Shenandoah Telecommunications Co

Approximately 9,200 new residential and small business passings were released to sales in the quarter, with a total of 20,600 addresses constructed year-to-date and 22,300 overall at the end of September. We expect to have approximately 27,300 total new target passings released to sales by the end of the year. The third quarter was a productive one for our new market development team as well. We added new Glow Fiber franchises in the cities of Frederick, Maryland, Charlestown, and Ranson, West Virginia, which added over 15,000 new target passings. Then in October, we successfully added three additional markets, including Martinsburg, West Virginia, Lancaster Township, Pennsylvania, and Blacksburg, Virginia, adding approximately 13,500 additional target passings. In total, Globe Fiber has approved franchise target passings of approximately 117,000, with a strong funnel of additional markets in our edge-out strategy heading into the fourth quarter. On slide 18, we have depicted our fiber, cable, and fixed wireless broadband footprint. This map really helps illustrate the integrated nature of our broadband networks and how operating leverage will increase over time given the overlap and adjacency of our operations and our growing footprint. As Chris mentioned at the start of the call, we're very excited to have launched Beam Internet, which is our new fixed wireless broadband service in early October. BEAM will leverage our newly acquired spectrum and target approximately 425,000 uncabled households with speeds of up to 100 megabits per second. We'll have roughly 25 macro sites on air by the end of this year as we continue to bring critical high-speed Internet access to the underserved in our region. We will continue to update you on the status of both our Glowfiber and BEAM Internet expansion plans as we progress in our market development and construction efforts toward the launch of commercial services over the next several quarters. Combined, our multi-pronged broadband growth strategy will more than triple Holmes' path to over 700,000 in the next five years. As summarized on slide 19, we now have product offerings to serve a variety of market dynamics, with our glow fiber service targeting higher-density urban markets and beam fixed wireless service targeting lower-density rural areas. The common denominator in all of our offerings, is to provide the leading high-speed Internet service available in each market combined with superior local customer service. With projected terminal penetration rates of beam and glow in the low to mid-30% range and incumbent cable penetration in the mid-50% range, we expect our broadband business to have industry-leading sustainable growth for the next several years. Turning to slide 20, Total towers and small cells increased to 230 in the quarter, with total tenants increasing 8.9% year-over-year to 414. We had a backlog of 119 open orders related to upgrades of existing tenants or the addition of new tenants at the end of September 2020. And finally, on slide 21, we provide an update to our 2020 capital spending results and guidance for our continuing operations. We're no longer providing wireless guidance as a result of the pending sale and discontinued operations presentation. Capital expenditures were $82.7 million through the third quarter of 2020, compared to $48.8 million at the end of the third quarter in 2019. The primary driver of the year-over-year increase relates to the investments in our Glow Fiber and Beam Internet fixed wireless broadband initiatives. For the full year 2020, our revised guidance is now $104 to $116 million, as we capitalize on our strong liquidity and cash flow generation to invest aggressively in the expansion of our fiber, cable, and fixed wireless broadband networks. Thank you very much, and operator, we're now ready to take questions.

As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Rick Prentice with Raymond James.

Thanks. Good morning, guys. Glad to hear you're doing okay during these crazy times. Morning, Rick.

Morning, Rick.

A couple questions. First on the wireless process. So have all three of the appraisers been selected to get started on their work?

Rick, that's going to happen here before the month is out.

Okay. And with the framework in place, what's the expectation on how they'll be able to do that work? Is it discounted cash flow comps? What is the expectation of how they'll perform that appraisal process?

Likely, it's a combination of factors, Rick. DCF would be among them, precedent transactions, comps, etc. But we don't want to comment too much on how or opine too much on how we think they ought to conduct the process, obviously, because we don't want to taint the process. But likely, it's a combination of factors.

And how would the expansion territories be addressed in that? I know it's assuming that the T-Mobile Sprint deal had not happened, so... Is there a thought that the expansion territories have to be addressed in that valuation?

Yeah, that's right. Jim, do you want to take that one?

