ATN International Q3 2023 Earnings Call Transcript

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October 26, 2023

There are 6 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the ATN International Q3 2023 Earnings Conference Call and Webcast. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Justin Benacassa, CFO.

Operator

Please go ahead.

Speaker 1

Thank you, Kathy, and good morning, everyone. This morning, we'll be review our Q3 2023 results. I'm joined by Michael Prior, ATN's Chief Executive Officer and by Brad Martin, our Chief Operating Officer. Michael will provide an update on the business and strategy and a high level overview of our quarterly results. I'll cover our financials and provide additional color where necessary, and Brad is here for questions and answers session.

Speaker 1

As a reminder, we released our Q3 results press release yesterday afternoon after the market closed. Investors can find earnings release and results presentation on our Investor Relations website. Our earnings release and the presentation contain forward looking statements concerning our current expectations, objectives and underlying assumptions regarding our future operating results. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those described. Also, in an effort to provide useful information to investors, our comments today include non GAAP financial measures.

Speaker 1

For details on these measures and reconciliations to comparable GAAP measures And for further information regarding the factors that may affect our future operating results, please refer to our earnings release on our website at atni. For the 8 ks filing provided to the SEC. I'll now turn the call over to Michael for his prepared remarks.

Speaker 2

Thank you, Justin. Good morning, everyone, and thank you for joining us. We're pleased with our Q3 performance as We continue to rapidly convert customers to our high speed networks and work toward completing our 3 year plan at the end of 2024. Let me start by sharing 3 key takeaways from our performance. First, we continue to execute well on all fronts, Delivering higher revenue and EBITDA on solid subscriber growth in both the quarter and 1st 9 months of 2023.

Speaker 2

2nd, the infrastructure investments we've made in building out our broadband network provide the foundation for strong recurring revenues, durable discretionary cash flow and long term shareholder value. And 3rd, as we approach the final year of our 3 year plan, We remain committed to managing our balance sheet and spending levels to maximize free cash flow over time. So we launched our ambitious glass and steel and first to fiber platform strategy 2 years ago, Accelerating the delivery of high speed data services to underserved consumers and businesses, primarily in rural areas. And reflecting on our Q3 and year to date results in the context of that plan, I'm proud of the financial and operational milestones Our team has accomplished towards those objectives. Justin will provide an update on our financial results, then I'll begin with our operating metrics.

Speaker 2

We achieved robust high speed broadband subscriber growth of 20% year on year, highlighted by strong contributions from our international markets. Additionally, our international markets saw a 13% annual increase in mobile subscribers. In the U. S, we continue to expand our network reach to high speed data subscribers and enterprise and government customers. At the same time, we are making progress on rationalizing our legacy network and reducing run rate operating costs.

Speaker 2

We recently were recipients or sub recipients of nearly $45,000,000 in federal grants to connect People in underserved rural and tribal areas to high speed Internet networks. These program grants Follow on the more than $155,000,000 in grants awarded to us and our partners over the previous 12 months. And we'll subsidize the funding for fiber and fixed wireless high speed network expansion in rural areas of the United States, including parts of Alaska, Arizona, Nevada and New Mexico. The network builds funded by these and potential additional grants are likely to extend over the next several years, paving the way for us to expand our network reach and grow our customer and revenue base even as the pace of our self funded capital expenditures decrease as planned. And for those of you who are new to ATN, We drive about half of our revenue from customers in the U.

Speaker 2

S, principally from rural communities in the West and Southwest in both urban and rural areas of Alaska. The other half of our revenue comes from Bermuda and the Caribbean, on to some fast growing markets like Guyana. We're seeing strong mobile subscriber growth and a rapid Uptake of High Speed Broadband. Based on the positive dynamics and our approach to maximizing the long term value of our capital investments, We are encouraged about the opportunities across our markets in the quarters and years ahead. ATN is all about high speed data connections.

Speaker 2

We play directly into what is unquestionably one of the world's most durable secular growth drivers, the need to be connected anytime and everywhere. And the demand for that connectivity at increasingly higher speeds is only going to accelerate. Our network's reliability, consistency and efficiency provide ATN with an essential competitive advantage and long lasting assets that will only benefit us as the drive toward greater connectivity continues. And now I'll hand the call back to you, Justin.

Speaker 1

Great. Thanks, Thanks, Michael. As a reminder, all the financials we'll be mentioning during today's call can be found in our accompanying slide presentation that we've added to our website, along with some additional financial tables. ATN's Q3 revenues grew 5% to $191,000,000 highlighting the contributed to our top line growth followed by carrier services and mobility. Moving down the P and L, operating income grew to $6,800,000 from $1,400,000 in the prior year.

