Shenandoah Telecommunications Co

Good morning, everyone. Welcome to Shenandoah Telecommunications' second quarter 2022 earnings conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Kirk Andrews, Director of Financial Planning and Analyst for Shentel.

Good morning, and thank you for joining us. The purpose of today's call is to review Shentel's results for second quarter 2022. 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.shintel.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 statements. Therefore, we have provided a detailed discussion of various risk factors in our SEC filings, which you are encouraged to review. We 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 statement. 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. Before reviewing the highlights of our second quarter results, I'd like to reflect on our progress over the past few years. We adopted our fiber to the home strategy about four years ago when we identified that Tier 3 and 4 markets were demanding faster broadband speeds, more reliable service, and choice of broadband providers. We spent the first year defining our underwriting, network design, brand, and go-to-market processes and launched our first Glow Fiber Markets in the fourth quarter of 2019. Since then, we've made remarkable progress in refining our strategies and accelerating our network builds and customer acquisition. We now have in place a platform that we can leverage for the next several years. I'm very proud of how our team has rallied around our Fiber First strategy and our ability to delight our customers. I'll now provide an update on Glowfiber results in the second quarter. As noted on slide four, we had another record quarter with Glowfiber data net additions of approximately 3,300, increasing sequentially almost 39% as our fiber network expanded and our brand awareness grew. Glowfiber is quickly earning a reputation as the fastest cementing with local customer service and fair pricing. The accelerated sales reaffirms our investment thesis that residents and businesses in our target markets want a high quality option for their internet service. We expect net ads to trend up as we continue to expand our network and awareness of the Glowfiber brand grows. Turning to slide five, we added almost 19,000 new Glowfiber passings in the quarter and ended the second quarter with approximately 113,000 passings. We're well on our way to reaching our goal of 150,000 Glow passings by year end. Our government relations team also made excellent progress in securing new Glow Fiber franchise agreements, adding approximately 72,000 new franchise passings in the second quarter, and bringing our total franchise and government grant award passings to 330,000 or 89% of 2026 target fiber passing. We now have clear visibility in our fiber network expansion plans. 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 7 to discuss our financial results for the second quarter of 2022. Broadband revenue grew 9.2% to $61.4 million, driven by an increase of 8.9% in residential and SMB revenue, due primarily from a 138.9% increase in Glow Fiber data RGUs and a 4.3% increase in incumbent cable data RGUs. Glow Fiber represented over half of our residential and SMB revenue growth, and we expect that to increase in future periods as we expand our fiber network. Commercial fiber revenue grew 9.4% to 9.3 million due primarily to growth in circuits. T-Mobile backhaul revenue was consistent with the first quarter of 2022. Broadband adjusted EBITDA for the second quarter increased 10.2% to 22 million, driven by top line revenue growth. Adjusted EBITDA margins of 36% remain steady with prior year and prior quarter as our results reflect higher than normal software upgrade and conversion costs and negative EBITDA from our BEAM project. We expect adjusted EBITDA margins to improve modestly in the second half of this year from the decommissioning of the 20 unprofitable BEAM cell sites and our software development costs begin to shrink. On slide 8, Tower segment revenue grew up $100,000 to $4.7 million in the second quarter due primarily to a 3.8% increase in tenants. T-Mobile tower lease revenue was consistent with prior quarter. Adjusted EBITDA declined 1.4% due to a slight uptick in expenses. Moving to slide nine, consolidated revenue grew 8.8% to $66 million in the second quarter due to growth in broadband revenues of 9.2% and 1.9% respectively. Consolidated adjusted EBITDA for the quarter grew 16.4% to $18.6 million due to a 10.2% increase in broadband adjusted EBITDA and an 8.6% decline in corporate expenses driven by our previously announced cost reduction plan. $1.1 million of cost savings from professional fees or 4.4 million annualized, was recognized in the second quarter. We continue to look for opportunities to drive costs out of the business. Moving to slide 10, free cash flow and cash on hand declined by approximately 50 million in the second quarter. We ended the quarter with a strong liquidity position of 433 million. We drew 25 million on the delay for all term loans in July, and expect to draw an incremental $50 to $75 million by year end. In addition, we now expect to receive $30 million in income tax refunds and $4 million from a refund of deposits from the CBRS Spectrum Auction to supplement our liquidity as we enter 2023. And now, I'll turn the call over to Ed.

