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Operator
Good morning. My name is Adam, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Consolidated Communications second quarter earnings conference call. Please be advised that today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this session, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I'd now like to turn the call over to Jennifer Spouty, Senior Vice President of Investor Relations and Corporate Communications. Jennifer, you may begin your conference.
Adam
Thank you and good morning. I'd like to welcome everyone to Consolidated Communications' second quarter 2021 earnings call. On the call today are Bob Udell, President and Chief Executive Officer, and Steve Childers, our Chief Financial Officer. Bob's comments today will highlight our strategic initiatives and progress with our Fiber Build Plan. Steve will provide details on our second quarter financial performance and an update on the Searchlight investment. Following their prepared remarks, we will open the call up for questions. Before we proceed, I will remind you our earnings release, financial statement, and earnings presentation are all posted on the investor relations section of our website at consolidated.com. Please review the Safe Harbor provisions on slide two of our presentation. Today's discussion includes statements about future events and financial results that are forward-looking and subject to risks and uncertainties. A discussion of factors that may affect future results is contained in consolidated filings with the SEC. Today's discussion will also include certain non-GAAP financial measures. Our earnings release includes reconciliations of these measures to the nearest GAAP equivalent. I will now turn the call over to Bob Udell.
Bob Udell
Bob Udell Thank you, Jennifer, and good morning, everyone. We've had a highly productive second quarter, delivering stable revenue, strong broadband growth, and exceeded our very aggressive build plans. In the quarter, we upgraded 76,000 gig-capable fiber passings. And for the year, we have completed 122,000 fiber upgrades, which is a great start to our five-year, 1.6 million location build plan. The first half of the year demonstrates our team's strong execution on our fiber-first strategy. I'm proud of what the team has accomplished in just six months and the transformation that is taking place. With that, we are on track to achieve our target and upgrade over 300,000 locations in 2021. Our build plan is outlined on slide six of our investor presentation. The recent upgrades were primarily in northern New England, California, Texas, and Minnesota markets. Crews constructed almost 1,400 miles of new fiber in the second quarter, which is double the miles constructed in first quarter. We are placing 288 fiber count or larger cables to meet the high capacity needs of our consumer, commercial, and carrier customers for years to come. Our near net regional fiber networks allow for very attractive average cost per passing. Our cost per passing is approximately 465 year to date, which includes edge access equipment, labor, and fiber components. This is well within our expectations. Our go-to-market strategy has been meticulously planned out. We're offering simple packages with highly competitive pricing and an optimized customer experience. Our gig-capable symmetrical product offering with no data caps will be a key differentiator compared to cable. We are installing fiber services within three days and on time for our customers for their appointments. And we have significantly improved our contact center performance and productivity. Our premium tech support, which comes with all fiber connections, ensures the best possible experience. Additionally, investments we are making in our digital transformation projects will give our customers new self-serve options, making it easy to do business with us the way they want. In short, all of these factors support a highly competitive, differentiated fiber product and a transformed customer experience. Keene, New Hampshire is a great example of a recent local market launch with very positive receptivity to our new fiber product. Our marketing strategy included a community event, local sponsorships, and a competitive offer that is making it easy for residents to choose Consolidated. We have been working very closely with our partners and vendors to understand supply relative to our forecast. We are cautiously optimistic that we have sufficient CPE to meet our forecast for the remainder of the year. And from a construction perspective, we have high confidence we can achieve our 2021 fiber build objectives and are already in the planning stages with our vendors for 2022 and beyond. We are seeing early successes in penetration rates, and they are in line or exceeding our plan. Early Q1 build areas with cable competition have already achieved double-digit penetration. We added approximately 3,000 consumer fiber gig-capable subscribers in the second quarter and nearly 7,000 fiber subscribers year-to-date. In fact, some of our late Q4 cohorts in rural areas with less competition are at 51% penetration. We are very pleased with the sales activity and receptivity to our fiber offering. It's a powerful combination of delivering not only the fastest symmetrical speeds, but also a truly differentiated