Speaker 1

Adjusted EBITDA grew 10% to $47,800,000 driven by the strong performance in our domestic businesses. The total net loss for the quarter was $3,600,000 or $0.31 per share, compared to a net loss of $2,800,000 or $0.25 per share in Q3 of 2022. The higher net loss in the quarter was primarily driven by the $5,800,000 increase in interest expense offsetting the $5,400,000 increase in operating income. Looking at the segment performance for the quarter, the international segment revenues grew 4% to nearly $94,000,000 While adjusted EBITDA was down slightly to $27,500,000 Operating expenses for the segment were unusually high in the quarter for a number of reasons, including the addition of sales support resources that are helping drive the stronger subscriber and revenue growth. We also saw elevated expenses in a few other operating categories, including regulatory fees, and we expect those costs will come down in the coming quarters.

Speaker 1

For the first time, we exceeded 400,000 international mobile subscribers, while also delivering strong high speed broadband subscriber growth. As I mentioned, subscriber growth was helped by the increased on the ground operation support that are capitalizing on the investments we've made to Mobile churn was up in the quarter as expected resulting from the wind down of a temporary COVID related MiFi program supported by the Education Department in the Virgin Islands. Turning to the domestic segment, Revenues grew 5% or $5,000,000 to $97,000,000 in the quarter. The increase reflected the strong performance of fixed and carrier service revenue growth, driven by increased enterprise and emergency connectivity fund revenue in Alaska and by the acquisition of Sacred Wind. As expected, this was slightly offset by a reduction in legacy roaming and construction revenues.

Speaker 1

Adjusted EBITDA in the segment rose 22 percent or nearly $5,000,000 to $26,900,000 The strong EBITDA performance is driven by higher revenues and several ongoing cost reduction initiatives. As we mentioned in the past in the last two quarters, ATN is focused on rightsizing the cost structure necessary to support the business into the future and improve overall operating margins. As a result, we recorded $1,400,000 restructuring costs in the quarter and 4 point We expect the majority of our operational review to be complete in the Q4 and do not anticipate any further restructuring costs into $600,000 net of $14,300,000 in reimbursable costs consistent with our Glass and Steel and First to Fiber strategies. We're on track to be within our 2023 CapEx guidance for spending between $160,000,000 170,000,000 Within the U. S.

Speaker 1

Segment, CapEx spending during Q3 was $18,400,000 that was primarily related to fiber expansion in Alaska in the Lower 48. Internationally, CapEx spending was 18 point $7,000,000 in Q3, which focused on the continuing fiber deployment in Guyana. In our earnings news release issued yesterday afternoon, we provided Preliminary full year 2024 outlook. Our preliminary 2024 adjusted EBIT Outlook anticipates a range of between $200,000,000 to $208,000,000 and our preliminary CapEx Spending outlook anticipates a range of $120,000,000 to $130,000,000 The increase in adjusted EBITDA combined with the slower pace in our network Investments will increase free cash flow as we move into 2024. Consistent with past guidance, Our CapEx guidance is net of reimbursable expenses.

Speaker 1

While ATN is slowing down its rate of capital Going into 2024, we expect the grants we've received and expect to receive will further expand our network investments and We extend our network reach and revenue potential. Turning to other balance sheet and cash flow highlights. We ended the quarter with cash and cash equivalents of $73,000,000 and net cash provided by operating activities was $89,500,000 year to date. At the end of the Q3, our total debt outstanding was $498,000,000 and our consolidated net Debt to adjusted EBITDA ratio remained at 2.3 times. As we move into 2024 and expand free cash, we'll expect to maintain a healthy leverage And with that, I'll hand it back to Michael.

Speaker 2

Thank you, Justin. Our performance across both the broadband and mobile areas of our business has us in a good place as we look towards the final quarter of 2023 And beyond. I'm excited about the opportunities in front of us. As planned, our glass and steel and first to fiber strategies have contributed to our recurring revenue and adjusted EBITDA growth. As we move closer to 2024, we are focused on executing on the opportunity we have developed, Expanding free cash flow as we come down the other side of the investment bell curve and growing subscribers and revenue at higher incremental unit margins, which should expand our operating margins and magnify the benefit of the normalizing capital spend levels.

Speaker 2

We expect the fiber investments in particular to have a long tail delivering sustained strong operating cash flows for years to come. And now I'll turn it back to you, operator, to open the line for questions.

Operator

Thank you. At this time, we'll conduct the question and answer session. Yes. Our first question will come from Ric Prentiss with Raymond James. Your line is now open.

Speaker 3

Great. Thanks. Good morning, everyone. Good

Speaker 4

morning, Rick.

