Consolidated Communications Holdings, Inc.

Ladies and gentlemen, good morning. My name is Abby and I will be your conference operator today. At this time, I would like to welcome everyone to the Consolidated Communications Fourth Quarter Earnings Conference Call. Please be advised that today's conference is being recorded and 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 the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star 1 again. Thank you. And I will now turn the call over to Philip Krantz, Senior Director of Investor Relations. Philip, you may begin your conference.

Good morning, and thank you for joining Consolidated Communications' fourth quarter 2022 earnings call. Our earnings release, financial statements, and presentation are posted on the Investor Relations section of our website at ir.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. In addition, during this call, we will refer to certain non-GAAP financial measures. which are defined and reconciled in our earnings presentation and press release. With me today are Bob Udell, President and Chief Executive Officer, and Fred Grafham, our Chief Financial Officer. Following their prepared remarks, we will open the call up for questions. I will now turn the call over to Bob Udell.

Thank you, Philip, and good morning, everyone. Before I provide an update on the fourth quarter, I'll start on slide four and discuss our journey from a copper-based telecom to a leading fiber broadband provider. In early 2021, after solidifying our capital structure, we started the most aggressive fiber expansion plan in our company's 128-year history. Over the last two years, we've made remarkable progress on this growth plan. Our mission is to turn technology into solutions, connecting people, and enriching how they work and live. Our service commitment has never been stronger as we deliver world-class fiber broadband to the communities that need it the most, unserved and underserved alike. Our commitment is born out of a belief that access to education, healthcare, employment, entertainment, and the larger world is what creates vibrant communities and a better quality of life. During 2022, we achieved several key milestones that demonstrate progress on our ongoing transformation and puts us on a path to return to revenue growth. Our total consumer broadband connections grew in 2022, fueled by the addition of more than 40,000 fiber subscribers during the year. The increase in fiber net adds of more than 2.5 times drove our 2021 cohort penetration rate of just over 15%, which exceeded our one-year target. On the heels of another strong build year in 2022, we surpassed 1 million total gigabit fiber allocations at year end and now have extended fiber to nearly 40% of our addressable market. This is nearly a four times increase from the start of our plan in 2021, an important inflection point. Also, we've bolstered our liquidity and aligned our business with over $600 million of aggregate divestitures during the year. We'll prudently redeploy these funds to support our continued fiber expansion plan. Longer term, we're looking to 2024 for another inflection point with year-over-year revenue and EBITDA growth. Specifically, we are targeting our compound annual growth rate in the mid-teens for EBITDA beginning in 2024 and meaningful margin expansion as our fiber business becomes the majority of our overall broadband revenue. To this end, we believe our EBITDA margins have upsized to the mid to high 40% levels over the long term. We are committed to our plan of reaching over 70% fiber coverage across our markets. Through continued execution of our transformation, I am confident that we will generate significant shareholder value as we increase penetration in our fiber markets and grow fiber broadband revenue within consumer and commercial data transport. I am incredibly excited to enter 2023 with a newly aligned leadership team that supports our evolving company and growth strategy. This includes the addition of three highly talented industry executives who collectively have decades of telecom experience at major service providers, as well as substantial experience driving fiber penetration and a demonstrated track record of delivering growth. To drive our customer acquisition strategy across our consumer broadband business, we most recently brought on Gaurav Junija as President of Consumer. Gaurav brings a proven track record in the telecom industry with experience and success gaining significant market penetration and growing consumer fiber revenue, and I'm really excited to have him on our team. Gaurav most recently led Metronet's go-to-market strategy and his work scaling new fiber services and establishing the infrastructure to accelerate performance will be pillars of his work with us growing Fidium and driving penetration across our expanded fiber base. In early January, Dan Stoll joined the company as president of our commercial carrier business. He will oversee our commercial and carrier go-to-market strategy, and is eager to help us capitalize on our broadband fiber investments and continue to grow commercial and carrier data services. Dan has more than 20 years of experience in the telecommunications and fiber network infrastructure