Shenandoah Telecommunications Q1 2023 Earnings Call Transcript

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Provided by Quartr
April 28, 2023

There are 7 speakers on the call.

Operator

Good morning, everyone. Welcome to Shenandoah Telecommunications First Quarter 2023 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Kurt Andrews, Director of Financial Planning and Analysis for Shentel.

Operator

Please go ahead.

Speaker 1

Good morning, and thank you for joining us. The purpose of today's call is to review Shentel's results for Q1 of 2023. 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.shentel.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.

Speaker 1

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 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.

Speaker 1

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'll now turn the call over to Chris. Go ahead, Chris.

Speaker 2

Thanks, Kurt. We appreciate everyone joining us this morning and I hope everyone is staying healthy and safe. We're off to a great start in 2023. As noted on Slide 4, we had a record quarter for our broadband segment driven by GloFiber results. GlobFiber net customer additions were just over 4,500 in the 1st quarter, 87% higher than the Q1 2022 and setting a quarterly record.

Speaker 2

Customer net additions benefited from the accelerating network expansion over the past few quarters. GlobFiber revenue more than doubled to $7,000,000 in the Q1, also a new high when compared to the same period a year ago Ann was the primary driver in achieving an all time high for quarterly broadband segment revenue and adjusted EBITDA. We're beginning to see the operating leverage and margin expansion in our broadband business as Globefiber accelerates growth And achieve scale. We now have a critical mass of Glow Fiber Markets with construction substantially complete Where we can drive up gross margins as we add customers with very little incremental network expense. We have a substantial opportunity to grow revenue, adjusted EBITDA and margins over the next few years As we increase our penetration rate from 17% to our target penetration rate of 38%.

Speaker 2

Moving to Slide 5 for an update on construction and customer growth. We added over 17,000 new GloFiber passings in 1st quarter and have increased passing 76% year over year to over 165,000 passings. Our sales team has more than kept pace with our construction team with GloFiber customers growing 109% to almost 29,000 by the end of March. Ed will provide more details on both our GloFiber network construction and customer growth later in the call. 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. Please refer to Slide 7 to review our financial results for the Q1 2023. Please note that we have broken out residential and SMB revenue between our cable markets and our Globe Fiber markets for the current period and prior year period, and we will continue this recording going forward. In addition, all of the government grant unserved residential passings that we were awarded And are at different degrees of construction surrounding existing cable or globe fiber market and will be reported with the adjacent market With most of the grant passings and customers reported in the Cable market segment. Turning now to our Q1 results, Broadband revenue grew $7,500,000 or 12.5 percent to $67,200,000 GloFiber revenue was the primary catalyst, Growing $3,600,000 or over 100 percent from the prior year period with strong customer growth, as Chris mentioned earlier, and steady ARPU.

Speaker 3

Commercial fiber revenue grew $2,600,000 or 28.6 percent to $11,700,000 Due to $800,000 in recurring revenue from circuit growth and $1,800,000 in non recurring Early termination fees related to backhaul disconnects in the quarter. As previously announced, T Mobile is planning to shut down the former Sprint network And disconnected 188 backhaul circuits during the Q1. We expect an additional 174 backhaul disconnects later in the year as part of this network rationalization. Broadband adjusted EBITDA grew 25% The $26,300,000 in the Q1 when compared to the same period in 2022 due to strong revenue growth, Partially offset by higher expenses with $1,700,000 to support the Globe Fiber expansion and $300,000 in higher software related costs From system upgrades. As Chris mentioned earlier, we are beginning to see the benefits of operating leverage as our Glo Fiber market scale.

Speaker 3

Adjusted EBITDA margins grew to 39.2% from 35.3% in the same period last year. Excluding the $1,800,000 in non recurring early termination fee revenue, broadband revenue and adjusted EBITDA Would have grown at a very strong pace of 9.5% and 16.4%, respectively, and our adjusted EBITDA margins would have been 37.5 percent or 220 basis points improvement from the Q1 2022. On Slide 8, Power segment revenue and adjusted EBITDA declined slightly by $300,000 to $4,600,000 and $2,900,000 respectively, due primarily to lower application fee revenue and intercompany revenue from decommissioning our Beam network. Moving to Slide 9. Consolidated revenue grew 11.3 percent to $71,700,000 in the 1st quarter Due to the previously mentioned growth in broadband, consolidated adjusted EBITDA grew 28.6 percent to $22,400,000 Also due to growth in broadband, we have $348,000,000 of liquidity as of March 31 as displayed on Slide 10.