Speaker 3

Hey, couple of questions. First, appreciate the preliminary 2024 guidance, always helps. Help us understand what your level of visibility is in giving that and kind of what the puts and takes are as far as What you're excited about and what you're concerned about?

Speaker 2

I think to answer the last part First, I mean, I think we feel pretty good about that and it is preliminary, but I think we feel we wouldn't have given a relatively tight range if we didn't feel pretty good about Landing in that area. The puts and takes are we have a huge portion of our Revenue is recurring, just naturally recurring with not a lot of volatility. So the puts and takes are kind of smaller things. We have One example is we have a contract that we know about that's COVID related $27,000,000 annual contract in the U. S.

Speaker 2

That is going to expire or scheduled to expire at the end of the Q1. And we've taken that into account That would be sort of on the negative side. On the positive side, we're pretty confident in the continued subscriber growth And continued organic revenue growth rates on the back of it. And And I would say it's kind of right down the middle in terms of our expectations on that and not heroic by any means.

Speaker 3

Okay. And speaking of revenue, you guys don't provide a revenue guidance. Any thoughts on Why that is? Is it just that you're managing towards the margin, different businesses going to have different profiles or just wondering why not a revenue guidance as well? Yes, I think So much is recurring.

Speaker 2

Yes. We didn't because I think there's more things moving. It's a lot easier to focus on EBITDA, which On CapEx, which leads us to the most important number, which is free cash flow. So we're really focused it there. So but as I said, I don't I think other than that one example I gave, I think you kind of we kind of expect to see revenue growth Similar rates to what we've been experiencing.

Speaker 3

And that $27,000,000 COVID related contract that was in the U. S?

Speaker 2

Yes. That's an annual rate. So 3 quarters of that, because it will fall away basically Next year.

Speaker 3

Yes. Okay. And obviously, we really do like free cash flow, which EBITDA minus CapEx kind of simple free cash flow. Justin, you mentioned healthy leverage. Where do we think you want to run leverage at over the mid to long term versus the 2.3 where you're at?

Speaker 1

I think we will our goal is to still get leverage down in that 2 times range, right? So some of that's going to be driven by Free cash flow and others can be driven by just growth in EBITDA. But our goal long term is to keep driving it down from the 2.3 level or it's closer to 2.

Speaker 3

Okay. And obviously, financial flexibility seems to tee up a lot of shareholder returns. How should we think about How you're thinking about stock buybacks stuck somewhat in liquid dividends, which are usually hopefully forever, just as we think about where financial flexibility might go For M and

Speaker 2

A? Yes, I think we're primarily focused on the shareholder side as opposed to M and A. We've been investing a lot of the business and it's time to sort of deliver on that. I think on the stock buybacks, I think Through September 30, we were at nearly $12,000,000 this year. And that leaves us with at the end of September, We would have had about $7,500,000 left in existing program.

Speaker 2

So typically in December timeframe, but sometimes at other times the Board will kind of look at those sort of capital allocation decisions, Dividends, buybacks and all the rest.

Speaker 3

Okay. Very good. Thanks a lot. Have a good one.

Speaker 1

Thank you, Rick.

Operator

This question comes from the line of Hamed Khorsand with BWS Financial. Your line is now open.

Speaker 1

Amit, are you there?

Speaker 2

Operator, why don't we try someone else?

Operator

Yes. We'll go to another questioner. Just one moment. This question comes from the line of Greg Burns with Sidoti. Your line is now open, Greg.

Speaker 4

Good morning. I just had a couple of questions about the segment margins. First, on the international side, that increase in spending you saw this quarter, It sounded like some was unusual, but some was maybe structurally higher spending to drive growth. Could you just Kind of break those apart and maybe so what kind of Are you expecting margins to expand from here? Or is this a good level to think about for the business Going forward?

Speaker 1

We are expecting margins to expand, but maybe Brad, I'll let you give a little more color on international.

Speaker 5

Yes. So from a margin expansion perspective, we'll continue to grow margin through continually adding subscribers and revenue on our existing Fixed cost based assets that we've been investing in. We have combined with the continued decommissioning of legacy networks, CSL and legacy mobile.

Speaker 2

And I think just I'm not sure we answered you on the most recent quarter was What some of it was related to the sales side, but some of it was things like regulatory fees and we're focused on bringing those costs down.

Speaker 4

Okay. And I think CapEx was closer to $70,000,000 $80,000,000 annually before, I guess you embarked on the current fiber initiatives. Is that a good level to think of like where More steady state maintenance or run rate CapEx is once we get past 24, maybe it's higher now because you have Alaska. How should we think about where CapEx is going to be heading over the next couple of years?

