ATN International, Inc.

Thank you all for standing by, and welcome to the ATN International Q3 2020 Earnings Conference call and webcast. All lines have been placed on mute to prevent any additional noise until the question and answer session. To ask a question over the phone by that time, you may press the star key followed by the number one. I'll now hand the call over to your host, Chief Financial Officer, Mr. Justin Benincasa. Sir, you may begin.

Great. Thanks, Jesse. Good morning, everyone, and thank you for joining us on our call today to review our third quarter 2020 results. Here with me is Michael Pryor, ATN's Chief Executive Officer. During the call, I'll cover the relevant financial information. Michael will be providing an update on the business and outlook. Before I turn the call over to Michael for his comments, I'd like to point out that this call and the press release contain forward-looking statements concerning our current expectations, objectives, and underlying assumptions regarding our future operating results, and are subject to risks and uncertainties that could cause actual results to differ materially from those described. Also, in an effort to provide useful information to investors, our comments today include non-GAAP financial measures. For detail on these measures and reconciliations, to comparable gap measures, and for further information regarding these factors that may affect our future operating results, I would refer you to our earnings release on our website at atni.com or the 8K filing provided to the SEC. Also, we are now in a quiet period with respect to certain SEC-related auctions, including the Rural Digital Opportunity Fund, RDOF, and will not be in a position to answer questions related to these proceedings. And with that, I'll turn the call over to Michael for his comments.

All right. Thank you, Justin, and good morning, everyone. Our results for the third quarter are substantively very similar to the second quarter, demonstrating the strength and resilience of our core telecom services businesses. Cash flow from our largest segment continued to improve on the back of good subscriber trends, productivity improvements, and cost controls. That said, we are not satisfied with the status quo. For example, we have much more that we can do, that we need to do, and that we are doing to improve our retail businesses and deliver an even more positive experience for our customers. Further, we continue to pursue the development of new platforms and services both within and outside of our historical territories. Relevant to both the pursuit of growth and the strength of current operations, I wanted to say that I'm grateful for the dedication and ambition of our people. I see folks across multiple businesses and markets driving hard to create great experiences for customers and pursuing ambitious strategic goals. I'm fortunate to be part of this company. And moving to the segment information, starting with international telecom. As noted, we saw strong double-digit year-on-year growth in EBITDA for this segment, And nine months in, the pace of our cash flow generation is ahead of last year, which in itself was quite good. As with the second quarter, this represents generally strong demand for our services and a particularly good job of spending controls in nearly all markets. Also consistent with the past quarter was the continued expansion of fixed line data subscribers. Our program of Heavy investment, particularly in 2017 and 2018, is paying off, and we continue to expand the reach of our fiber network and improve resiliency, capacity, and speeds. Broadband subscribers for the segment totaled roughly 138,000 at quarter end compared to 125,000 from a year ago, a roughly 10% growth rate. A positive development this quarter that we are working to turn into a trend is a pickup in mobile subscribers with approximately 289,000 at the end of the quarter against 276,000 in the second quarter and 285,000 a year ago. We think there is room to run, but we will need to continue to improve our execution, especially in the area of sales and marketing. We're adding new retail locations and programs in the current quarter to invest further in this effort. and we are expanding the use of new subscriber management tools, including the use of AI. And video subscribers declined at an 8% annual rate, similar to the second quarter. While the percentage decline is pretty significant, the impact on profitability is minor. Also consistent with the second quarter, we saw a slight increase in voice subscribers at about a 2% annual rate as customers continue to add bundled offerings. In terms of pandemic impacts, there was nothing new here in the results, and we were starting to see limited signs of tourism recovering in some markets. We continue to monitor the situation carefully and are preparing in case the pandemic causes macroeconomic conditions to decline further. In other news, as reported in our release, we increased our ownership stake in One Communications, our Bermuda and Cayman Islands subsidiary. Justin will cover this further. But I'll just note that we are believers in this business, and together the team and our outlook is as long and as positive as our experience, having made the original investment in the predecessor company more than 20 years ago with multiple larger follow-on investments, all yielding very good results to date. Investors may also have seen the news in Guyana where the government passed new telecom legislation that among other things, formally ends our exclusivity in international voice and data and local fixed line services. I'm not going to say a lot about this while we're in discussions and considering our options, except to note that the government had long failed to act against open and notorious unlicensed activity by our competitors. So we do not see this as a major change in the market at this point. We do believe the competitive environment there will tighten. but also that the overall market will experience significant growth. We will continue to put most of our attention on delivering a great experience for customers. Control what you can control. Moving to U.S. telecom, as highlighted last quarter, the year-on-year comparisons were not favorable this quarter as a result of some contract restructuring and the accounting related to that. But, as also expected, the results were broadly consistent with the second quarter. And I mentioned ambitions at the outset, and the team here is certainly committed to moving to the next hit level. The strategy remains to grow revenues and cash flows outside of our legacy neutral host carrier services revenue. We're looking to do that in a number of ways. One, growing our private networks business known to the market as GeoVerse. Second, growing rural broadband revenues. And third, growing our fiber-based services to carriers, and commercial and governmental customers. While we did not break these items out individually, we made progress in all three of these areas despite pandemic limitations that impacted certain sales and strategic activities. More to do and more to come. In other developments for the segment, we were successful in obtaining licenses across a wide range of areas in the recently concluded CBRS PAL auction, This activity and investment are part of our efforts in several areas to further develop the platform and services. We also worked with our partners in the Navajo Nation to win nearly $20 million in CARES Act funding to support the build of more than 100 additional wireless broadband sites. We are committed to complete the build by year end, and our team is doing a tremendous job towards reaching that ambitious goal. which will have substantial real-world impacts for families, students, and educators across a large section of Navajo lands. We have had a long and successful partnership with the Navajo Tribal Utility Authority and our teams are justifiably proud of their achievements and the momentum created by this latest win. In renewable energy, The pandemic-related factory and mill shutdowns in India were reversed during the third quarter, leading to a recovery for this segment from the second quarter. In addition, repairs and operational improvements led to better production. However, the annual comparisons are negatively impacted by currency movements and pandemic-related delays in settlement. So, in summary, we are pleased with the resilience and discipline of our operations. Year-to-date results from our international telecom businesses represent a significant yield on past investments, and we see additional opportunities to grow in many of our markets and build on our substantial asset portfolio. In the U.S. telecom segment, we continue to focus on new strategies to leverage our assets and capabilities to drive growth, and we look forward to updating you on our progress in quarters to come. And that's it for me. Back to you, Justin.