customer experience, which is key to our value proposition that comes with our new fiber services. We have completed five public-private partnership builds this year, totaling roughly 8,000 passings, and are well positioned to participate in any additional funding opportunities that allow us to expand broadband to rural America. This year alone, we have won bids for 16 additional municipal partnerships and have dozens more in the planning stages, not to mention a very solid track record with state and federal programs. Simply put, we understand the funding sources, have good relationships with our community partners, and have the infrastructure in place to build fiber at scale and support the network for the long term. Within our commercial channel, we're experiencing an increase of face-to-face meetings in most markets. which is good news. However, sales cycles or time from quote to close still seems extended due to lingering COVID-19 concerns. Our commercial go-to-market strategy is based on leveraging our fiber network to provide application solutions which grow data and Ethernet revenue. Our sales teams are always focused on network, and we utilize a solutions-based sales approach, which we call CCI Ignite. We work to become a trusted advisor to our customers and provide simple solutions to complex problems. Data and transport revenue grew 1.4% year-over-year, and it's up from roughly 1% growth in the first quarter. We are pleased with the momentum of our sales teams and the sales activity around Ethernet, unified communications, and SD-WAN, which are our leading solutions. As we build up carrier-grade capacity, We increased on net buildings by roughly 1400 or 11% year over year. We had nearly 200 strategic builds in the quarter and on net revenue represents roughly 90% of our revenue for commercial. Our strong balance sheet enables us to support this channel and commit the capital needed to grow the business with the highest return projects in focus. Our partner one agent channel performed well in the recent quarter and is highly engaged. This provides us 150 agents selling on our network who we continue to move upmarket and also who help bring in new logos. Our carrier team is actively engaged with emerging 5G network opportunities across all the major carriers. The carrier product mix, like commercial, is weighted toward Ethernet, and we are seeing more interest in carrier-grade wave solutions. Our Cary sales team is experienced, nimble, and proactive in pursuing network growth opportunities as we manage the pressures of price compression on second-generation contracts and an increasingly competitive landscape. We continue to be optimistic about business recovery and are pleased with the receptiveness for meetings and resolving projects. I'll now turn the call over to Steve, who will provide more insight on our second quarter financial results. Steve?
Bob Udell
Thank you, Bob, and good morning, everyone. It was another exciting quarter for our team as we made great progress in our transformational Fiber First build strategy. Today, I will provide an update on second quarter results, reiterate our full year 2021 guidance, and remind you of the strength of our balance sheet. Our second quarter highlights can be found starting on slide four of the presentation. Operating revenue for the quarter was $320.4 million, down just 1.5% compared to a year ago. Adjusted EBITDA was $126.7 million, which is in line with our guidance, which factors in the startup investments into the sale and support functions of the fiber build plan. The quarter also included a $3 million increase in wireless cash distributions, which was largely offset by increased marketing costs to support the rollout of our new 1 gig plus fiber products. Now, looking closer at revenues. Total commercial and carrier revenue was $143.8 million in the second quarter, down $2 million, or 1.4%. Data and transport revenue was $90.8 million, up approximately 1.4% in the second quarter. Growth continues to be led by customers adding dedicated Internet bandwidth and Internet services, as well as our commercial VoIP solution, ProConnect. Voice revenue declined 2.3 million, or 5.1%, driven by a reduction in access lines and the migration of our customers to VoIP solutions, which we record in data. Turning to our consumer channel, total consumer revenue was $125 million, which represents a year-over-year decline of 2.3%. Consumer broadband revenue was $68 million, up 3.7%, and reflects the highest growth rate on a year-over-year basis that we have realized over the past few years. It also represents more than two years of consecutive year-over-year growth in broadband revenue. While we are laser-focused on the execution of our fiber-to-the-prem build plan, our growth is driven by driving data output through speed upgrades to both fiber and copper customers, combined with targeted rate increase activity. Consumer data ARPU in the second quarter was $57.26, up approximately $4.50, or 8% from a year ago. Consumer voice revenue was down 6.8%, or $2.9 million. Video revenue was down $2.4 million, and on a standalone basis, this product has a slightly negative margin. The pace of our video revenue declines has increased this year as we sunset our linear video services and transitioned to new and in-demand streaming partnerships. Our current over-the-top