ATN International, Inc.

you will need to press star 1-1 on your telephone. You will then hear an automated message advising you that your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Justin Benicasa, Chief Financial Officer. Please go ahead.

Great. Thank you, Operator, and good morning, everyone. Today we will review our first quarter of 2023 results. With me here is Michael Pryor, ATN's Chief Executive Officer. Michael will provide an update on our business and strategy, as well as a high-level overview of our quarterly results. I'll then cover our financials and provide additional color where necessary. As a reminder, we released our first quarter press release last night after market closed. Investors can find the release and results presented for this call on our investor relations website. Before I turn the call over to Michael, I'd like to point out that this call, our press release, and the presentation contain forward-looking statements concerning our current expectations, objectives, and underlying assumptions regarding our future operating results. These statements 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 details on these measures and reconciliations to comparable GAAP measures, and for 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 8-K filing provided to the SEC. I'll now turn the call over to Michael for his prepared remarks. Thank you, Justin.

and thank you for joining us, everyone. I would like to start the call today with three key takeaways from our Q1 performance. One, our strategy is working and is driving growth in subscribers and footprint or addressable market. Two, adjusted EBITDA performance is improving in line with subscriber and revenue growth. And three, our three-year outlook, as announced at the beginning of 2022, is tracking to plan. We expect revenue and EBITDA growth to ramp to bring us in line with the three-year CAGRs we have forecast. At ETN, our central purpose is to provide connectivity for all. In doing so, we improve lives and communities and deliver lasting value for all our stakeholders. We go where the need is and where most of the larger telecommunications companies prefer not to go. To date, that includes the Caribbean, the rural and tribal lands of the U.S. Southwest, and Alaska. Today, we are in the process of advancing initiatives to secure our vision and long-term growth. We call these strategic initiatives class and steel and first to fiber. They are core to our strategic three-year plan, as I first outlined in the beginning of 2022. It is a plan with the intention to build a highly resilient customer base and average revenue per user, or ARPU, on the tail of relatively short-term increases in capital expenditures. To accomplish our goals, we are currently investing in quality assets to expand our strong market position, which should bode well for the consistency of future cash flows. Internationally, we are investing in our first fiber strategic initiative to expand our market leadership. Through this strategy, we are bringing fiber-rich digital infrastructure to the Caribbean, expanding our network reach and growing markets like Cayman and Guyana, and continually improving and strengthening our network and services in places like Bermuda and the U.S. Virgin Islands. These actions are providing us with several new growth levers and cash flow generators, while at the same time, reducing the risk of customer churn. Domestically, in Alaska, our fiber expansion continued to all segments, business, carrier, wholesale, and retail. And the team is accomplishing that while also working to improve operating efficiency and margin. In the lower 48, our glass and steel strategic initiative is capitalizing on the changing needs of our wholesale mobile carrier customers to complement an effort to fill in the fiber and other connectivity gaps in the rural areas of the southwestern and western United States. The first net contract with AT&T was the first pillar of this strategy, and we expect to enter into a similar arrangement with another national carrier in the current core. These partnerships with the national mobile carriers are a testament to our strong and reliable offerings, scalability, deep and broad local operating capabilities, and brand reputation. As important, we are expanding our business and retail broadband