Southern Missouri Bancorp Q2 2023 Earnings Call Transcript

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August 2, 2023

There are 9 speakers on the call.

Operator

Good morning, everyone. Welcome to Shenandoah Telecommunications Second 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 Q2 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 at.schentel.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 are cautioned not to place undue reliance on these forward looking statements. Except as required by law, we undertake no obligation And with that, I will now turn the call over to Chris. Go ahead, Chris.

Speaker 2

Thanks, Kirk. We appreciate everyone joining us this morning, and I hope everyone is well. I'm pleased with the continuation of our fiber first growth during the Q2 and with the solid execution across the board. As noted on Slide 4, we added almost 18,000 new GloFiber passings in the 2nd quarter and have increased passing 63% year over year to just under 183,000. Our sales team added 4,000 data subscribers in the 2nd quarter and has grown the GloFiber customer base by 92% over the past year.

Speaker 2

GloFiber revenue grew 101% over the same quarter last year and represented 78% of our consolidated revenue growth. We expect these GloFiber revenue trends will continue and be a catalyst for creating shareholder value over the next several years. Our Cable and Commercial businesses also reported Solid recurring revenue growth of $900,000 $500,000 respectively. With strong expense management, Our broadband segment converted 77% of the revenue growth into adjusted EBITDA growth during the 2nd quarter, driving adjusted EBITDA margins to 39% or 300 basis points higher than the same period a year ago. Fiber Networks are extremely scalable, driving high speed data gross margins of more than 80%.

Speaker 2

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 6 to review our financial results for the Q2 of 2023. Broadband revenues grew $5,300,000 We're 8.6 percent to $66,700,000 As Chris noted, GlobFiber revenue was the primary catalyst Growing $4,100,000 or over 100 percent from the prior year period with strong customer growth and a slight increase in ARPU. Cable market revenues grew $900,000 or 2.2 percent due to growth in ARPU and excluding the impact Commercial fiber revenue grew $900,000 or 9.8 percent to $10,300,000 due to $500,000 in recurring revenue from circuit growth and $400,000 in non recurring Early termination fees related to the backhaul disconnects in the quarter. As previously announced, T Mobile was planning to shut down The former Sprint network disconnected 22 backhaul sites during the Q2.

Speaker 3

We expect an additional 151 backhaul disconnects Later in the year as part of this network rationalization. Broadband adjusted EBITDA Grew 18.4 percent to $26,100,000 in the 2nd quarter when compared to the same period in 2022 Due to revenue growth of $5,300,000 partially offset by $1,200,000 in higher expenses due to higher advertising expense, Primarily to support the GlobFiber expansion. As Chris mentioned earlier, we continue to see the benefits of operating leverage of our GlobFiber business. Adjusted EBITDA margins grew to 39% from 36% in the same period last year and consistent with the Q1 of 2023, which included higher early termination fees from T Mobile. On Slide 7, Tower segment revenue and adjusted EBITDA were in line with the same period 2022.

Speaker 3

We have not Recognize any churn from T Mobile to date, though we have received notices that they plan to terminate 53 leases as part of the previously announced decommissioning of the Moving to Slide 8, consolidated revenue grew 8.1% to $71,300,000 in the 2nd quarter due to the previously mentioned growth in broadband. Consolidated adjusted EBITDA grew 21.1 percent $22,500,000 also due to growth in broadband. We have $301,000,000 of liquidity as of June 30th As displayed on Slide 9, negative free cash flow in the first half of twenty twenty three was $16,000,000 more than the prior year due primarily to increased investments in expanding GloFiber and government subsidized construction to unserved homes, Partially offset by $29,000,000 in income tax and sales tax refunds received during the Q1. We also closed on the 2.5 gigahertz spectrum sale in July, which generated cash proceeds of 17,000,000 As reflected on Slide 10, we have no significant debt maturities until 2026. We amended our credit facility in the Q2 of 2023 to change our variable base rate from LIBOR to SOFR, Extend the delayed draw end date to December 31, 2023 and delay the beginning of term loan repayments to March 24.

Speaker 3

We expect to save approximately $4,000,000 in interest expense during 2023 as a result. And now, I'll turn the call over to Ed.

Speaker 4

Thanks, Jim, and good morning, everyone. I'll begin on Slide 12 with an update on our integrated broadband network that now We have confirmed that we have no lead sheath cables in our network. We had another record quarter for fiber construction as we built over 350 new route miles for GloFiber Passings, commercial fiber customers and government grant projects in unserved areas. This was an improvement of more than 20% over our construction rate in the Q1 and we are on track to accelerate our number of fiber passings in the second half

Speaker 5

of the year. At the end

Speaker 4

of the Q2, we turned up our newest GloFiber markets of Shippensburg in Waynesboro in Pennsylvania, and we now have GloFiber multi gigabit service Turning to Slide 13, our number of approved GloFiber Passings has grown to 478,000 with 65 franchise agreements in 23 markets across 5 states. In addition, we continue to have success with government grant awards. And in the Q2, we were awarded $6,300,000 in grants that will enable us to extend broadband to over 27,000 unserved locations, primarily through fiber to the home technology. In In the Q2, we added over 18,000 new fiber passings, including 400 new government subsidized passings, and we now pass more than 183,000 homes and businesses In addition, our construction backlog remains very robust with 319,000 incremental passings approved for construction. As we ramp up construction, we continue to see strong customer growth as shown on Slide 14.