partner strategy allows us to meet our customers' needs and manage any rising content cost or capex spend. The decline in linear video revenue actually improves gross margins and free cash flow. Network access revenues totaled $31.1 million, up slightly from a year ago. Special access declines were offset by an increase in universal service fund revenue driven by higher rates to end users during the quarter. Subsidy revenue was down approximately $600,000 due to a mandated reduction in state funding from the Texas high-cost funds. We are part of an appeal which is being filed by the Texas Telephone Association on their recent ruling in an effort to restore funding to prior levels. Now, turning to operating expenses, exclusive depreciation and amortization were $214.3 million, up $10 million or 4.9% from the second quarter of 2020. Cost of services and products increased $5.8 million primarily due to two factors. First, universal service fees increased $3.6 million as a result of higher end-user rates in the second quarter. As a reminder, these fees are pass-through expense and are neutral to EBITDA. Second, in the quarter, we recognized a $3.4 million one-time charge related to asset sale, which we treated as an add-back to adjusted EBITDA. SG&A cost increased 4.2 million or 6.5 percent, primarily due to an increase in marketing expense targeting customers where we have completed some one-gig upgrades and rolled out our new fiber products. And as Bob mentioned, we have upgraded more than 122,000 passings here today. That interest expense for this quarter was $45.4 million, an increase of $14 million from a year ago. As displayed on slide seven, The increase reflects our new capitalized balance sheet with a Searchlight investment and the global refinancing we completed last October, which allowed us to extend maturities, increase liquidity, and reduce leverage. For the quarter, non-cash interest on the Searchlight note combined with the amortization of deferred financing costs and the related discount totaled $10.9 million. The remaining increase in interest expense is primarily due to the higher mix of senior notes as compared to 2020. As a reminder, in early April, we completed a repricing of our term loan, further strengthening our balance sheet. The repricing, combined with a $400 million bond offering, reduced our annualized cash interest costs by approximately $18 million. At the end of the second quarter, we have over $500 million in liquidity, and we expect to receive the $75 million from the second stage of the search-like transaction once we receive FCC approval later this year. Our new capital structure and strong liquidity position provides us with a fully funded bill plan to return to growth. At June 30th, we recognize a non-cash loss of $39.8 million related to the increase in the fair value of the contingent payment rank, the searchlight. Slide 8 of our presentation outlines the investment steps of our Searchlight Partnership. We have received approval under the Hart-Scott-Rodino Act, and in April we received overwhelming support from shareholders who approved all proposals related to the investment. Additionally, subsequent to the end of the second quarter on July 15th, we received all required PUC regulatory approvals necessary for the conversion of the CPR issued to Searchlight. The second stage of the investment, which is $75 million, will occur following FCC approval, which is expected by year-end. The change in administration and the late FCC and Team TalentCom review processes have impacted the timeline for approval. However, we are aware of no substantive issue or challenge to the petition. The end state, with Searchlight's full investment of $425 million, will result with Searchlight holding approximately 35% of an estimated 112 million shares of common stock, pro forma reflecting the full conversion of the CPR. And upon the second closing, Searchlight's convertible equity interest or note will convert to perpetual preferred stock and will retain a 9% coupon. Cash distributions from the company's wireless partnerships totaled $12.7 million in the second quarter and are $22 million for the first half of 2021, as compared to $19.7 million for the first half of 2020. Capital expenditures totaled $119.2 million in the second quarter, just over $195 in the first half of the year. 40% of our CapEx year-to-date is supporting our fiber network expansions and our digital transformation technologies. Our fiber growth plan is fully funded, and our five-year plan to upgrade at least 70% of our service area with fiber gig plus capable services enabling highly competitive broadband services is off to a great start. Today, I'll affirm our previous guidance for 2021, which is outlined on slide nine. Capital expenditures are expected to be in the range of 400 to 420 million. This guidance reflects increased investment levels, driven by our build and success-based CapEx related to the Fiber Expansion Plan. Adjusted EBITDA is expected to be in the range of $500 to $510 million. Cash interest expense is expected to be in the range of $130 to $135 million. We expect to pick the Searchlight investment at least through 2022 and have the option to do so through 2025. Cash income taxes are expected to be in the range of $2 to $4 million. With that, I'll now turn it back over to Bob for closing remarks.
