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Operator
Good morning. My name is Brent and I will be your conference operator today. At this time, I would like to welcome everyone to the Consolidated Communications first quarter earnings conference call. Please be advised that today's call 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 time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. Thank you. I will now turn the call over to Jennifer Spouty, Senior Vice President of Investor Relations and Corporate Communications. Jennifer, you may begin your conference.
Brent
Good morning and welcome to Consolidated Communications' first quarter 2022 earnings call. Our earnings release, financial statements, and 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 the presentation. Today's discussion includes forward-looking statements about expected future events and financial results. that involve risks and uncertainties that may cause actual results to differ materially from those expressed today. A discussion of factors that may affect future results is contained in consolidated filings with the SEC. During this call, we will also refer to certain non-GAAP financial measures, which are defined and reconciled in our earnings presentation and press release. On the call today are Bob Udell, President and Chief Executive Officer and Steve Childers, our Chief Financial Officer. Following their prepared remarks, we'll open the call up for questions. I'll now turn the call over to Bob Udell.
Bob Udell
Thank you, Jennifer, and good morning, everyone. 2022 is off to a fast and productive start. Our team is energized, our build machine is executing well, and we're expanding our flagship vidium fiber product to new markets. Today, I'll update you on the progress of our build, the demand we are seeing, and comment on our cohort data now that one full year is in the books since our fiber expansion began. Consolidated's mission is to turn technology into solutions, connecting people, and enriching how they work and live. This mission is centered at the core of our fiber expansion plan as we connect more locations every day with superior fiber internet and a digital infrastructure that will enable consumers, businesses, and communities to thrive in the coming years. We have a significant opportunity with 2.7 million total passings and a plan to upgrade over 70% of these locations, or 1.6 million locations, by 2025. We're roughly 100 days into our newly launched Vidium fiber product, and the response continues to be very positive. Vidium was initially launched in northern New England. Vidium is designed to make broadband easy. It means simple plans, transparent pricing, and an exceptional customer experience from end to end. We are offering gig symmetrical speeds, premium whole home mesh Wi-Fi capabilities, no data caps, no contracts, and all at an extremely competitive price point. We have the ability to install fiber services the same day and on time by appointment, and we have a dedicated premium customer support channel. All of this is to create the best experience possible for our customers. Fidium has been very well received as measured by our industry-leading net promoter score numbers and the very positive customer feedback we've received so far. We're looking ahead with plans to launch a 2-gig product this June. First quarter brought our strongest period of fiber net ads yet, with 8,000 total consumer and SMB new fiber subscribers. An important inflection point was achieving positive net broadband connections in northern New England this quarter. Seventy-five percent of these net ads are new subscribers, with the remainder being DSL upgrades. Additionally, over 60% of our fiber subscribers are taking the one gig speed. We kicked off our growth plan in early 2021, quickly ramping the fiber construction engine while also embarking on a total retooling of our customer acquisition process and service experience. Our initial cohort is just reaching the 12-month mark, and penetration is tracking slightly above our target of 14%. This initial cohort reflects the very positive receptivity experienced in communities and a higher ratio of DSL upgrades pre-fidium launch. As a reminder, our cohort penetration targets for year two are 24% and year three, 33% as outlined on slide four. Terminal penetration will be closer to the 40% range over a five-year horizon where we have duopoly parity. Also in first quarter, we hit an important inflection point in northern New England, where we saw net broadband unit growth for the first time. An even more important milestone will be turning the total company net positive for broadband connections, which we expect to occur in early third quarter. This will be our next major inflection point in our transformation to a fiber-first broadband service provider and aligns with a roughly three times growth in fiber connections for 22 compared to 2021. The opportunity for FIDIUM is significant, and we are just getting started. Now, we're excited to bring FIDIUM fiber to 50 additional markets this month, which brings us to a total of 150 communities where FIDIUM will be available by the end of second quarter. We've had a great response to our community launch announcements, which have generated hundreds of pre-signups. Now, let me tell you more about our pre- and post-launch plans. We're using a targeted digital and local media strategy to announce Vidium and provide easy options to pre-sign up via our self-serve enhanced website. Our strategy is to win subscribers at the