Shenandoah Telecommunications Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 3, 2023

There are 7 speakers on the call.

Operator

Good morning, everyone. Welcome to Shenandoah Telecommunications Third Quarter 2023 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.

Speaker 1

Good morning and thank you for joining us. The purpose of today's call is to review Shentel's results for the Q3 2023. Our results were announced in our press release 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.

Speaker 1

After our prepared remarks, we will conduct a question and answer session. As always, let me refer you to Slide 2 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're cautioned not to place undue reliance on these forward looking statements.

Speaker 1

Except as required by law, we undertake no obligation to publicly With that, I'll now turn the call over to Chris. Go ahead, Chris.

Speaker 2

Thanks, Kirk. We appreciate everyone joining us this morning and hope everyone is well. Today, we are planning to discuss Our Q3 financial and operating results excluding the results and impact of the Horizon Telecom transaction we announced last week unless expressly noted. Our respective teams are very excited about this transformative combination and have already started work on obtaining the necessary approvals and doing early stage planning for the upcoming integration. We will have more to share in future earnings call.

Speaker 2

I'll now turn to the highlights of our Q3 results. We continue to make solid progress in executing our Globefiber growth plan. As noted on Slide 4, we added almost 20,000 new GloFiber passings in the 3rd quarter. We increased passings 55% year over year and crossed the 200,000 milestone during the quarter. Our GloFiber passings are now almost the size of our cable market passings.

Speaker 2

As we approach our 4th Quarter of launching our 1st Globe Fiber market in November, we will have doubled the size of our broadband business in terms of passing. With the Horizon Telecom acquisition expected to close in 2024 and accelerated construction anticipated across all of our markets, We expect to double the broadband passings again by the end of 2026. Moving to Slide 5, Our sales team added over 4,500 GloFiber data subscribers in the Q3 and has grown the GloFiber customer base by 77% over the past year. Similar to the high growth in broadband passings, We've grown total broadband data subscribers by 78% since the Q3 of 2019. Our track record over the past 4 years provides confidence for us to grow our broadband data subscriber base at similar growth rates in the next 3 to 4 years as we expand our GloFiber network.

Speaker 2

As reflected in Slide 6, The growth in broadband data subscribers has driven a steady expansion of our consolidated adjusted EBITDA margin year over year since 2019 when we launched GlobeFiber. The key catalysts for the margin improvement are the combination of extremely scalable fiber networks, which are driving incremental high speed data gross margins of more than 80% and our ability to gain scale in our selling, general and administrative expenses. We expect margins to continue to expand as we execute our GloFiber growth plan and close on our acquisition of Horizon. With that, I'll now turn the call over to Jim to review the details of our financial results.

Speaker 3

Thank you, Chris, and good morning, everyone. I will start with our broadband financial results for the Q3 2023 on Slide 8. Broadband revenue grew $5,100,000 were 8.1 percent to $67,400,000 GlobFiber revenue was the primary catalyst growing $4,400,000 or 90% from the prior year period, with strong customer growth and a 5.8% increase in data subscriber ARPU. Cable market revenues excluding the impact of our discontinued beam service grew 300,000 were 0.7%, due primarily to a 1% growth in data subscriber ARPU. Commercial fiber revenue grew 900,000 were 9.4 percent to $10,400,000 due to $500,000 in recurring revenue from circuit growth and $400,000 in non recurring early termination fees related to backhaul disconnects in the quarter.

Speaker 3

As previously announced, T Mobile is planning to shut down portions of the former Sprint network and disconnected 71 backhaul circuits during the Q3. We expect approximately 80 additional backhaul disconnects as part of this network rationalization. Broadband adjusted EBITDA grew 19.4 percent to $26,600,000 in the 3rd quarter when compared to the same period in 2022 due to revenue growth of $5,100,000 partially offset by $700,000 in higher advertising As Chris mentioned earlier, we continue to see the benefits of operating leverage of our Globe Fiber business as broadband cost of service increased only $100,000 despite adding 15,000 customers over the past 12 months. On Slide 9, Tower segment revenue was in line with the same period 2022. We have not recognized any churn from T Mobile year to date, So we have received notices that they plan to terminate 53 leases as part of the previously announced decommissioning of the former Sprint network.

