Shenandoah Telecommunications Co

Welcome to Shenandoah Telecommunications' second quarter 2021 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 Shintel. Please go ahead.

Good morning, and thank you for joining us. The purpose of today's call is to review Shintel's results for the second quarter of 2021. Our results were announced in a press release distributed last night and the presentation we'll be reviewing is included on the investor page at our website, www.chentel.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, Ed McKay, Executive Vice President and Chief Operating Officer, and Jim Volk, Senior Vice President of Finance and CFO. 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 statement. Therefore, we have provided a detailed discussion of various risk factors in our SEC filings, which you are encouraged to review. you're 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. 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. It took three years since Brent announced their merger with T-Mobile, but we're very pleased to have completed the $1.94 billion sale of our wireless assets and operations to T-Mobile on July 1st. The sale successfully completes a 25-year chapter in the history of Shentel and allows us to temporarily de-lever our business, return significant value to our shareholders, and fully focus on our rapidly growing broadband business. Immediately following the sale, we've repaid all of our outstanding term loans, totaling $681 million, and our board of directors approved an $18.75 per share special dividend, totaling approximately $937 million. The special dividend will be paid on August 2nd. As we look forward to growing our broadband business, we closed on a $400 million new financing facility, that will provide growth capital to expand our broadband networks from 279,000 homes and business passings to 730,000 passings. Jim will provide more details on the financing shortly. During the second quarter, we also began to transform our cost structure around our broadband and tower businesses. We announced workforce reductions in April that will allow us to realize $1.7 million in annual run rate cost savings and continuing operations as we exit the second quarter. As we complete these previously announced reductions, we expect the annual run rate cost savings to grow to $3.3 million as we exit the third quarter and $4 million as we enter 2022. Shifting now to our broadband network expansion on slide five, we continued our strong construction momentum in the second quarter, with 19,000 new passings being added, with the total passings now just under 279,000. Our Glow Fiber branded Fiber to the Home business added 12,000 new passings, doubling the pace of the last two quarters, including the launch of service in the Virginia markets of Roanoke and Lynchburg in April. Our beam fixed wireless network added over 6,500 passings during the quarter, with our beam service now available to over 21,000 homes in seven Virginia and West Virginia counties. We expect our integrated broadband network to reach approximately 329,000 passings by the end of 2021. Turning to slide six, broadband data net additions were over 3,900, despite a seasonal bump and churn due primarily to college student move outs in several of our markets. The second quarter was a pivotal turning point in the mix of our net additions with Glow Fiber and Beam now contributing over 50% of our net ads. We anticipate this trend will continue over the next several years. DataNet's additions over the last several quarters and reduction in corporate expenses were the primary drivers in the outstanding revenue and adjusted oil to growth during the second quarter. Before turning the call to our financial results, I'd like to introduce Ed McKay, who was recently promoted to Chief Operating Officer on July 2nd. Ed has been with Shentel for over 17 years, most recently serving as Senior Vice President of Engineering and Operations. Ed is an outstanding leader and has been instrumental in the launch and growth of our Glow Fiber and Beam new services, making him a natural successor to lead our operations into the next chapter of our broadband-centric business. 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 8 to discuss our financial results for the second quarter. Broadband revenues grew 12.2% to $56.2 million, driven by an increase of $6.3 million or 16.7% in residential and SMB revenue, due primarily from a 20.3% increase in broadband data RGU's. ARLEC and other revenue declined $400,000 or 8.8% to $3.7 million, primarily from fewer DSL subscribers and lower government support. Broadband adjusted OIVDA for the second quarter grew 500,000, or 2.5%, to 20.3 million from the same period a year ago. The revenue increase of 6.1 million was partially offset by 5.6 million in higher expenses. Three million of the increase supported the expansion of our Glow Fiber and Beam services, including 1.2 million of compensation commission expense, 1.1 million of advertising and telemarketing expenses, and 700,000 of maintenance and line costs. Software and professional fees increased 1 million due to enhancements to our back office systems. We also incurred a recurring increase in video programming fees totaling 500,000 and a non-recurring increase in franchise and regulatory fees of 500,000. On slide 9, tower segment revenues grew 8.3% to $4.6 million, and adjusted OIVDA grew 9.3% to $3 million for the second quarter of 2021, due to an 8.5% growth in tenants. Moving to slide 10, consolidated revenues grew 11.7% to $60.7 million in the second quarter of 2021, Consolidated adjusted OIPEDA for the quarter grew 29.6% to $16.3 million. The increases were primarily due to strong broadband and tower revenue growth and a 30% decline in corporate expenses. The decline in corporate expenses were due to a combination of lower compensation, legal, and professional fees. Please note that effective with the wireless sale, T-Mobile will now become our largest customer representing approximately 7.5% of consolidated revenue. Turning now to full year 2021 outlook on slide 11. We are reaffirming our 2021 outlook with consolidated revenues expected around the midpoint of the 241 to 248 million range and adjusted OEBDA expected in the lower end of the 69 to 76 million range due to higher non-recurrent expenses, primarily related to the wireless sale transaction. We ended the second quarter with cash and equivalents of $248.8 million, an increase of $19.6 million from the first quarter of 2021, due to strong free cash flow from our wireless segment reported as discontinued operations. Moving to slide 12, we reflect our liquidity position pro forma for the wireless sale, special dividend, and the new financing transactions that Chris noted earlier. We expect over $480 million of liquidity will fully fund our business plan until we return to positive free cash flow in 2024. On slide 13, we summarize certain key terms of the new credit facility that we closed on July 1st. The $400 million facility consists of $300 million in delayed draw term loans, $100 million in a revolving line of credit. We do not expect to draw on the new facility into the fourth quarter when we make estimated income payments related to the wireless sale. We have significant financial flexibility with our new facility to add incremental debt up to four times total net leverage that will allow us to be opportunistic on the mergers and acquisition front. Pricing of the new facility is attractive, reflecting the strong credit profile of our broadband-centric business. We expect total net leverage to generally be below the 2.25 times ratio for most of the life of the facility, excluding the impact from any potential acquisitions. And now I'll turn the call over to Ed.

