ATN International, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the ATN International Fourth Quarter Earnings of 2020 Conference Call and Webcast. At this time, all participants are in the listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question, you will need to press star 1 on your telephone, and if you need any assistance during the call, press star 0. I would now like to hand the conference over to your speaker today, Mr. Justin Vinincasa, Chief Financial Officer. Thank you, and go ahead, sir.

Thank you, Operator. Good morning, everyone, and thank you for joining us on our call to review our fourth quarter and full year 2020 results. With me here is Michael Pryor, ATN's Chief Executive Officer. As usual during the call, I'll cover the relevant financial information, and Michael will provide 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 our 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 material from those described. Also, in an effort to provide useful information to investors, our comments today include non-GAAP financial measures. For details on these measures and reconciliations to comparable GAAP measures and for further information regarding the factors that may affect our future operating results, I would refer you to our earnings release on our website at atni.com or to the 8K filing provided to the SEC. And with that, I'll turn the call to you, Michael.

Thank you, Justin. Good morning, all. As I typically do at this time of the year, I will go through the key elements of the most recent quarter as well as the full year. I will also offer more outlook commentary than usual to provide additional insight into our plans, particularly as they relate to business shifts within our U.S. telecom segment. To summarize, ATN's telecom businesses delivered good results in 2020, demonstrating significant resilience in a year in which worldwide businesses faced unprecedented challenges. Our core communications operations produced strong EBITDA results and steady cash flow from operations. This could not have been accomplished without the hard work and dedication of our employees and the consistent past investments that we have made in our communications infrastructure assets. There are areas that we still need to address, particularly in our U.S. telecom business where we need to adapt and work to optimize a changing environment and changing customer needs and to pursue new opportunities. And in 2020, we demonstrated the discipline to exit businesses like Indian Renewable Energy that, while likely right directionally as an investment thesis, did not turn out to be well suited for our capabilities and detention. On the other side of the ledger, this was also the year in which we showed our ability to act quickly to take advantage of investment opportunities to increase future value. Such was the case with our creative work to reach a definitive agreement to acquire Alaska Communications. This is the type of business and business environment that we know well, and we believe we are well-placed to partner with the existing team and our co-investors to drive greater value. More on those subjects to come, and I would also encourage you to take note of the added detail in our earnings release and Justin's commentary, which includes the many investments we have made on core infrastructure and the significant capital deployed through equity buybacks at both the subsidiary and parent levels. Now let me turn to our individual operating segments, starting with international telecom. In the face of continued difficult pandemic-related economic conditions, the fourth quarter for this segment showed the same consistent, strong, and steady performance that we have seen throughout the year, with good subscriber growth in metrics and very positive EBITDA increases, as our teams managed very well despite the downturn in certain revenue categories, such as enterprise and wholesale. Fixed data subscribers increased by a little more than 10% year-on-year, and churn in that base remained quite low. This is our core service offering in our market, so we were quite happy with this result, which reflects both increased penetration of our higher-speed offerings and strong market demand overall. Mobile subscribers increased by roughly 7% year-on-year, and this was the second consecutive quarter of good growth. Some of that may represent a partial recovery from the early weeks of the pandemic, but our analysis indicates we are picking up share as well, which is a credit to the hard work and improved go-to-market strategy of our sales and leadership teams. Video subscribers continue to decline, but voice subscribers remain steady, even up slightly. Looking ahead for this segment, we are continuing to invest in advanced services, including higher-speed fixed and mobile data and enterprise solutions. We have some challenges with regulatory changes in several markets, including a potential reduction of subsidies in the Virgin Islands and the introduction of new licenses in Guyana. But overall, we expect another year of solid EBITDA production for the segment. In addition, we are hopeful there will be and economic recovery in the tourist-dependent island markets as the year moves along, and we expect Guyana's economy to experience significant growth. In U.S. telecom, EBITDA here declined in the fourth quarter, and we expect that to remain the trend as we look ahead to 2021 performance. We are in the midst of a major transition of this business, from one driven by roaming-based wholesale revenue to a revenue mix consisting of backhaul, tower rentals, and other carrier services alongside what we expect to be a growing contribution from enterprise and retail. Toward