ATN International, Inc.

Good day and thank you for standing by. Welcome to the ATM International Q2 2021 earnings call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Justin Benincasa, Chief Financial Officer. Please go ahead, sir.

Thank you, Operator. Good morning, everyone, and thank you for joining us on our call to review our second quarter 2021 results and to discuss our recent lab and communications acquisitions. With me here is Michael Pryor, ABTN's Chief Executive Officer. During this call, I'll cover the relevant financial information, and Michael, as usual, will provide an update on 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 materially from those described. Also, in an effort to provide useful information to investors, our comments today include one-gap financial measures. For detail on these measures and reconciliations to comparable gap measures and to further information regarding the factors that may affect our future operating results, Please refer to our earnings release on our website at atni.com or to the 8K filing provided to the SEC. I should also note that SEC filings for Alaska Communications up through the first quarter of 2021 can be found on the website at ALSK.com. And now we're still finalizing the business and personal purchase accounting and expect to file our 8K aid that will include the performance of financial results around the end of September. And with that, I'll turn the call over to Michael.

Thank you, Justin. We were pleased to close the acquisition of Alaska Communications last week, more or less on the timeline we expected. As we have discussed on previous calls, we are excited about both the near and long-term opportunities here and think this is an excellent fit for our operating portfolio. and extension of our core business strategy, which is building and operating critical communications infrastructure into more remote and challenging markets where we can maintain a long-term competitive advantage. I will provide more thoughts on this addition shortly. Otherwise, our existing business has performed well overall for the quarter with solid revenue growth led by growth and approval additions. We did, of course, experience higher year-on-year expenses against an extraordinarily low second quarter last year, when many expenses were immediately reduced or mitigated by government action. Added to that were expense increases in several categories, including regulatory, and some unusual expenses, which we don't expect to continue into the current quarter, including a legal rule. So I'll turn back to Alaska. For the past Two years, this business has had good success growing its business and wholesale revenue, which now represents more than two-thirds of revenue, and much of that is under multi-year contracts. We expect that strategy and success to continue as we leverage fiber facilities built on an anchor tenant return model and look for opportunities to generate incremental cash flows on those facilities at the same time as we continue to pursue additional strategic builds. We're also exploring opportunities to refine and accelerate their business strategy. These include taking advantage of recent fiber mills in the Pacific Northwest, an MDU business, and providing resources to better pursue public-private partnerships, managed services, and private network opportunities. And we'll speak more about that in coming quarters. In the meantime, I want to officially welcome the Alaska employees into the ATN family. Our teams have been off to a fast and productive start, and I am grateful for the very positive and forward-looking attitudes of all concerned. I also want to thank the internal teams who got the deal done and are still working on the details of integration. Our financing partners, Freedom 3 Capital and the bank led by Fifth Third Bank Corp, as well as our financial and legal advisors, who are all critical to getting this done and will be just as critical moving forward. Thank you all. So we will include Alaska in our U.S. telecom segment, which going forward will account for roughly half of AT&T's consolidated revenues. In the third quarter, a little over two months of results will be included in our consolidated results. And Justin will have some more details on the balance sheet impacts as well in a few minutes. So sticking with the domestic businesses for now, our existing U.S. telecom business has a similar quarter to the first quarter this year with EBITDA at almost exactly the same level. The inputs are similar as well. The first step build continues on schedule, and construction revenue for that build is still more than offset by construction expense, as expected. Spending on the developing product and networks business also has continued at a similar pace to the previous quarter, and Justin will provide some numbers on that. As we alluded to in the release, after reviewing the direction of progress of the underlying businesses in this segment, we concluded that While there are some important common operational resources, our rural business under the umbrella of common rural networks and our private network business, GeoVerse, would be better served with a more formal separation, similar to how we pursue different markets in our international telecom segment. The businesses are distinct, and the customers they are pursuing and