neighborhood level and provide a frictionless digital order experience. In fact, we're using the construction process to build relationships with local community leaders who are very excited about our mission to improve the economic future of their community. We are creating some great buzz with Vidium influencers and We're creating FIDIUM fans while generating great interest at local community events. You can see some of this excitement on slide six. Our new digital customer experience provides intuitive self-serve options which make it easy for customers to do business with us. These tools significantly enhance the customer experience throughout the service delivery process. For example, before we launch a new FIDIUM fiber market, prospects can enter their contact information and they will be automatically notified when Fiber service is available and ready for sale on their street. Consumers can order new service on Fidiumfiber.com, schedule their appointment, and the order is automatically provisioned when the install is complete. We're using web chatbots to address the most prominent service requests, and our new portal offers customers the ability to manage payment preferences and even link multiple accounts to a single account, all at Fidiumfiber.com. In addition, Our new Fidium Attune Wi-Fi smart home app allows customers to view active devices on their network, run speed tests, create and manage user profiles and controls on their network, manage security for every device on their network, and filter suspicious activity. Consumers can manage their home Wi-Fi for an overall optimal network experience. On slide three, you can see the pace of our bill, including our plan to upgrade 400,000 locations this year. 265,000 upgrades will occur in our northern New England states of Maine, New Hampshire, and Vermont. The remaining upgrades are in Texas, California, Illinois, Minnesota, and Pennsylvania. Our team has demonstrated the ability to accelerate the fiber build, creating a machine capable of scaling to a pace of over 100,000 locations per quarter, and we anticipate upgrading 100,000 locations in the second quarter. We are smoothing out the release of new locations for sale on a monthly basis, improving our marketing efficiencies and effectiveness. This rapid expansion is the first critical step in achieving broadband revenue growth. To ensure we keep the schedule, we've opportunistically accelerated projects in many of our markets. An example of this is the speed with which we have completed underground work in several of our largest communities. This is a result of favorable weather and the ingenuity of our internal construction crews' knowledge of the existing conduit plan. In addition, we have inventory to ensure continuity of our construction plan. To this point, in our plan, we have secured over $87 million in broadband partnerships and grant funding support, supporting over 60,000 locations. This funding supports the build-out of rural high-cost passings. We are well positioned to capitalize on government programs and public-private partnerships with a very successful track record as we continue to pursue all broadband infrastructure grant opportunities that make sense for us. On slide five, you see our FIDM expansion markets in green. This largely represents the states where we are actively upgrading 1.6 million locations by 2025. The blue states provide upside for future builds or rationalization of assets, which we continue to evaluate. Discussions are ongoing with multiple parties. By the end of 2022, 37% of our locations will be fiber to the premise with multi-gauge capable speeds. That's up from 10% when we started this plan at the beginning of 2021. We doubled our fiber passings in 2021, and we will nearly double them again in 2022. We are well positioned competitively, and 90% of our service area has one or no competitor, and the demand for high-speed broadband continues to increase with fiber and symmetrical speeds is clearly the best product to meet this rising demand. Our fiber expansion plan is our path forward for growth and also provides opportunities for commercial and carrier channels to use the same assets for multiple revenue opportunities. Our network architecture and core upgrades enable 10 gig capabilities and eventually 100 gig services to the edge, future proofing our product portfolio. Turning to our commercial and carrier channels, We are focused on growing data transport revenue, and we did just that in the first quarter. We were seeing solid demand for emerging 5G opportunities across our regions and with major carriers and hyperscalers. Within the commercial channel, we're leading with best-in-class fiber-based solutions, and we do this by leveraging three sales channels, our direct channel, inside channel, and an agent channel we refer to as Partner One. Our commercial go-to-market strategy leverages our extensive fiber network in our solutions-based sales approach, allowing us to become a trusted provider to our customers while providing a simple solution to their complex business problems. New fiber passings with our unique routes provide opportunities for us to leverage the same fiber to grow commercial revenues. We increased our lit buildings 11% in the first quarter and had 90% of our new sales activity on our network, which correlates to higher margins increased opportunity to upsell, and a greater ability to ensure the best customer experience. I will now turn the call over to Steve, who will provide more insights on our first quarter financial results.
