Q1 2020 Earnings Call
Ladies and gentlemen, please stand by your conference calls scheduled to begin momentarily. Thank you for your patience and please continue to standby.
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And your telephone please be advised today's conference is being recorded if you require any further systems. Please press star zero I would now like to hand to conference over to your Speaker Jennifer Spotter. Please go ahead.
Thank you and good morning, I'd like to welcome everyone to consolidated communications first quarter 2020, earning call.
On the call today, our Bobby Dol, President and Chief Executive Officer, and Steve Childers, Our Chief Financial Officer.
Bob's comments today will highlight our strategic initiatives and our operational results as well as how we are managing our business through the Kobe 19 Pendennis.
Steve will provide details on our first quarter financial performance and an update on guidance.
Following the prepared remarks today, we will open the call up for questions.
Before we proceed I will remind you our earnings release financial statements and earnings presentation are all posted on our Investor Relations section of our website at consolidated Dot com.
Please review the Safe Harbor provision on slide two of our presentation.
Today's discussion includes statements about expected future events and financial results that are forward looking and subject to risks and uncertainties.
A discussion of factors that may affect future result is contain consolidated filings with the FCC.
Today's discussion will also include certain non-GAAP financial measures.
Our earnings release includes reconciliations of these measures to the nearest GAAP equivalent.
I will now turn the call over Q body, though.
Thank you Jennifer and good morning, everyone.
First I hope you and your families are well the world has significantly changed since our last call in late February but one thing remains constant our team of 3400 employees are working hard to serve our customers and our first and first responders in the communities we serve.
We were doing all dealing with an unprecedented time the consolidated communications is well positioned to manage through this pandemic and meet the changing needs of our customers. We started 2020 strong momentum and a clear focus on our financial priorities centered around delivering stable adjusted EBITDA and improving our bound.
And she both of which we accomplished in the quarter.
Before we get into our first quarter results I'll share an update on how cool that 19 is impacting our business our customers and our employees.
I'm extremely proud of how the consolidated team has responded to this crisis as a critical infrastructure provider, we understand the importance of broadband connectivity in everyone's lives today and our company is at the forefront of helping consumers and businesses connect learn and operate during these unusual times.
We have implemented numerous majors to ensure business continuity, allowing our team to focus on continued reliable services and support our residential business and carrier customers.
We are focused on the safety and wellness of our employees customers and partners. We made important changes to our business operations in response to the pandemic. For example, we successfully shifted roughly 90% of our office employees to remote work arrangements over just a few day period.
This transition to remote work went very smoothly and had no adverse effect on our business operations. During this time, we're handling more calls increased order volumes and productivity is very high.
We've trained our outside field technicians on preventative measures and equip them with personal protective equipment and implement it added precautions such as calling ahead for all on site visits to ensure the safest environment possible for employees and customers.
We expanded home garage policies across all of our service areas to further protect our field personnel and ensure we were not congregating employees and work centers.
We are seeing call volumes up on average, 20% across all customer groups and order activity within the within consumer is correspondents correspondingly up and driven by a 40% increase in bandwidth upgrades required to meet work from home and remote learning requirements.
Our prior work and upgrading hundreds of thousands of locations with higher capable speeds has positioned us to respond faster too high demand for speed upgrades.
These investments allow us to efficiently and expeditiously complete more customer upgrades without requiring a technician to visit.
To support businesses, we established an expedited order process for medical critical care education, and government customers, who now more than ever require a rapid service delivery everyday we're helping businesses to manage through this challenging time, let me give you. Some examples hypervisor a global manufacturer based.
In hand over new Hampshire needed to triple their bandwidth capacity to accommodate a critical shift in work from home VPN traffic in just a few days.
Medicare equipment medical equipment in respiratory care provider based in Greensburg, Pennsylvania use proconnect to transition more than 100 employees to remote work with a mixture of unified communications soft phones and mobile clients, we did that and just two days.
We quadrupled the bandwidth and completed a high performance managed router upgrade in record time to help one of the largest wholesale grocery distributors in the northeast and to ensure that more than 600 supermarkets and convenience store shelves remain stock.
