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2/25/2021
Ladies and gentlemen, this is the operator. Today's conference is scheduled to begin momentarily. Until that time, your lines will again be placed on music hold. Thank you for your patience. Thank you. Thank you. Thank you. Thank you. Good morning, everyone. Welcome to the Shenandoah Telecommunications Fourth Quarter 2020 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Kirk Andrews, Director of Financial Planning and Analysis for Shentel.
Good morning, and thank you for joining us. The purpose of today's call is to review Shentel's results for the fourth quarter and full year 2020. Our results were announced in a press release distributed this morning, and the presentation we'll be reviewing is included on the investor page at our website, www.gentel.com. Please note that an audio replay of this call will be made available later today. The details are set forth in the press release announcing this call. With us on the call today are Chris French, President and Chief Executive Officer, Dave Heimbach, Executive Vice President and Chief Operating Officer, and Jim Bolt, Senior Vice President of Finance and TFO. After our prepared remarks, we will conduct a question and answer session. As always, let me refer you to slide two of the presentation, which contains our safe harbor disclaimer, and remind you that this conference call may include forward-looking statements subject to certain risks and uncertainties. These may cause our actual results to differ materially from the statements. Therefore, we have provided a detailed discussion of various risk factors in our SEC filings, which you are encouraged to review. You are cautioned not to place undue reliance on these forward-looking statements. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statements. And with that, I will now turn the call over to Chris. Go ahead, Chris.
Thanks, Kirk. We appreciate everyone joining us this morning, and I hope everyone is staying healthy and safe. As reflected on slide four, we had a record year of broadband results with about 18,800 high-speed data net additions, more than two and a half times higher than 2018 and 19. Our success was driven by excellent execution of our growth strategy that we accelerated over two years ago when Dave joined the company. We now have three last mile broadband networks tied together by over 6,700 route miles of fiber. Our largest and most developed network, the incumbent cable business, added over 14,600 net additions due to strong demand for faster data speeds at a fair value from our customers who are increasingly working and learning from home. Glow Fiber contributed 4,000 net additions in its first full year of operations, exceeding our expectations for construction pace, penetration rates, and churn. Glow has validated our investment thesis, and we plan to accelerate the pace of expansion. Our Beam fixed wireless broadband service was launched in late October and contributed approximately 100 net additions. Dave will provide more detail on these outstanding results later on the call. Turning to slide five, 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. We now reach approximately 247,000 homes passed, an increase of over 38,000 from the end of 2019. We plan to accelerate our investments in both Glow and Beam and expect to reach approximately 730,000 homes passed over the next five years. 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 glow and beam terminal penetration rates 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. Moving to slide six, I'd like to transition now to provide a brief update on the pending sale and expected use of proceeds that we announced earlier in February. With the T-Mobile exercise of the purchase option of our PCS assets in operation and the termination of the sales price behind us, we're now focused on executing the asset purchase agreement in the first quarter and obtaining required regulatory approvals and closing the transaction in the second quarter. After the sale is completed, we of course will have to pay taxes and will need to pay off our existing credit agreements. Our board of directors will then meet to consider the special dividend and set the record and payable dates. The first full year of Glow Fiber's operations and the launch of Beam were significant accomplishments for 2020, as was the work leading up to the successful outcome to the appraisal process for the PCS sale. But I'm most proud of how our entire organization addressed the impact of the pandemic. They quickly took steps to protect our employees while continuing to provide service and support for our customers. The year was perhaps one of the most challenging in our company's history, but the team not only met the challenge but became stronger in the process. I'm very pleased with how our organization responded and how well Chantel is positioned for a very bright future. With that, I'll now turn the call over to Jim to review the details of our financial results.