services they are offering have different attributes. Further, we see some interesting opportunities for both organic and strategic expansion And we may want to utilize strategic or financial partners to pursue those, particularly on the private network side. As to rural networks, we're pursuing a five or four strategy of connecting rural communities. We are looking to utilize a combination of carrier wholesale customers, enterprise customers, and government incentives to connect each community. And then we look to serve the full scope of the market's communications needs directly or through local partners. As an example of that, we expect to complete two middle-mile fiber builds in northern Arizona in the current quarter. Nearly all of the construction cost is covered by government incentive payments to build into educational sites and provide high-speed data services. We are augmenting that build and expect to provide back-loaded wireless towers, data services to enterprise customers, and wholesale transport services to some local broadband providers. The business is looking to execute on more of this sort of arrangement to connect rural communities out west. In addition, our rural broadband revenue in these markets is growing, roughly 10% higher for the first six months of the year, and we think there's room to grow selectively from here with network improvements and expansion. But our focus for now is on the enterprise and wholesale side. Moving to international telecoms, Broadband growth was more central to the story in international telecom. Subscribers increased by 6% year-on-year. While some of the largest builds are behind us, we are continuing to invest in expansion of the reach of our fiber-based networks and in our overall capacity and quality. We see plenty of additional opportunity for residential subscribers and enterprise revenue with our fixed data services while maintaining low levels of churn. Relevant to that, there are two developments worth noting in the Canada market. One, the government showed an innovative and forward-looking approach in removing VAT charges from broadband services. They are focused on getting people connected for learning, for business activity, and for general quality of life. Second, another sign of a change in Canada, we have landed contracts to provide substantial fiber facilities, and advanced mobile services, including private LTE to oil and gas customers. And we expect that to continue to grow. International telecom segment mobile subscriber levels also continue to grow, continuing to trend a year ago as a result of a number of measures our teams undertook to improve our competitive positioning in select markets. Year-on-year, we saw a 16% increase in overall subscriber levels. similar rates have increased on the prepaid and postpaid side. Video subscribers on the IMF continue to decline and voice subscribers remain steady. Expenses were high for this segment for the second quarter in a row. As explained in our release, some of that was in the realm of one-time costs and some of it was increased for regulatory and other expense. Outside the one-time items, there are no quick fixes. but we will continue to improve operating efficiencies to manage expenses down where we can. In many areas, revenue opportunities related to the network expansions I referenced are a higher priority. We've been asked on previous calls about the impact and timing of the pandemic recovery. As an update, I note that most of our international markets are still feeling economic pain from very limited travel into and out of the market. We are encouraged by the pickup and leisure travel and are hopeful that the next 12 months will look better than the past 12 months in that standpoint. To recap and to provide a little bit of a higher-level perspective following this major transaction, more than three-quarters of our revenue is monthly recurring. It arrives through the operation of a collection of domestic and international communications services companies operating in smaller and typically more remote markets. and that in each case have substantial network infrastructure, a strong and extensive track record in markets, as either the first or second leading provider of the relevant services and infrastructure, and good momentum around their core service offerings. We believe we can continue to expand in these markets and live markets. The remainder of our business, which is domestic, is comprised of a small but growing rural fiber and broadband business that has similar attributes, to those more geographically distinct markets, a wholesale wireless business engaged in multiyear restructuring, and an emerging private network business. We are working to create digital value and a clear story around those latter assets. For now, if we simply annualize the first half performance for both ATN and Alaska, ATN would have annual revenues of about $740 million, with the vast majority derived from recurring and contracted resources, and adjusted EBITDA of about $160 million. We believe that is a great platform on which to create value. And with that, I'll turn it over to Justin, but I'll just note that we are hearing feedback that says the call quality has been a little rough. We're going to continue, but we hope you can hear us well enough to understand. We need to repeat, we will, so...