operations in the region using government grants and anchor tenants wholesale or government customers to expand our high-speed network and fixed-line revenue. And, as we discussed last quarter, the addition of sacred wind was intended to boost this effort. The early evidence is very positive, with the team meshing well with their new colleagues and hitting the ground running with some key early wins on new subsidized fiber builds and customer growth. The first quarter of 2023 marks the start of the second year of our three-year investment plan. We are already seeing the benefits of our expanded network and its associated customer additions. ATN's first quarter revenue reached the highest level in more than a decade. This quarter, we showed consistency of execution and were again rewarded with high levels of customer retention and progress on our key operational and financial metrics. We expect our customer revenue and adjusted EBITDA growth trends to continue throughout 2023. We're also working on augmenting this growth through improvements to the cost structure of several operations, such as by accelerating the removal of legacy network and operating costs. In total, we are enthusiastic about the durability of our revenue, our financial flexibility, and our long-term growth prospects. We continue to track to our three-year plan. And to illustrate our progress in the quarter, We drew the homes passed by our broadband networks to about 736,000 at the end of the quarter, which was 21% higher than a year ago. This includes an additional 108,000 passed by fiber or other higher speed solutions. Our ongoing network investments also are reflected in our subscriber load. As of March 31, 2023, 55% of our more than 216,000 broadband subscribers were connected to our fiber or other higher-speed networks, representing growth of nearly 18% year-over-year in high-speed data subscribers. We ended the quarter with more than 328,000 mobile subscribers in our international segment, and this is up 13% from a year ago. reflecting the success of our sales and marketing efforts and investments. As Justin will discuss, we saw positive results across both of our operating segments, including a strong performance in Alaska, fiber and broadband customer additions that I've just mentioned, and of course, the mobile subscriber growth. Both in the Caribbean and in the U.S., most of our expansion work is in markets that we believe will continue to benefit from growing demand and positive secular tailwinds. putting us in an excellent position to benefit from this growth as we provide these communities with the connectivity capabilities that will help them thrive. An example of this work is our VIA subsidiary in the U.S. Virgin Islands. We were just awarded a contract to bring high-speed fiber-based connectivity to all public schools in the territory. The project is 100% fiber-based, delivering the fastest speeds and including an inter-island fiber link between the two Department of Education network operation centers, providing a critical additional layer of resilience for the school's connections. Notably, this public-private initiative ensures that the territory benefits from a more digitized teaching and learning experience as it helps schools and libraries in obtaining affordable internet access and telecommunications services. In summary, we remain committed to providing connectivity for all. We are working to be first to fiber in those markets that are aligned with our established criteria and where we believe we can also develop strong first mover advantages. In addition, we continue to prioritize building and owning modern core digital communications infrastructure consistent with our glass and steel strategies. Most importantly, as we execute towards these two strategic objectives underpinning our three-year plan, we also are steadily expanding our overall broadband network and subscriber count. In turn, this should generate revenue growth with higher incremental operating margins, giving us confidence in our long-term growth targets as well as our core financial objectives for this year. As Justin will expand upon momentarily, our financial position enables us to be flexible in the execution of our strategies as we look to maximize value for stakeholders. And with that, I'll hand the call back over to you, Justin.