Thank you, Chris, and good morning, everyone. Please refer to slide eight to discuss our financial results for the fourth quarter. Broadband revenue grew 7.8 percent to 53.7 million in the fourth quarter of 2020, driven by an increase of 4.3 million, or 11.6 percent, growth in residential and SMB revenue, due primarily from a 22.3 percent increase in broadband data RGUs. Commercial fiber revenue grew 700,000, or 8.7%, to $8.7 million, driven by higher enterprise and backhaul connections. Arlec and other revenue declined $1.1 million, or 20.5%, to $4.2 million, primarily from lower DSL subscribers and intercompany phone service. Broadband adjusted OIVDA for the fourth quarter grew 700,000, or 3.5%, $21.4 million from the same period a year ago. The revenue increase of $3.9 million was partially offset by higher maintenance costs of $1.2 million and compensation expense of $1.8 million due to a combination of Glow Fiber and Beam Startup staffing, higher incentive expense from strong operating results, and enhanced benefit plans. On slide 9, Tower segment revenue grew 20.4% to $4.6 million, and adjusted OIVDA grew 18.9% to $2.9 million for the fourth quarter 2020 due to 5.5% growth in tenants and 16.2% increase in the average lease rate due to amendments to the intercompany leases. Moving to slide 10. Consolidated revenue grew 8.5% to $58.1 million in the fourth quarter of 2020. Consolidated adjusted OIPDA for the quarter grew 20.4% to $15.7 million. The increase was due primarily to strong growth in towers and a $1.5 million reduction in corporate expenses. Turning now to the full year 2020 results on slide 11, Broadband revenue grew year-over-year 5.4% to $204.3 million in 2020, driven by an increase of $12.7 million, or 8.9%, in residential and SMB revenue, due primarily from the 22.3% increase in broadband data RGUs. Commercial fiber revenue grew $2.3 million, or 7.7%, to $32.8 million, driven by higher enterprise and backhaul connections. ARLEC and other revenue declined $4.7 million, or 22%, to $16.6 million, primarily from the lower DSL subscribers, government support, and intercompany phone service. 2020 broadband adjusted OIVDA grew $400,000 to $81.5 million from 2019, as revenue growth was largely offset by higher compensation software fees, and professional service expenses. Compensation expenses increases were primarily due to new hiring for the launch of Beam and increasing the support staff of Glow Fiber in the four new markets that we launched in 2020, in addition to COVID-19 supplemental pay for customer-facing employees during the second quarter. On slide 12, tower segment revenue grew 31.3% to $17.1 million, and adjusted EBITDA grew 29.7 percent to 10.7 million for 2020 in comparison to 2019 due to 5 percent growth in tenants and 23.4 percent increase in the average lease rate due to amendments to the intercompany leases. Moving to slide 13, consolidated revenue grew year-over-year of 6.7 percent to 220.8 million in 2020. Consolidated adjusted OIPA dot grew 15.8 percent to 57.2 million during the same time period. The increase was due primarily to strong growth in towers and a 5 million or 12.5 percent reduction in corporate expenses. We are also reaffirming our 2021 outlook that we disclosed earlier this month. We expect consolidated revenues to be 241 to 248 million and adjusted OIVDA to range between $69 and $76 million. Moving to slide 14, we ended the fourth quarter with $698 million of debt with an effective interest rate of 2.3 percent and $270 million in total liquidity, including $195 million of cash equivalents. Continuing operations had $67 million of negative free cash flow in 2020 driven primarily by $59 million of CapEx and $5 million of negative contribution to adjusted OIVDA for Glow Fiber and Bean. Our discontinued wireless operations generated strong free cash flow of $232 million in 2020. And now I'll turn the call over to Dave.
Thanks, Jim, and good morning, everyone. I'll begin on slide 16 with our incumbent cable business in which total RGUs grew a robust 7.9% year-over-year in the fourth quarter to approximately 182,300 compared to approximately 168,900 in the same period in the prior year. We added roughly 2,100 net broadband data RGUs in the quarter and ended the year with 98,500 data RGUs, which is an exceptional 17.4% increase to the prior year period. We're also very pleased to report that our incumbent cable broadband data penetration rate increased from 40.6% in the fourth quarter last year to 47.2% this quarter on the continued strength of our new broadband data speeds, our new rate card, service improvements, and increased demand related to the pandemic. Income and cable broadband data churn in the fourth quarter continued to improve, declining 10 basis points versus the prior year quarter to an impressive 1.54%, representing the 15th consecutive quarter of year-over-year churn improvement. Broadband data average revenue per user in the quarter increased slightly versus the prior year period to $78.14 as our new Powerhouse-branded rate card leveraging an improved value proposition based on our DOCSIS 3.1 speed upgrades, now comprises 74% of the base. At the end of the fourth quarter 2019, 35% of incumbent cable data customers were on rate plans of 10 megabits per second or less, whereas now 79% are on plans of 25 megabits per second or higher. with an average subscribed download speed of 83 megabits per second, which is well beyond the reach of our DSL competitors. Turning to slide 17, as Chris mentioned at the start of the call, we had an outstanding first full year executing our new fiber-to-the-home edge-out strategy, Glow Fiber. Glow had approximately 5,800 total RGUs at the end of the fourth quarter, with a 14.5% aggregate broadband data penetration rate, across all markets comprised of just over 4,000 new Glow Fiber customer relationships. We continue to see extraordinarily low churn in our Glow Fiber high-speed data product, with less than 1% churn in the quarter at .88%. Broadband data ARPU was down sequentially to 77.25% in the quarter as a result of new activation revenue timing, but not due to discounting. In fact, we continue to see a higher percentage of new subscribers electing our higher priced Gigabit Speed Tier, with 44% of new subs in the quarter adopting this plan, comprising 40% of the overall Glow Fiber base. Our streaming TV and voice services continue to perform very well, with 28% and 15% attachment rates in the quarter, respectively. At the end of 2020, 67% of Glow Fiber customers were