Thank you, Michael. For the second quarter, total consolidated revenues were $123.9 million, up 14% from last year, and consolidated adjusted EBITDA was $25.2 million versus $29.1 million in the second quarter of 2020. I'll speak to the specifics of these comparisons as I cover the second details. Starting with the international telecom segment, revenues were up 8% from $80.1 million last year to $86.2 million this quarter. And adjusted EBITDA was $28.4 million, slightly down from $28.7 million of a year ago. As Michael mentioned in his comments, segment revenue benefited from broadband and mobile subscriber growth in several markets, but we've seen higher expenses compared to last year, which led to a modest decline in adjusted EBITDA and reduced margins. Expenses in the prior year benefited from several temporary savings related to reduced operations and delayed maintenance during the height of the pandemic. In addition to those costs returning this year, we had increased costs related to expansion of our managed service business, higher regulatory and license fees in certain markets, and we also incurred a 1.1 million one-time legal expense in the quarter. As in past quarters, we continued to opportunistically purchase minority owner shares in One Communications, are Bermuda and Cayman Islands subsidiary and now own approximately 78% of the outstanding equity of this well-performing business. And that compares to 59% a year ago. Capital expenditures in the quarter were $11.3 million for this segment and $21.8 million year-to-date. For the full year in this segment, we expect to be at the higher end of our guidance of $45 to $55 million. In the U.S. telecom segment, revenues were $37.6 million for the quarter, up from $28.2 million a year ago. This includes $9.3 million of construction revenue related to the first net project. We still anticipate completing 50% of the $85 million project this year, which will bring us to approximately 65% completion at year end. The decline in adjusted EBITDA for this segment to $4.5 million from $7.5 million last year was due to higher operating costs we discussed last quarter, which includes the operating costs associated with the completion of the CARES Act-funded build-out of our rural broadband sites, and that's in advance of the anticipated additional revenues, and the FirstNet sites coming online. In addition, we spent $3.1 million on our developing private network business in the quarter, which was $1.3 million over last year. As noted in the release, from the July 22nd close date through the end of this year, we expect the Alaska acquisitions to contribute between $105 and $109 million of revenue to our U.S. telecom segment and between $27 and $29 million of adjusted EBITDA. With regards to cost synergies, we expect to achieve approximately $2 million of cost savings in the next 12 to 18 months. Similar to past ATM transactions in new markets, we'll work to gain cost efficiencies and margin improvement over time where they make sense and don't impede our ability to continue growing the business. Capital expenditures in the U.S. telecom segment this quarter were 3.9 million and 18.8 million year to date. We also expect capital expenditures in the U.S. segment to be at the higher end of our guidance of 40 to 50 million, excluding Alaska, And Alaska continued at similar levels to the first half as they continued with several customer-specific fiber builds and network expansion. Consolidated net income for the quarter was $2 million or $0.13 per share and was helped by a tax benefit of $1.5 million. Included in the operating expense for the quarter was $2.2 million of non-cash stock-based compensation expense. Moving to the balance sheet on June 30, total cash and short-term cash investments were $96 million and total debt outstanding was $71 million, excluding the first net customer receivable credit facility put in place to monetize the structured payment receivable under the contract. This facility is secured by the customer receivable and has no recourse to ATM. Subsequent to the end of the second quarter, in conjunction with completion of the Alaska Communications acquisition, ATN borrowed $73 million to fund its equity portion of the transaction and subsequently repaid $10 million of that borrowing. We also facilitated a new credit agreement that Alaska Communications entered into at the close that is non-recourse to ATN. Alaska borrowed $210 million under that term loan facility and $110 million under the $35 million revolving facility. For the consolidated company, including Alaska, our leverage is slightly over two times and approximately 1.6 times on a net cash basis, still giving us substantial resources to fund additional growth initiatives. And with that, operator, we'd like to open the call up for questions.

Yes, sir. Our first question comes from the line of Rick Prentice from Raymond James. Your line is now open.

Thanks. Good morning, guys. Good morning, Rick. It was a little garbled, a little bit like underwater, but things got better towards the end there. A couple of questions. Hopefully you can hear me okay. Appreciate the information on Alaska showing the first quarter, sorry, the second quarter and year to date in there. How should we think about what Alaska means to how you guys report your segment reporting? Are there going to be some more changes? Should we expect Alaska style reporting, your style reporting?