Great. Thanks, Michael. With much focus these days on the financial climate, inclusive interest rates, and access to capital, let me start by sharing a few words on our capital allocation. strategy and how we expect the moves we're making today to expand ATN's success now and in the years ahead. ATN is in a strong competitive position given our solid balance sheet to make strategic investments in advanced connectivity as we set out to do last year. Our operations generate significant cash flow that provides ample liquidity to support continued investment in advancing our growth initiatives that Michael talked about early. We have a disciplined and balanced capital allocation strategy that will continue to adapt as we deploy capital to reward stockholders, including our quarterly dividends, organic investments to help secure future growth, and our share buyback program. In addition, we'll work to maintain financial flexibility, allowing us to remain opportunistic in making investments that can accelerate or enhance our strategy and returns. All in, our plan works to better serve customers by establishing a first-to-market advantage, which in turn will provide durable financial results for years to come. This is a playbook we've deployed successfully in the past. We anticipate that temporarily heavy capital investment cycle will be followed by a substantial increase in monthly recurring revenues and free cash flow. Turning to our results for the quarter, total consolidated revenues increased 8% as you can see in our accompanying slide presentation that we've added to our website along with some additional financial tables. Operating income improved 0.6 million from 0.1 million a year ago. Adjusted EBITDA was up 6% year-over-year. These improvements were primarily driven by continued strength in the international segment Steady results in the domestic business, as we've benefited from the investment we've made in network expansion and upgrades, totaling more than $200 million over the prior two years, as well as from the Sacred Wind acquisition, which closed in November of 2022. Turning now to our segment breakdown, in our international segment, revenues rose 4% in the quarter, and adjusted EBITDA was up 5%. This increase was the product of the continued growth in broadband and mobile subscribers and the associated revenue, partially offset by the previously announced step-down in federal high-cost support subsidies for the U.S. Virgin Islands. Our strength internationally continues to be driven by superior customer support and great execution by the local teams to increase high-speed data subscriber counts in ARCO. We also see continued positive growth in our mobile subscriber base and revenues as a result of strong sales and marketing efforts following our substantial network upgrades and expansion. While these marketing and sales efforts are delivering with benefits, we are aware that overall expenses have room for improvement and will continue to monitor and make the necessary moves to balance subscriber and revenue growth and margins in this climate. In our U.S. segment, revenues were up 12% in the quarter. Of note, our Alaskan operations continued to perform well, producing a substantial top-line contribution and strong operating cash flows. During the period, business and carrier services accounted for approximately 74% of the segment's service revenues, mainly reflecting higher revenue performance from Alaska. This was partially offset by expected reduction in legacy wholesale wireless revenue as we continue to reposition the lower 48 business around the glass and steel strategy and carrier managed service contracts that provide stable, long-term recurring revenue. As part of our effort to reposition this business, we conducted a review of all the sites that were supporting our legacy roaming network. This review was aimed at determining what was necessary to support the business in the future. As a result, we recorded a restructuring charge of $2.9 million in Q1 to exit sites that were no longer needed. Construction revenues, which aligned with the number of FirstNet sites completed in a given quarter and roughly equivalent to construction costs, were also lower year on year. We expect to substantially complete this construction project in 2023, with a small number of sites being completed in early 2024. Based on the schedule today, we estimate that construction revenue will be in the range of $12 to $14 million, with approximately 70% to 75% of that revenue coming in the second half of 2023. Overall for the U.S. segment, adjusted EBITDA was up 16% year-on-year, mainly due to the contribution of our expansion in Alaska and the Sacred Wind acquisition. ATN's total net loss of the quarter increased to $5.9 million, or a loss of $0.44 per share, mainly due to a $5.4 million increase in interest expense over last year. We reported CapEx for the quarter of $50.6 million, which includes $29.1 million for our U.S. segment and $21.5 million for our international segment. Higher CapEx spending in the U.S. includes investments in fiber bills in Alaska, infrastructure to support BurstNet, and modest additional costs following the Sacred Wind acquisitions. International segment spending largely includes the continued fiber deployment in Guyana and mobile network investments. In line with our previous announced guidance, we expect a slower CapEx spend for the rest of the year compared to our first quarter pace. Now turning to our balance sheet and cash flows, we ended the quarter with cash and cash equivalents of $56 million. Net cash provided by operating activities was $16 million. In the quarter, we used approximately $27 million of cash to fund various working capital items, including the reduction in capex payables and approved balances. At the end of the first quarter, our total debt outstanding was $465 million, including $30.3 million in debt from the Sacred Wind acquisition, and $249.1 million on Alaska Communications balance sheet. This figure excludes the $48.1 million related to the first net customer receivable financing facility. With a consolidated net debt to adjusted EBITDA ratio of 2.3 times, we're continuing to maintain our strong balance sheet as well as the flexibility needed to execute a Fiber Build strategy. Before we turn to our guidance, I want to note that as we shared last quarter, we changed how we report our adjusted EBITDA beginning in 2023 to be in line with most of our peers. We're excluding non-cash stock-based compensation and have provided a pro forma reconciliation table in our earnings release. For the first quarter of 2023, stock-based compensation was $1.8 million compared with $1.5 million in the same period last year. As detailed in our news release, our longer-term outlook continues to track the plan. For 2023, our guidance remains the same, with adjusted EBITDA in the range of $183 to $193 million for the full year, with somewhat more of that year-on-year growth expected in the second half of the year. Capital expenditures is estimated to be in the range of $160 to $170 million net of reimbursed amounts, primarily for network expansion and upgrades which are expected to further drive subscriber revenue growth in the following period. In summary, we delivered a solid financial result aligned to our plan, which we expect will yield durable recurring revenues and cash flow growth. We're benefiting from our established leadership across our markets, and as well as from our ongoing network expansion, network upgrades, and growth in our subscriber base. As we invest in our accordance with our three-year plan, we're also building out our foundation and setting ATN up well for the long term. We look forward to continuing delivering value to all our stakeholders across our operation and updating everyone on our progress going forward. And with that, I'll turn it back over to Michael for his remarks.