single-play broadband data only. 25% of subs were in a double-play, and 8% were in a triple-play. Slide 18 depicts the status of our active and approved Glow Fiber markets as of the end of the fourth quarter. Our first Glow Fiber market in Harrisonburg, Virginia, reached 18.6% broadband data penetration at the end of the year, with some of our most mature neighborhoods in that community approaching our target terminal penetration rate. Construction efforts are progressing very well and also exceeded our expectations in the fourth quarter and indeed all of 2020, in spite of concerns and delays related to COVID-19. Approximately 6,300 new residential and small business passings were constructed and released to sales in the quarter, with a total of 27,000 glow fiber addresses added in 2020 and just under 29,000 overall at the end of the year. We launched the Salem, Virginia market in January, and we expect to construct and release to sales approximately 45,000 new Glowfiber passings by the end of 2021, bringing total active passings to approximately 74,000. In total, Glowfiber has approved franchised targeted passings of approximately 117,000 with a strong funnel of additional markets in our edge-out strategy as we start 2021. On slide 19, 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. This quarter, we've updated the map to include launched beam fixed wireless markets. We constructed 25 beam macro sites in 2020, servicing nearly 9,500 target households and resulted in roughly 100 new beam subscribers at the end of 2020 in Albemarle, Augusta, Louisa, and Rockingham counties in Virginia. We plan to construct 70 new beam sites in 2021 and increase target households past to approximately 45,000. As Chris stated at the start of the call, combined, Our multi-pronged broadband growth strategy where molded triple homes passed to over 730,000 in the next five years. We'll continue to update you on the status of both our Glow Fiber and Beam Internet expansion plans as we continue to progress in our market development and construction efforts. Turning to slide 20, total tower tenants increased 5.7% year-over-year to 427. This includes 221 intercompany tenants primarily for our wireless business. We had a backlog of 151 open orders related to upgrades of existing tenants or the addition of new tenants at the end of 2020. Finally, slide 21 provides an update to our 2020 capital spending results and guidance for our continuing operations for 2021. We're no longer providing wireless guidance as a result of the pending sale and discontinued operations presentation. Capital expenditures were $120 million in 2020 compared to $67 million 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 2021, our guidance for the full year is $157 to $168 million as we continue to invest aggressively in the expansion of our fiber cable and fixed wireless networks. Of the $55 to $60 million of capital spent in our legacy broadband operations, approximately $24 million is success-based in support of the continued growth in our commercial and wholesale fiber business and the increase in broadband data penetration we expect to achieve in our incumbent cable markets. Of the $100 to $105 million in glow fiber and beam-related capital spent in 2021, approximately $74 million is related to design and construction of new fiber and fixed wireless target passings, and $13 million is related to connecting new fiber and fixed wireless subscribers. Thank you very much, and operator, we're now ready for questions.
At this time, if you would like to ask a question, please press star 1 on your telephone keypad. Again, that's star 1 to ask a question. Your first question comes from the line of Hamid Korsand with BWS Financial.
Good morning. The first question I had was about the Glow Fiber. I was looking to see if you're seeing this kind of penetration and results from subscribers early on, does that promote competition to come in? How do you create a moat so you're not seeing increased competition as you're seeing early success?
Hey, good morning, Hamed. This is Dave. Yeah, thanks for the question. The competitive landscape in the markets that we have targeted for Glow Fiber is universally the case where the incumbent LEC or the incumbent phone company is only providing DSL-based services, and the vast majority of the share belongs to the incumbent cable company. We believe that with the construction of a fiber network, which, as I'm sure you can appreciate, is pretty disruptive to the community, that that in and of itself, getting franchising, getting permitting, and completing the construction is a competitive moat in and of itself, just having developed and deployed the infrastructure Number one. Number two, we believe that the value proposition of a fully symmetrical, future-proof, fiber-based connection, which is far superior to anything anybody else can get in these markets, is the second aspect of that competitive moat. And thirdly, we think that those services provided by a local company that is adding jobs and investing in these communities is going to engender a lot of goodwill amongst the subscriber base as well as the communities at large. And so we're not particularly – there's a lot of things that keep us up at night, but the competitive encroachment of somebody else is not one of those. We're monitoring the competitive response by the cable incumbents very closely, but thus far we've had success and don't see any signs of that slowing.
Okay. And my other question was, are you seeing any seasonality in the business now that COVID restrictions are loosening, or is it just too early? Okay.
Too early for that. I'd say the only seasonality we're seeing at the start of the first quarter is we've had a lot of unpleasant weather in this part of the country, a lot of snow and ice storms, and that's hampered construction efforts and door-to-door selling efforts here more recently. But obviously, as the weather warms up, it's going to be close to 60 degrees here today. We think that'll turn.
Okay. Great. Thank you. Mm-hmm.
As a reminder, to ask a question, you will need to press star 1 on your telephone keypad. Again, that's star 1 to ask a question. I am showing no further questions at this time. I would now like to turn the conference over to Jim Volk, CFO.
Well, thank you, everyone, for joining our call this morning. We look forward to keeping you updated on our progress with our broadband growth strategy in future quarters. Have a good day.
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