How should we think about what 3Q would look like? It's going to be a little bit of a hybrid, Rick. I think where we report more by line of business, they report by kind of customer or business. So we're going to basically provide it kind of a little bit of both. in the segment. So we're going to, it'll be mostly by our predominant reporting will be by type of service. And then we're going to do further breakout by customer type.

Okay. Okay. And appreciate the color on the Alaska CapEx. It looks like they spent about 22 million in the first half. So we're expecting maybe 22 million in the second half. You mentioned finishing customer orders. How should we think longer term about what the capital intensity you guys will be spending at Alaska, but in total, really.

I think I'll start, and Justin can add. I mean, I think right now we see fairly significant opportunities for new fiber builds, many of which will have the anchor tenant construct I talked about. So, you know, there's a top line, there's a gross CapEx number, if you will, and then there's There will be a fair amount of that. We expect it will continue to be reimbursed. But more broadly, we just think there are opportunities to continue to work on the network expansion they've been doing that should pay off well. So I think expect significant capital expenditures in the near term.

Makes sense. And nice getting the reimbursements. You guys report that, or would you report that as a net CapEx? I know having just gotten off a tower company call, the accountants make them report reimbursed CapEx through revenues and EBIT amortization or prepaid rents. For you guys, how does that reimbursement come in? Is it really a net CapEx?

Are you referring to the reimbursable CapEx we speak to in there? Yes.

Yeah, and also I think Michael talked about how sometimes you'll get government incentives back also. Okay.

Yeah, I mean, I just mentioned it. So we have a couple different kinds. We have, you know, we have capital expenditures where there is, you know, repayment from customers, anchor tenants in a form of non-recurring charge. So that will come through revenue, and the full capital expense will be deployed. And then most of the government programs also have you record the gross tax and revenue, but there are, Justin, I don't know if you can speak to it, we had in the past had some contra-cap-X and it could be with future programs that could occur.

Yeah, I mean, it does depend on the flavor of it. I'd say we have reporting both ways for the most part. We have some that actually is strictly a contra-cap-X and others that do come as revenue. But I will say that the two that Michael referred to are contra-cap-X.

Okay. And when you do receive it or when you book it as revenue, does it come in in a lump sum? Does it come in monthly, quarterly, annually, just trying to match up revenues and cash flows type thing?

Yeah. I mean, there's things like high-cost support, right? That always comes through revenue. But I think the – and I'm not quite sure on the tower company you're referring to, but I would say that the – The grant things that we've got that Michael is referring to, those are mostly just coming through as contra cap ex for us, Rick.

Okay. Okay. That helps.

Right. Yeah. Let's just make, I just want to clarify that.

Yeah. Okay. And then obviously you guys are seeing some interest in your, accelerating your growth with possibly some pools of funds that might be out there. Can you talk a little bit about, are we thinking pension funds, infrastructure funds, obviously a lot of money chasing opportunities, but how should we think about what kind of magnitude or potential partners they might involve?

Can you repeat that, Rick?

Yeah, you mentioned in the press release about potential strategic partners and funding. How should we think about the available pools? Is that pension fund, infrastructure funds, private equity funds? And what kind of magnitude might these partnerships kind of entail? I don't want to speculate on that.

I think the magnitude will depend in part on use of proceeds, right? Are we doing two-step kind of deals where we're combining or extending the business with strategic transactions? Then the magnitude will be higher, obviously. We don't you know, from the rural business is more likely to have infrastructure-oriented partners, and the private networks business is more likely to have more private equity or strategic partners, but we've seen signs that there could be, you know, infrastructure interest in there as well.

Okay. A lot of money out there for sure. Final one for me is, obviously, headlines coming out of Washington with Biden apparently getting bipartisan support for an infrastructure bill. Rural broadband mentioned as one of the categories. How should we think about where you guys might be able to play in that space? I know it's early. The legislation is just coming together, but give us an updated thought on D.C. infrastructure, what it might mean for you.