industry. Most recently, he served in key senior leadership roles at Zayo. In December, Fred Grafham joined us as Chief Financial Officer. His experience spans 30 years and includes financial management, operational leadership, and expertise within the technology and telecom industries at both public and private companies, including Level 3 and Comcast. He's already had an influence on our planning process, our priorities, and his passion around unit economics is contagious. He looks forward to meeting with the members of this investment community throughout the year. We have also realigned various leadership functions. John Runny, who previously served as our CIO, became our chief technology officer. He will lead the combined areas of network planning, business intelligence, and IT, and will leverage his past experience leading these areas. Gabe Wagner continues as our executive vice president of operations and now has responsibilities for all aspects of our fiber deployments, allowing for all areas associated with fiber construction to be integrated into one team. Collectively, this new team streamlines functions providing added efficiencies with a focus on increasing market penetration through the ramp of additional sales channels. I am more confident and energized than ever before in our ability to carry out and achieve our growth plans. We remain extremely bullish on fiber and will leverage our fiber investments to grow across all areas of our business. Fiber is a superior product offering symmetrical speed not available from cable or fixed wireless. Fiber provides decades of runway to meet customers' evolving broadband needs as demand for data continues to rise. Put quite simply, fiber is best suited to serve our communities today and for years to come. Importantly and central to our investment thesis is that we enjoy several distinct structural advantages as we continue on our transformation. This includes our incumbent position. We know our fiber expansion markets very well given our long operating history and our historical deployment of fiber hubs deep into these communities. We have a fiber-rich carrier class network that we can cost-effectively extend, including existing conduit capacity for buried facilities and pole access where we have aerial plants. These network advantages provide us with favorable unit costs and with significant return economics as we execute on our plant. Now, let's turn to slide 10, where I'll update you on our fiber build plan. In the fourth quarter, we upgraded 60,700 locations and completed more than 400,000 upgrades in 2022. Our total fiber passings now extend to just over 1 million locations. We're 38% of our overall service area, up from 10% in 2020. By reaching this critical milestone, we've seen an inflection point in consumer broadband, such that we are now generating positive broadband ads on the strength of our fiber business. This also was a catalyst for achieving consumer broadband revenue growth in both Q4 and for all of 2022. Looking forward to the next few years, we plan to build fiber to more than 70% of our passings by mid-2026. While this is roughly two quarters later than we previously predicted, it's consistent with our plan to maximize public-private partnerships as we execute on our builds. Once complete, this will mark a seven-times increase in fiber passings from 2020. As a result, for 2023, we are targeting at minimum 225,000 new fiber locations. I'll note our 2023 build target is a moderated level versus the prior two years as we focus on driving penetration within our existing base of fiber passing, and we benefit from broadband revenue growth as a result of reaching the previously mentioned critical fiber coverage level of nearly 40%. and also actively pursue any grant or infrastructure funding opportunities that align with our build plan so that we can maximize the economies of our builds for complete areas. The governmental funding opportunities, which we will continue to sync with our build plan, help to offset rural high-cost passings and extend our reach to entire communities, allowing a return consistent with our model. As we've noted in the past, this is an important aspect of our expansion strategy. In fact, in 2019, we've been awarded approximately $150 million of broadband partnership and grant funding to support projects across just a few of our states. I am happy to report a recent award from the New Hampshire Office of Broadband Initiatives of roughly $40 million to support our build of approximately 25,000 locations across rural New Hampshire. When combined with our own investment of capital, the entire project will provide reliable fiber internet services to more than 57,000 homes across the state. Another recent award includes $16.7 million as part of the State of Maine Connected Ready grants that will support our fiber bill at more than 18,000 locations within our footprint. These awards reflect the recognition of Consolidated as a quality partner through its incumbent advantages with a stellar track record of building fiber. We are really excited to bring FidiumFibre's super-fast symmetrical internet service to additional communities in both Maine and New Hampshire, and this is just the beginning. We are tracking roughly 