Speaker 4

As Chris mentioned, we saw GloFiber data customers increase 90 2% year over year, ending the 2nd quarter with almost 33,000. We've added almost 16,000 broadband data customers in the past year Our penetration rate climbed to 18% in the 2nd quarter, up from 15.2% a year ago. Our Total number of data, video and voice revenue generating units has reached almost 41,000, up approximately 81% year over year. Our broadband data average revenue per user increased by 1.5% year over year and reached $75.63 for the quarter. This was driven by a combination of additional equipment revenue and customers selecting higher speed tiers.

Speaker 4

For the quarter, almost 43% of our new residential GloTV video service is available to about 89% of our Glo Fiber Passings and the video attachment rate for the Q2 was approximately 11% in areas where the service is available. Our GloVoIP service is available to all GloFiber passings and the attachment rate was over 11% for the quarter. At the end of the Q2, approximately 12% of our total GloFiber customers subscribed to video service and approximately 12% subscribed to voice service. And finally, our churn continues to remain very low at 1.1%, an improvement of 11 basis points over the Q2 of 2022. Moving on to Slide 15, we highlight our data penetration rates as the markets age.

Speaker 4

Our cohort that launched a year ago in the second with a weighted average increase of about 2%. We continue to expect to reach an average terminal penetration rate of approximately 38% 5 to 6 years after market is launched. Let's move on to our operating results for our cable markets on Slide 16. Broadband data customers grew approximately 1.4% year over year and we ended the quarter at about 109,000. Our total revenue generating units decreased year over year by about 2% as we continued to see declines in video service and residential voice service due to cord cutting.

Speaker 4

Our data penetration increased year over year from 51% to 51.3% at the end of the second quarter. However, we saw a decline of approximately 500 broadband data RGUs in the quarter. From a seasonality standpoint, the 2nd quarter is typically our slowest quarter. In addition, broadband data churn was up 14 basis points year over year at approximately 1.8% for the quarter. The increase was driven by 5 basis points of involuntary churn, which we believe was due to softness in the economy in some of our markets, with the remaining 9 basis points due to voluntary churn.

Speaker 4

As we previously disclosed, we have some overbuilder competition in our markets. Our percentage of incumbent cable passings with a cable or fiber competitor is currently in the high teens and we expect this to grow to approximately 25% over the next few years with announced construction projects. I will point out that approximately 23,000 of our planned government subsidized passings will extend broadband unserved areas around our cable markets and we see this as an excellent opportunity for broadband subscriber growth as we complete construction over the next several years. Broadband data average revenue per user remains strong and increased approximately 2.1% year over year $82.55 as customers continue to migrate to higher speed tiers. In the Q2, we also completed speed rolls bringing higher speeds and more value to our customers Turning to Slide 17, we highlight our broadband enterprise and wholesale commercial fiber business.

Speaker 4

During the Q2, we booked new sales with monthly revenue totaling approximately $102,000 a 5% improvement year over year. Our wins for the quarter included 3 new E Rate contracts, bringing our total to more than 40 school systems and a dozen library systems under contract. We also installed new services totaling $85,000 in incremental monthly revenue, a 30% improvement over the Q2 of 2022. For cell site backhaul connections, T Mobile is our largest customer and they continue to reduce the number of circuits as part of their Sprint network rationalization project. Over the past year, they have removed 222 connections.

Speaker 4

And as Jim mentioned, we expect approximately 151 additional disconnects in 2023. The remaining 167 sites are under a long term 7 year contract. Excluding T Mobile, Turning to Slide 18 and our tower segment. We ended the quarter with 4 48 total tower tenants and approximately 2 tenants per tower. Our 3rd party tower tenant Increased to 4.37 however, our intercompany tower leases decreased from 31 to 11 as we turned down beam fixed wireless sites in 2022.

Speaker 4

As Jim mentioned, we do expect T Mobile to reduce the number of tower leases as they complete their Sprint network rationalization project later this year. Finally, Slide 19 provides our capital spending and guidance for the year. We've invested approximately $136,000,000 in capital projects year to date. The significant increase year over year was driven by the ramp up of construction in our low fiber markets and the unserved markets where we won government grants. We've invested almost $14,000,000 in government subsidized projects year to date and we expect to be reimbursed for approximately 50% of these costs as we complete construction.

Speaker 4

For Glo Fiber, we've invested $99,000,000 year to date, including approximately $90,000,000 for engineering and construction and $8,000,000 to connect new customers. For the full year, our guidance remains in the $260,000,000 to 300,000,000 Thank you very much. And operator, we're now ready for questions.

Operator

Thank Our first question comes from the line of Frank Louthan of Raymond James.

