Southern Missouri Bancorp Q1 2024 Earnings Call Transcript

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May 3, 2024

There are 6 speakers on the call.

Operator

Good morning, everyone, and welcome to Shenandoah Telecommunications First Quarter 2024 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 Q1 2024. 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. And with that, I will now turn the call over to Chris. Go ahead, Chris.

Speaker 2

Thanks, Kirk. We appreciate everyone joining this morning and I hope everyone is well. I will start the call with an update on the recent transactions and our strategy execution. As listed on Slide 4, we announced and closed on the sale of our towers during the Q1. The $310,000,000 sales price represents a multiple of approximately 31x2023 Tower segment adjusted EBITDA when considering the expected T Mobile revenue churn we had previously disclosed.

Speaker 2

We are very pleased with the sale price, especially when considering the publicly traded tower companies are trading at multiples in the high teens. This transaction is a good example of the market value of our assets and businesses exceeding the implied value in our stock price. We also closed on 3 $56,000,000 in new financings on April 1, including $275,000,000 in incremental credit facility capacity and $81,000,000 in preferred equity. We had strong interest from both lenders and financial sponsors during the financing processes, which reflects well on our track record, management team and fiber first strategy. These financings will provide growth capital to continue to invest into new Globefiber expansion markets.

Speaker 2

On April 1, we closed on the acquisition of Horizon Telecom for $385,000,000 which included issuing 4,100,000 common shares to a selling shareholder of Horizon. Horizon's fiber rich network will open up new GloFiber expansion markets in Ohio, while doubling the size of our commercial fiber business. We recently announced our plans to expand the GloFiber network to Greenfield, Hillsboro, Jackson, Johnstown and Zanesville, Ohio. We're excited to welcome our new Ohio colleagues to Shentel and I'm pleased to report that Glenn Lytle has joined the senior management team to lead commercial sales for the combined company. Glenn brings over 25 years of commercial fiber sales experience, including the last 5 years successfully growing the Horizon Commercial Fiber Business.

Speaker 2

I'll now turn to Slide 5 to give an update on our strategy execution and our Horizon integration efforts. Although we've only owned Horizon for about 5 weeks, we are off to a fast start with our integration efforts. We announced a brand change from Horizon to GloFiber in mid April and implemented a new GloFiber rate card in Ohio. Similar to the plans we use in the Mid Atlantic States, we focus on easy straightforward pricing with no long term contracts. We expect the new rate card will enhance customer additions and reduce churn.

Speaker 2

We also identified another 1,000,000 dollars in annual run rate expense synergy savings, increasing our target to $10,600,000 We began to implement plans to achieve these synergies in April, realizing about $4,800,000 annualized or about 45% of our target as we enter May. We expect to complete the integration and realize the full energy savings target by the end of the first half of twenty twenty five. In parallel with our sale, acquisition and financing activities, we've reported a strong quarter of operating results in our Mid Atlantic markets. We added 5,000 GloFiber customers, setting a new quarterly record. We also constructed and released to sales almost 26,000 new GloFiber passings.

Speaker 2

With the 260,000 passings constructed in the Mid Atlantic markets and 15,000 passings acquired as part of the Horizon merger, we now have 275,000 GloFiber expansion market passings or 46% of our year end 2026 target of 600,000. Moving to Slide 6, We now have over 15,000 route miles in our super regional fiber network spanning 7 adjacent states. The combination with Horizon has been well received by our commercial customers. We now have 25 GLO Fiber Markets as reflected on Slide 7. We have started engineering, permitting and or construction in another 8 markets, including the 5 new markets in Ohio.

Speaker 2

With the Horizon acquisition closed and most of the underwriting of new markets complete, we have good visibility into the future state of our Globe Fiber network and markets. The next 32 months will be focused on execution of our build and sales plan. 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. Before I provide commentary on our financial results, please note that we have altered our financial reporting triggered by the plan to sell our Tower portfolio in the Q1. The tower segment is now reported under discontinued operations in our statement of comprehensive income and statement of cash flow. The tower assets are recorded as held for sale on our balance sheet. These changes are reflected for the current and prior periods in our earnings release and Form 10 ks.

Speaker 3

Under the new organizational and reporting structure, the company has one reportable segment in continuing operations going forward. And now moving to Slide 9 for our financial results for the Q1. Revenue grew 3.1% to $69,300,000 in the Q1 2024, driven by continued strong residential and SMB revenue growth of 4,700,000 dollars or 9.1 percent, partially offset by the expected decline of $2,300,000 or 19.8 percent in commercial revenue. The residential SMB revenue increase was driven by growth in growth fiber markets revenue of 73.1% due to a 62.3% increase in broadband data RGUs and a 9.7% increase in data ARPU. Commercial revenue declined due to the expected decline in T Mobile revenue.