that end, in addition to investments in fiber, high-capacity wireless solutions, towers, and rural wireless broadband equipment, which Justin will cover all in a bit more detail, We also are committing significant dollars to product development and expanding our sales and marketing activities in private networks and elsewhere. We've had some wins in private networks in 2020, including contracts to provide the network platform for two municipalities. But similar to many early stage businesses, the pandemic took a toll on our business development efforts. Thus, Actual revenue build-out and contract activity was relatively low in the fourth quarter and for the year. However, we are allocating significant financial resources to accelerate the pace of that activity in 2021, with a particular focus on certain segments such as municipal networks and state and local education. We also are pursuing strategic partnerships to expand our product reach and to combine offerings with other participants in this nascent market. Some of the investments in this segment are relatively low risk, such as building out critical network infrastructure under customer contracts or in areas of unmet demand. Others are higher risk, such as the investments in private network solutions. But the market opportunity is commensurately large. We will continue to closely monitor progress and will calibrate our investments to align with market and business prospects. So the net of all this is that we expect much lower EBITDA for this segment in 2021 compared to 2020 levels. However, as you might gather, we believe that the potential rewards are worth the level of investment, and we will provide updates as things develop. And as a last note on this segment, relevant to this segment, is the spending we had on our CBRS licenses across the country. The largest portion of that spending was to provide a resource to pursue rural broadband opportunities, particularly in connection with the recently completed Rural Digital Opportunities Fund auction. We expect to retain roughly $20 million in awarded subsidies and related build obligations from that reverse auction. And while we had hopes of a much higher award, we still believe there may be attractive opportunities to utilize the CDRS spectrum to augment local broadband and private network offerings. Further, there are still some questions about the RDOF process and the follow-on funding, which we are following carefully. Moving to renewable energy, which will be the last time I touch on this. As noted, we closed the sale of two-thirds of our equity in Vibrant Energy. While structured as a sale, and we indeed received initial cast proceeds of around 20 million, we view this mainly as bringing in a majority partner for this business. We have had some good sales and development momentum there recently, some of which is in concert with our new partner, which is Blue Leaf, a part of Macquarie's Green Investment Group. So we think the team and the business have good potential from here. We are no longer driving, but we will be along for the ride. Given the distance, business sector, and relative size to the rest of our operations, we think that this is a better position for us. Lastly, I'd like to publicly thank the leadership and team at Vibrant for managing through some tough developments in the Indian renewables market and putting the business in a position to grow. Moving to the Alaska communications transaction, this was one of our major accomplishments in the fourth quarter. the work leading up to our offer to acquire the Alaska Communications, which was accepted in the final hours of 2020 and officially announced on January 4th. ATS is an excellent fit for us, and we look forward to entering this market with a provider that has a great reputation as a customer-centric organization serving business and carrier customers, as well as residential households. We have identified opportunities for revenue synergies coming from combining our capabilities in infrastructure expansion, and bringing next-generation managed services and private networks to market. ACS shareholders are set to vote on the transaction on March 12th, and assuming they approve the transaction, the next step will be to gain regulatory approvals. I should note that the waiting period for Hart-Scott-Rodino approval has expired, but there are additional federal and local approvals. In addition to the operating and financial benefits of this combination, there are two key takeaways that I think are important. One, this transaction demonstrates a new ATN's ability to act quickly and opportunistically to complete a major strategic transaction, which speaks to both our strong financial position and our flat organizational structure. And two, our operating platform, track record, and expertise make ATN a perfect partner for financial investors, such as Freedom3 Capital in this case, seeking to invest in communications infrastructure assets and businesses. We believe there will be more opportunities like this, and with a projected post-transaction net leverage ratio of less than two times, we have the financial flexibility to pursue them. So to sum up, ATN demonstrated significant resilience in 2020 with strong positive performance from our communications services businesses. 2021 will be a year of additional spending and compressed margins in our domestic telecom business, but we are investing in areas that should provide growth and better economics in the medium term. We are looking ahead to further improvements in our international telecom business in 2021 and to the completion of the Alaska Communications transaction in the second half of the year. That'll turn it back to you, Justin.