All right. Thank you, Michael. For the third quarter, total consolidated revenues were down 3% over last year at $111.7 million, and consolidated EBITDA was $31.1 million, down 5% over the third quarter of 2019. Consistent with the first half of the year, and as Michael noted, our international telecom segment has continued to show improved profitability and offsetting much of the straight-line revenue impact that was anticipated this quarter in the U.S. segment. Looking at each of the segments and starting with international telecom, revenues were $82.5 million, up slightly from $81.3 million last year, and EBITDA increased 19% to $29.7 million. Year-to-date EBITDA growth for the segment was 13% on modest revenue growth, highlighting our ability to pivot quickly to gain operating efficiencies in many of our international markets. As we noted in the release in October, we purchased an additional 10% of One Communications, our Bermuda Cayman Islands company, which brings our total ownership to approximately 70%. We expect this to be accretive to overall company earnings beginning in the fourth quarter. Since our 2016 merger to Form 1 Communications, the business has performed well across several key metrics. We've significantly expanded our network footprint in the Cayman Islands. We've grown subscribers in both markets, expanded EBITDA margin by 8 percentage points, and expanded free cash flow. Capital expenditures for international telecom segment were $8.5 million in the third quarter and $28.4 million year-to-date. We still expect the segment's CapEx to be in the $35 to $40 million range this year. U.S. telecom segment revenues were $28.1 million for the quarter, consistent with this year's second quarter, but down 15% from a year ago. And EBITDA was $8 million down from $13.7 million in the third quarter of 2019. As I mentioned, over the last several quarters, we've expected very little seasonality in revenue this year compared to past years on the terms of our carrier, based on the terms of our carrier contracts. The year-on-year comparison is most evident in this year's third quarter, which is historically the seasonally strongest quarter for us in our domestic wireless business. With respect to our build-out in support of FirstNet, after certain COVID-19-related delays, we've delivered our first two sites this quarter and expect to deliver approximately 25% of the total sites this year that are to be built under the agreement. U.S. telecoms capital expenditures in the third quarter totaled $8.4 million and $17.3 million year-to-date. We do expect to be closer to the high end of our previous CapEx guidance of 25 to 30 million as we continue to build sites and backhaul to support the FirstNet builds. In renewable energy segment, revenues were 1.2 million in the third quarter compared to 1.4 million last year, while EBITDA was 393,000 compared to 302,000 last year. We had consolidated net income for the quarter of $2.7 million, or 17 cents per share. Our effective tax rate was 1.5 percent for the quarter, and we expect to be in that range for the overall year, in part from the benefit of an NOL carryback as part of the CARES Act. Also included in operating expense for the quarter was $1.9 million of non-cash stock-based compensation expense. and $1.5 million of costs related to our early-stage initiatives in the U.S. telecom segment. Just quickly on the balance sheet, at September 30, we had total cash and short-term cash investments of $135.5 million, total debt outstanding of $83.7 million. And, Operator, we'll turn the call back to you for questions now.