Speaker 6

Great. Thank you. Is there anything you can do to sort of accelerate the marketing and penetration of broadband? Just curious if we Start to see a broader ramp with that with the passings. And then walk us through sort of longer term your leverage plans.

Speaker 6

Where do you see yourself peaking on leverage? And then How quickly can that EBITDA grow to bring that back down and where are you comfortable sort of in the long term as a baseline target? Thanks.

Speaker 4

Yes. So thanks for the question, Frank. So this is Ed. I'll start. So as far as ramping up the Cloak customer We are continuing to focus on sales through our web sales channel.

Speaker 4

That's our most cost effective channel. We have seen a significant increase year over year in the percentage of sales through the web. We have also started to offer some Additional promotional activity on that web channel to encourage sales there and we're seeing good traction from that. And then I'll let Jim answer the question on the leverage.

Speaker 3

Yes, Frank, we expect peak leverage To get to about 3.9x in 2025 and then we it should start to decline and by 2027, We should be down to about 2.5 and declining well beyond that as we start to as GlobFibre starts to kick off a lot of free cash flow.

Speaker 6

All right, great. That's helpful. Thank you.

Operator

Thank you. Stand by for our next question. Our next question comes from the line of Dan Day of B. Riley.

Speaker 5

Just a quick one for me. Any updated thoughts on how you're looking at M and A as you capital allocation lever? You talked a little bit about it in the past, Whether it's something you're actively looking into or just sort of view it more as maybe it's something that comes, maybe it doesn't.

Speaker 3

Yes, Dan. Again, we continue to look for to be opportunistic and look for another Beachhead to continue our global fiber expansion strategy and that could come in the form of buying an incumbent cable business, buying a fiber business. We would entertain either one. Ideally, it would be sizable enough that would have a good strong Base business, but with the opportunity to expand out from there to again kind of replicate what we're doing in the Mid Atlantic area in other parts of the country.

Speaker 5

This is the 2nd straight quarter with the EBITDA margin over 31% combined.

Speaker 4

At the end of the

Speaker 5

year, I think it's a little higher than we had been modeling and talking about. Just talk about the timing of

Speaker 7

the business, the timing of the business, the timing of the business, the timing of the business, the timing of the business, the timing of the business, the timing of the business, the timing of the business, the timing of the business, the timing of the business, the timing

Speaker 3

of the business, the timing of the business, the timing of the business, the timing of the business, the

Speaker 5

Whether there's anything that the T Mobile network rationalization that's keeping that a little high longer,

Speaker 3

Yes. So Dan, We're still T Mobile is still in the process of rationalizing the network. And as we Ed and I both mentioned on the call, there's more churn to come from that. We expect for the 12 months following the end of that process, which is likely to be this year, that the margin will probably go down by 200 basis points, but then after that, you should with all that flushed through the system, you should start to see margins We'll grow pretty rapidly as GlobFiber continues to grow and penetrate. And we're Thinking going back to the broadband business, getting the broadband EBITDA margin should be in the 40% range by, Call it 25 and then growing increasingly year after year from there.

Speaker 5

Do you have a goal for when you expect just Glove Fiber itself to be EBITDA

Speaker 3

Dan, we turned EBITDA positive at the end of last year, and we are EBITDA positive this year, Likely to be single digits in terms of EBITDA, but we are we have been positive all of 2023.

Operator

Thank you. Our next question comes from the line of Hamed Khorsand of BWS Financial.

Speaker 8

Hey, good morning. So first question is, is there anything going on in Globe as far as marketing is concerned or competition is concern where the quarterly ads fluctuate even though your passings continue to go up?

Speaker 4

No, I would say historically, the Q2 is the slowest quarter for us, but really No significant changes from a competitive standpoint. In fact, we've seen the competition back off on some of their more competitive promotional offers that

Speaker 8

And with the warmer months kicking in as of Q2, Should I expect CapEx plan just accelerates here before winter comes around? Will there be any passings in Q3?

Speaker 4

Yes. So a lot of the construction we did in Q2 was in preparation for passings in Q3. A lot of the markets we're building in right now are markets where we did not have existing fiber infrastructure in place. So we had to establish a pop and then build fiber out to the neighborhoods. A lot of our construction in the Q2 was building that fiber to get out to the neighborhoods.

Speaker 4

So we think we're well positioned to accelerate construction in the second half of the year.

Speaker 8

Okay. And then The cash you received from the Spectrum sale, is that just going to be used purely for the CapEx program?

Speaker 3

Yes, Yvette. We plan to reinvest that into the broadband business.

Speaker 8

Okay, great. Thank you.

Speaker 3

Thanks, Yvette.

Operator

Thank you. As there are no more questions in queue, I would now like I turn the conference back to Jim Vo for closing remarks. Sir?

Speaker 3

Yes. Thank you all for joining. We look forward to updating you on our progress in future quarters. Have a great day.

Operator

And this concludes today's conference call. Thank you for participating. You may now disconnect.

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Earnings Conference Call
Southern Missouri Bancorp Q2 2023
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