Yeah. Rick, so we expect the appraisers will want to look at our 10-year plan and the growth that we're expecting from expansion markets, which, as you know, are a big part of our growth strategy going forward. So they will be factored in from a DCF perspective in that respect. And there's also a mechanism within the affiliate agreement and the framework that if for some reason the appraised value for the expansion markets was the multiple for the expansion market on the EBITDA is less than book value, they would bump the value for the expansion markets up to the net book value as of the valuation date. So there is a kind of a the mechanism was intended to make sure that we don't lose our investments that we've been making since we acquired those markets.

Right. Makes sense. And Chris, you had mentioned, you know, you look at the proceeds, obviously you have to repay the term loan and then income taxes. Any indication of what kind of taxes might be born or what the, what the basis is on the wireless business?

Well, Not that we've publicly said yet. I don't know, Jim, if you want to add any other color, but we have not disclosed the cost basis on those assets.

Yeah, Rick, as Chris said, we have not disclosed the basis, but we will, once the value is determined, it looks like it's going to be the second half of January, we will disclose not only the value, but what we think the after-tax proceeds would be and what the tax impact will be.

Makes sense. Okay. I think, Chris, you also mentioned guidance and financing and corporate costs. Obviously, that would be one of the areas that you have to look at. What's the thought as far as timeframes as far as looking at the corporate costs? How do you right-size the organization? How should we think about that timing and rough magnitude of what that dollar level might be?

Yeah, we're... obviously looking at that now. And timeframe will be about the same as once we get clarity on the proceeds from the sale and the tax effect and all that so should be the first or second quarter of next year.

Okay. And then, as we think about the tower business, how critical is that to keep with the broadband business? We've seen some transactions, even just this week, American Tower paid 30.4 times tower cash flow for a private tower company. So how should we think about the tower business? Is it something you want to keep, you need to keep, or is it something that might get monetized as well?

Rick, I would say we'll take it one step at a time here. Wireless is in the batter's box right now, and then we'll determine what to do with towers down the road. I don't think it's strategic to us, as I think we've said in the past, but the towers can be a valuable source of funding if we're doing an acquisition and we wanted to monetize them to help us fund an acquisition. So we're kind of thinking about it in those lines.

And last one, just to pick up on that comment, are there any transactions out there that in the telco market cable, broadband space. How is that market looking in pipeline for potential acquisitions?

Yeah, Rick, we continue to look for opportunities, both kind of the small tuck-in opportunities like Big Sandy that we completed last year, and there's a couple of those that we're competing on as we speak today. And we're also looking at more transformative opportunities as well. You know, they don't come along as frequently, but we're poised to be opportunistic as they do.

Great. Thanks, guys. Appreciate it. Have a good day. Stay well.

Thanks, Rick.

Thank you.

Your next question comes from the line of Zach Silver with B Reilly.

Okay, great. Thanks for the question. The first one, just following up on some of Rick's questions around the appraisal process. I mean, Telesteel, I think, spread agreed to waive around $250 million of cash payments for management fees. Is that something that is factored into the appraisal framework?

Zach, it actually won't be a part of the appraisal framework as much as it will be as like a working capital purpose price adjustment once the value is determined. So it will be added to the ultimate value, but it will be done kind of after the fact, not as part of the appraisal process.

Okay, that makes sense. And then you flagged that the term loans require repayment upon closing of the wireless sale. When you think about, you know, how the new Chantel looks, how are you thinking about capitalizing that business from a leverage perspective?

Zach, we're stoked. putting pen to paper on that. But I would say in general, you probably can expect leverage similar to the leverage that we have today, you know, in the same range that we have today. You know, we will be growing the business, the broadband business aggressively, as Dave and Chris have outlined on the call. So we will put something in place that will allow us to make sure we have adequate funds to keep funding that business and keep growing the business.

Got it. And then at a more high level, it seems like that alongside COVID accelerating demand for high speed broadband and the relative attractiveness of this business, there's been a lot of investment from incumbent players and also new entrants. And you guys sort of have a hybrid approach there. How do you see the competitive environment evolving in your markets and what gives you the confidence that you can compete with some of the larger incumbents or you know, others pursuing fixed wireless technology in those markets.