Thank you, speakers. Participants, we will now begin the question and answer session. To ask a question over the phone, please press star 1 from your telephone keypads, or you may press the pound key to withdraw your request. Our first question is from the line of Rick Prentice of Raymond James. Sir, your line is now open.

Thanks. Good morning, guys. Good morning, Rick. A couple questions. First, Michael, you called out the CBRS auction where you guys were successful. I think it was about $20 million in bids. Have you paid that completely within the quarter? I know there was a possibility that it might have slipped some of it into October 1st. But also, can you talk to us about what you see as the addressable market and what kind of capital you might put to work with that spectrum?

Sure. Yeah, I'll let Justin respond on the financial side in terms of the timing of the spend. But on the strategy, I mean, I would just say it's a mix of deployment in rural areas, obviously you can see from those licenses, and private networks, support of our private networks business, which is already – been utilizing CBRS, and I think also within a small amount added to the Virgin Islands spectrum holdings.

And we did, Rick, we did pay for it fully in the quarter. Okay.

And when you think about the CapEx that you might put to work to support the spectrum purchases, Any way for us to think about the addressable market, how you might deploy capital, what kind of return on capital the projects would involve?

I can't speak to specifics because of other proceedings and things, but I can say that when we, as always, when we buy Spectrum, we buy it because we believe we have a potential use and we may or may not in the end, in the short term, Sometimes we have turned around and swapped spectrum or sold spectrum if we can't put it to use. But the actual use of it, we run through our filter like everything else. So it's, you know, do we, you know, can we earn a reasonable return for the cost of building it out? You know, what do we think the risks that are associated with that? So this will be no different. But beyond that, I can't really get into specifics.

Okay. And the private network at Geoverse, is that mostly in-building type items you're imagining?

Yeah, or campus type things. You know, a lot of the interest level we see is beyond simply in a specific building.

Yeah. Okay. Next question. It looks like you did some stock buyback in the quarter. Can you talk to us a little bit about your stock buyback program, how you execute it, Is it set up like a 10B5 type plan? What are your thoughts as far as putting capital work into stock buyback?

Yeah, we, you know, in the history, I think you know this, and investors follow this, we've been, you know, very opportunistic in it, not looking to put a certain amount to work in a given period, but more looking to move. And we had been frustrated in the past by, you know, long-term, long no-trade windows, so we did in fact put some of our authority to put in place a 10b-5 type plan, which we've more or less fully utilized at this point. But we do think that's a useful mechanism because of the fairly large generations in our stock.

And do you report out, I don't recall seeing, but do you report out in the queues how many shares you bought or is it just how many dollars? Just trying to keep track of what kind of average price you're getting.

You know, I'm not entirely sure.

Let me find that out. I'm not sure if we put the dollars in the shares or not. But we'll answer before the call is over. Okay, that'd be great.

because it's just always a nice indication of where you put it to work, and it obviously shows confidence in the stock price when the gyrations do happen. Goodness knows this has been a gyration year or one of the other things happening.

And the final question, on the islands... Sorry, we do do both shares and dollars, too. I just was told.

In the 10Q? In the 10Q. And do you know when you're going to file the 10Q for this quarter?

I think around the fifth is my understanding.

Okay. And final area of questions for me is on the islands, obviously, as COVID hit, there was concerns about what it might mean for tourism, what it might mean for the employees that support tourism that are your customers. How should we think about what you're seeing? You mentioned some tourism recovery in some of the markets. How should we think about what you think? Obviously, COVID is still unclear. What should we be thinking about in 4Q as we look into 21 as far as impacts on mobile, on fixed, on your business as well as your consumer areas?