Speaker 3

The Pay and Walk agreement with T Mobile that allowed T Mobile to terminate leases with only a $10,000 termination fee ended on September 1. These 53 leases will continue to generate rental revenue until all required equipment is renewed from the lease property and We expect the rental revenues could continue for up to 2 more years for a portion of these leases. Most of the remaining T Mobile tower leases have an initial term ending in 2029 with optional lease extensions to 2049. Tower adjusted EBITDA declined $400,000 due primarily to the accounting associated with the transfer of a cable only tower to the broadband segment and termination of the related intercompany ground lease. Moving to Slide 10, Consolidated adjusted EBITDA grew 20.5 percent to $22,900,000 also due to growth in broadband.

Speaker 3

We have $286,000,000 of liquidity as of September 30 as displayed on Slide 11. This liquidity position does not include the incremental committed financings related to the Horizon transaction. Negative free cash flow for the 9 for the 1st 9 months of 2023 was $23,000,000 more than prior year due primarily to increased investments in expanding Globe Fiber and government subsidized construction to unserved homes, partially offset by $29,000,000 in income tax and sales tax refunds received in 2023. Please also note we received $17,000,000 in proceeds from the closing of the 2.5 gigahertz spectrum sale in July that is reported separately from capital expenditures and the cash flow from investing activities. As reflected on Slide 12, our outstanding debt was $150,000,000 as of September 30.

Speaker 3

We have no significant debt maturities until 2026. We expect to draw the remaining $150,000,000 of delayed draw term loans in the 4th quarter for the terms of our credit agreement. And now, I'll turn the call over to Ned.

Speaker 4

Thank you, Jim, and good morning. I'll start on Slide 14 with an update on our rapidly expanding integrated broadband network that now consists of over 9,300 route miles of fiber. In the Q3, we launched 2 new Globe Fiber markets in Hanover County, Virginia and Greencastle, Pennsylvania, and we now offer Globe Fiber multi gigabit service in 21 markets with engineering and construction underway in 4 additional markets. We also added 5 new franchise agreements in the 3rd to bring GlobFiber to over 40,000 additional homes and businesses, including the City of Lancaster and additional boroughs and townships adjacent to our existing markets in Pennsylvania. Turning to Slide 15, our total number of approved Globe Fiber Passings has grown to 519,000 with 70 franchise agreements in 23 markets across 5 states.

Speaker 4

In addition, we continue to have success with government grant awards. In the Q3, we were awarded $2,600,000 in grants to bring broadband to approximately 1,000 additional unserved homes adjacent to our cable systems in West Virginia. We've now been awarded a total of approximately $90,000,000 in grants that will enable us to extend broadband over 28,000 unserved locations primarily through fiber to the home technology. Our engineering and construction teams continued to deliver in the 3rd quarter with the addition of over 20,000 new fiber passings, bringing our total to over 203,000, including approximately 1,000 that are part of government subsidized projects. In addition, our construction backlog remains very robust with 340 1,000 incremental passings approved for construction.

Speaker 4

Our construction pace is dependent on other utilities to process pole attachment permits and locate existing underground facilities. In some cases, the industry wide high volume of broadband deployments is causing delays for both permitting and locates. This is a risk we're monitoring closely and actively working with our utility partners to mitigate and we expect to finish the year with approximately 235,000 total fiber As we ramp up GloFiber construction, we continue to see strong customer growth as shown on Slide 16. As Chris mentioned, we saw GloFiber data customers increase 77% year over year, ending the quarter with over 37,000. We've added over 16,000 broadband data customers in the past year and our penetration rate climbed to 18.5% in the 3rd quarter, up from 16.1 percent a year ago.

Speaker 4

Our total number of data, video and voice revenue generating units has reached 46,000 up approximately 68% year over year. Our broadband data average revenue per user increased by 5.8% year over year and reached $77 for the quarter. This was driven by a combination of additional equipment revenue and customers selecting higher speed tiers. For the quarter, 47% of our new residential subscribers adopted speed tiers of 1 gig or higher, including approximately 4% that took speed tiers of 2 gig or higher. Flow TV video service is now available to over 99% The homes that we passed at the end of the 3rd quarter approximately 11% of our total GloFiber customers subscribed to video service and approximately 12% subscribed to voice service.

Speaker 4

And finally, our churn continues to remain very low at 1.1%, an improvement of 10 basis points over the Q3 of 2022. We continue to focus on providing the fastest speeds in our markets, outstanding local customer service and fair straightforward pricing. We recently surveyed almost 3,000 GloFiber customers and we were very pleased with our Net Promoter Score of 61. As comparison many broadband providers are in the single digits or even in the negative range. In addition, over 82% of our customers indicated that they have already recommended GloFiber to a friend or family.