Jennifer
Thanks, Bob, and good morning to everyone. As Bob mentioned, we are continuing to make significant progress with our five-year value creation plan and Fiber First strategies. This year, we will increase the pace on our fiber network construction to over 400,000 gig plus upgrades, and we are seeing significant progress on our fiber cells capabilities and penetration take rates. Today, I'll provide an overview of our first quarter results, and I will reiterate our 2022 full year guidance. Before I do that, I want to call out some updates to our reporting. First, as you can see on our revenue schedules, we are now separating commercial and carrier revenues. which is a change from our past practice of showing these customer channels on a combined basis. Second, we have made enhancements to our metrics tables. We are now splitting out the network composition and subscriber metrics between northern New England, where we are targeting approximately 70% of our fiber upgrades, and all other markets. Also, on that same table, we are breaking out consumer broadband revenue between fiber and copper and calculating ARPUs on the same basis. Our first quarter financial summary is on slide seven of our investor deck. Total operating revenue for the first quarter was $300.3 million, down 7.5% as compared to a year ago. Adjusted EBITDA was $107.2 million and represents a 35.7% adjusted EBITDA margin for the quarter. As previously disclosed, effective January 1, 2022, Our $48 million in annual CAF II funding transitioned to $6 million under the Rural Development Opportunity Fund. The subsidy reduction impacts Q1-22 and subsequent quarters revenue in EBITDA by $10.5 million. CapEx for the quarter was $157.7 million. While I will reiterate our full year CapEx guidance in a few minutes, I want to call out a few things. First, our cost to pass and cost to connect is still in line with our targets. And second, our Cap Q1 CapEx includes approximately $20 million of cost associated with pre-work that will benefit future periods and accelerate underground work for two of our larger markets. Third, in light of supply chain concerns, we continue to build inventory for construction and CPE of roughly $17 million to ensure execution on our build and subscriber plans. Let me remind you of our fiber-to-the-prem investment thesis and our commitment to our fiber-first strategy that will future-proof our business. We have several meaningful fiber deployment advantages compared to our peer group. These include the following. The first is our incumbent position. We know these markets very well, and we have a fiber-rich carrier-class network that we can cost-effectively extend. Second, we own or have large long-term leases on the local and long-haul networks and have existing conduit facility for buried facilities and pole access where we have aerial fiber. Third, in northern New England, approximately 80% of our fiber is aerial and in close proximity to our existing fiber backbone facilities. And we have a very experienced teams, including internal and external resources we can flex to ensure we complete the build on time. With this plan, we have a tremendous cost advantage. specifically in New England, where we plan to upgrade over 1 million passings over the five-year build plan. We have the greatest opportunity to drive significant returns in New Hampshire, Maine, and Vermont, where more than 90% of our markets have a single or no competitor. We also have a very economical cost to upgrade the majority of the network to gig-plus enabled services, and we are confident we can acquire significant market share. Now, I'll review revenue by customer channel. Turning to our consumer channel, total revenue was $117.7 million, down 4.3% compared to the year ago. Normalizing for the impact of our Ohio assets, revenue declined 3.5% year-over-year. Overall, consumer broadband revenue in the first quarter was $65.9 million, up approximately 1% after normalizing for our Ohio sale. Consumer net ads are up over 70% from Q4 2021 as our customer acquisition engine ramps. Consumer fiber revenue was $17.2 million, up $3.1 million, or 22% year over year. And we added over 19,300 consumer fiber connections in the last 12 months. For the first time since the inception of the build plan, our northern New England markets achieved net positive broadband ads. We are now providing a new metric for consumer fiber ARPU, which was $63.88 in the first quarter. Consumer voice revenue was down 3 million, or 7.3%, primarily due to the continued erosion of access lines and associated voice services. Video revenue declined 2.4 million, or 14.4%, year over year. Our transition to over-the-top video services has enabled us to cap linear video deployments and improved margins for free cash flow. Commercial revenue totaled $105.8 million, down $358,000, or 0.3%. Data and transport totaled $57.9 million in the recent quarter, up 1.4% year-over-year, primarily driven by growth in dedicated Internet services. Q1 was a strong quarter for business systems equipment and custom job installations, driving up revenue $1.5 million year-over-year. Momentum is strong in this area, and our teams are having their best equipment sales quarter since 2019. Offsetting this growth is continued voice erosion, which is occurring at a slightly higher rate in Q1. Access line erosion, combined with lower slick and long-distance usage charges, drove the decline. Carrier data and transport revenue was $33.5 million, up roughly $200,000 year over year, benefiting from our carrier team's ability to win additional new business and the timing and the pricing reductions from the tower contract renewals. Our Q1 carrier revenue was solid, and as a reminder, we still estimate revenue pressure in the tower contract negotiations to be in the range of $10 to $12 million in 2022, establishing a new rent rate for carrier fiber to the tower revenues. Network access revenues totaled $26.2 million, down $5.4 million year over year. Over half the decline was driven by lower universal service fund revenue with the balance coming from special and switched access declines. As a reminder, the FUSI charge is a pass-through, so it should be even or neutral. In other revenue, we continue to add incremental rural fiber locations through our public-private partnerships, allowing us to deliver enhanced and increased broadband services to rural markets where we have little to no competition. In the current quarter, we completed builds in five communities encompassing approximately 5,000 passings, and we recognize $4.5 million in non-recurring revenue. This compares to $6.5 million in one-time revenue related to community builds in Q1 of 21. Operating expenses excluding a loss and impairment of assets held for sale were $209.2 million, an improvement of $1.6 million, or 0.8% from a year ago. The primary drivers were lower expenses associated with public-private partnerships and reduced direct product-related costs offset slightly by increased marketing and branding expense. Net interest expense for the first quarter was $29.5 million, a decrease of $18.9 million compared to a year ago. This is a result that 2021, including non-cash interest, of $10.2 billion on the Searchlight note, which was converted to perpetual preferred stock last December. The remaining reduction in interest expense was primarily a result of favorable repricing of the company's term loan in April 2021. Additionally, as you can see from the capital structure on slide 14, we have no debt maturities until 2027. Our net debt leverage ratio was 4.04 times at March 31st, up from 3.78 at year end 21. at the end of the first quarter we have approximately 410 million in liquidity which provides us with ample flexibility to execute our build plan and return to growth cash distributions from the company's wireless partnerships were 8.2 million in the first quarter compared to 9.6 million a year ago as a reminder we own five verizon wireless limited partnerships with interest ranging from 2% to 24%, providing consistent and stable cash flow. We anticipate these partnerships to generate between $39 and $41 million of free cash flow this year. Now, I'll recap our two investiture announcements from the first quarter. First, we closed the sale of our Ohio assets on January 31st, which generated $26 million in proceeds. This transaction did not materially impact our passings and was also not in the Fiverr expansion plan. Our Q1 metrics have been adjusted to exclude Ohio operations. Second, we announced an agreement to sell our Kansas City assets on March 3rd. This divestiture aligns with our ongoing market portfolio review as part of our capital allocation plan. We estimate net proceeds of approximately $90 million and expect to close in the second half of this year. following customary regulatory approvals. In the quarter, we recognize a non-cash goodwill impairment of $126.5 million related to the sale of our Kansas City assets now being treated as assets held for sale. Additionally, we continue to review markets in our portfolio for investment or monetization. We believe we have the opportunity to raise substantial funds and additional liquidity through additional asset investors. Our criteria in this review includes evaluating the fiber build opportunities, market-level competition, and potential valuations. Today, we are reaffirming our previously stated 2022 guidance, which is also outlined on slide 13. Adjusted EBITDA is expected to be in the range of $410 to $425 million. Capital expenditures are expected to be in the range of $475 to $495 million. Cash interest expense is expected to be in the range of $123 to $127 million. Cash income taxes are expected to be in a range of $2 to $4 million. And we do not expect to be a federal cash taxpayer until 2026. In summary, this will be a year of strategic investments and continued notable progress with our Fiber Build Plan. We will see inflection points as we facilitate a return to total company revenue growth and significant margin expansion. We anticipate we will achieve positive fiber net add on a total company basis in the third quarter. With that, I'll now turn the call back over to Bob.