Yeah, I think first to start on the tourism, we don't have any inside baseball view, but what I am told by people in the markets we're in is I think the general feeling is the worst thing has passed and they expect buildup from here, and they've certainly seen some return. And there's different reasons, but if you think about where we are, where we have tourism, the Virgin Islands is interesting because it's a U.S. territory, so that makes it more attractive to people who might go to other territories and they're not allowed to go. as a US traveler or are concerned about it, the restrictions. And then, you know, Bermuda and Cayman are both, you know, seen as playing COVID very, very safe and conservative. And, you know, so they're attracting higher end in particular, some of the first sort of movement back, but there's still, it's certainly, you know, it's still, definitely depressed. There's still like in the Virgin Islands, there's still some big hotels that are not open. And the cruise ships are not out there, which, you know, do contribute to those economies. And so I think when we look at it, it's possible we've seen the worst. But if this lingers long, and the sort of various support businesses are out of work or under depressed returns for long, that's going to mean more people are struggling, and that can have a ripple effect. So I wouldn't say we feel like, okay, we're definitely free and clear now. And that's the best way I can say it. I think as long as things aren't severe – You know, I think it's been proven both in our business and other people's businesses that the services we offer are, you know, absolutely seen as essential services. So, otherwise, we expect the demand to continue to be steady.

Okay. Thanks, guys. Stay well for you, your employees. Thank you.

Yeah, and you as well.

Our next question is from the line of Mr. Greg Burns of Sedoti. Sir, your line is now open.

Morning. In terms of the mobile side of the international business, has anything changed in that market to give you confidence to start maybe investing a little bit more there and driving growth, or is it just a function of maybe your focus or attention was in other parts of the business and now you're kind of recircling back on the mobile side?

I think most of our investment has been made. The networks are in great shape, extremely competitive, and there's always some ongoing investment in that, but that's not really the trigger. There's some investment I referenced in my prepared remarks in the retail side and a couple markets, but that's not huge. it's really been a matter of putting, you know, in a couple markets, putting the right tools and strategy in place. And I think, you know, we are seeing some signs that there's, you know, a lot of work is starting to pay off, right? You know, like everybody, we like to see it recur to be confident, and we're certainly not going to let our foot off the gas because we see additional opportunity there. So, you know, it remains a an area of focus and an area we're targeting to, you know, create some growth.

Okay, thanks. And then the equity, the 10% equity in one communications, what was the purchase price for that?

We haven't disclosed that, Greg.

So, yeah, we don't usually get that deal.

But we would say, you know, it was a good value to us.

Okay, and what was the trigger for that purchase? Did they approach you, you approached them, or do you have options to maybe acquire the remaining balance? What's the structure of the ownership stakes there?

Yeah, I don't think we can speak to the future state, partly because of Bermuda market restrictions and sensitivities, but we were approached, a party we knew well, and it was... a situation of portfolio need on their side. So this is a financial investor, not a strategic.

Okay. Thank you.

Our next question is from the line of Alan Klee of National Securities. Sir, your line is now open.

Good morning. For your emerging investments, can you tell us how much of a drag they were on your earnings for the quarter and thoughts on when that could start to turn positive EBITDA?

I'll let Michael talk to the EBITDA piece moving forward. We've spent about a million and a half on them in the quarter. So they're about of an EBITDA drag.

And I assume by Justin's answer, he's answering the ones that are going through our P&L as opposed to minority, any minority investments. But, you know, it's interesting because, for example, I'll give you an example, Alan, probably the biggest piece of that is investment in private network and scaling up that business and in the early stages of successful growth there, it could be, you know, increased costs, right? But we would hope that there would be also increased visibility of the value generation at the same time. But, you know, so we're not really thinking about it as a near-term EBITDA situation. We're focused on, you know, building a platform that can be, you know, a significant contributor to ATM for years to come.

Thank you. We know there's a lot of infrastructure funds that are looking for acquisitions and paying up for assets, which might be making it harder for you guys trying to do that. Could you talk maybe about anything you've seen in the market of kind of valuations and maybe how we could think about how that might imply the value of what you have?