Thank you, Justin. ATN continued to execute at a high level this quarter with steady momentum across our markets. Strategically, our market approach enables ATN to deliver a strong product suite to customers and to secure our market leadership by growing subscribers and revenue and reducing churn. Being the first to provide a community true high-speed connectivity creates a unique opportunity to generate customer loyalty and build a strong base of revenue across all sectors, consumer, business, and government, which in turn enhances operating cash flows and generates strong returns for our stakeholders. Looking ahead, we will continue to serve our customers well, advance our strategic broadband build-outs, and make progress toward our three-year growth objectives. With that, operator, I'll hand it back to you to open up for questions, please.

Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again.

One moment for our first question. Our first question comes from the line of Rick Prentice with Raymond James.

Your line is open. Please go ahead.

Thanks. Good morning, everybody. Good morning. Hey, I want to start first on personnel. I think in my notes at year-end call, you had mentioned you'd be substantially complete with FirstNet this year, like you're still saying. I had written down that maybe there could have been $27 million of revenue and $23 from FirstNet with two-thirds in the back half. How's that reconciled to what you said about $12 to $14 million? And what percent complete are you as we try and kind of keep track of that? I know it's a low-margin project.

Yeah, we were. It was originally at that range. Some of that's going to fall into 2024 now, and some of the site construction may go away. So we are lowering that number down to the $12 to $14 million, again, to be very back half of the year weighted.

Right, right. So the total contract, which again is low margin, might be less than that $85 million. I think I've written that way back when.

That is correct.

Okay. And is there a way to kind of help us understand what percent complete you are right now? Is it kind of in that?

Yeah, it's about 75% complete today.

Okay. And obviously that is excluded from the guidance. The long-term guidance talks about ex-construction. How about sacred wind? Is sacred wind included in that guidance because clearly Sacred Wind was not there in 21. It was additive modestly in 22. It was in the first quarter. So is Sacred Wind on top of that guidance or does it kind of get rolled into it then?

It gets rolled into it.

Okay. And I think I remember Sacred Wind might have been bringing about $10 million of annual EBITDA. Is that fair?

They did something like that last year, yeah.

And any reason to think that would go down instead of up as you look to spend capital there?

No, but it's really a full integration. So, you know, we don't really look at it that way. I mean, it's already sort of obscure. But, I mean, if you're trying to ascertain kind of what it brings in as it comes in, that's about right.

Okay. Okay. And then the revenues were never disclosed, but it looks like the margins might be in that 50% plus range kind of ballpark-ish, just given before integrating and adding it into the rest of the company.

Yeah, it's higher margin than the business it's going into. That's correct. Sure.

Okay. Now stepping back away from it, you mentioned we might be pursuing, we might have a similar contract to FirstNet with a second carrier. So is SecondNet going to be – similar low margin contract to get stuff out there and you get some other business off it? Or how should we think about what this second net, I know they probably don't want to be called that, but the second contract would be.

Yeah, we're definitely not going to call it that. We'll talk more about it, you know, when it actually gets finalized. But just to give you an idea, a way of thinking about it, it's really the margins are, from the project itself are positive. The returns are positive. It looks attractive to us to do. But more importantly, as we get sort of over the hump of sort of finishing off the vast majority of that old roaming business, it really releases us to optimize the business going forward. So we're really carrying two cost structures at the same time right now. So that's the main benefit that we see. And it's a nice underpinning of long-term recurring revenue as we continue to build out the fixed broadband revenue in the area.

Okay. That would also be kind of a construction project that would be outside of guidance, I assume.

Again, I think we'll talk more about it when there are details on the contract. I think it'll be different in structure and P&L impact than FirstNet. Okay.

Last one from me, public and private valuations have remained diverged somewhat. Can you talk about what you're seeing in the marketplace as far as public versus private valuations and any M&A thoughts on your side as far as anything that might be interesting to buy or interesting to sell?

Yeah, I think we do see the same. There are a lot of deals getting done still in the, you know, from infrastructure funds and traditional PE funds in space. And, you know, they're typically at multiples well in excess of how we're valued and other public companies are valued. So that means it's harder for us to participate in bolt-ons, but it also is kind of a validation of the value we've been building because we look at some of these businesses that are being acquired and we like our infrastructure, we like our trajectory, we like our market position much better. So I think we will continue to look at things. We always consider things if they come across us, but it's just not a core focus for us right now. We're really focused on executing this plan.

Okay. Very good. Thanks. Stay well, guys. Yep. Thanks, Rick.

Thank you. And one moment for our next question. Our next question is going to be from the line of Greg Burns with Sedoti. Your line is open. Please go ahead.

Morning. I know you're guiding for CapEx to step down to the 10% to 15% range after 24, but how should we think about next year? Do you step down towards that level next year, or does CapEx kind of stay elevated at what we're looking at this year, next year, and then you kind of you know, step down more significantly in 24?