Bob Udell
Thank you, Steve. Our execution on our fiber-first strategy is accelerating nicely. We continue to be focused on our four key strategic priorities outlined on slide 10, which include executing on our consumer fiber expansion plan, growing commercial and data transport revenue, enhancing the customer experience across all channels, and maintaining a disciplined capital allocation plan, which includes a strategic review of assets in our market portfolio. Our fiber transformation is in process, and you can see some of the milestones outlined on the timeline you'll find on slide 11, as well as anticipated milestones in the coming years. We are currently in the stage where we are scaling our customer acquisition engine as we work toward a return to revenue growth in 2023. As we look to the future, our path forward is all about executing on our fiber expansion plans and growing strategic revenue. We have a large opportunity and numerous competitive advantages as we execute on our fiber-first strategy and become the broadband leader in the markets we choose to serve. We are focused on growth and creating long-term value for our shareholders. Operator, we will now take questions at this time.
Operator
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. Your first question comes from the line of Gregory Williams with Cowen. Your line is open.
Gregory Williams
Great. Thanks, guys. This is James on for Greg. A couple questions. First on access to capital, by our model, we see cash getting pretty low. Around 2023, and I mean, you guys talked a lot today about continuing to review the asset portfolio. We also had the 13D from Searchlight saying they were interested in maybe increasing their stake. So if you could just add some color into how you're thinking about access to capital going forward and maintaining the self-funded build. And then the second question, just on margins, last quarter you mentioned the $15 million incremental marketing spend. Could you just help us out with the timing of that as you guys continue to ramp the city and brand, especially in these expansion markets here. If you could help us out with cadence, that'd be helpful. Thanks.
Bob Udell
Yes. Good morning, James, and thanks for the question. Let me start just with a few of the kind of subtends to your question, and then Steve will take the majority of it. First, on the 13D, we're not going to chat, obviously, about that. But with regards to assets, we've been working, as we've talked about in past quarters, on assessment of our markets, and that takes time. And as you can see by the announcements we've made, that has picked up some momentum. And so we've got a dedicated team looking at that. It's very contained work, and it's managed in conjunction with all of our other priorities so that we can maintain focus on executing our build plan and address interest in the properties that we decide to market. Steve?