And we're helping numerous schools with collaboration tools and remote phone features to connect teachers parents and students.
We're closely monitoring all early indicators of potential business impacts related to coven 19, well, we're seeing bandwidth upgrades and demand for collaboration solutions. Some of the more complex and advanced solution sales are slowing a bit as businesses focused on response to the pandemic and we of course are watching small business customer trends closely.
Within our wholesale business, we're working with wireline and wireless service providers across the country in support of bandwidth upgrades and new service requests we made it easier for carriers to upgrade facilities with an efficient expedite order process.
Our network engineers and technicians are working 24, seven to ensure network reliability and performance, which our customers. So vital <unk> so vitally needed.
We've had we've had approximately a 20% increase in data traffic utilization and 10% increase in voice traffic in our network continues to perform well.
Oh networks are not created equal and we're extremely pleased with how well our network is performing performing as it is designed to handle increased traffic we are seeing.
Our industry is incredibly resilient and our services play an increasingly important role in the post pandemic economy, we've been through our share of crisis in downturns in the past in our company has always emerge stronger and better position for the future I'm confident we will do the same in this situation.
Well, we managed the business. During this time, we remain focused on our strategic imperatives, which have not changed you can see these on slide five of our presentation deck.
These strategic imperatives continue to be our roadmap for long term success and let me really we view them briefly first we're committed to producing stable earnings and growing free cash flow. The recent cobot 19 response actions have led us to further refine how we do business, which creates opportunities for long term savings and efficiencies.
Our second strategic imperative is leveraging our fiber assets across three customer groups carrier commercial and consumer we're opportunistic with her fiber builds and focused on success based opportunities the benefit multiple customer groups third we are executing on our capital allocation plan, which we announced one year.
Go we're focused on this we are focused on disciplined cash management, well, we remain committed to improving the balance sheet and our final strategic imperative is the review of our portfolio of assets for potential monetization. This analysis continues and I'll update you further if there is a material event to discuss.
Now first quarter highlights our carrier sales team continue.
To drive gig Ethernet sales and is doing an excellent job of negotiating long term contracts. Our collaboration continues with wireless carriers as we help optimize their capacity needs and provide transport solutions that offer diversity and maximize utilization for peak performance total tower connections under contract increased four.
<unk>, 0.2% year over year totaling 3900 connections as we build out capacity within our carrier grade fiber network to support wireless densification, especially in rural areas, we're well positioned to be the backhaul provider of choice.
Our network investments made for carrier services are also benefiting commercial customers. Our on net buildings increased 17% from a year ago, primarily driven by des Moines, Iowa market expansion.
The vast majority of our new sales are on net which correlates to higher margins increased opportunity to add products and a greater ability to ensure the best customer experience.
We recently launched Proconnect unified communications in Northern New England. This cloud based collaboration solution makes it easy for users to make an receive calls hosts videoconferences share files message and manage through advanced features from anywhere and from any device valuable solution. During this time of the.
Endemic.
Within the consumer channel.
We achieved the fourth consecutive quarter of broadband revenue our strategy of leading with broadband services is growing average revenue per unit and it's working.
Virtually 100% of our consumer base is connected to their network through either fiber to the node or fiber to the home our core network capacity allows us to grow bandit broadband revenue in the most cost effective manner.
Our fiber rich network positions us well the partnering with communities to deploy last mile fiber in rural areas that would otherwise be difficult to justify financially.
Just this week, we announced the citywide upgrade of Brooklyn, Maine, and we've been successful with five other fiber to the home are a piece in the northeast and we're targeting a second half 2020 turn up of these fiber network extensions.
See I TV, our streaming video service fully launched in northern New England in late 2019.
It is leveraging the network speed improvements over the last two years, we see strong sales activity with CCH TV and we continue to see 60% to 70% of the subscribers, bringing their own device the easy self to install product further reduces overall capital intensity compared to traditional video.
We will expand CCTV in legacy markets this year and expect to launch this summer in Texas.
Through a combination of efforts, including public private partnerships innovative and new technologies, we are improving our consumer broadband business.
I will now turn the call over to Steve will provide more details on our financial results for the first quarter and an update on guidance for 2020, Steve.
