Shenandoah Telecommunications Q4 2023 Earnings Call Transcript

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February 21, 2024

There are 8 speakers on the call.

Operator

Good morning, everyone. Welcome to Shenandoah Telecommunications 4th 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 at 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 Q4 and full year 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 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 statements. And with that, I will 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 well. 2023 was another strong year for Shentel as we continued executing our Globe Fiber expansion plan. As you can see on Slide 4, consolidated revenues and adjusted EBITDA grew approximately 8% 19%, respectively, driven by GloFiber subscriber growth. Since our 1st full year of launching GlobFiber in 2020, our consolidated revenue and adjusted EBITDA have grown at a compound annual growth rate of approximately 9% 18%, respectively.

Speaker 2

We believe this is an industry leading pace among publicly traded broadband companies. As noted on Slide 5, we had over 41,700 GlobFiber subscribers as of December 2023, an increase of over 71% compared to 2022 and over 10x 2020 subscribers. Globefiber revenues have grown over 160% per year over the past 3 years, fueling our industry leading consolidated revenue and adjusted EBITDA growth rates. Moving to Slide 6, we added over 86,000 new GlobeFiber passings in 2023, almost a 20% increase from 2022 and over a threefold increase from 2020 levels. Our sales team has more than kept pace with our construction team.

Speaker 2

We added over 17,000 GloFiber net customers, representing a more than 32% increase over 2022 and a 62% annual growth rate since 2020. We expect to accelerate the pace of Glo Fiber construction and sales again in the next year, continuing the annual improvements we've made in each of the past 3 years. Before I turn the call over to Jim, I'd like to give an update on our pending acquisition of Horizon Telecom. We've received most of the required regulatory approvals and expect to close the transaction in the 2nd quarter depending on the timing of the remaining regulatory approval. The Shentel and Horizon teams have been working well together in planning for the integration of the 2 companies.

Speaker 2

We now expect most of the system integration work to be completed in the Q1 of 2025. 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 2023 on Slide 8. Broadband revenue grew $20,300,000 or 8.1 percent to 269,300,000 dollars As Chris just mentioned, Globefiber revenue was the primary catalyst growing $16,800,000 or 92% for the prior year with strong customer growth of over 71% and a 4% increase in data subscriber ARPU. Cable market revenues excluding the impact of our discontinued Beam service grew $2,500,000 or 1.4 percent due primarily to 1.8% growth in data subscriber RFP. Commercial fiber revenue grew $3,300,000 or 8.5 percent due primarily to $3,000,000 in non recurring early termination fees related to backhaul circuit disconnects.

Speaker 3

T Mobile disconnected 338 backhaul circuits during 2023 as part of the previously announced shutdown of the former Sprint network. With most of the T Mobile backhaul disconnects now behind us, we expect commercial fiber revenue in 2024 to decline by $3,000,000 in lower backhaul revenue from a full year of lower T Mobile backhaul circuits, $3,000,000 in lower non recurring early termination fees and $1,000,000 in additional T Mobile churn in 2024, partially offset by continued growth in other customer segments. We expect commercial fiber revenue to return to mid to high single digit growth rates starting in 2025. Broadband adjusted EBITDA grew $15,800,000 or 17.6 percent to $105,800,000 in 2023 when compared to 2022, due to the previously mentioned revenue growth of $20,300,000 partially offset by $4,600,000 in higher advertising expenses to support the GlobetFiber expansion. Broadband adjusted EBITDA margin expanded 320 basis points year over year to 39.3 percent as we continue to see the benefits of operating leverage of our fiber network.

Speaker 3

As the broadband cost of service declined slightly year over year despite adding over 17,000 growth fiber customers over the past year. On Slide 9, Tower segment revenue declined slightly to $18,600,000 due primarily to lower intercompany revenue for the decommissioning of Beam fixed wireless network in 2022. We have not recognized any tower lease churn from T Mobile to date. We still expect T Mobile to terminate 53 leases as part of the previously announced pay and walk agreement, though the timing is uncertain. These 53 leases will continue to generate rental revenue until all required equipment is removed from the leased property and an inspection notice is issued.