Okay. Thank you, Michael. For the fourth quarter, total consolidated reported revenues were $123.7 million, up 10% from last year's $112.1 million. Adjusting for construction revenue related to the first net build, revenue was up slightly from last year. Adjusted EBITDA for the quarter was $30.5 million, an increase of 7% over 2019 and adjusted EBITDA of $28.5 million. Looking at the segments and starting with international telecom, fourth quarter revenues were up slightly to $83.8 million from last year and adjusted EBITDA increased 6% to $28.1 million. The pandemic caused us to quickly pivot to accelerate implementation of new digital solutions and processes within our businesses, including the rollout of electronic bill payment and other automated services across our markets. Thus, we're able to quickly gain operating efficiencies in many of our international markets during the year. This quarter's net income also reflects an increase in our ownership in One Communications, our Bermuda and Cayman Islands company, to approximately 70%. up from 51 percent following the original transaction. Capital expenditures in this segment totaled $38.9 million for the full year, coming in lower than originally expected as some of our planned capital spending was delayed or slowed due to the pandemic. With adjusted EBITDA for the year totaling $114.3 million in reduced capital expenditures, we saw significant free cash flow generation in this segment in 2020. We expect most of the 2020 delayed capital spending to occur in 2021 and segment capital expenditures to be in the range of $45 to $55 million for the year. In the U.S. telecom segment, fourth quarter revenues totaled $38.7 million, up from $27.8 million a year ago, mostly due to the $10.5 million of FirstNet construction revenue I noted earlier. Currently, we expect to complete an additional 50% of the $85 million construction project this year for FirstNet. Adjusted EBITDA for the segment was $7.2 million, down from $8.3 million in the fourth quarter of 2019. This included net additional operating costs of $1.5 million for the quarter and approximately $6 million for the year associated with our early stage private network business. Looking into 2021, we expect full-year investment spending on private network to increase to roughly $12 million as we expand the product development and sales effort that Michael noted earlier. In addition, as FirstNet sites come online and revenue shifts from wholesale roaming to maintenance and rental income, there will be increased operating expenses associated with the new sites. This increase in operating costs will be somewhat mitigated by lower network capital costs as the wholesale roaming traffic comes off the network. We were also pleased to be awarded $18 million under the CARES Act to build an additional 85 wireless broadband sites in partnership with the Navajo Tribal Utility Authority, and we completed most of this build late in the fourth quarter. These 85 sites should be a good addition to our rural broadband going forward, As we look to add more subscribers, but together with the first net site cost, these increased network footprint will negatively impact even the next year with increased network operating costs of 10 to 12 million. We reported 30 million of capital expenditures for the year in this segment. A substantial majority of the spend was on network infrastructure expansion, primarily wireless base stations serving fixed broadband and retail customers. fiber, and other backhaul in towers. Over $15 million of that was reimbursed mostly through the CARES Act. We expect to increase our capital expenditures in 2021 for the segment to $40 to $50 million, which includes additional investments of approximately $25 to $30 million for tower and backhaul construction. As noted in the release, we completed the sale of 67% of our equity interest in vibrant energy business in the first quarter of 2021, with consideration of approximately $21 million and the potential earn-out on an additional $6.3 million. Accordingly, we showed the assets and liabilities as held for sale and will no longer consolidate the operations going forward. For the quarter, we reported total net loss of $20.5 million or $1.29 per share, inclusive of the $21.5 million loss on the sale of Vibrant Energy and $1.5 million in related transaction costs. The effective tax rate for the year reflects a mix of our country operations and benefits from the CARES Act, offset by no tax benefit from the Vibrant loss. We expect the tax rate to revert more to normalized levels in 2021. Also included in operating results for the quarter was $1.3 million of non-cash stock-based compensation expense. Looking at the balance sheet and cash flows, we ended the quarter with total cash and short-term investments of $104 million and total debt outstanding of $72.8 million as we accelerated debt payments in the international segment by $10 million in the fourth quarter. In addition to $11 million in shareholder dividends, the company used approximately $37 million to increase our majority ownership in subsidiaries and to buy back ATN stock. As Michael mentioned, we expect our net leverage ratio to be under two times after the completion of the Alaska Communications acquisition, which gives us substantial flexibility to invest in additional organic and inorganic growth initiatives. And with that, operator, we'd like to open the call up for questions.