Thanks, Jim, and good morning. I'll begin on slide 12, where we show our integrated fiber and cable broadband network. We continue our rapid fiber expansion and we had another record quarter for new construction. We added approximately 300 new route miles of fiber, bringing our total to over 7,900. We also had a record number for new fiber passings in the quarter with the addition of almost 19,000 in our existing low markets. Construction is also underway in our new markets of Lancaster and York counties in Pennsylvania and Williamsburg and Suffolk and Virginia. We are on track to launch all four of these markets in the second half of the year. As Chris mentioned, the second quarter was a productive time for our government relations team, adding new franchise agreements for over 72,000 new passings, including Shippensburg, Greencastle, and Waynesboro in South Central Pennsylvania, Ashland in Hanover County, Virginia, and Sussex County, our first Glow Fiber expansion into Delaware. In addition, Chantel continues to have success with government grant funding for unserved areas. We were announced as the winner of over $10 million in additional grants to bring gigabit fiber to a total of over 3,000 unserved locations in Frederick County, Maryland, and Grant County, West Virginia. Turning to slide 13, we now have approximately 411,000 approved GLOW fiber passings with franchise agreements in place. These are all greenfield builds outside of our current incumbent cable footprint. We are on track for our goal of constructing 75,000 new passings in 2022, and we are well positioned to ramp our construction to over 100,000 additional fiber passings in 2023. With our previously announced grant funding and our new grant awards in the second quarter, Centel has now won over $68 million in state and local grant funds to bring gigabit broadband to over 19,000 unserved homes. Engineering is currently underway, and we plan to ramp up construction in the second half of 2022 after we execute the government grant contracts with each county. To date, we have executed contracts with three of the seven counties and expect to have the remaining contracts with the counties and states finalized in the second half of 2022. In total, we have a construction backlog of approximately 317,000 fiber passings in addition to almost 113,000 glow fiber passings already constructed. Turning to slide 14 for our operating results for our Glow Fiber business, we had another record quarter for customer growth and ended the period with almost 23,000 total RGUs and a 15.2% aggregate broadband data penetration rate across all markets. Our penetration rate has stayed steady at the 15 to 16% range over the past seven quarters as our sales have increased in line with our newly constructed passings. Our Glowfiber customer relationships also more than doubled over the past year to end the quarter at over 17,000. We typically see elevated churn in late spring and summer months, and our broadband data churn rate remains low at 1.22%. Over half of our churn for the quarter was due to customers moving out of the area. In the second quarter of 2022, approximately 41% of our new subs adopted speed tiers of one gig or higher, and our data RQ remained consistent at $74.42. Our streaming TV and voice services continued to perform well with 19% and 15% attachment rates in the quarter, respectively. At the end of Q2, 74% of our Glowfiber customers were single-play data only, twenty one percent were in a double play and five percent were in a triple play slide 15 demonstrates our data penetration as our markets age our passings launched in the second quarter of 2022 have already reached a penetration rate of almost eight percent and that jumps to almost 17 percent from markets launched 12 months ago in the second quarter of 2021. We continue to see steady growth as our markets mature and brand awareness increases. And our initial neighborhoods launched in the fourth quarter of 2019 now have a penetration rate of over 34% after 30 months. Let's move on to our incumbent cable operating results on slide 16. Our broadband data RGU's grew approximately 4.3% year over year to end the quarter at about 108,000. Our data penetration increased from 49.1% in the second quarter of 2021 to 51% this quarter. Data net additions were approximately 600 during the seasonally challenged second quarter. Total RGUs grew 2.2% year over year to approximately 191,000 at the end of the second quarter. We continue to see declines in our video service due to cord cutting, but we see growth in our voice RGUs driven by success with commercial customers. Broadband data average revenue per user increased approximately 3.3% year over year to $80.85 in the second quarter as customers continue to migrate to higher speed tiers. Broadband data churn for the second quarter was 1.67%, about eight basis points higher than the same period in 2021. Churn is typically seasonal, with higher churn in the late spring and summer months. However, our churn remains below pre-COVID levels. As a point of reference, our Q2 2019 churn was 2.07%. On slide 17, we summarize our BEAM fixed wireless results. Last quarter, we announced plans to decommission 20 unprofitable cell sites, which we completed on June 30th. We now expect BEAM to be able to break even in the second half of the year. Slide 18 provides a view of our broadband enterprise and wholesale commercial fiber business. During the second quarter, we booked new sales with monthly revenue totaling over $97,000. We also installed new services in the second quarter, totaling $65,000 in incremental monthly revenue. This is down from Q2 2021. However, our new installed monthly revenue is up approximately 6% year to date versus 2021 as we had a strong start to 2022. Monthly churn and revenue compression for our commercial fiber business improved significantly year over year with a combined total of 0.3% for the second quarter of 2022. The high compression in the second quarter of 2021 was primarily due to a major wholesale customer replacing higher cost optical circuits with lower cost ethernet circuits. Our number of cell site backhaul connections decreased slightly year over year to 702. Our largest backhaul customer is T-Mobile, and we did see a reduction of circuits as they turned down non-traditional cell sites and repeater systems in Q3 2021, shortly after the sale of our wireless assets and operations. As we previously disclosed, we expected T-Mobile to rationalize their network in our former wireless service area as they decommissioned the National Sprint CDMA LTE network. In late July, we executed a contract with T-Mobile to extend backhaul services for 175 sites on a seven-year term. The remaining 365 circuits still have over two years left on the term, and we expect T-Mobile to terminate the vast majority of these circuits in late 2022 or early 2023. We estimate revenue from the early termination fees to total 3 to 3.6 million, depending on timing, And we expect annual revenue churn to be approximately 6.7 million as T-Mobile disconnects circuits. However, we believe there is significant opportunity for additional backhaul revenue as we build fiber into T-Mobile switching centers and have the opportunity to bid on backhaul for additional cell sites as we expand our low fiber network. Turning to slide 19 in our tower segment. As we also previously disclosed, we believe some tower leases with T-Mobile will churn as they rationalize their network and turn down legacy Sprint sell sites. We now expect fewer sites to churn and estimate that we will retain approximately 196 of the 262 leases. We expect annual revenue churn to be approximately $3 million as T-Mobile turns down these month-to-month leases in late 2022 or early 2023. In summary, the total T-Mobile revenue term from our tower and broadband segments will be about $9.7 million, or about $700,000 higher than the high end of our previous guidance range. Total tower tenants increased 3.8% year-over-year to 465 at the end of Q2 2022, driven by 11 new leases from wireless carriers other than T-Mobile. We continue to grow our relationship with DISH as they build out their national 5G network with nine executed leases and 11 pending applications. Finally, slide 20 provides our 2021 capital spending and our guidance for 2022. Year-to-date capital expenditures through Q2 were approximately $88 million in 2022 compared to about $80 million in 2021. The primary driver for the year-over-year increase was the acceleration of our globe fiber network construction. For 2022, we have reduced our guidance for the full year to a range of 190 to 210 million. We continue to invest aggressively in the expansion of our fiber to the home networks. However, state and grant contracts have taken longer than expected to finalize. So this has pushed back our construction start date on these projects by several months. We expect to have these contracts finalized in the coming months, but the timing of the start of construction and delivery of materials has shifted approximately 20 million of our projected 2022 spend into the first half of 2023. From a supply chain standpoint, we feel very confident in our ability to execute on our construction goal of 150,000 total fiber passings by the end of 2022 and over 250,000 total fiber passings by the end of 2023. Thank you very much, and operator, we're now ready for questions.