Speaker 3

As reported throughout 2023, T Mobile disconnected backhaul circuits as part of the decommissioning of the former Sprint network. The revenue decline reflects a full period of these disconnects and a significant reduction in related early termination fees. We still expect about $7,000,000 in lower T Mobile revenue in 20 24 and for the commercial revenue to return to mid to high single digit growth rates starting in 2025 as previously disclosed. Adjusted EBITDA of $19,300,000 was relatively flat in the Q1 as compared to the Q1 2023. Revenue growth was offset by higher expenses associated with expanding our Globe Fiber line of business, higher programming fees for our video product and bad debt due to general macroeconomic conditions.

Speaker 3

I'd now like to update you on our liquidity position following the horizon and related financing transactions, which we closed on April 1. As reflected on Slide 10, we raised $81,000,000 in our new preferred equity financing and used the proceeds along with cash on hand, primarily from the tower sale to complete the acquisition of Horizon Telecom. In summary, we traded a slow growth infrastructure asset for a digital fiber asset with higher growth potential, which fits nicely with our fiber first strategy. Our pro form a liquidity position on April 1 is $484,000,000 including about $110,000,000 in cash, dollars 225,000,000 in available delayed draw term loans and $150,000,000 in available revolver capacity. We are well positioned to fund our business plan to grow our Globe Fiber Expansion market cap into $600,000 by the end of 2026.

Speaker 3

Moving to Slide 11. Our pro form a outstanding net debt as of April 1 is $190,000,000 On a similar note, after adjusting fully diluted common shares of 51,000,000 with the additional 4,100,000 common shares issued to a rollover shareholder of Horizon as part of the acquisition. And the ads converted equivalent common shares of the preferred equity. Pro form a April 1 fully diluted common shares are now 58,400,000. As a reminder, the exchange price for converting the preferred equity to common shares is $24.50 Before turning the call over to Ed, I will provide our expectations for 2024 Horizon Financial contributions and some key operating metrics on Slide 12.

Speaker 3

We expect Horizon to generate $50,000,000 to $54,000,000 in revenue and $12,000,000 to $16,000,000 in adjusted EBITDA for the 9 months of April to December 2024. Capital expenditures for the 9 month ownership period in 2024 are expected to range from $30,000,000 to 39,000,000 dollars Most of the commercial fiber CapEx is success based relating to installing service for a portion of the 609,000 contracted monthly recurring revenue backlog. As Chris noted earlier, we announced 5 new Globe Fiber expansion markets in Ohio. The Globe Fiber CapEx in Ohio will be a combination of initial engineering and permitting for these new markets, constructing a few 1000 more passings in existing Ohio markets and success based CapEx to connect customers. Horizon currently passes 15,000 homes and businesses with fiber in 3 greenfield markets and 14,000 testings in the RLF market.

Speaker 3

And now I'll turn the call over to Ed.

Speaker 4

Thank you, Jim, and good morning. I'll start on Slide 14 with an update on our fiber construction metrics. The Q1, we continued the growth of our predominantly fiber network ending the quarter with 55% of our total broadband passing served by state of the art 10 gig XGS PON fiber to the home networks. We added over 26,000 new fiber passings in the Q1 and our construction pace was 47% faster than the Q1 of 2023. We are very pleased with the progress toward our goal of over 100,000 additional fiber passings in 2024.

Speaker 4

We now have approximately 260,000 GloFiber passings and our total number of approved GloFiber passings reached 565,000 at the end of the Q1. Combined with 15,000 existing Greenfield Fiber Passings in former Horizon markets and our recently announced expansion to 40,000 additional homes in Ohio, we now have enough passings in our construction pipeline to reach our goal of 600,000 total Glo Fiber Passings by 2026. In addition, we plan to construct approximately 23,000 fiber passings as part of government grant projects and 3,500 were complete at the end of the Q1. As we continue to ramp up Go Fiber Construction, we had a record quarter for customer growth as shown on Slide 15. We added over 5,000 new GloFiber customers in the Q1 and reached a total of almost 47,000, up 62% year over year.

Speaker 4

Our total number of data, video and voice revenue generating units has reached approximately 57,000, up 56% year over year. Our sales team continued to outpace our construction team and we grew broadband data penetration from 17.4% a year ago to 18% at the end of the Q1, while adding almost 95,000 new passings during the same period. Our broadband data average revenue per user increased almost 10% year over year due to a combination of rate adjustments, additional equipment revenue and customers selecting higher speed tiers. For the quarter, 50% of our new residential subscribers adopted speed tiers of 1 gig or higher, including approximately 3% that took speeds of 2 gig or higher. We continue to focus on providing the fastest speeds, most reliable network and outstanding local customer service and our churn remained extremely low at 0.86 percent for the quarter.