Thank you. And as a reminder, to ask a question, you will need to press star 1 on your telephone. Again, that is star and the number 1 to ask a question. And please stand by while we compile the Q&A roster. Thank you. Our first question is from the line of Mr. Rick Prentice from Raymond James. Your line is now open.

Thanks. Good morning, guys. Good morning. Hey. I want to start with Alaska. The purchase price is to pay, obviously, cash for stock and assume the debt. But how do we think about how the funding actually is going to work between yourself and F3C?

The funding is basically roughly one half each on the equity capital needed.

And if I'm right, was that like $193 million that you're paying in cash to take out the equity portion?

It should be a little less than that because we'll probably bring the debt level up.

That's what I was wondering. So I'm trying to think, so like the debt level maybe goes up. So I'm just trying to think of what the cash out the door for you guys would be and then how much it gets contributed. It's complicated with the partnership, I guess.

I would plan the cash out the door for ATN in the $70 to $75 million range.

Okay. And how should we think about... Alaska had given guidance for revenues and EBITDA. You said you think there could be some revenue synergies when you put the companies together. How about also on the CapEx side? How much CapEx will be spent with Alaska coming on board? You mentioned... There could be private networks and other stuff.

I think it'll be case-by-case. We don't have specifics on that now, Rick. We'll be planning, and we're ongoing planning on that. We're looking at that. They're focused on completing their fiscal year, having a shareholder vote, approvals. So I don't think we have a pencil sharp enough on that, but we have ideas. And I think it's largely opportunistic items. There is a continuation of their existing strategy of building out fiber in a number of areas. And they've done that with sort of an anchor tenant funded model. And we see opportunities to continue to do that. So that's one area of capital expenditure. But the private networks and some of the maybe expansion or acceleration of some fiber, we'll have to revert once we've done more work on it.

Okay. And the Navajo Nation, good project, obviously CARES Act helps a population really use that. How should we think about what the opportunity is to then grow the revenues on that? You mentioned you'll have some additional costs coming in, but how do we think about growing the revenues, and how are you going to report it?

It's actually that that partnership is in our numbers already, right? So that's part of our U.S. business that we've already had that partnership, so an expansion of the network within that partnership.

And so it would flow through any subscriber gains, which we certainly expect as part of this will flow through our revenue.

But we're kind of coming out of the gate late with all the costs of it, but we'll need some running time to kind of get the revenues from subscriber growth over the cost level in 2020.

In 21, yeah. How fast do you expect that to lease up? Is there a community commitment? Just trying to think of how fast do the revenues pace up to to having put all the sites in place.

There's no contractual commitment, but this is to provide broadband to people who don't have it, right? And by and large, they all want it. So we expect to sign up people pretty rapidly, provision them. And then I'll also add that there are – There are tribal subsidies and further subsidies envisioned in the plan just released by the Biden administration for a lot of communities like this that would subsidize their purchase of broadband services. So the net of all that is we certainly expect to add customers to the network quickly. That's the whole purpose of building it out for them. And, you know, that will include both residential customers and, you know, potentially some enterprise and education.

Right. Okay. And you brought out some more of the OneCom stuff. What's the best way for us to think about all the different investment levels you guys have as far as you own X percent of Bermuda, but you own a different percent of, of different operations. We're going to be bringing Alaska in at 50-50. Just trying to think of what's the best way for us to look at all the various assets you have and your ownership stakes.

Piece by piece. Well, you know, I think there's two things, right? There's the math of sort of proportionate EBITDA, and, you know, so you can do that, but I think the value to us is a little bit better than the proportionate because, you know, we get some benefit from the scale overall of all those operations, and obviously we're in a control position in all cases. So I think, you know, so I think it would be, you know, proportionate plus, right? And... And it also presents us with opportunities. I mean, I think it was an interesting illustration in the Bermuda situation. If you look at how ATN is valued even now, those were, while we're not disclosing the prices, they were highly accretive. We acquired stakes at values below the implied value. value the market puts on ATN as a whole. And we think, you know, from risk-reward standpoint, that's certainly a good trade. So, you know, and, you know, as Justin pointed out, we started that deal. We didn't, you know, we had a combination of merged. This is Bermuda. You know, we merged our existing operations. We put some additional cash in for new equity to result in this business combination, give us control. And then over time, we increased our level of equity ownership. And so that structure is quite a good one. It allows us, you know, to spread our money over multiple investments but still improve that as opportunities, you know, kind of go deeper within the investments as opportunities manifest. So I think it's a, you know, we like that model. Okay.