Speaker 3

Negative free cash flow for the Q1 was $10,000,000 less than prior year as we collected 29,000,000 And income tax and sales tax refunds during the Q1, supplementing the net cash provided by operations. We expect to close on our 2.5 gigahertz spectrum sale, which will generate cash proceeds of $17,000,000 by the end of the third quarter. As reflected on Slide 11, we have no material debt maturities until 2026. We continue to be in a strong liquidity position To accelerate our fiber network expansion plans without having to raise additional capital. And now, I'll turn the call over to Ed.

Speaker 4

Thanks, Jim, and good morning, everyone. I'll start on Slide 13 with our integrated broadband network. We had a record quarter for fiber construction, adding approximately 300 new route miles of fiber for new globe fiber passings, New commercial fiber customers and our new government grant projects in unserved areas. Our network now consists of over 8,600 route miles of fiber And we are on track to accelerate construction in the second half of the year. In the first quarter, we also announced State College Pennsylvania as our newest Globe Fiber market.

Speaker 4

Engineering work is currently underway and we plan to start construction in 2024 for over 15,000 homes and businesses in the borough and adjacent townships. As we finalize additional franchise agreements in the market, this number will increase. We now have GLOW franchise agreements in place with where we won government grant funding for unserved areas and we will be ramping up construction in the remainder of the year. Turning to Slide 14, we now have 460,000 approved Goldfiber passings with franchise agreements in place. This is more than enough to enable us to reach our goal of constructing 450,000 new greenfield passings by 2026.

Speaker 4

In addition, we continue to have success with government grants and we recently won additional grants totaling 9,400,000 in Frederick County, Maryland to bring fiber to over 1500 unserved homes. We've now been awarded a total of over $81,000,000 in grants That will enable us to extend broadband to over 25,000 unserved locations, primarily through fiber to the home technology. With the completion of over 17,500 new Glow Fiber Passings and over 200 new government subsidized fiber passings in the Q1, We now pass over 165,000 homes and businesses with fiber. In addition, our construction backlog remains very robust With 317,000 additional passings approved for construction. As we ramp up construction, our data penetration in existing Globe Fiber markets is Turning to Slide 15 for our GloFiber operating results.

Speaker 4

You can see that our number of GloFiber customers has more than doubled over the past year, Ending the quarter at almost 29,000. Our digital marketing campaigns have been very successful and our website is now our leading sales channel accounting for approximately 35% of all sales. As Chris mentioned, this was a record quarter for us as our broadband data penetration rate climbed 17.4%, up from 14.7% a year ago. Our total number of data, video and voice Revenue generating units also approximately doubled year over year to over 36,000. Our average revenue per user of $74 was in line with our Q1 2022 results and we saw an increase of $0.70 Quarter over quarter, driven primarily by increases in equipment revenue.

Speaker 4

In the Q1, approximately 42% of our new residential Subscribers adopted speed tiers of 1 gig or higher, including approximately 5% that took speeds of 2 gig or higher. Our FLOW TV video service is available to about 85% of our FLOW Fiber Passings and the video attachment rate for 1st quarter was approximately 13% in areas where the service is available. Our voice service is available to all GloFiber Passings Attachment rates were approximately 11% for the quarter. At the end of the Q1, approximately 14% of our total Glo Fiber customers Subscribed to video service and approximately 13% subscribed to voice service. And finally, our churn continues to remain very low At 0.86 percent for the quarter.

Speaker 4

Slide 16 highlights our data penetration rates as markets age. 18 months after launching in Neighborhood, we typically reach data penetration rates of 20%. We are continuing to see a steady climb in penetration As our markets mature and brand awareness increases and we expect to reach an average terminal penetration rate of approximately 38% 5 to 6 years after a market is launched. Let's move on to our operating results for our cable markets on Slide 17. Our broadband data RGUs grew approximately 2.5% year over year and we ended the quarter at just under 110,000.