Thanks, Jim, and good morning, everyone. I'll begin on slide 15, where we show our three primary product offerings. Our Shentel incumbent cable networks serve both small towns and rural areas with gigabit broadband, voice services, and cable TV services across 211,000 homes and businesses in Virginia, West Virginia, Maryland, and Kentucky. Our glow fiber service targets higher density urban and suburban areas, while our beam fixed wireless internet service targets lower density rural areas where it can be cost prohibitive to build fiber or cable. We now pass 279,000 homes and businesses with our broadband services. This represents an increase of over 58,500, or almost 27%, from the second quarter of 2020. Our growth fiber service is starting to edge out of our original markets to areas with less existing Chantel fiber and into lower density suburban neighborhoods where utilities tend to be underground. These suburban areas have a higher cost to pass, but also typically have a higher penetration rate. Based on our performance to date, we have increased our target terminal penetration for GLOW to 38%, And our target cost per passing has also increased to between $1,000 and $1,400 as we construct in these lower density areas. We continue to expect our broadband business to have industry-leading sustainable growth as we build out our networks over the next several years. Turning to slide 16, we have depicted our rapidly expanding broadband network now consists of over 7,000 route miles of fiber connecting our incumbent cable, glow fiber, and fixed wireless broadband networks. In addition to launching Glow Fiber service in Roanoke and Lynchburg, Virginia during the second quarter, we reached franchise agreements with Mountville Borough and East Hempfield Township outside of Lancaster, Pennsylvania. In our beam fixed wireless footprint, we launched service in seven additional counties, six in Virginia, and our first county in West Virginia. Let's move on to our operating results in the second quarter starting on slide 17. In our incumbent cable business, total RGUs grew 6% year-over-year in the second quarter to almost 186,800 compared to about 176,100 in the same period during the prior year. We added nearly 1,800 net broadband RGUs to end the quarter with approximately 103,500. This is a significant increase of 13.2% compared to the same period in the prior year. Our incumbent cable broadband data penetration increased from 44.1% in the second quarter of last year to 49.1% this quarter. The value of our broadband rate card combined with service improvements in field operations and customer service are the primary drivers behind our success. Shentel also leverages the net promoter score research metric as an indicator of our overall customer satisfaction. We have seen a dramatic increase in our broadband customer net promoter scores over the past two years. growing from a 10 percent rating in the second quarter of 2019 to a 39.7 percent rating in the second quarter of this year. Broadband data average revenue per user in the quarter increased modestly versus the prior year period to $78.48, driven by our Powerhouse branded rate card. Eighty percent of our broadband data subscribers are now on plans of 25 megabits per second or higher, with an average subscribed download speed of 85 megabits per second which is well beyond the reach of our DSL competitors. Although churn in the second quarter increased by 26 basis points year over year to 1.59%, churn remains significantly lower than pre-COVID levels. Turning to slide 18 for our Glow Fiber business, we had approximately 9,900 total RGUs at the end of the second quarter with a 15.5% aggregate broadband data penetration rate across all markets. Our GoFiber customer relationships increased over 5,800 year over year to end the quarter at almost 7,200. Our broadband data churn rate did increase 48 basis points year over year to 1.15%, but the prior year number was based on an extremely small customer base. We continue to be very bullish on our residential and small business fiber edge-out strategy and our low churn on broadband service. Glow fiber ARPU was down year-over-year to $73.66 for the quarter. However, this is due to a beginning-of-the-year accounting change for deferred