Sure. I think a couple of things to remark on there, and I think we touched on this a little bit last quarter or the quarter before, but maybe I can expand upon it. The first is we certainly watch those deals. We've seen those deals and are aware of them, and I would say they would imply a much higher value in our view on our assets than the market is currently giving them if you look at they're really starting to invest in, you know, we of course have wholesale operations, fiber operations, and towers and various things like that, but we also have, you know, the bulk of our revenue right now is coming from that retail side, and you start to see infra funds more and more in the U.S. and internationally invest in retail operations, you know, home broadband, Fiber-based is a lot of their liking in high-speed services. And you look at those prices, and they're much above what the market appears to be valuing us at today. So that's noteworthy. The second thing I would say is the first part of your question. We have shifted really last year and accelerated this year from – You know, we saw that competing against some of the low cost of capital investors for the types of telecom assets we have, sort of proven established businesses, just doesn't make sense. And, you know, we in the past have done a lot of those on a sort of GARP approach, get in at a good value, grow the platform, and sort of have the benefit of both boosts in return. And it's really hard to get in at a value that works for our cost of capital in those types of businesses. But what we believe is that we can provide a good role and harness that interest of capital to get into this business because we have, you know, a heck of a platform and also a lot of experiencing pulling – complex assets, difficult areas, pulling them together and making strong, you know, recurring cash flow businesses out of them. So, you know, we think there is a great deal of upside for us in continuing to develop our platforms, both existing platforms and new platforms, and then looking to partner with some of those low-cost capital providers to, you know, to fund additional investment and additional growth. So that's really our focus right now.

This might be the same question, but asking it a little differently. If we look at your businesses, international, I believe, has a nice growth outlook. You've stabilized U.S. telecom and renewables is just not material today. You're generating good free cash flow. You had kind of a record quarter. and your balance sheet is under leveraged. So you have this question of, like, what can you do with your cash to improve your growth outlook on a meaningful level versus kind of modest incremental? How do you think about that?

Yeah, it is somewhat the same side of the previous question, but I think the way we think about that is we can – use that capability to develop our platforms further. And that can be very meaningful. I think if we're going to take value and overall cash flow production to the next level, that's what we need to do. And we're very focused on that. We're looking at that in both of our telecom segments in And I referenced a number of the ways we're doing that in my prepared remarks.

OK. Thank you.

Sure.

Again, participants, it is star 1 to ask a question over the phone. It's the pound key to remove yourselves from the queue. Our next question is from the line of Hamid Khorasan of BWS. Your line is now open.

Hey, good morning. Good morning. Just a question on determination and access fees. There was a dip this quarter. Is that sustainable or is that related just to COVID and data flow?

I'd say some of that's sustainable, some of it's related, right? It's hard to kind of pinpoint it. There's certain things. we're getting some breaks on programming costs, but then there's a lot of things we've done in there that, like I said, to kind of pivot our OpEx quickly and take them down, and we think they're sustainable.

And lower roaming by our customers certainly impacts that number.

Yeah, yeah, yeah. You have lower handset sales, you have lower cost of sales, too, usually down there as well, so.

Okay, and then on the international mobile subscriber side, are you conceding on pricing to capture new subscribers, or is it just more promotions and advertisements?

It's more of the latter, but it's also retail. It's also, as I said, subscriber management, using tools to better manage on the prepaid side, the subscriber base and top-ups and things like that. I think there's also attractiveness in the markets of our bundled offerings and how we can deliver value that way.

Is there a market that's still bothering you on the international side?

You know, every market we expect to do better. I don't really want to single it out now particularly.

Okay. And then on the first net contract with the deliveries happening, what would the timing of the capturing revenue for the backhaul be? Would it be immediate?

It would be, yeah, pretty much, pretty much. Right, once we turn a site over, it flips into capturing it immediately, yes. So I guess the answer to that is yes.

Okay, that's it for me. Thank you. Sure.

Anybody else, operator?

Operator?

Our next question is again from the line of Alan Klee of National Securities. The airline is now open.

Yes, hi. Can you just remind us on the first net contract, there's going to be a time period where you're constructing it out and you're not making any margin on that. But once you're done with that, what will we compare this to to think about what the potential is? margin profile of the business could be and where the potential growth or think of it as stability or how to think about the top line and the bottom line for that business once we get to that point. Thank you.

I would say on the top line, it's kind of a lateral move, right? And from where we flip from a roaming revenue to a backhaul and lease revenue. But I would say that Probably it's a little more of a compressed margin once we flip over on that. Not material, but it will definitely – we have more expenses to deliver that service than we do to deliver a wholesale service. OPEX, yeah, OPEX.

Thank you.

No further questions on queue.

Okay. We thank everybody. Thanks for the quarter, and we'll see you after year end. Everybody be well. Take care.

And that concludes today's conference. Thank you all for participating. You may now disconnect.