Certainly. Ladies and gentlemen, if you have a question at this time, please press star 1-1 on your telephone. One moment for our first question. And our first question comes from the line of Frank Luther from Raymond James. Your question, please.

Great. Thank you. Talk to us a little bit about the funding that you've gotten and remind us, how does that show up when you receive it? Do you get reimbursed on a percentage of completion basis or all the way at the end? And then how is that booked? Is it contract expense or how does it come into your numbers?

So, the detailed agreements are still being worked out with each county, but we expect the grants will be dispersed on a cost recovery basis with a lag of 3 to 6 months on average.

Okay, great. And is the T-Mobile progress, how is that relative to what your expectations were at the beginning of the year? Are they going faster than you expected or slower? How would you characterize it?

Is that the T-Mobile, you're talking about the turn down of the legacy sprint network? Yeah. It's probably going a little slower than we expected. We've expected we would have seen a few more sites turned down at this time. So we're still not clear exactly when these circuits will be terminated or the tower releases that are month to month will be terminated.

Thank you. One quick follow-up. On the new backhaul that you renewed with them, how are the rates on that versus what they were paying before? What are you seeing on that front from the lease infrastructure?

The rates are slightly lower, but they're getting significantly more bandwidth for the same amount of money.

Okay, great. Thank you very much.

Thank you. One moment for our next question. And our next question comes in the line of Dan Day from B Reilly. Your question, please.

Yeah, morning, guys. Appreciate you taking my questions. Just first for me on Beam, I'm curious if you have any plans, you know, maybe in the near term to sell the Spectrum you had licensed for the Beam Fixed Wireless now that you're kind of putting in that project and maybe just remind us how much you originally paid for the Spectrum rights related to Beam.

So I'll comment on the plans for Beam. So we plan to continue to operate the remaining cell sites and support the existing customers at this time, but we have started to explore options for selling the spectrum holdings, and we've actually classified those as assets held for sale.

Yeah, Dan, the original cost on the 2.5 spectrum was about $15 million. So we think the spectrum has held its value and probably appreciated a lot. a bit since we originally acquired it if we decide to sell it.

Awesome. Thanks, guys. Last time, last earnings call, you talked about some of the sort of back office systems upgrades and some of the other near-term kind of OpEx headwinds. Just maybe provide an update on those items for me.

sure so one of the major projects was an upgrade of our erp system that has now been completed all of our second quarter financials were running through the new erp system we've also made significant progress on some of our other upgrades including a new website for our cable business and we've also deployed new systems to to track our fiber construction for our glow fiber So significant progress there.

Great. And then just last one, mostly out of curiosity. I mean, it looks like in the incumbent cable side, you actually added more voice customers than you did broadband, which is pretty rare. Just anything going on there with the additions on the voice subscribers in the quarter? Yes.

So those are commercial voice customers. So we're seeing significant success with both from a SMB and enterprise perspective, adding voice lines.

Yeah, Dan, we had one large sale that we, large commercial sale that we booked last year and installed in the first half of this year. And there was quite a few IP-centric lines on the voice side that it's referring to that got installed and increased the RGU's this quarter.

Great. Well, I appreciate you all taking my questions, and I'll turn it over.

Okay. Thank you. Thank you. As a reminder, if you have a question, please press star 1-1. And our next question comes from the line of Hamid Khursin from BWS Financial. Your question, please.

Good morning. So first off, on the income at broadband, are you doing anything different on the advertising to acquire new customers? Is your cost to acquire customers going up on that front?

I would say one major change, we did launch a new website for our incumbent cable business. And we can now take automatic, we've automated orders over our website. So that's a significant change from what we had previously. So that actually brings our costs down slightly. But from an advertising standpoint, marketing standpoint, we haven't made any significant changes over the past quarter that would impact our costs.

Okay. And overall, are you seeing any changes as far as the customer payment habits or anything in that form?

We are continuing to see more customers shift to auto bill pay and e-bills. But we do still have our fair share of customers that come into our local stores to pay their bill every month.

Yeah, Ahmed, our involuntary churn did bump up a little bit in the past quarter, as did our bad debt. But our bad debt was really at record lows. It was running about 0.5%, 0.6% of service revenues. It's now kind of up to 0.8% of service revenues, which is still very good. I think the COVID-19 tailwinds had supported making it a priority payment by our customers. And maybe that's changed just a tad, but still better than historical experience.

Great. And then the last question was, what's the biggest overhang as far as preventing you from adding more passings quickly this year? Is it labor or is it more just government approvals?

No, it's really two main factors. One is make ready work by the power companies. So as we're attaching to power company poles, they have to prepare those poles for us to attach. That's slowing us down. And then the municipalities themselves, they only want a limited number of construction zones within a given city or town. So that limits us as well. But we have not had issues with our own construction crews. We still remain well positioned from a labor standpoint and material standpoint.

Okay. Thank you.

Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Jim Volff for any further remarks.

Yes, thanks, everyone, for joining us. We look forward to updating you on our Fiber First progress in the next quarter. Have a good day.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day. The conference will begin shortly. To raise your hand during Q&A, you can dial star 1 1.