Speaker 3

Tower adjusted EBITDA declined 300,000 dollars to $11,600,000 due primarily to the lower intercompany revenue. Moving to Slide 10, consolidated revenue grew 7.5 percent to $287,400,000 in 2023 due to the previously mentioned growth in broadband. Consolidated adjusted EBITDA grew 19.3 percent to $90,600,000 also due to growth in broadband. Adjusted EBITDA margins expanded year over year from 28.4% to 31.5% in 2023 due to the scaling of our fiber network. Please note that we expect our consolidated revenue and adjusted EBITDA growth rates to slow in 2024 due to the previously mentioned $7,000,000 and expected decline in broadband T Mobile revenue.

Speaker 3

We expect consolidated revenue and adjusted EBITDA to return to similar growth rates in 2025 as we've reported over the past 3 years. We have $239,000,000 of liquidity as of December 31, as displayed on Slide 11, consisting of $139,000,000 in cash and $100,000,000 in available revolving line of credit. We drew down the remainder of our $300,000,000 delayed draw term loans during the Q4 prior to the expiration of its availability. This liquidity position does not include the incremental $356,000,000 in committed credit facility and preferred equity financings related to the Horizon transaction, which will close on the same day as the Horizon merger. Negative free cash flow for 2023 was $143,000,000 or $28,000,000 more than prior year due primarily to increased investments in expanding low fiber and government subsidized construction to unserved homes, partially offset by $26,000,000 in income tax and sales tax refunds in 2023.

Speaker 3

Please note, we received $17,300,000 in proceeds from the

Speaker 4

closing of the

Speaker 3

2.5 spectrum sale and $1,900,000 in government grants related to unserved home construction that are reported separately from capital expenditures in the cash flow from investing activities. As reflected on Slide 12, our outstanding debt was $300,000,000 as of December 31. We have no significant debt maturities until 2026. And now I'll turn the call over to Ed.

Speaker 5

Thank you, Jim, and good morning, everyone. I'll start on Slide 14 with an update on our integrated broadband network. We had a record quarter for fiber construction adding over 33,000 new fiber passings and constructing almost 500 new route miles of fiber. The Q4 marked a milestone where GloFiber now passes more homes and businesses than our incumbent cable markets. In the Q4, we launched the new Globe Fiber market of Salisbury, Maryland and we now offer Globe Fiber multi gigabit service in 22 markets with 3 additional market launches planned for 2024.

Speaker 5

Turning to Slide 15, our total number of approved GloFiber passings has grown to 500 and 64,000 primarily driven by a new franchise agreement to expand fiber services to approximately 40,000 additional homes and businesses in Frederick County, Maryland. We now have 74 franchise agreements in 25 markets across 5 states. We continue to work through challenges with pole attachment permits and underground locates and our engineering and construction teams delivered a very strong Q4 adding over 31,000 new global fiber passings and over 2,000 government subsidized fiber passings bringing our total fiber passings to over 236,000. Our number of planned government subsidized passings decreased slightly quarter over quarter as we decreased the scope of 1 government grant project. However, our government our construction backlog remains very robust with approximately 351,000 incremental fiber passings approved for construction.

Speaker 5

As we ramp up GloFiber construction, we continue to see strong customer growth as shown on Slide 16. We added over 4,300 GloFiber customers in the 4th quarter to finish the year at over 41,700 and our data penetration rate reached 17.8 percent, up from 16.5% at the end of 2022. Our total number of data, video and voice revenue generating units has reached over 51,000 up approximately 65% year over year. As Jim mentioned, our broadband data average revenue per user increased by 4% year over year to over $76 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 speeds of 2 gig or higher.

Speaker 6

At the

Speaker 5

end of the Q4, approximately 11% of our total GloFiber customers subscribed to video service and approximately 12% subscribed to voice service. And finally, our churn remained very low at 1.0% for 2023, an improvement of 7 basis points over the prior year as we continue to focus on providing the fastest speeds in our markets, outstanding local customer service and fair straightforward pricing. Moving to Slide 17, we highlight our data penetration rates as our markets age. All of our cohorts showed improvements in the 4th quarter and we continue to see penetration rates above 18% after 1 year and above 30% after 3 years. Our oldest cohort launched 4 years ago has now reached a penetration rate of almost 39%.

Speaker 5

Ultimately, we expect to reach an average terminal penetration rate of about 38% 5 to 6 years after new passings are launched. Let's move on to our operating results for our cable markets on Slide 18. Broadband data subscribers remained flat year over year and quarter over quarter and we ended the year with over 109,000.