I think it's more significantly in 24, but I think it would probably tend to step down a bit next year as well on its way to a lower level in 24.

Okay.

Okay. Yeah.

Okay. And then with the international wireless growth, what is your market share there, you know, across some of your markets? And, you know, I'm just trying to get a sense of, you know, what the growth opportunity is there. And is the growth – are you taking share from anyone in particular in any markets, or is it kind of greenfield growth?

Yeah, we don't give a market share statistic. And I'm not going to do that now, but I can answer the second part of your question. We are taking shares. So there's, I think – I would say OVAR subscriber growth more to date is about taking share than market growth.

Okay. And then I guess lastly on the domestic wireless business. So with the new managed services contract, does the wholesale wireless component of your revenue, does that now go to zero or trend towards zero? Are we completely converting all that revenue into kind of long-term managed service contracts after this deal, or for the most part, most of that revenue?

It's really what we call carrier service revenue. So already those roaming contracts appear under that line of carrier services revenue, so this would appear in the same line.

Okay. All right.

I was just going to say, but generally, yes, they are replacing that wholesale enrollment.

Okay. Perfect. Thank you.

Thank you. And as a reminder, again, to ask a question at this time, please press star 1-1 on your telephone. One moment for our next question. Our next question comes from the line of Hamid Khorasan with BWS Financial. Your line is open. Please go ahead.

Good morning. A follow-up on this to-be-announced contract. What kind of preparations are you taking as far as the roaming business is concerned with the towers? Are there going to be more charges in Q2 as if you need to take towers offline? How would that work on the cost line?

I think we, right now, we think we've taken the charges that we would anticipate. You know, by and large, I think they are reflected in what we're doing now. And we are, we would be continuing to use our towers and sites. There will be some, you know, there'll be some sites that we won't use, some new tower sites, but by and large, it'll be reused.

Okay. And then on the Alaska side, is there any seasonality in the business that you're seeing this year as far as the fiber bill goes and adding on new customers?

There's not a lot of seasonality in that business. I mean, there's definitely quarters. I mean, their numbers are big, so there are quarters that tend to come in larger than others, but generally it's Fairly straightforward. I mean, it could be for something that got delivered in the quarter as opposed to seasonality, I would say, more.

There is probably a slight from the residential fiber business. It's a little easier to sell and be active in the second, third quarter. Bills also can tend to be easier to execute then, although we do both all year round.

And now on the fiber build in Alaska, are you primarily focused on residential or are you seeing demand from commercial?

All things. We're building, continue to build fiber towers. We're building longer routes, government customers. But a lot of the sort of expansion and the capital spend that comes from that business has been lately disproportionately around the residential.

Okay, great. Thank you.

Yeah.

Thank you, and one moment for our next question. And we have a follow-up question from the line of Rick Prentice with Raymond James. Your line is open. Please go ahead.

We got a few more in. Following up on Hamid's question, on the sites that you reviewed and have taken a charge, how many sites are you left with? Are we down like in the 500 site range? Are we below the 500 site range, above 500 sites? How many sites are left?

So I'm not going to give you a precise number of sites, but let me just, I think one thing maybe we were to be clearer on is A lot of that restructuring cost is operating costs, right? So it's elements of the business, including people that support certain parts of the business. So some of it is sites, but some of it is people as well. So it is not material to our overall tower number, though.

but can you give us a bread basket size about how many you've got? Because also we've always wondered why couldn't or wouldn't you maybe put a debt financing on the towers or position them for a potential sale someday, depending on where things happen.

Yeah, we own a couple hundred towers in that subsidiary. The sites are some towers that we still lease for various, is part of that, but We did come down, I think it was like about 70 sites in the count through the restructuring.

But a lot of that emphasized was third-party sites.

Yeah, third-party sites, right. Yeah, anything we own, we still value the asset and are using it.

Thank you.

I'm showing no further questions, and I would like to turn the conference back over to Justin Vinikas for any further remarks.

Actually, I'll take it as Michael Pryor. So thank you, operator, and thank you all for joining us this morning. We're excited about the future, given the essential nature of our offerings, the expansion of our network, our first mover advantages in underserved communities, and the financial flexibility we have within our controls.

Thank you, everyone.

This concludes today's conference call. Thank you for participating.