Good morning, as Bob indicated in his remarks, we did have a very strong start to the year and in the first quarter. We performed above our original 2020 guidance for adjusted EBITDA free cash flow and debt reduction.
Despite the disruption of the health crisis, and the transition to the work from home for safety of our employees there were no material impacts to our Q1 results.
That said due to the uncertainties in both the some dirty and the duration of the current economic downturn. We are withdrawing our 2020 guidance until we have more visibility into the impact coverage 19.
Our business.
Slide six of the earnings presentation summarizes the company's first quarter results.
Operating revenues for the first quarter totaled 325.7 million down 3.8% compared to Q1 night team and we generated adjusted EBITDA of 131.6 billion, which is up one point threemillion from a year ago.
Now, let's look at each of our customer channels total commercial and carrier revenue 147 million in the first quarter data and transport grew 1.6% to 89.6 million.
We're services revenue declined 2.3 million or 4.9%.
Other revenue declined 3.5 million, primarily due to lower equipment sales, which have very low margins.
As we think about Q1 performance and potential impact of co that 19 in the second quarter and beyond our commercial sales team started this year or very close to being fully staffed quota bearing headcount for our direct SMB indirect resources.
We are seeing a high level and virtual sales activity with broadband upgrade a unified communications demand to assist in the transition to businesses working from home.
We do continue to monitor our SMB channel and while we havent seen a material impact today, we do expect to see a higher churn rate for this customer group.
Additionally, we expect decisions on equipment purchases to be deferred due to due to the economic conditions and we could see a decline in this lower margin revenue versus our original plan.
We are seeing strong performance from our carrier sales team at this time, we have strong demand.
Backlog for wireless backhaul to support higher national broadband.
Before we move transition to consumer I'd like to emphasize our commercial and carrier group did have a very strong first quarter as we as we discussed we expect certain areas to come under pressure, but as of today's call. We are seeing no material changes are leading indicators.
Now turning to our consumer channel revenue totaled 126.4 million and was down 3.3 million or 2.6% year over year.
Consumer broadband revenue grew for the fourth consecutive quarter and was up 1.6% in the first quarter consumer revenue increased 4.5% to over seven $373 per unit, we continue to realized positive momentum by leading with broadband specifically in our newly.
Upgraded areas.
Consumer voice was down 6% or 2.7 million in a recent quarter, but that decline voice revenue was cut in half a year ago Retributive just have more real robust broadband offerings country can trigger contributed to higher voice retention.
Our video revenue was down 8% and is consistent with our strategy to transition from low margin.
Linear video to broadband streaming services, the 1.6 million client in revenue was more than offset by reductions in video programming expense and lower capex.
That work access revenues declined 5.1 billion largely due to declines and special access assessing revenues were up slightly and remain at our expected $18 million run rate per quarter.
With respect to subsidies, we remain optimistic about the opportunity to expand broadband capabilities and rural markets. What's the support of the rural development opportunity Fund.
We are evaluating the funding opportunities and potential returns on invested capital within our service area and we will be aggressive as as we look to enable access to underserved areas.
The FCC final order, which was published in February brings certainty on transition revenue. It adds new sort of servers term surface tiers in auction weightings that we believe will be advantageous for existing fiber infrastructure providers.
Now turning to operating expenses exclusive depreciation and amortization operating expenses totaled 205 point 205.6 million improvement at 8% or down 17 million from prior year.
We continue to identify and implement initiatives to transform the business and optimize free cash flow. Our track record speaks for itself in this area as we have debt and we will continue to be very focused on improving our cost structure based on indeed, our business and our customers.
Cost of services and products declined 7.6 million driven by network cost often optimization, lower CPG sales and lower salaries and benefits associated with ongoing cost initiatives.
Cost expense will fluctuate with revenue, especially on equipment sales linear video content cost and network at revenues.
Yes, you day cost reduced.
6.6 million, a recent quarter, primarily due to operational synergies and ongoing efficiencies.
We did experience a modest amount of an increase in bad debt expense related to the new accounting standards for credit evaluation for accounts receivable and also for Cogan.