Speaker 6

Our

Speaker 5

total revenue generating units decreased by about 3% year over year as we continue to see declines in video service and residential voice service due to cord cutting. Our broadband data penetration decreased slightly year over year from 51.7% at the end of 2022 to 50.8% at the end of 2023. Although our broadband data customers was flat year over year, we added approximately 37,000 new passings in 2023, primarily as part of government subsidized projects in unserved areas. Broadband data churn was 1.58% for the Q4 of 2023, an improvement of 5 basis points year over year as we increased broadband speeds in the second half of the year, giving customer higher speeds and more value for the same price. For the entire year, churn was 1.65 percent, up about 7 basis points year over year due to overbuilder competition in some markets.

Speaker 5

ARPU increased approximately 1.8% year over year to $82.75 Turning to Slide 19, we highlight our broadband enterprise and wholesale commercial fiber business. In 2023, we booked new sales with monthly revenue totaling approximately $350,000 down about 5% year over year. Our new installed monthly revenue for 2023 was $353,000 and we finished the year with an installation backlog of approximately $140,000 in monthly revenue. For cell site backhaul connections, T Mobile continues to reduce the number of circuits as part of their Sprint network rationalization project. In Q4 of 2023, they removed 57 connections.

Speaker 5

As Jim mentioned, we expect additional churn as they complete their network turndown this year and 167 of the remaining 190 backhaul connections are under a long term contract. Excluding T Mobile, churn and revenue compression remain low at 0.4% for 2023. Turning to Slide 20 and our tower segment, we ended 2023 with 4 53 total tower tenants and slightly over 2 tenants per tower. Our 3rd party tower tenants remain steady ending the year at 4.37. However, our intercompany leases increased with new leases for Shentel broadband network equipment at several additional tower sites.

Speaker 5

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 219 as we decommissioned 2 non revenue towers and transferred 1 non revenue tower to our broadband segment. Our 2023 capital spending and guidance for 2024 are reflected on Slide 21. With strong Globe Fiber construction results in the Q4, we finished 2023 with capital spending at the higher end of our previous guidance range at approximately $257,000,000 The significant increase over 2022 was driven by investments in Glo Fiber and government subsidized passings. In 2023, we invested $31,000,000 in government subsidized projects and we expect to be reimbursed for approximately 50% of these costs as we complete construction.

Speaker 5

Our Global Fiber investment was $182,000,000 in 2023 including approximately $156,000,000 to design and construct new passings and approximately $17,000,000 to connect new customers. For 2024, we're projecting capital spending in the $260,000,000 to $290,000,000 range as we continue to accelerate construction for low fiber and government grant projects. We plan to invest approximately $32,000,000 net of government subsidies to expand broadband to approximately 7,000 unserved holds. We also plan to invest about 190,000,000 including approximately $160,000,000 to expand service to 100,000 new passings and $24,000,000 to connect new customers. For commercial fiber business, we have budgeted approximately $11,000,000 in success based spending.

Speaker 5

We've also budgeted about $41,000,000 in our incumbent cable business, including $10,000,000 in DOCSIS upgrades to add additional capacity and provide higher speeds in competitive markets. Thank you very much. And operator, we're now ready for questions.

Operator

Our first question will come from the line of Frank Louthan with Raymond James.

Speaker 4

Great. Thank you. When you get the Horizon deal completed and you're kind of at a full construction ramp. How many homes do you expect to be passing per year? And then what is sort of the catch up from the marketing standpoint?

Speaker 4

How many you think you can add? And that's the first question. And second question, is T Mobile selling fixed wireless in the legacy wireless markets where that you sold to them? Thank you.

Speaker 5

Frank, this is Ed. So I'll answer the T Mobile question first. Yes, they do offer their fixed wireless service in the legacy markets that we sold to them. Up to this point, we have not seen any material impact from T Mobile fixed wireless. As far as the construction rate, as I mentioned, we plan on building 100,000 additional gold fiber passings this year.

Speaker 5

We do believe we'll be able to accelerate that somewhat with the addition of Horizon as well. So we expect to pace over 100,000 Passings.

Speaker 4

Okay. All right. Thank you very much.

Operator

Our next question will come from the line of Dan Day with B. Riley Securities.

Speaker 7

Yes. Hey, guys. Thanks for taking the questions. So just I noticed you talked about exploring other strategic alternatives in the press release to maybe raise some growth capital. Just maybe frame up what those might look like.

Speaker 7

Obviously, you talked about a tower sale, if you could provide an update there. And just as you think about strategic alternatives, whether you'd think about a sale of any non tower assets? Thanks.