Speaker 4

Our data penetration increased year over year from 50.7% to 51.8% at the end of the first quarter And we added approximately 300 broadband data RGUs in the quarter. Total RGUs remained fairly constant year over year at approximately 188,000. We continue to see declines in our video service and residential voice service due to cord cutting, but commercial voice services are growing. Broadband data average revenue per user remains strong and increased approximately 2.4% year over year So almost $83 as customers continued to migrate to higher speed tiers. And finally, churn was up approximately 20 basis points year over year to 1.52 Thank you for the quarter.

Speaker 4

An increase in non paid disconnects was a primary factor in the uptick in churn and it appears that macroeconomic conditions are impacting some of our lower To a lesser extent, competition impacted churn. As we previously disclosed, we see increased competition in some markets As adjacent broadband providers edge out into portions of our service areas. Turning to Slide 18, We highlight our broadband enterprise and wholesale commercial fiber business. During the Q1, we booked new sales with monthly revenue totaling approximately $105,000 We installed new services totaling $82,000 in incremental monthly revenue. Several major contracts that we signed at the end of 2022 The beginning of 2023 requires significant construction.

Speaker 4

In these cases, we are seeing a delay between contract signature and revenue, We expect our revenue from installed services to improve in the second half of the year as we complete these construction projects. T Mobile continues to reduce the number of backhaul connections as part of their Sprint network rationalization project. Over the past year, they've removed 203 connections. And as Jim mentioned, we expect 174 additional disconnects in 2023. The remaining 166 sites are under a long term 7 year contract.

Speaker 4

As part of this contract, we are building fiber 4 T Mobile regional switching centers in 2023 with the first already completed. These switching center connections create additional backhaul opportunities And we recently signed agreements for 5 new T Mobile backhaul circuits. Excluding T Mobile, churn and revenue compression for our commercial fiber business Remains very low at approximately 0.6% for the Q1. Turning to Slide 19 and our tower segment, Our number of revenue producing towers and 3rd party tower tenants remained constant year over year. However, our intercompany leases decreased from 33 to 10 As we turn down Beam fixed wireless sites in 2022.

Speaker 4

We ended the Q1 with 4.45 total tower tenants and approximately 2 tenants per tower. As we previously disclosed, we expect T Mobile to reduce their number of tower leases from 262 to approximately 192 As they complete their Sprint network rationalization project later this year. Finally, Slide 20 provides our capital spending and guidance for the year. We finished the Q1 with approximately $68,000,000 in capital investments. The significant increase over the Q1 of 2022 was primarily driven by the ramp up Construction in our Globe Fiber Markets and the Unserved Markets where we won government grants.

Speaker 4

We invested almost $7,000,000 in government subsidized projects, including engineering materials and preliminary construction work toward the 4,000 new passings we expect to complete in 2023. For GloFiber, we invested approximately $50,000,000 in the Q1, including approximately $40,000,000 for engineering and construction, $4,000,000 to connect new customers and $5,000,000 in additional fiber and equipment inventory to support construction activities in the second half of twenty twenty three. For the full year, our guidance remains in the $260,000,000 to $300,000,000 range as we continue to invest aggressively to accelerate construction of our fiber to the home networks. Thank you very much. And operator, we're now ready for questions.

Operator

Thank you. Our first question comes from the line of Frank Louthan with Raymond James. Your line is now open.

Speaker 3

Hey, guys. It's Rob on for Frank. Hey, so what's the long term margin potential of the business after you guys get the current homes built? And then as a follow-up, how would you rank your capital allocation priorities today? Thank you.

Speaker 3

Yes, Rob, I'll start with the first one. We got to 30 if you exclude the early termination Revenue from T Mobile this quarter, we did see margin expansion in our broadband business of a little bit over 200 basis points to 37%. Mike, as we continue to scale and add more customers, specifically in the Glow existing markets, We expect that broadband EBITDA margin will get up to about 43% by 2025, which is consistent with where we Started this back in 2018 before we had the dilutive effects of launching a new Line of business like low fiber. We also launched Beam and then shut down Beam. And we've also been updating Our system upgrades and we had some increases in our software related costs.