Speaker 2

Yes. I think if you look I think we think of it as a percentage of revenue, right? And we've been running well above 15%, which is sort of we would call the top end of a normal range In recent years as we've been embarked on these programs. So we would expect it to start not only to move into that range, but move down the range. Not trying to give you a number on 25 at this point, but I think that's the direction of travel.

Speaker 2

Typically in our experience in a lot of the markets we've been in for many years after a period of excess, we're usually Pretty down 10% can be below that in individual markets for a while after that kind of expenditure. And of course, Like everybody else, part of the belief in cyber investment is that it has a lower maintenance Cost and it's got a long run rate of long technologically useful life In the business. So the fundamentals of what we're investing in, I think should lend us down to the lower end of that range without again trying to give you a 25 number.

Speaker 1

Yes. And just to clarify too, Greg, I think your 70, 80 was probably somewhat pre Alaska. So just

Speaker 4

Yes, yes, right. Okay. Perfect. All right. Thank you.

Operator

Thank you. One moment for our next question. This question is from Hamed Khorsand with BWS Financial, your line is now open.

Speaker 1

Ahmad, you there?

Speaker 2

Hammad, I don't something must be wrong there, operator.

Operator

Yes. You may need to unmute Hammad or we can try someone else. Thank you.

Speaker 1

Yes. We'll have to come back to him, I guess, if we get that fixed. Yes.

Operator

So we have another question from Ric Prentiss with Raymond James. Your line is now open, Ric.

Speaker 3

As long as it's open airtime, I'll take it.

Speaker 2

We can't have dead airtime, you know that, Rick.

Speaker 3

Exactly, exactly. Can you hear me now? The Follow-up questions I had is first, a lot of interest in the industry about fixed wireless high speed Internet. How do you all think about your markets domestically and internationally about do you have the capacity To offer fixed wireless, is there an interest out there? Can it reduce churn?

Speaker 3

Just kind of opine on fixed wireless and I have one more follow-up.

Speaker 2

Yes, I think it's absolutely part of the mix in all our markets really. And it varies, right, an area like Bermuda is very little part of the mix, fairly densely populated. We've got high speed connections to virtually every home. Even someplace like Cayman and parts of Cayman, we are bringing fiber to towers and using fixed wireless Solutions because the economics are better and it's typically used in partially populated areas if we have a good enough spectrum Availability or and technology availability, we can deliver high capacity to each user. And we've been working with Technologies that have really improved, improved the customer experience Across the board.

Speaker 2

As on the U. S. As well, in the U. S. We kind of have always called it sort of hills and towns.

Speaker 2

So even in the rural areas, we're going to tend to bring fiber to the towns and then we'll bring fiber to the towers into the businesses. But The people live in the hills, a ranch in the hills or something. If we're going to connect them, it would be typically through a fixed wireless solution. And we have a number of areas where we have a fair amount of capacity on fixed wireless network investments we've made in the U. S.

Speaker 2

That we expect to be Loading subscribers on in the quarters to come.

Speaker 3

Okay. And the other question is, on the other topics hot recently has been direct to device satellite connectivity into Smartphones. I know you guys have had some unique views into some of the satellite world, but what are your thoughts on where direct to device Plays out what role of FIFO?

Speaker 2

I mean, I think it's going to be a great it's a great tool and it's a great functionality, right? So I just think, Where we are an operator, that's the functionality we'd like to deliver to our customers. And where we are not a mobile operator, I think it's good for our customer base in our areas. It's probably it's good for some of our workers who are Out there in remote areas. So I think it's here to come.

Speaker 2

I mean how big Usage it is a totally different question. But in terms of available functionality, I think it's Once people get used to it, they're going to everyone's going to want it. I don't know, Brad, if you had anything to add to that or

Speaker 5

No, fully agree. Yes, fully agree. And that will continue to evolve, but we definitely see a great use case for that.

Speaker 3

And it seems like The ecosystem really needs to get the chipset, the satellite operators, the chipset, the phone and the operator kind of all Congealed working together, is that a fair thought or?

Speaker 2

I don't know if I know enough. I know, I do think it's got to have Some of that, I mean, we were involved in ex com, which did that, they do with Golostat, right, which is working with Apple, I believe. And So those are and there's other providers who are doing that. So it seems to me it does have to be Sort of a multi pronged effort. Any further questions, operator?

Operator

I'm showing no further questions at this point. So I'd like to now turn it back to Michael Prior for closing remarks.

Speaker 2

Okay. Well, thank you. Thank you all for joining us on the Q3 call.

Speaker 1

Have a good one. Take care, everybody.

Operator

Thank you for participating in today's conference. This concludes the program. You may now disconnect.

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ATN International Q3 2023
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