Speaker 3

Yes, Dan. We're looking at multiple options to raise additional growth capital. Towers is one of the possibilities. We don't have anything to update today on that. The important thing to note is we don't really need the capital until 2025, so we have plenty of time to explore different alternatives.

Speaker 3

Another possibility that we've taken an early look at is maybe entering the asset securitization market, the ABS market for some of our more mature fiber markets. So we're going to explore all different options and then come out with what we think is the best option to continue to provide capital to grow our business.

Speaker 7

Okay, great. Thanks, Jim. And then just on the CapEx guidance for 2024, you talked about the increase in the incumbent cable, DOCSIS upgrades, all that sort of stuff. Like is this new sort of 40,000,000 ish maintenance CapEx run rate in incumbent cable the way we should think about it? Or is this sort of a one time upgrade and then we sort of go back to a little lower than that.

Speaker 7

And then just to be clear on the $180,000,000 to $200,000,000 guidance for Glow and Fiber to the Home, are you including any passings from the incremental $100,000 from the Horizon acquisition there or would that all be CapEx upside to that?

Speaker 5

Yes. So this is Ed. I'll answer the Horizon question first. The $100,000 that I mentioned was just the legacy Shentel Global Fiber Business, not any incremental passings from Horizon. And as far as the cable CapEx, the guidance is roughly $40,000,000 to $40,000,000 in total CapEx for 2024.

Speaker 5

As I mentioned about $10,000,000 of that is DOCSIS upgrade. So I think over the next 5 years as we do complete our DOCSIS upgrades, we'll see some elevated CapEx there and then we'll come down as we complete the DOCSIS upgrades.

Speaker 3

Yes, Dan, on the DOCSIS upgrades, we're planning to spend about $65,000,000 over the next 5 years, about $10,000,000 of that will be this year. So you can layer that in the top. And once we complete that project, you should see the cable markets CapEx come down again.

Speaker 7

I guess to ask the question on the Globe Fiber 1 a little bit different way. If you do execute on some of the passings in the, say, Ohio markets, like would there be would that $190,000,000 need to come up to account for that? I guess is the question I was asking.

Speaker 3

Yes. Dan, we will once the deal closes, and right now we're looking at likely Q2, we will provide updated guidance on the capital spending for 2024. It will go up for as we continue to invest in the Ohio markets as you mentioned. And also the number of passings on the fiber to the home side, we'll give you some updated guidance on that as well. We do expect to add about 100,000 homes in the Ohio markets over the next 3 years.

Speaker 3

How many are going to come on in 2024, we'll provide an update once the deal closes.

Speaker 7

Awesome. Thanks guys.

Speaker 1

Yes. Thanks, Dan.

Operator

Our next question will come from the line of Hamed Khorsand with BWS Financial.

Speaker 6

Hi, good morning. So the first question I had was, are you seeing any changes in the competitive landscape regarding GlobalFiber in recent months and quarter as you're talking about this overbuild?

Speaker 5

So no significant changes in the competitive landscape. We still primarily compete with one of the big incumbent cable providers there. They've continued with promotional pricing, but no significant changes as far as what they're offering from a package standpoint.

Speaker 6

And are you doing anything different on the promotional standpoint as you enter these new markets?

Speaker 5

We're still really leading with fair straightforward pricing. We do offer the 1st month of service free, but we're not providing these deep promotional discounts that our incumbent cable competitor is providing.

Speaker 6

Okay. And then as far as the subscriber signing on initially, are you seeing any changes in the packages they're subscribing to? Are they opting initially for the higher tier price or are they coming in at the lower tier?

Speaker 5

They're continuing to shift more toward the higher tiers. As I mentioned, almost half of our new customers are signing up for gigabit speeds or higher. So we're definitely capturing the higher end of the market as customers want more bandwidth.

Speaker 6

And my last question is that has there been any changes as far as your cost in your capital expenditure model? And how much has that been?

Speaker 5

So I will say, we previously gave a range of $1,000 to $1400 per per passing for new construction for GloFiber. We are at the higher end of that range now. We're building in some less dense areas and the cost for construction has gone up. We've seen it level off in the past year, but we did see some significant increases before that.

Speaker 6

Okay, great. Thank you.

Speaker 3

Thanks, Annette.

Operator

That concludes today's question and answer session. I'd like to turn the call back to Jim Volk for closing remarks.

Speaker 3

Yes. Thank you all for joining. We look forward to updating you in 2024 of what we expect will be a very exciting year. Thanks everyone and have a great day.

Operator

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

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