Speaker 3

Most of that is now behind us. So as we move forward, we should start to see some regular expansion in our EBITDA margins on the broadband side of the business To get to, like I said, back to where we started at 43% in the next 2 years, and there's plenty of room above that as we slow down our investments In the 2026, 2027 timeframe, those broadband adjusted EBITDA margins should get even higher than that.

Speaker 4

Hey, Rob, I'll jump in on the capital spending. Our priority remains You're focused on extending our fiber to home networks. Roughly 75% of our entire capital budget this year is focused on adding new Our broadband passings both in GloFiber and our government subsidy projects.

Speaker 5

Great. Thank you, guys.

Operator

Thank you. One moment for our next questions. And the next question comes from the line of Dan Day with B. Riley Financial. Your line is now open.

Speaker 4

Yes.

Speaker 6

Good morning, guys. Appreciate you taking the question. So, been in the news a little lately about availability of labor for fiber builds being tight. It's kind of been out there a lot, but it's just seen a little more recently. You're seeing contractors having like no capacity to take on new projects, Some fiber over builders sort of maybe in housing some things that they had previously contracted out.

Speaker 6

So just wondering what you're seeing on that front And any potential savings from the housing versus contracting?

Speaker 4

So, yes. So, good morning. Appreciate the question. So from a contractor standpoint, we've had success holding on to our contractors. We've got over 100 construction crews right now Working in over a dozen different markets, mainly regional folks.

Speaker 4

We've had long term relationships with most of these contract firms. So So we feel pretty good about that. We are bringing some of our labor in house, particularly splicing work. We're bringing that work in house and also we're bringing in drop bury crews to install the dropberries to customers' homes. So we are shifting some of that in house and it's more about not only saving money by doing that, but also making sure we have Reliable crews that we can get that work done.

Speaker 6

Understood. Thanks. And then On Global Fiber, the ARPU, and you might have talked about this, sorry, I hopped on the call a little late, but the ARPU ticked back up, where it was a year or so ago. Last time we were on, you guys had talked about launching that 100 meg tier on customer demand. I think that resulted in a couple of quarters of it going a little lower as people Adopted that tier.

Speaker 6

So just what you're seeing most recently as far as the puts and takes within Globe Fiber for Arco and Speed Tiers?

Speaker 4

Yes. So the big factor there is equipment revenue. Prior to the Q1, we were actually offering Free WiFi equipment in the home for 12 months to some customers. We've stopped offering the free WiFi equipment as a promotion. That's why we had this roughly $0.70 uptick in the ARPU for the quarter.

Speaker 4

We continue to see customers take Our higher tier services, as I mentioned, over 42% of our customers are taking 1 gig or higher.

Speaker 6

Okay. That's all I had guys. Thanks for the time.

Speaker 3

Thanks, Dan.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Hamed Khorsand With BWS Financial, your line is now open.

Speaker 5

Good morning. The first question I had was just related to your comments about the Customers that dropped off were not paying. Has that been a factor before in a recession environment? And how do you adjust for that given that you're currently building out in these markets with fiber?

Speaker 4

So I would say, yes, it has been a factor during past recessionary times. It's something we're monitoring very closely. We have seen the outstanding overdue balances come down. So we're hoping that's moving in the right Direction, but something we're monitoring very closely at this point.

Speaker 5

Okay. And then as far as the Fiber build goes, this past quarter, the CapEx that you spent, was that because of weather? And how does that Play out for the rest of the year as far as your CapEx goes. Are you accelerating any programs?

Speaker 4

We will be accelerating the number of new fiber passings throughout the year. We spent Q1 building a lot of connections out to the neighborhoods. We had to build from our pops out to the neighborhoods. And then in the following quarters, particularly in the second half of the year, we'll be connecting more of those neighborhoods, Particularly in some of our newer markets that we recently launched.

Speaker 5

Okay, great. Thank you.

Operator

And at this time, I'm showing no further questions. I'd like to hand the conference back over to Mr. Jim Volk for closing remarks.

Speaker 3

Thank you for joining us on a Friday morning. We look forward to updating you on our fiber first growth plan in future quarters. Have a good day.

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Earnings Conference Call
Shenandoah Telecommunications Q1 2023
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