Bob Udell
Thanks, Steve. While it's early on in our five-year growth plan, I'm very pleased with the team's ability to exceed our fiber upgrade targets and to be on track with a very aggressive first-year build plan. I'm confident in our ability to deliver a differentiated, superior fiber product with an excellent customer experience and with improved digital capabilities. Furthermore, I am very confident in the fiber construction machine we are developing as we continue to scale. The investments we are making today is creating a new trajectory and path forward for the growth of consolidated communications. We have a clear plan for growth and the expertise to execute on this strategy as demonstrated by our first half of the year results. Our balance sheet is strong, and we have the support from an experienced strategic partner in Searchlight. We are on a path to return to total company top-line growth in 2023. In closing, I want to thank our consolidated team who is working hard to deliver on this bold plan. Our path forward is all about building long-term sustainability and value for our investors, our customers, and our employees. I couldn't be more excited for what our future holds. Adam will now take questions.
Operator
Thanks. At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. And your first question comes from the line of Greg Williams with Cohen.
Greg Williams
Great. Thanks for taking my questions. I have three questions, if I may. The first one is on the wireless cast distribution. Sounds like $12.7 million is coming in a little higher than expected. trends. And where do you see that shaking up for the remainder of the year? I assume it comes down in the second half, as you typically guide it around $37 to $39 million for the year and just seeing if that still holds. Second question is just on bottlenecks and inflation. Bob, you mentioned that your plans don't see any bottlenecks now. And in fact, your orders for 2022 are ready to go. But maybe on the inflation side, I think last quarter you mentioned You know, resin was creeping up a bit for the conduits. Are you seeing anything there that caused a little more scrutiny? And then the last question is just on cable's response to your fiber build. You mentioned some good penetration levels, and what's cable doing in response to your fiber deployment in their footprint? Thanks.
Bob Udell
Yeah, thanks, Greg. Hey, Steve, you want to start with the wire stitch row, and then I'll take it at two.
Bob Udell
Yeah, sure. Greg, the question on wireless, I appreciate the question. So, yeah, previously we have always said we'd be in the range of 37 to 39 for full year. And to your point, you're exactly right. We are running ahead of where we thought we would be for the first half of the year. And so if we would hit what's in our internal models, we would be at 41. So we're cautiously optimistic that we're going to exceed that 39 million that we've been talking about. But again, that assumes we kind of hit our internal numbers for Q3 and Q4. And I will remind you, we don't, as a limited partner, we don't have a lot of visibility to what's coming down the pike from Verizon. So, you know, we wish them the best. And putting up good numbers the rest of the year. And I will remind you that we did have $41 million in cash distributions at the end for 2020, but we're a little bit cautious since we don't necessarily have the control of the checkbook there.