Speaker 4

Moving to Slide 17, we highlight our data penetration rates as our markets age. All of our cohorts continue to see steady increases quarter over quarter. Our Q3 2022 cohort has already reached 18% penetration after 1 year and we're seeing penetration rates above 30% after 3 years. Our oldest cohort launched in late 2019 is now quickly approaching our target average terminal penetration rate of 38%. Let's move on to our operating results for our cable markets on Slide 18.

Speaker 4

Broadband data subscribers A slight increase year over year remained flat quarter over quarter and ended the Q3 at about 109,000. Our total revenue generating units decreased by about 3% year over year as we continued to see declines in video service and residential voice service due to cord cutting. Our data penetration decreased slightly year over year from 51.5% to 51.3% at the end of the 3rd quarter. Although we saw a slight increase in the number of broadband data subscribers year over year, we've also added almost 1500 new passings over the past year. Broadband data churn was 1.74 percent for the quarter and fairly consistent year over year despite over builder activity in some markets that we previously disclosed.

Speaker 4

We've increased broadband speeds in all of our markets, giving customers higher speeds and more value for the same price. As we have proactively moved customers to higher speeds, We've been able to maintain our ARPU, which is up 1% year over year to approximately $82 in the Q3 of 2023. Turning to Slide 19, we highlight our broadband enterprise and wholesale commercial fiber business. Through the Q3, we booked new sales monthly revenue totaling approximately $75,000 This is a decline versus Q3 of 2022. However, our year to date 2023 new sales bookings are in line with 2022.

Speaker 4

We also installed new services totaling almost 98,000 and incremental monthly revenue in the 3rd quarter, which is about 10% higher than our average over the past 4 quarters. Q3 2022 was elevated primarily due to the installation of a major E Rate customer generating over $27,000 in monthly revenue. For sell side backhaul connections, T Mobile continues to reduce the number of circuits as part of their Sprint network rationalization project. Over the past year, they removed 289 connections. And as Jim mentioned, we expect approximately 80 additional disconnects.

Speaker 4

The remaining cell sites are under long term contract. Our engineering operations team continues to provide a quality network experience for our customers And excluding the T Mobile network rationalization, churn and revenue compression for the commercial fiber business decreased year over year to 0.3% in the 3rd quarter. Turning to Slide 20 and our tower segment. We ended the 3rd quarter with 4 46 total tower tenants and approximately 2 tenants per tower. Our 3rd party tower tenants remain constant at 436.

Speaker 4

However, our intercompany tower leases decreased from 21 to 10 as we turned down Beam fixed wireless sites in 2022. As Jim mentioned, we do expect T Mobile to eventually reduce the number of tower leases as they complete their Sprint network rationalization project. And finally, our total number of towers decreased to 220 as we decommission 2 non revenue towers. Our capital spending and guidance for the year is reflected on Slide 21. We've invested approximately $190,000,000 in capital projects year to date.

Speaker 4

The significant increase year over year was driven by the ramp up of construction in our flow fiber markets and the unserved markets where we won government grants. We've invested approximately $18,000,000 in government subsidized projects year to date and we expect to be reimbursed for approximately 50% of these costs as we complete construction. For Globe Fiber, we've invested almost $140,000,000 year to date, including approximately $127,000,000 for Engineering and Construction and $13,000,000 to connect new customers. For the full year, we have lowered our capital spending guidance to a range of 2 $43,000,000 to $258,000,000 primarily due to fewer new fiber passings in government subsidized projects and Global Fiber Markets than originally planned for the year. In addition, we were able to postpone some planned cable system capacity upgrades while still increasing customer broadband speeds in our cable markets.

Speaker 4

Thank you very much. And operator, we're now ready for questions.

Operator

One moment for our first question. And our first question comes from Frank Louthan of Raymond James.

Speaker 5

Great. Thank you. Can you kind of sum up sort of the tower outlook? It seems like you're getting a little bit more fees and the shutdowns and so forth and things Taking a little longer. Where does that get us kind of from a quarterly run rate going forward?

Speaker 5

What's the expectation there? And then On the Horizon deal, I think you need about $250,000,000 or so to finish the funding. You're looking at that from Possibly a tower sale. What are your options for financing that? If you don't get the tower sale or it comes Sure.

Speaker 5

Would you look at the ABS market or anything like that? Thanks.