revenue from the account level to the product level. In the second quarter of 2021, 55% of new subs adopted our 1-gig speed tier, which now comprises 46% of the overall Glow fiber customer base, an increase of 3% quarter-over-quarter. Our streaming TV and voice services continue to perform very well with 23% and 14% attachment rates in the quarter respectively. At the end of the second quarter of 2021, 70% of Glow Fiber customers were single play broadband only, 23% were in a double play, and 7% were in a triple play. Slide 19 depicts the status of our active and approved Glow markets as of the end of the second quarter. Broadband data penetration in our most mature markets of Harrisonburg and Stanton, Virginia have reached 22.4% and 20.2% respectively. And we first launched GLOW with 1,700 households passed in the fourth quarter of 2019. And we now have reached 31% penetration in these neighborhoods after only 18 months. We now have approximately 46,400 residential and small business passings constructed and released to sales. and our construction rate of almost 12,000 new passings this quarter was more than 50% higher than the same period last year. Glow target passings in all franchise-approved markets now exceed 200,000 as we continue to add new municipalities and the surrounding counties to our plans. Engineering and construction work is now underway in all approved markets as we work toward our goal of bringing multi-gigabit, symmetrical, low-latency service to 300,000 glow fiber passings in the next several years. On slide 20, we have highlighted our early results for our emerging beam internet fixed wireless broadband service. As a reminder, this is a purpose-built fixed wireless network leveraging licensed 2.5 gigahertz and 3.5 gigahertz mid-band spectrum, standards-based 5G ready LTE technology, and commercial-grade towers and small cells that are predominantly fiber-fed. We provide a highly reliable, low-latency service using high-gain outdoor antennas at the customer's home and the same robust indoor Wi-Fi technology that we leverage for our glow fiber and new incumbent cable customers. We completed nine new beam internet sites in second quarter, and we now have a total of 36 sites on air. Our target markets are low density rural areas without cable or fiber internet options. We currently have service available to over 21,000 target households, and we expect to approximately double this number by the end of the year. We increased our beam broadband data RGUs by about 70% in the past quarter, and our penetration in this early stage investment is now 3.9%. We are encouraged by our strong churn numbers of approximately 1% and our ARPU of over $72. We continue to see approximately two-thirds of our customers adopting the $80 per month, 50 megabit per second speed tier. Turning to slide 21. Total tower tenants increased 8.5% year-over-year to 448. This includes 239 intercompany tenants, primarily for our wireless operations. At the end of second quarter, we had a backlog of 160 open orders related to upgrades of existing tenants or the addition of new tenants, including 15 applications from DISH as they begin to build their national 5G network in our markets. Finally, slide 22 provides current year-to-date capital spending results and guidance for our continuing operations for 2021. Capital expenditures were approximately $80 million through the second quarter of 2021, compared to $52 million in the same time period in 2020. Glow fiber and beam internet fixed wireless expansion are the drivers behind the increase, with year-to-date capital investments of approximately $45 million and $7 million, respectively. Of the $27 million in capital spending in our legacy broadband business, almost $13 million is success-based in support of our continued growth in our commercial and wholesale fiber business and our increase in broadband data penetration. We are confirming our guidance on capital spending for the year of between $157 and $168 million as we continue to invest aggressively in expanding our fiber and broadband networks. Given our accelerated low-fiber construction, we are likely to come in on the high end of that capital spending range. Thank you very much, and operator, we're now ready for questions.