100 million additional broadband government partnership opportunities across our markets and feel well-positioned to provide partnering communities the best fiber broadband service at the best value. We are confident in our plan and bullish on fiber, which is our future. We are proceeding with a prudent build pace in 2023, and we have proven that we can ramp and build quickly as circumstances warrant. Over the last two years, we have averaged just over 90,000 upgrades per quarter, and we remain ready to quickly ramp fiber expansion as planned at all. Our cumulative 2021 cohort fiber penetration at the 12-month mark is 15.1%, which is above our target of 14%. We've achieved this largely through penetration of the single-family home or SFU channel and passings that are ready for sale. We have a comprehensive strategy to increase penetration across all cohorts. First, we've doubled our door-to-door sales team headcount since the end of the year. Second, we introduced the Fidium Fiber brand in November of 2021. Based on this timing, several of our communities where we constructed fiber prior to that date didn't have a chance to experience the game-changing customer experience that we are offering with Fidium. We're doubling back or rerouting these areas, highlighting the FIDIUM value proposition, driving additional penetration. Third, we've expanded our alternative channels recently, adding several new consumer sales partners to augment digital door-to-door and call center sales efforts across select markets. And fourth, we recently launched FIDIUM at Work, a simple, highly competitive fiber broadband service with the AppTune at Work Wi-Fi app to support small businesses. Vidium at Work leverages a digital online sales channel to offer plans including two gigs over a 10-gig capable network targeting the small business or home office customer at a highly competitive price. Now, let's turn to slide 13, where I will cover the momentum we're experiencing in the consumer fiber business, which is contributing to overall consumer broadband growth. This is a key catalyst for us as we progress towards year-over-year growth in revenue and EBITDA in 2024. 10,600 FIDIUM fiber subscribers, an increase of more than two times the prior year. Fiber broadband revenue normalized for Kansas was $23.7 million, up 51% year-over-year, and 12% increase from the third quarter. The positive traction we are generating in fiber contributed to overall consumer broadband revenue growth of 5% in the fourth quarter and 3% for the full year of 2022. Fiber subscriber trends remain consistent, with over 70% choosing a 1-gig service, while the vast majority are new subscribers. Our shift to fiber from copper is evident, as fiber now makes up a full third of our consumer broadband connections, which is up from 22% a year ago. Looking at ARPU, fiber ARPU exceeds copper by over $13, or 25%. This is a healthy spread, and it provides us with ample upside to continue to drive meaningful revenue and EBITDA as our mix shifts to fiber. In the fourth quarter, consumer fiber broadband ARPU was up 4.5% year-over-year, driven by the increase in speed mix. Now, I'd like to turn to slide 14, where I will outline the tremendous opportunity that lies ahead for us within consumer broadband as we provide our communities with a superior fiber broadband product and continue our positive momentum. We completed 2022 with roughly 123,000 consumer fiber broadband customers or penetration of 12% on our fiber passings of 1 million. As we look to 2026, we believe we can grow our fiber customer base to over 500,000, the equivalent of 25% penetration on our targeted fiber passings of 2 million. Under this scenario, our fiber broadband revenue would approximate $450 million in 2026, up from $80 million in 2022, an increase of more than five times. Further, with fiber projected to represent over 80% of our consumer broadband revenues, we expect considerable margin expansion as we leverage our revenue growth with improved efficiencies that come from fiber. Let's turn to our commercial and carrier channels where we experience data transport growth in both the fourth quarter and the full year normalized for Kansas. An advantage in our commercial go-to-market strategy is our ability to differentiate with high-quality and scalable fiber-based network connectivity. This is supported by our cloud service toolkit, including UCaaS, ProConnect Voice, SD-WAN, and data security enabling solutions, which meet our customers' needs and help to reduce churn. In Carrier, we benefited from capacity upgrades in the fiber-to-the-tower business and a favorable delay in tower negotiations which has largely offset expected market rate adjustments during 2022. New fiber passing within our consumer routes provide opportunities for us to leverage the same fiber to grow both carrier and commercial data and transport services. We increased our lit buildings by 7% in the fourth quarter after normalizing for Kansas, which correlates to higher margins, increased opportunity to upsell, a greater ability to ensure the best customer experience, and more opportunities for Fidium at work. I will now turn the call over to Fred, who will provide more insight on our fourth quarter financial results. Fred?