Bob Udell
With regards to the second part of your question, bottlenecks or inflation, we really don't see any bottlenecks at this stage on the fiber construction side. We're actually seeing improved delivery on commit dates, and we feel pretty good about even the start of 2022 from a terminal and you know, in miscellaneous equipment perspective. On the CPE side, we're a little more cautious from a chip perspective. You know, we're all trying in this industry to make the transition from Wi-Fi 5 to Wi-Fi 6. And so seeing that product delivery, you know, slip a little bit is, you know, causing us to work even closer with those vendors that we have that integrate with our digital infrastructure for service delivery and create some additional options. So we've got good flexibility with the inventory we have on Wi-Fi 5 or access to inventory on Wi-Fi 5, but we're being a little bit cautious on the move to Wi-Fi 6. As far as pricing, I haven't seen anything from an inflation perspective You know, we've got some long-term contracts. We made some volume commitments last fall. And so we feel like we're in a pretty good shape to hedge, at least for the next couple of years from an inflation perspective. And with respect to your cable response to fiber build, I think we're so small still that we don't get a ton of attention. You know, we're seeing some, you know, natural growth. speed upgrades by cable in some of our markets. But it's a natural pattern that we ourselves have deployed. And with the one gig symmetrical product, it is hard to compete with. We feel very confident in that product, the simple service experience for how it's ordered. And so I don't think anyone can really match us in the reliability of what we're deploying. in our fairly suburban and rural markets compared to it being more distant cable markets from a plant perspective. So I feel good about our product.
Eric Luchow
Great. Thank you.
Operator
And your next question comes from the line of Eric Luchow with Wells Fargo.
Eric Luchow
Great. Thanks for taking the questions. Just two for me. First on the fiber build, obviously good penetration level so far. Maybe you could talk about the activity. Are they mostly net new customers to consolidated? Or are you seeing more of the early growth ads coming from existing customers that may be upgrading from DSL or fiber to the node where the sales process might be a little easier? And then secondly, I'm curious your aspiration to get to total company top line growth by 2023. I think can get our arms around the consumer broadband business the opportunity there maybe we talk about the commercial and carrier segment at what point do you think some of these growth areas ethernet sd-wan that you talked about can offset you know some of the legacy declines in products like voice thank you yeah great um thanks for the question uh let me start first with um you know the the
Bob Udell
activity on the fiber builds from a passing perspective. We're really benefiting from probably 60% being new ads, and that is growing, because where we're upgrading, we're hitting some of the areas where I think competitive activity on the cable side has outpaced our DSL loop shortening. And that's why we've made the transition as we have and obviously started that process about a year ago in planning and are now executing on it. So it's going from 59%, 60% gross new ads to higher as the quarters progress. And we feel good about that. In terms of the top line growth, I would tell you that commercial and carrier continues to benefit from transport and data growth. That is not necessarily consistent across the industry, and we've been able to do that because we continue to have a pretty strong network product that we extend for customers between the $500 a month range and higher. As soon as they go for a dedicated Ethernet product, we're doing almost all of that with fiber versus a bundled copper solution. And so that's allowed us to have consistent growth and high reliability in that bucket. And so when we do our planning and look at all the regions in which we're deploying fiber from an FTTP perspective, we feel pretty confident that we'll be in a good position to see those lines crossed from a – a revenue decline on voice offset with a growing fiber-based broadband growth curve. Steve, anything to add?
Bob Udell
Yeah, Bob, I agree with everything that you said. I guess the reminder to Eric and everybody else on the call is part of the calculus in saying we're going to return to growth is we're obviously very focused and very excited about the FTT plan, everything that you said on commercial and carrier side. I think we've demonstrated that we have best-in-class teams in that area. I think we're one of the few putting up consistent growth on the commercial or on the enterprise side. And then I would just remind you that we do have the reset from CAF 2 to ARGOF funding January 1st of 2022, which I think everybody has built into their models right now, but that is being taken into consideration in the top line growth number for 2023. I think you'll start seeing some sequential growth in 2022 to do the business. plan and consistency of the commercial carrier teams.
Bob
Okay.
Eric Luchow
Thanks for taking the question.
Operator
And your next question comes from the line of Anna Gosko with Bank of America.