Hey, good morning, Zach. Yeah. Look, we, we have a, uh, I think a track record over the, over the course of the last year that, uh, that hopefully is, gives you confidence in our ability to do that, uh, with the investments we've made and, and the results we're, we're achieving. Um, we, we're a well-known, uh, a company in our region and, um, the urban markets get rural quickly here in this part of the country. And so I think having a multi-pronged broadband strategy here, leveraging three distinct technologies, is the absolute best way to go. We have been, as I think you would observe, we've been aggressive in acquiring protected spectrum assets in our region. and you'll probably notice the overlap of the 3.5 we acquired with our incumbent cable markets as well. So we have both an offensive and defensive strategy with our three-pronged strategy here, and I'm quite confident in our ability to take market share and defend our existing market share in the near future.

Got it. And then last one for me. The incumbent, the broadband penetration for the incumbent cable business, I mean, I think expanded at one of the better rates that we've seen this quarter. Can you talk about where the new subs are coming from? Is it folks upgrading from DSL? Is it broadband nevers? And just what were those new additions coming from?

Yeah, I think it's both of those categories, in addition to folks that perhaps were leveraging their cellular data plan and trying to tether off of that. Obviously, we're capitalizing on the tailwinds of the pandemic and work and study from home. But our investments in both our network and our new rate card and our operations all came at an outstanding time, quite frankly. So I think I think we're executing better. I think we've got a better price-value equation now than we did before. I think you see that as evidenced in 14 consecutive quarters, a term reduction. Our NPS scores are through the roof, and not so long ago they were pretty poor. So I think if you consider the operational momentum that we have, in addition to the tailwind of the demand factors of COVID, I think they've all come together quite nicely here to produce those results. But, you know, in terms of where the share is coming from, it's stealing it from our DSL competitors. It's taking it from folks that were tethering to cellular plans. may have been using satellite previously. And last but not least, to your point, there's probably some broadband netters that have added service. We didn't make a comment about this in the script, Zach, but the other aspect of the growth is we added 700 net prepaid subs in the quarter. That's part of that overall number. And that's to deal with our more credit-challenged subscriber base. And we added a rate plan in the midst of COVID that we've allowed to persist here through the year. And we're in the midst of revamping our overall prepaid strategy and expect to see good growth through those investments as well.

Got it. That's helpful. Thanks, guys.

Once again, if you have a question, please press star followed by the number one on your telephone keypad. Your next question comes from the line of Hamed Korsan with BWS Financial.

Hey, good morning. Just building on that competition theme, have you guys done any analysis on what are your expectations as far as the cost of acquisition beyond just the cost per passing?

Yeah, of course. Good morning, Hamed. For which category are you questioning? All three?

Really just the glow fiber and the beam.

Yeah, so the cost to connect the glow fiber customer is in the $800 to $900 range, Hamed, all in. And on beam, it's roughly half of that.

What's usually the enticement to get customers to switch over? Is it just that you're faster?

We're faster. We've got a much more straightforward go-to-market strategy with respect to our value proposition. We've got three speed choices. We're not playing games or gimmicks on introductory prices that raise after expiration rates. People recognize that this offering is coming from a regional company, and generally around here folks like to spend their dollars with companies that reinvest in their communities. And candidly, there's just Comcast fatigue. Folks are very pleased to have a choice. All of these markets are non-Fios Verizon markets, thus far that we've launched in. And so their option is really if they want a robust high-speed broadband product, it's either us or Comcast.

Okay. And having multiple options, what are the chances here of just expanding your coverage region beyond what we're used to?

Well, I think with our GLOW strategy, definitely. We've clearly demonstrated a track record here of adding new markets every quarter, and we'll continue to do that. And if you take a look at the map and you just look at where we started and where we are now, you're seeing us edge out further and further beyond home base, so to speak. So I think there's a strong likelihood that when you look at the combination of the spectrum footprint, on that map in the presentation, and you look at the markets that we've added for GLOW, I think you can expect for us to continue to grow the footprint. Having said that, we're very conscious of, you know, taking advantage of operating leverage and operating synergies, and we don't want to pick up and plunk down five states away where the green field is built. That probably... would not be something you should expect us to do. But edging out from kind of the home base and the center of our universe is something we're very focused on.

Okay. Thank you.

Your next question comes from the line of Kent Newcomb with Wells Fargo.