As of today's call, we have not seen a material difference our accounts receivable aging or daily cash receipts trends. We continue to monitor these key metrics very closely.
Net interest expense for the quarter was 32.1 million down 2.2 million from the same period last year, our weighted average cost of debt was approximately 5.3% at the end of quarter ended the quarter down from 5.6% at year end.
Cash contributions from the company's wireless partnerships were 10.1 billion in the first quarter compared to 7.3 million a year ago and are aligned with our anticipated distribution level.
Historically, our cash distributions have been 35 to 37 million a year. However at this time, we have no additional insight to the financial results for our final limited partnerships with horizon.
Adjusted net income per share was a positive 23 cents per share compared to net loss of three cents a year ago improvement reflects the consistency of our operating resolved and decline in depreciation expense.
We invested 42.4 million capital expenditures during the fourth first quarter, which supported success based projects and broadband network infrastructure expansion.
Total liquidity, including cash on hand, and availability under our revolver was approximately 98 million.
In response to that economic impact of co. The Nike, we will be focused on maximizing cash liquidity and we won't be making a certain elections under the carriers that tougher employer portion of payroll taxes, which we estimate to be a little over $4 million a quarter.
Consistent with our capital allocation policy, we use essentially all free cash flow in the quarter to reduce debt by $43 million.
For a total of 105 million in the last three quarters since we made to change our capital allocation policy.
Our net debt leverage was 4.23 times at the end of the first quarter down 4.33 from 4.33 times at the end for into the year.
We will continue to commit all cash free cash flow to improve the balance sheet with the goal of getting turned out leverage target of four times as soon as possible.
Although the near term outlook is uncertain, our commitment to our strategic imperatives and our position.
As a critical service provider is stronger than ever.
We have demonstrate our ability to me manage costs and we will take whatever actions necessary to protect the business.
With that I'll now turn call back over to Bob.
Thank you Steve So in closing I am pleased with the solid and consistent results, we delivered in first quarter, while reducing operating expense and executing on our capital allocation plan.
We're taking every we're taking action every day to keep our employee safe and help our customers and the communities. We serve during these trying times, we have a strong business and have an up and have operating plans in place to respond to the fluid events associated with cobot 19, we've weathered many storms in our 125 years and operate.
Patients and I'm confident we'll manage through this one and help our customers do the same.
Operator, we'll now take questions at this time.
Thank you ladies and gentlemen, if you have the question at this time. Please press star one on your telephone.
Draw your question please press the pound.
Once again star one to ask a question and our first question comes from Davis Herbert with Wells Fargo. Your line is open.
Good morning, everyone hope you're staying healthy unsafe appreciate all the prepared remarks very very helpful.
In your prepared remarks seemed fairly positive about network performance and customer activity you did withdraw your guidance. However, and I know you suggested SMB is something you're watching.
Can you talk about that percentage of revenue in the SMB channel and maybe some other areas, where you see a lack of visibility having an impact on the Tom you've got four year.
Well. Thanks Davis was a question and I'll start that and then a and then Steve will will have I'm sure some specifics.
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Yeah, Let me let me tell you will how close we're watching the trends right now and and how good we feel about what we're seeing and the fact is we just don't know what the economy is going to do a you know over the next 60 90 days.
With respect to SMB closures, but what we can tell you right now is we're seeing.
Roughly.
51000, SMB accounts, you know those that we defined as SMB as those with 500 dollar a month.
Bills with us or less and and there's.
255 that have called us for either a temporary.
Hold on their service, which indicates that they want to maintain their business line in a relationship with us and those customers get a 50% discount and and so that's really resulted in.
Oh, a 50%.
Hold if you will kind of like a vacation or seasonal suspend and a and that's resulted in about a 10 Grand a month impact and that's as of yesterday, we're seeing those statistics. So it's not a real significant factor yet.
And and you look across our whole base, we think that with the increase in speeds.
We're in a pretty good position to weather the storm, we just don't know.
What's going to happen over the next couple of months, Steve anything that.
Yeah, So David maybe just put a little finer point on what Bob said, if you. If you look at our earnings release and the revenue tables, we don't necessarily break out SMB and that carrier commercial group, but I think Bob I gave you the math to get to 100 910 million dollar.