Thank you. To ask a question, you will need to press star, then one on your telephone. To withdraw your question, please press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from a line of Rick Prentice with Raymond James. Your line is now open.

Thanks. Good morning, guys. Good morning, Rick. Hey, a couple questions. First, as we listen to what's out there, we get a lot of questions on supply chain and COVID-related questions. Talk to us a little bit about your supply chain, building out the beam and the glow, as well as labor force to hit kind of the targets for the homes passing by.

Yeah, Rick, this is Ed. I'll comment on that. We have seen a definite increase in the lead times required for our materials for our glow fiber construction. And that includes your customer premise equipment as well. We're now ordering fiber over a year in advance. We're ordering CPE a year in advance as well. And we have a lot of fiber right now in our warehouse. So up to this point, we have not had any impact on our construction schedule because of supply chain issues, but we're monitoring that very closely. From a labor perspective, we're monitoring that closely as well, but we have not had any problems at this point getting contractors into our network to build our networks.

Makes sense. And then, obviously, it's been a very busy summer so far. Looks like it continues to be busy. You mentioned a couple times opportunistic on the M&A front. Can you talk to us a little bit about what is happening out there in the broadband universe, both maybe Near your footprint and anything outside of footprint?

Near our footprint, there's just not a lot of opportunities right now. Pretty high valuations, but we're being very disciplined in our M&A approach. We believe we have significant upside in our organic growth plan, but we're monitoring this closely.

And anything outside footprint, any large ones that are being shopped around out there? nothing at this point to comment on now. Okay. And the final one for me on the tower business, how should we think about the potential for churn? You mentioned T-Mobile's 7.5% of consolidated revenues. How should we think about what might happen with the tower portfolio? And related question, you mentioned 160 orders backlogged. What kind of the process time you guys are targeting to get amendment and new colos on the tower's

It's typically a fairly long process. We'll likely see some of that revenue in the fourth quarter, but most of that revenue from new tenants, particularly a dish network build-out, we won't see the impact of that until 2022. But with T-Mobile, we certainly think there will be some rationalization of the network. We don't have the exact details at this point, but in general, we don't expect that rationalization to occur immediately. until after they turn down the Sprint CDMA network. We don't expect that to happen until 2022. As far as cell site backhaul that we provide now to T-Mobile, that's governed under a separate agreement. It has industry standard early terminations provisions embedded in that. And from a tower portfolio standpoint, we don't consider that to be a strategic asset. we would consider monetizing that, you know, to fund a more transformative broadband acquisition, you know, as opposed to issuing credit in the future or issuing equity in the future.

Makes sense. Okay. Thanks, guys. Stay well. Thank you, Rick.

Thank you. Our next question comes from the line of Dan Day with B Riley Securities. Your line is now open.

Yeah, hey, good morning, everybody. Thanks for taking my questions. So the 300,000, 215,000 homes passed targets for GLOW and BEAM, respectively. Can you maybe just provide some commentary on, and that's for 2026, I believe, what needs to happen for you to either kind of materially exceed or miss those numbers? Just kind of, and same question for the targeted penetration rates, just sort of looking for the level of variance and then the puts and takes on what we might need to think about for those numbers in the coming years.

We feel very good about the construction plan at this point. As we said earlier, we already have over 200,000 franchised households passed in the pipeline where we're actively doing engineering and construction work right now. So we feel very good about the construction there. We are keeping an eye on some of the universal broadband funding that is out there. We believe that's probably more of an opportunity right now than a threat to us. You know, that funding is not going to be available in areas that we serve, either with our incumbent broadband business or with GLOW. We do think with the level of funding that's proposed in the state of Virginia, for example, there could be additional opportunity for us to build out GLOW fiber to the home. But as that GLOW fiber to the home opportunity increases, that could decrease our total addressable market for our beam service, but we have the ability to shift resources from Beam to Blow as needed, and we're prepared to do that.