Yeah, I mean, look, I mean, if you think about that, that the RDOF program, which, you know, some of those awards have now been peeled back, but That first program was up to $9 billion and something less than that awarded. Right now, from what I've read, $65 billion is earmarked for broadband type infrastructure under this bill that is being pursued. You know, like a lot of people, we're waiting for more information and more details. Do we think there's opportunity for us in that? We do. And we also think there's opportunity in funds that have already been earmarked, and we're pursuing some of that. We continue to build out some things even today related to the CARES Act funding, and our Our belief at this point is that it feels to us more likely that that will come through state and local distributions from federal to state and local to projects as opposed to a federal nationwide program option. Could be wrong about that, but that's how we're looking at it as more probable. And we think that will play well for us because we have good ties in the areas we are operating and a good reputation, and we have a good team for pursuing and analyzing those opportunities. So it's absolutely on our radar screen. Great.

Stay well, guys. Appreciate the call. Sure.

As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Our next question comes from the line of Hamid Khorsand from BWS Financial. Your line is now open.

Good morning. So first off, I wanted to ask you about Geoverse. What are you seeing in that business from, you know, demand side and opportunities that now you're thinking to accelerate the growth of that business by seeking outside capital?

I think that the last year was slow for a lot of us, including others, in pursuing private networks. The pandemic did not help that, and we're seeing the interest from multiple levels in private network solutions or private cellular solutions. There's It just solves a number of problems, and with the continued distribution of 5G technologies and interest in 5G technologies and what it does, as well as even 4G technologies, the use cases are growing. So what we see that could make it more significant and require more funding is we really are looking at what we've been doing is we've been developing a platform. It's really a platform more than a sort of unit-based infrastructure build, which makes it a bigger opportunity, but it makes it also need, you know, more net funding in the short term. And then there are some, you know, a lot of the people we're talking to, customers, partners, are thinking about this in sort of you know, big ways, multi-site ways, multi-use case ways. And so some of those applications, if we're successful, will require, you know, could require a fair amount of capital. I don't want to speculate on exactly how much and, you know, what, but I think that's, hopefully that gives you a flavor for how we're looking at it.

Okay. And then before you, ATN has been mostly working wireless centric, so now it sounds like with this call and press releases, you're focusing more on fiber. Can you disclose how many miles of fiber you have now and what your expectations of adding how many miles per year and how costly is in some of the geographies that you're looking to add those miles?

Yeah, I don't want to do that now. I'm not sure I have the combined numbers in my head anyway, so I'm not prepared to do that now. But I would just say two things to that, Hamid. First of all, you know, we have had a fairly fiber-forward approach for a while in a number of markets. We did, you know, two transactions in 2016 in our national telecom that brought in substantial wireline assets, as you know, and we went and did multi-year fiber expansion in those markets and in additional markets. And so we're seeing great take-up. We're seeing very low churn rate, and we continue to see multiple values for delivering fiber solutions. There are different flavors of it in different markets. As we've talked about, Alaska, for example, is very much business and wholesale driven with some retail as well. But In our offshore markets, it's probably flipped the other way. It's more serving residential broadband is the biggest unit there. It's a similar approach of being one of the top, either the leading or second provider of core infrastructure in these markets, and fiber is the core infrastructure. But mobile is still important in a number of our markets, and we're doing well there. So it's just a different delivery mechanism, if you will, in some ways, and it's a little bit different product with full mobility, but it still requires all that fiber backbone these days because it's all about data services, whether it's connected or whether it's fixed or mobile. So that's the way I look at it. Now, we could look at providing more data on that in the future, Hamed, too, on some of the fiber extensions. I would be careful because some of the fiber mile information out there is kind of silly because, you know, route miles is obviously more useful than fiber miles, but that also is a little hard to do apples-to-apples comparisons because it depends on the use cases and the density.

Okay, and my last question was regarding Alaska. What is it that you think that you could improve upon in Alaska, and how fast do you think you could generate those revenue synergies that you mentioned in the press release?