Speaker 4

On Slide 16, we highlight our data penetration rates as our markets mature and our continuing progress increasing penetration rates across all our cohorts. 1st year after launching the Global Fiber market, we typically see penetration rates over 18% and after 3 years data penetration rates typically exceed 30%. Ultimately, we expect to reach average terminal penetration rates of about 38% 5 to 6 years after launching service in a new area. Our most mature neighborhoods launched in late 2019 have already exceeded this goal. Let's shift to our Q1 operating results for our cable markets on Slide 17.

Speaker 4

Broadband data subscribers decreased slightly year over year to 109,000 and broadband data churn increased to 1.67%, driven primarily by competition from cable and fiber over builders in some markets. Our data penetration decreased to 50.3%, driven by the decrease in subscribers and the addition of over 4,000 passings in the past year, primarily in government subsidized areas. Our total revenue generating units decreased by about 4.5% year over year as we continued to see declines in video service and residential voice service due to cord cutting. Competition has increased, but unlike some of our larger cable peers, our markets are predominantly rural with a cable or fiber competitor offering service to less than 20% of our passings. Despite competitive pressure in portions of some markets, broadband data ARPU increased by 2.4% year over year to $85 offsetting most of the decrease in revenue from fewer RGUs.

Speaker 4

I'll also add that we believe Shentel has limited exposure to the ACP program relative to some of our larger cable peers. Less than 4% of our total broadband data customers subscribed to ACP supported plans and over 75% of them were customers prior to enrolling in the ACP program. Moving to Slide 18, we highlight our broadband commercial fiber business. In the Q1, we booked new sales totaling $110,000 in monthly revenue, up almost 4% year over year. Our new installed monthly revenue for the Q1 was 66,000 dollars and we finished the quarter with an installation backlog of approximately $165,000 in monthly revenue.

Speaker 4

We expect majority of this backlog to be installed in the second quarter. Monthly churn and compression decreased significantly year over year to 1% for the Q1 of 2024. T Mobile has now completed the vast majority of backhaul disconnects associated with the Sprint network rationalization. As Jim mentioned, although these disconnects will temporarily slow revenue and earnings growth in 2024, we expect our commercial fiber business to return to historical growth rates in 2025 and beyond. Our 2023 capital spending and guidance for 2024 are reflected on Slide 19.

Speaker 4

Total capital investments for the Q1 totaled 70,000,000 dollars roughly in line with our capital spending in the Q1 of 2023. Our GloFiber and government subsidized investments were on plan for the Q1 and we are on pace to finish 2024 within our previous guidance range of $260,000,000 to 290,000,000 dollars Thank you very much. And operator, we're now ready for questions.

Operator

Thank you. Our first question comes from Hamed Khorsand with BWS Financial. Please proceed.

Speaker 5

Hey, good morning. So first off, I just want to ask you about the ads you had with GlobalFiber. Is that a method of just being in more markets or is that because you're gaining momentum with the markets you've already been established in?

Speaker 4

Good morning, Hamid. This is Ed. So it's a combination of both there. Not only do we have additional new passings as we ramp up construction, but we're continuing to grow our penetration rates in those more mature markets. It's definitely a combination of the 2 and we accelerated our net adds year over year as well.

Speaker 5

And do these customers that you're adding, do they have a prior broadband service provider or are they brand new to the service?

Speaker 4

I would say the majority of our ads are switching from 1 of the big cable providers.

Speaker 5

And lastly, with Horizon, with the revenue that they're generating, is there any growth possibilities this year? Or are you more looking as to 'twenty five potential?

Speaker 3

Yes, I can jump in there, Amit. The revenue has grown low single digit rates the last 2 years. They have a very sizable backlog as we noted on the slide. They have $609,000 of monthly revenue under contracted sales contracts that are awaiting installation. We're trying to accelerate that installation pace.

Speaker 3

It's gone a little slower than what we had expected so far. But our new leadership team is involved there and we expect that will pick up as a couple of quarters pass and we should see some meaningful improvements by the time we get into 2025.

Speaker 5

Okay. Thank you.

Speaker 3

All right. Thanks, Amit.

Operator

Thank you. And this concludes the Q and A session for today. I will pass it back to Jim Volk for final comments.

Speaker 3

Yes. Thanks everyone for joining us this morning. We look forward to updating you on our progress on our fiber strategy and the Horizon integration in future periods. Have a great day. Thank you.

Operator

And this concludes our conference. You may now disconnect.

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Earnings Conference Call
Southern Missouri Bancorp Q1 2024
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