inc., which Hawaiian Telcom blamed for its back-office operation problems. The company replaced BearingPoint with Accenture Ltd.

The company also agreed to a $435 million sale of its directory publishing business to Local Insight Media.

S&P said that, like all wireline operators, it is likely Hawaiian Telcom would continue to lose customers to wireless competition. But much of the loss would also be due to competition from its rival, Oceanic Time Warner Cable, S&P said.

"We believe this is a current assessment of our operations," said Mizutani. "From top to bottom, we remain confident the company is taking the steps forward to improve our business. We anticipate a strong second half of 2007. We are launching some new products and exciting services in the third quarter."