Jennifer
Yeah. Hey, James. This is Steve. Thanks for the question. We're obviously spending a lot of time on balance sheet management, cash management, and we believe we still have a self-funding plan with the ability to, number one, just grow the business from an execution standpoint, increasing margins. In our models, with the investment we're making, the fiber penetration rates and growth in our commercial and carrier business, we expect to see mid-teens growth on EBITDA year over year. We also, as Bob mentioned, the asset sales, we are very focused on that right now and have a few in motion, although obviously nothing ready to report today. We're also, as I think he said in his prepared remarks, also looking at different avenues to draw subsidy funding, grant money type things to help offset some of our costs to build. So we feel like we're in a position to self-fund based on our execution. of the business. With respect to your marketing cost, you probably, we started the brand launch, or the brand actually launched in November of 21, so we're like 100 days into it now. You saw a little bit of branding increase in the Q1, and that will ramp, or we're kind of, as we launch the fitting brand in May of this year, or just later this month, You're going to see a little bit of incremental marketing brand expense related to that. And as we continue to build at pace on the fiber construction plan, we're going to add the salespeople to support that over time. So you'll see a general ramp over the last three quarters and that a little bit Q1, but mostly it's still to come.
James
Got it. Thanks, guys.
Operator
Again, if you would like to ask a question, press star followed by the number one on your telephone keypad. Your next question is from the line of Jason Kim with Goldman Sachs. Your line is open.
Jason Kim
Thank you. It's good to see the momentum on the fiber side. First question, on the ARPU, clearly fiber has higher ARPU than copper, but you're also adding subs that are at a promotional price as you launch new markets. So how should we think about fiber ARPU for the balance of the year?
Bob Udell
Good morning, Jason. What you'll see is right now we're early into some markets, and we're working through a promotional rate of $70. That gives us some upside room. And remember, we're in suburban and mostly rural markets, and we've got a good amount of headroom when you look at the competitive dynamic and the strength of the cable plant versus where we are rolling out a symmetrical, fully fiber product. So we've got pricing headroom. ARPU, with the promotional rate, will take a little bit of a dip, which you saw, I think, quarter over quarter. But compared to most of the industry peers, I think we're still going to maintain a higher ARPU and be able to build from there.
Jason Kim
Great. And then are you seeing any impact from fixed-wireless? particularly in your DSL subscriber base?
Bob Udell
We're really not. When you look at our topography, fixed wireless is really a niche play. As we look through the economics, fixed wireless bridges the time between DSL's bandwidth and demand growth to a period of time where you can afford to get fiber there. And as we've looked at those economics, fiber makes sense for us. And it's fairly costly to put fixed wireless antennas out sufficient in like northern New England to cover our geography, except for in the very, very low density areas. And so we really don't see it as a huge threat and haven't seen it as a real impact on DSL-based.
Jason Kim
Understood. And then with respect to the EBITDA growth, Steve, I think you mentioned teens growth. Can you clarify what that meant if you're referring to absolute dollar growth or percentage growth, and if so, over what timeframe? And then in the press release and during the prepared remarks, you talked about building momentum towards revenue growth in 2023. Will EBITDA also grow next year, and can we expect margins to improve as well?
Jennifer
Jason, thank you. Thank you. And I'll try to try to get all those pieces for you. So, yeah, we do see EBITDA growth and what I refer to in the mid-teen growth is kind of the, you know, 10 or 15 percent over the base. We obviously had a major reset this year with the CAF 2 funding transition, as well as our incremental investment in the sales marketing expense and the power write down. You know, we talked about on the last call. So from this base, we do expect to start growing EBITDA, you know, 10 to 15% year over year. And as we've talked and we've shared on this call in the past, you know, EBITDA margins were probably down almost 40% Q4 to about 35, you know, 36% for Q1. We, over time, over the five-year period as we hit, you know, penetration rates, as we see the fiber operational cost efficiencies, et cetera, et cetera, we do expect to see margins approaching on even a margin basis, high 40s, 50% margin over the five-year build period. So it'll be an incremental transition as we build and take market share.
Jason Kim
Understood. Thank you very much.
Operator
There are no further questions at this time. I would like to turn the call back over to Mr. Bob Udell. Thank you.
Bob Udell
And thank you all for joining the call today. We appreciate your support and interest in our transition plan and really appreciate you tuning in and look forward to updating you on our next call. Have a great day.
Operator
Ladies and gentlemen, this concludes today's conference call. You may now disconnect.
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