Good morning. Can you hear me okay?

We can.

Yes. Yeah, good morning, Kent.

Good morning. My question is on the dividend. You recently raised it quite a bit. I guess I'm under the assumption that you expect to maintain that dividend after the sale of wireless. I guess the question would be are the cash flows sufficient to do that and continue your investment build out or perhaps you're obviously going to use proceeds from the sale to to invest as well?

Yeah, Kent, we have a long history of having an annual dividend. We will probably right-size that according to the broadband and tower businesses that we own, that we'll own at this time next year. So it will likely adjust according to the cash flows and the earnings coming from those businesses. But yes, we think we're in a strong, you know, liquidity and, you know, cash generation prospect here that we can do both. We can return value to the shareholders and we can continue to invest in our new, you know, uh, glow fiber and bean products.

Thank you.

You have a followup question from the line of Rick Prentice with Raymond James.

Thanks guys. Um, I find slide 19 really interesting. I think it lays it out quite well. Um, A couple of questions related there. What kind of speeds will you be offering the Beam customers?

Hey, Rick. Our initial rate plan is entry at 25 megabits download and then up to 100 megabits download, depending on where you are with respect to the tower and what our signal propagation characteristics look like. Over time, we expect to offer higher speeds when, you know, CPE advancements continue to develop here. But out of the gates, we're offering three tiers, 25, 50, and 100.

Okay, great. And then as you think about what markets get glow fiber versus what get beam, is there a break point where fiber density as far as population changes? per square mile, so there's no time to go beam versus fiber, and what would that break point basically be?

Yeah, look, there's a combination of factors here that we evaluate. Certainly density and, you know, whether it's route mile or square mile density is one of them. Another factor we look at is just what the competitive landscape looks like. So, for instance, We are not targeting cable areas, in other words, folks that have a choice from a Comcast or a Cox or someone with our fixed wireless strategy. We're targeting areas that only would have maybe DSL or satellite or a local unlicensed spectrum wireless ISP as their most viable broadband choice. Okay. It's a function of density, it's a function of competition, and it's also a function of other socioeconomic factors and poverty rates and all kinds of other factors as we look at the level of investment. As you can appreciate in that slide, it's a much greater upfront investment deploying fiber than it is deploying beam, which is a much more capital-efficient technology. So we want to have a little greater certainty on the glow fiber side of achieving our penetration rate objectives as a result.

Right, because I think the addressable market you've laid out is that there's a much larger addressable market for the beam side than the glow side, at least right now.

Yeah, that's right. And the other factor, Rick, that we consider candidly is in these franchise permits we're getting, those are for our ability to offer video service. Obviously, there's going to be a point in time in the not-too-distant future. We're not entirely certain when that is. You're probably not either. But we all have a pretty good inclination that we're heading to a streaming-only universe. But to date, We have not wanted to put ourselves in a position where we didn't have a viable video product in the bundle, particularly when competing with Comcast. But I imagine there will be a point in time at which data only would be a viable strategy and that we could achieve the kinds of penetration rates and churn rates and broadband data ARPUs that would support the kind of IRRs we expect to get with a three-product bundle strategy. And to that extent, it would enable us to get out of some of these more urban centers and into suburban areas that might be out in the county, which to date we've been reluctant to do because that would obligate us to a build strategy for the video franchise for the whole county, which we obviously don't want to obligate ourselves to doing given the density characteristics. So I think you can expect this to change over time as the market evolves.

And obviously T-Mobile has launched the T-Vision product, which is content-related for streaming, but also to kind of be a pull for fixed wireless broadband. Do you see entering kind of that content side of the business or offering content bundles to try and push the penetration rates, or you don't even need it given the competition level that you're going against?

For the fixed wireless strategy, we don't have any plans right now to offer a bundled video offering of any kind. That could change over time, but we don't have any plans at present.

Okay. Thanks, guys.

It appears that there are no additional questions. I would now like to turn the conference back to Jim Volk for closing remarks.

I would like to thank everyone for joining our call this morning, and we will keep you posted as we make progress, you know, both on the wireless side with the appraisal process and, of course, with our broadband and tower businesses. Thank you for joining the call today. Have a good day.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation. You may now disconnect.