Got it. Got it. Thank you. And then a follow-up on pricing for Beam. I know it's very early days in that product, only a couple hundred subscribers right now. Just two-thirds, it sounds like, are in sort of that middle tier. How do you think about how it's always tough pricing out a new product? How do you think about Maybe tweaking pricing, do you think you have it right, especially for that higher tier, maybe to induce switching from satellite? Just anything on pricing would be great.

We think we have it right. We have three tiers currently. We start out with a $60 per month 25-meg plan, then move to a $50 per month plan, or excuse me, 50-meg per month at $80, and then we have a higher 100-meg plan at $160 per month. But I think with these rural customers, reliability is most important. So we believe we're priced very competitively to go up against other wireless ISPs that may already be there. And typically, they could be charging $100 per month for a 10 meg service. And we also believe we have an advantage over satellites and DSL. So I think reliability is the key. We believe these customers will pay to get that reliable service out in these rural markets.

Great. Thanks. Just one more and I'll turn it over. The EBV program, can you provide any commentary around that? Is it, you know, so far mostly existing customers upgrading speeds or, you know, are you seeing a material number of new customers coming in because of that program and just anything around that would be great. Thanks.

So total right now we have about 450 EBV customers. The vast majority of them have been existing customers. So we're not seeing a whole lot of traction with new customers at this point. But that is something with our door-to-door sales team, we are having leave behind materials so that customers can get into the EBV program.

Great. Well, thanks, guys, for taking my questions. I'll turn it over. You're welcome. Thanks.

Thank you. As a reminder to ask a question, you would need to press star, then one on your telephone. Our next question comes from the line of Hamed Korsen with BWS Financial. Your line is now open.

Hey, good morning. So first off, I just want to ask if you're seeing any changes in the consumer habits as far as subscription and churn now that the COVID restrictions are much looser? Sure.

Churn is up slightly, as we mentioned, but it is much lower than it was for pre-COVID levels. So we have not seen a dramatic change, a slight increase in churn, but it's still very, very positive across all of our product lines.

But your ads and cable were down quite a bit. Is that a return to the seasonality of pre-COVID?

Correct. The net ads were down quite a bit, but yes, the tailwinds from COVID are decreasing. So we expect to be more in line with our net ads this quarter going forward as opposed to how we were last year in the middle of COVID. We are starting to see a shift in our net ads toward glow and beam. Over 50% of our net ads in the past quarter were glow and beam. and we expect to see that continue to accelerate. But in an incumbent cable business, we think this quarter represents what we're likely to see going forward.

And as far as T-Mobile being 7.5% of revenue, how long would that last for? Do you have a timeframe from T-Mobile?

We do not yet. We still don't have details on their plan at this point. We are engaged in conversations with them, but we just don't have a Don't have an update for that at this time.

Okay. And then I know the previous question is about the acquisitions, but is there any plans to make acquisitions that you would make a comment like that?

Yes. And if I could jump in on this one. We have a great organic growth plan that's going to allow us to grow the business quite a bit in the next five years and create a lot of shareholder value. I would view us as an opportunistic M&A player here. We are looking for acquisitions. We've done some small tuck-ins, and we'll continue to do that, and maybe something bigger if the right opportunity crosses.

Understood. That was really the reason why I was asking questions because you've laid out a CapEx program that kind of is robust. So I was trying to see where do you think it's lacking that you would think that an acquisition is cheaper to do it or you want to grow somewhere.

Yeah, Ahmed, acquisitions, generally the tuck-ins are just unique opportunities. They tend to be very accretive. Those deals aren't as frothy as some of the larger deals that have been announced in the last year or so. And then for something more transformative, it would be a scale opportunity. It will allow us to, you know, have a bigger platform and a bigger scale and hopefully allow us to expand our glow and change products that we're launching.

Okay, thank you.

Thank you. There are no further questions at this time. I would now like to turn the call over to Mr. Jim Volk for closing remarks.

Well, thank you again for everyone joining our call and following our progress. July has been a pretty busy month. Early August, we come kind of to the end of our transformation process here with this special dividend being paid. And we just want to thank everyone for being loyal shareholders and look forward to keeping you updated on our progress going forward. Thank you.

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