Well, first of all, they've been doing a lot of things well. So we like their core strategy, but they – you know, it was pretty – I think they would tell you it was pretty distracting the last few years. They've been considering – strategic alternatives. They, of course, had an activist shareholder get involved. And, you know, and they were going through a process. And then, you know, since then, seeking closing approval. And so I think they're just generally its ability to, you know, by effectively going private, it's just really focused on business and business first and no other distractions. So we kind of give them that. We also have, despite their, you know, pretty good size, we have some operational capabilities and know-how that, you know, they're excited about. They think we can help them execute on their plan. And so, you know, that's part of where our optimism comes from. And then, you know, how fast it comes, it's hard to say. You know, in Alaska it's interesting with builds, right? There's some things you just, you know, in some parts of Alaska you can't build. as much in the winter, of course. Some of it will take time, but we see opportunity. And I think, look, our focus is keep growing it and grow very stable, strong, long-tail recurring cash flow streams. And that incrementally should really start to drive value.

Okay. Thank you.

Yep.

Our last question comes from the line of Mr. Rick Brantis from Raymond James. Your line is now open.

Hey, guys. Appreciate a couple of follow-ups. First, Justin, you called out a $1.1 million one-time legal cost in the second quarter. Was that in the international segment? It was, yes. And roughly what was that?

It was in the international, yes.

Anything specific we should be looking at as far as what it involves?

No, we don't want to get into too much detail, but hopefully it's once and done.

It doesn't have anything to do with any ongoing business or personnel issues or anything like that.

Okay. That's good to know. And then international business also had continued a couple quarters now of nice mobile subscriber growth. Talk a little bit about the trends you're seeing there. Why do you think you're winning shares? Is it something you can continue to do?

Yeah, I think it's mainly that in a couple markets we felt that, and we talked a little bit about this a year or so ago, that we felt that we needed to do a better job with our competitive positioning, our retail strategy. And so we undertook a number of steps to improve that. And it's been bearing fruit since basically four quarters in a row. So I think enough to call it, you know, a real trend and really positive. So it really was just about improving our competitive positioning, shifting our strategy a little bit from a retail and marketing standpoint. Okay, that was it.

Okay, and I think there's still room to continue to win success in the markets.

Yeah, I do. And I think there's also, you know, sort of macroeconomic lift in, in Guyana, uh, in particular, but I, you know, not, not entirely. I think there's other, there are other opportunities there. Okay.

And last one for me, um, a lot of similar questions on this question, when you're putting in new fiber, what kind of strand counts are you putting in just, you know, not to the nearest strand, but just ballpark wise, how much, how much fiber are you putting in when you do new construction?

It depends on the location, Rick, right? So if we're doing it in, you know, denser areas in our international markets, I don't even want to quote the strand count, but very strand rich, you know, many more strands than you think you're probably going to ever need, right? And that just makes, as you know, it makes the, you know, it's not just, you know, allows you to be opportunistic in the future, but it lowers your cost. It allows you to you know, reduce latency, have, you know, dedicated fiber pair for many uses. And so that's the way the industry has been going. And, you know, it's, you know, it's transit class. So it's the incremental cost of doing strand-rich deployments is not much. Then if you go really long haul, you don't put as rich in certain things, particularly in like subsea, you know, because there are far, far fewer strand counts in those. situations but even you know middle longer miles up in the US we were trying to tend to do pretty pretty strand rich deployment just because it gives you future opportunity right and the incremental cost like you point out it's not that much there's a lot of labor costs so we're thinking in the hundreds to maybe thousands no I know I've read some of those things I think I read Facebook It might have been Facebook. I could be wrong about that. It took like 5,000 into their data set. Nothing like that, but hundreds.

Hundreds makes sense. Okay, great. Thanks for the extra color, guys.

Sure.

There are no questions at this time. Please continue. Thank you.

That's all we have, operators, so we can end the call at that. We look forward to speaking with everybody in the next quarter.

And sorry again about the technical difficulties starting out.

This concludes today's conference call. Thank you. You may now disconnect.