Total revenue from SMB, if we broke it out so the way I would think about a total commercial.
The carrier numbers, probably about 2026 30, 26% to 30% of that total commercial carrier and then Smbs probably.
Maybe 17% to 18% of that number or said differently SMB is probably about 7% to 8% of our total revenue as like Bob said, we are monitoring the age we're managing watching on call center volumes, we've actually add as we've talked about in prior calls we've actually added a bit staffing that are the SMB team upward.
The last few months, we're paying more attention to get the SMB group anyway, and we've also rolled out several products will make it easy for them to either move from home or come back to or when they come back in the business. So right now through April.
I'm really pleasantly surprised with the level of activity that we're seeing from the sales team most continue to monitor.
Great. That's really helpful and then you're making nice progress towards your leverage target and how do you balance.
The debt pay down approach, which you know made nice progress on that this quarter versus building liquidity to address some of that uncertainty that you guys reference.
Yes. There is this is Steve again, thanks for the current question and that is our focus right I mean as Bob said in his opening remarks, our strategic imperatives, our accounts allocation policy, even though we are withdrawing guidance those policies and commitments are.
Are still there we're highly focused on it so with leverage again, we did accelerate the pace of de leveraging for Q1 off free cash flow went to pay down debt and you might have noticed that we bought when we bought about $5 million in bonds and our open market repurchases that for the quarter that was in part.
Because the bonds.
For most of the first quarter were trading 95.
Our above and in Q3 Q4, we bought about 55 million, we provided a little bit more significant discount. So we were focused on getting the revolver down.
Over the first half a quarter and maybe the last two or three weeks. When you started the bond started trading down a little bit and because of the uncertainty of covance.
We did buy a little or few bonds, but we weren't at that time, we're pivoting towards maximizing liquidity under the revolver get getting as close to zero as we possibly can so I think in the short term. We are focused on preserving every dollar of cash that we have we will look too.
Yeah, well Q1, one or both the bonds as walls, but.
Thats, Okay now revolver.
But we are focused on on a preserving liquidity and short term, but again, we still remain committed to the overall leverage targets a four times as soon as we can.
I understand okay. That's that's very helpful and last question for me and I'll turn it over.
This is your ongoing portfolio review and just curious if you are having ongoing conversations.
For this crisis hit if things do normalized knowing you know I'm not sure when or if that happens, but do you. What would you expect some of some of those conversations to come back again and more progress on on any sort of asset sales. That's it for me. Thanks.
Yeah. Thanks, David you know that obviously I can't I can't speculate or won't speculate on ongoing discussions, but I I will I will say this you know any conversations that we're having continue and no one knows how long.
Long vis a vis situation with Covance is going to last and so I don't see it impacting with the the cycle time. It takes to you evaluate and analyze and then and then a work through.
No.
Discussions with any interested parties I don't see that changing.
You know as result of covert analysts this word to extend in effect. The capital markets. You know for 18 months and and even then I I think theres deals getting done so it's not changed our approach in any way you know, we're not a distressed seller of those types of things, but we're certainly.
You know doing analysis and deciding you know if if some of those assets are better served.
By being part of someone else's structure, and we'll continue that process.
Next question Sydney.
Thank you. Our next question comes from the line of Gregory Williams with Cowen and company. Your line is open.
Hey, guys.
Greg Real quickly you noted that you're going to.
Rather aggressive in bidding for the art up opportunity and advocate advantageous.
Our current product will be providers.
Is it fair to characterize that a lot of the 6 million homes passed for art up are actually cap to home simply upgrading from 10, one to 25 three speeds.
And these are on the already upgraded with fiber to the notes it seems like you're in a very strong position to win again again is that fair characterization.
And second.
From coping 19 is there any commentary on somewhat of an impact from the snowbird effect in some of the Fairpoint markets, where people are leaving for the winter that might not be coming back into the footprint due to cover 19. Thanks guys.
Yeah, Thanks, Dan for the.