And speaking of opportunities, last one for me, you mentioned leverage will be under two turns after Alaska, so you still have financial flexibility. Sounds like there's a lot of financial partners out there looking at opportunities. How should we think about the pacing of the ability to put the balance sheet to work? Is this a year 21 as we look into 22 that more, you know, a lot of investment going on right now, but is this a thought that there's even more to come?

Yeah, I think there could be. We don't control that entirely. What we do control, we've talked a bit about, which is building out our existing platforms, which we said before we find attractive with the high asset values in auctions. We find it more attractive to build out the same assets ourselves. And so we've got a fair amount of spending on that sort of core network infrastructure and also advancing some new businesses. So that's significant. As to doing transactions more in the vein of Alaska, larger platform additions, I think that will partly depend on partners and opportunities. This one was an unusual one, and that's why we moved so quickly on it. but we do think we can offer a lot of value to the financial investors. We see some of them going direct and down and buying into assets that maybe have more operational complexity and risk than they're valuing, and we think we could bring something to the table plus some of the synergies with our you know, with our core operating capabilities. So, you know, we're looking to do it, but we don't exactly control, you know, the pacing entirely other than our willingness to continue to do it. The other thing I want to note, though, is when we talk about the leverage, keep in mind that we're expecting the acquisition debt, if you will, the debt that goes in part with the Alaska transaction, to be recourse only to that Alaska asset. So the capacity at ATN level is a bit higher than might be implied by that consolidated leverage ratio.

Makes sense. All right. Thanks, guys.

Yeah. Thanks, Rick.

And our next question is from the line of Greg Burns from Sidoti. Your line is now open.

Morning. Morning. The 10th the 10 to 12 million of incremental operating expenses you expect next year for the U.S. telecom segment, what's the split of that between the transition from the AT&T contract and the NAVA-owned nation sites?

I would say the bulk of it's more related to the first net sites, but

So that's it, yeah. Okay. And I guess you're not going to have the full FirstNet network constructed next year. So I guess will there be incremental costs on top of that, or will the expenses continue to grow as you complete that network?

Yeah. It's a good question. I think you could see expenses continuing to grow as you complete it, but we're kind of ahead on some of the expenses to where we are on the delivery of the site. But then there's probably other costs within the existing wholesale that we could start to rationalize as well. So it's hard to predict right now today, but there probably would be an increase in some of the costs.

Okay. And then in terms of the remaining carrier services revenue there that, you know, I guess the non-AT&T business, what is the trajectory of that business? Have the contracts been renegotiated recently or should we expect, you know, what pace of decline do you expect from the remaining portion of that business?

I think overall, over the long term, we expect a decline, which wouldn't be significant in this year, but in future years we do if we don't transition the business. And we do think there's opportunity to fill that by some of that decline within the wholesale side. If we just took existing contracts and we didn't assume any other successful actions on our part, then it would decline.

On the fixed side of the U.S. telecom, there's pretty good growth year over year. What's driving that growth?

Broadband, basically.

Okay, I think you'd mentioned maybe in the prepared remarks, subsidized government broadband. Is there specific projects that we should be aware of?

Well, it's a combination. It's retail broadband growth. It's enterprise growth. And, you know, it includes government program things like E-rate, so, you know, education area. And, you know, we expect more of that. In 2021, we're building out a new subsidized fiber route, which will offer new opportunities in all those buckets, as well as we expect to improve penetration in some of the residential broadband.

Okay. And then in terms of the FCC support in the Virgin Islands, I think it's $16 million annually. What happens to that? this year and next year?

The way it works is once the program is approved, the other application is approved, it goes for the first year for us down to two-thirds of that, and for one year, and then for a second year, it's one-third, and then it would end. I would note, though, that we are challenging that and we think it's possible there's a different outcome, but if you just take the, you know, the outcome to date of the award, that's the way it would work. Um, so that, you know, that could happen, you know, really any month this year, it could start that process.