Speaker 3

Yes. Frank, I can jump in on both of those. Yes. We haven't seen any churn yet from T Mobile on the tower leases. They had given us proper notice under this agreement that ended September 1 for 53 leases that they plan to terminate.

Speaker 3

The timing is uncertain of exactly when those Leases will be terminated, but based upon recent conversations that our teams had with them, it sounds like this could be a more of a gradual Churn or disconnects than what we're seeing on the backhaul side. So my expectation is we'll probably see some of these leases Continue for up to maybe 2 more years based upon some of these conversations. And as you can see in our quarterly results, We're doing about $3,000,000 of adjusted EBITDA a quarter, about $12,000,000 annually. The 53 leases translate to about $2,200,000 in revenue churn when they're all fully Yes, terminated. So I hope that answers your first question.

Speaker 5

Okay, great. Yes.

Speaker 3

And then as far as for the additional capital growth capital that we need To fund our business plan, post acquisition of Horizon, we have multiple sources that we can look at. Powers is one of the sources we're going to explore. But the ABS market, as you mentioned, is another source that would be appealing to us, especially as our Globe Fiber markets, We're now getting several markets kind of go above that 20%, 25% penetration level, which would make them attractive candidates for the ABS financing. Lastly, I also mentioned our current credit facility, The first maturities occur in June of 'twenty six. So by early 'twenty five, we're likely to be in conversations to refinance that And that could also provide some additional capital.

Speaker 3

So we have several sources of how we can achieve our growth capital funding gap.

Speaker 5

All right. That's great. Last question. So the CapEx lowering this year, is that just kind of deferred into next year? How should we think about that?

Speaker 3

Yes, you are correct. We ran into some delays, as Ed mentioned, on especially on the Subsidized builds in getting access to some of the poles and just getting some of the locates done to locate facilities before we do on And that has had a cumulative effect here that we're not likely to get as many passings done in that area this year, but we hope to catch up in 2024.

Speaker 5

Anything on those items going to is that going to continue? Was that a temporary slowdown? Or is there something about The co ops or whatever that own the poles or the locate guys that's going to make that an ongoing problem or has that been addressed?

Speaker 4

Yes. This is Ed. It's really a volume issue for these folks. I think that we will continue to see some short term challenges. But even with this, we're projecting roughly a 25% increase in our number of fiber passings between 20222023.

Speaker 4

We think we can continue to scale, particularly as we ramp up construction in some additional markets. So we're continuing to have some challenges there, but we think we can still grow the number

Speaker 5

Can you mitigate that with some of your vendors by giving them some commitments or something ahead of time to devote some

Speaker 4

So in our case, we have the materials, we have our own construction crews ready to do the work. That's not where the issue is. It's with the actual the other utility companies. They're having trouble getting resources to do They're permitting work for the poles and then they're locates for the underground facilities. So in some cases, we're able to mitigate that by paying overtime work for Our overtime for the locators that are located in underground facilities, for example, we're also working in some cases to do It was called self remedy where we're able to adjust the other telecommunications facilities on the poles.

Speaker 4

So we're working on ways to mitigate that, but that's something we're going to be dealing with for the next year plus.

Speaker 5

Yes. Okay. Good deal.

Operator

And our next question comes from Hamzah Coruscant of BWS Financial.

Speaker 6

Good morning. Just on the topic about this CapEx shift and permitting and so forth. Would you be putting in more investment into Getting penetration rates up into the markets that you've already established and connected or are you just really Focused on the CapEx moving forward maybe next year?

Speaker 4

Amit, this is Ed. So we're very focused on increasing the penetration in our existing markets. That's the primary goal of our Sales and marketing teams are definitely focused in that area.

Speaker 6

How does Horizon fit into this, I guess you're planning scope for next year. Given that you're doing everything with Glow, the marketing involved, is there any Form of distraction is what I'm trying to get to.

Speaker 4

So we'll be using a separate Engineering and construction team in the Horizon market. So we don't feel that, that will be a distraction from the current construction we're doing in the global markets.

Speaker 6

Okay. Very good. Thank you.

Operator

Thank you. I'm showing no further questions at this Tom, I would like to turn it back to Jim Volk for closing remarks.

Speaker 3

Thanks everyone for joining us today and have a great day. Thank you.

Operator

This concludes today's conference call. Thank you for participating and you may now disconnect.

Powered by Quartr
Earnings Conference Call
Shenandoah Telecommunications Q3 2023
00:00 / 00:00