For the question, let me start with the second part first and then I'll come back to the art off we're actually seeing the opposite of we we've seen about a full month to six we advance of people moving into a the vacation homes in northern New England because.
What we're realizing is that's where people are going in order to social distance themselves and that's what are coming out of New York, Boston, whatever large city that that they're a most.
You know that they live in and and we've seen a.
Well in advance of that which we think is actually positive.
So that's that's that point the the second the related to our dog.
We are well positioned and and let me give you a finer.
Analysis of how to think about it the reason that we acquired the Fairpoint assets in the first place was the proximity of the fiber to the to the customer base and a and that's made it advantageous for us to extend that through the fiber nodes and the and the.
Fiber to the home, especially as represented by the public private partnerships that we're successfully winning we've got five of those that will.
Build out in 2020 and that gives us roughly another 10000 passings of direct fiber to the home.
And and so the way to think about it is on the average we're seeing the cost per passing of extending a connecting that network to be around the 500 dollar mark and that's literally half of what the the typical industry averages when you got to build that including the core network from scratch and that puts us in an excellent position.
Long term so yes, we think we're well positioned for our dog.
And it won't be 25, htthree, it'll be it'll be 100 or a gig.
Very helpful. Thank you.
Thank you.
Thank you ladies and gentlemen.
Our next question comes from Jennifer friendships with Wells Fargo. Your line is open.
Great. Thank you appeal.
I wanted to ask and sorry, if I got cut off but if it does that but just what you're seeing in terms of wireless back haul it seems like that holding up there, but I wanted to confirm T. Mobile now close are you seeing some RFP coming from then secondly, I wanted to ask about.
Bob Your bigger picture thoughts, if we did see a fourth annual as.
<unk> Party, both Democrats and Republicans have made clear that broadband will be a large part of that.
This would be an addition art off any thoughts you have there would be but.
I'll just leave it that I had one more question much huh.
I'll come back yeah.
Okay, Oh, thanks, Jennifer let me.
Let me start with them the stimulus piece first and and.
I'll come back on the on the wireless backhaul.
Overall on on stimulus you know we.
We we see it unfolding and and we don't know exactly how it's going to impact the economy, but for example, just in the last day I heard that that.
Folks with SBK loans, the banks are being told by the SP a that those loans are going to be paid for the next six month principal and interest so that gives us some some optimism on the small business side in terms of stimulus from an infrastructure perspective, we're we're deep in those conversations in fact I'm participating.
In the listening session with the with the House, a energy and Commerce Committee later today and and so we're we're driving.
Discussions around how we take that stimulus in close that digital divide and we absolutely feel we're ready was shovel ready projects to implement those across our service territory. We've done the analysis in preparation for our dog as I mentioned in the in the previous question and so what I wanted.
Demonstrate for the staffs and the the rep. The congressional reps and senators that are working on that is we can make this happened now.
And and I think we're in a good position to make sure that complements our our dos and and the the.
Sunset of Caf, a transition to greater deployment of broadband so back to the wireless backhaul question. We saw it as I mentioned in the prepared remarks, an uptick in bandwidth augmentations.
And and we were very well prepared to handle that our network team does an excellent job in a in managing capacity and and keeping us position to move as bandwidth demand catalyst and drive increasing usage.
So we saw Augmentations, we also set up and expedite path to continue to look at anything any dynamic the changes in bandwidth requirements across our carrier customers and we've got a good reputation for being responsive in that way.
Yes, we are seeing some RF eyes, and RFP activity to continue supporting.
The the commitment that were made to accommodate the the T mobile sprint.
A merger.
And and any more than that I think would be a.
Speculation and I, probably can't comment on at this stage, but we're optimistic and we feel well position to help in our markets with the unique assets that we have.
Great. Thank you very much.
Thank you, ladies and gentlemen, once again to give a question at this time. Please press the star and the number one key to ask the question once again at a star then one to ask a question.
And I'm not showing any further questions at this time.
Well. Thank you all for joining us on this call.
And I do appreciate we all appreciate your support of consolidated and we look forward updating you next quarter on.
Our results and and all of our progress with co bid a 19 backdrop have a great day and please stay safe.
At.
Gentlemen, this concludes todays conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.
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