Okay. Um, and then just, just lastly on the, on the wireless internationally, um, what's your market share, uh, currently and, you know, what's, what's, um, I guess how much more opportunity is there for you there on the wireless side? Thanks.

Yeah, I think, you know, it depends on markets. But, you know, we don't break out the individual markets. But we think, you know, when we look at the shares in some of the areas, we think there's significant opportunity to increase share. You know, in some cases it's because we've launched new capabilities recently. And in other cases, it's we had to basically refresh our approach from a sales and distribution standpoint. And, you know, so far we've seen, you know, some early, you know, a couple quarters finally seeing, you know, real results from those efforts. And I think, you know, our expectation is we'll continue that direction and we'll continue to gain share. But I don't want to quantify it, and it wouldn't, it wouldn't make sense as a whole because share is only one piece of it. There's differing ARPUs between the different markets.

Okay, great. Thank you. Sure.

And as a reminder, to ask a question, you will need to press star 1 on your telephone. Again, that is star and the number 1 to ask a question. Thank you. And we have one more question from the line of Hamid Horson from BWS Financial. Your line is now open.

Hi, good morning. Morning. So just wanted to ask you what what kind of activities and sales and marketing are you doing on the private LTE front? And what are you seeing as far as the revenue bucket is concerned?

Yeah, the kind of activities we're doing is we're building out the sales force. We're getting out there. We're building out sales support, sales engineers, and that's ongoing. We're still adding resources, and we have both direct and indirect channels. We have direct in certain areas and we have, there's a lot of, as I mentioned, there's a lot of partnerships. There's, you know, some of these, you know, things like the municipalities or the state and local education area. Really all the areas, there are different partners and partners can be, you know, other, you know, pieces of the solution which can include, you know, system integrators kind of on the ground to infrastructure owners or funders to technical solutions, so technical partners in delivering a full solution. So we're pursuing both those direct and indirect channels and ramping up the activities. Activities were slow for us, and from what we gather for other participants in the market last year, it you know, as you can imagine, you know, a bunch of the segments in the market were, you know, some of the early interest within areas like hospitality, commercial real estate, and you can see why that probably didn't grow, but it's also, you know, it's early stage, so getting around, getting people to come in for product demonstrations, those kinds of things are, you know, have been much more difficult, but we're We're driving forward without it, and we think that will start to get a little bit easier in terms of the activity this year. And so we just want to make sure we have the resources to really go after it.

So are the costs pretty much fixed in at this point? So it just scales in? No.

No, we're adding it as we go. So we're adding it on a monthly basis. Now, of course, they'll get a time where if you don't see the sales activity, you stop adding resources, right? So you've got to have the contract wins. But right now we're still in the cost buildup stage, which is why we pointed it out as part of our remarks.

And as far as your remarks about the backhaul for U.S. Telecom, are you seeing any other traction with the customers other than the current FirstNet contract?

Yes. Now, not on a site-by-site basis, just broadly, we've been building in capability, backhaul capability, in the region, in our operating region, in and near, and we have been seeing some, but we're expecting to ramp that because we're still building a lot. But in the past, on a smaller level, when we have added capabilities there, we've had a good track record of adding different revenue streams from wholesale to enterprise on new routes and capabilities. And these communities, these rural communities, really need that. So if you're referring to carrier backhaul, we think there will be that opportunity as well.

Okay. And my last question was just on Alaska. Once this deal closes, how will the reporting look like in Texas? are you, since you're consolidating it, is it going to be, you know, all the EBITDA will be, you know, associated with you, or how are you going to be reporting all this?

Yeah, so it'll be consolidated operations, and so, yes, all the EBITDA would be shown, and then there's a minority interest back out.

Okay, great. That was it. Thank you. You're welcome.

And there are no questions at this time, sir. Turning it back to you, Mr. Benincasa. Thank you.

Okay. Thank you, everybody, for listening in, and we look forward to updating you more after the first quarter. Take care.

And this concludes today's conference call. Thank you for participating. You may now disconnect.