Anna Gosko
Hi, thanks very much. So just to follow up on the prior question and comment. So with the growth ads that you're getting on the Fiber to the Home, to clarify, are those actually competitive wins from cable? And if so, on what basis? Is it the superiority of the product, or are you being promotional as well?
Bob Udell
Yeah, we're absolutely being aggressive with marketing and advertising. It's demonstrated by, you know, our pop in marketing spend. We're trying new things and cycling quickly through programs that work. And so I would say there are competitive wins from cable where we have a duopoly. and they're based on our local activity in the market. We start with a softening of the market with construction, kind of like the air attack, if you will, set up a website, very tightly managed for soliciting interest, do some PR, then we do direct mail, and then direct sales comes in. And so that equation is really helping us drive both electronic, which is really low cost, customer onboarding and marketing and onboarding, and then the direct sales spreads word of mouth as well as in itself produces sales. And so that kind of air attack and ground troops coming in with door-to-door is really an equation that works quite well.
Anna Gosko
Okay, and then I was referring to promotional pricing. How aggressive are you being on promotional pricing?
Bob Udell
Yeah, I would tell you on commercial, we really lean on our relationship with the customer. And so we take first the customer's input on what they're doing with broadband and then focus on providing them a solution. And we have our building blocks From a product perspective, whether it's DDoS or Cloud Secure, that allows us to use the new technology to solve a problem for them. And so we're definitely competitive on price. The fiber has high reliability, and so the maintenance behind it after it's installed isn't high. And I think that equation with our aggressive technology you know, work with the customer to understand what their use of broadband looks like allows us quickly to assess, you know, how we solve a problem for them with a competitive price. But we're definitely competitive. I wouldn't say we're underpricing competition.
Anna Gosko
Okay. And then, okay, thanks. And then secondly, just a follow-up on the topic of, you know, some of the post-pandemic impacts we're seeing on prices and inflation and the labor market. Do you have adequate labor now, or are there unfilled positions in your company that potentially could be a hindrance to either the rollout or kind of other parts of your operations?
Bob Udell
We have sufficient resources to meet our plans. Uh, and, uh, and we continue to, you know, iterate, um, on, uh, other areas that we might, um, expand to. Uh, so we don't see a, a labor. Um, or inflation challenge right now, but you know, we, we watched the economy in the world around us. I can't see the inflation or labor challenges hurting us any worse than, than any other competitor. In fact, I think we're better positioned because of our culture and we've got a sticky, uh, culture, our, our tenure and retention. of employees is outstanding. And we have provided a new opportunity for employees to renew their excitement around bringing a wonderful service to the communities that we serve in suburban and rural areas. So there's a lot of energy in the company right now. We have a lot of good candidates for positions that might become open. And so I don't see any labor shortage that's impacting us in the foreseeable future, but we're always looking for good people and so far have a good pipeline for them.
Anna Gosko
Okay, thanks. And then final question. I know you've got a lot on your plate right now, but it looks like there are other local markets potentially available around the country. Are you open to any kind of acquisitions or tuck-ins or M&A at this point?
Bob Udell
Absolutely. You know, I would tell you that, you know, never say never, but we're really focused on executing our plan that's in front of us now, and we think there's more value in our organic builds than trying to chase, you know, the price up on additional M&A activity. But we've got some great partners in Searchlight. They're really good at assessing those opportunities, and so I'm really fortunate to have them as a, you know, specifically, Andrew, And I pray it was, you know, my fleet contact there as a partner that allows us to, you know, see and evaluate opportunities that come across their radar.
Anna Gosko
Okay, so never say never. Okay, thank you.
Operator
And once again, ladies and gentlemen, if you would like to ask a question, simply press star at the link number one on your telephone keypad. And there are no further questions at this time. I would like to turn the call back over to Mr. Bob Udell.
Bob Udell
Thank you, Adam, and thank you all for joining the call today. We appreciate you tuning in and look forward to updating you on our third quarter results. Have a great day.
Operator
This concludes today's conference call. You may now disconnect.
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