Q1 2020 Earnings Call
Thursday
good afternoon. Ladies and gentlemen. This is the operator today's conference call is scheduled to begin momentarily took that time your lines will again be placed on music old. Thank you for your patience.
Dead dead dead dead.
Thursday Thursday
Thank you for standing by and welcome to Altus usaq 12020 results presentation. All lines are in a listen-only mode after the speakers remarks. There will be a question-and-answer session. If you would like to ask a question during this time simply, press star. Then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Now let the turn the call over to your host Nick Brown, please. Go ahead sir.
Hello everyone and thank you for joining and a moment. I'll hand over to our CFO micro who will take you through the presentation and then we'll move and I as today's presentation may contain forward-looking statements. Please read the disclaimer on page to the slides are available on the company's website and a replay of the call will be made available. And now I had I had sex there.
Thanks, Nick.
Hello, everyone starting just jumping straight into slide three. I first want to take a moment to thank the entire LTC USA team was been working tirelessly to keep our community connected as an essential service in this time of Crisis. Our products Broadband T-Mobile news play critical role and it's a responsibility. We take very seriously through a variety of programs including three LTS Advantage Broadband for students free Wi-Fi for students schools and First Responders and the FCC pledge. We've been keeping customers and communities safe and connected during a time of need while it is certainly an unprecedented time for all I'm inspired by the ongoing dedication and work ethic displayed by our teams each and every day. I'll get into more detail of our community efforts shortly. So let me summarize our q1 highlights.
Total revenue growth of 2.2% in q1 was driven by the strength of our core Broadband business which grew 14% year-over-year. We have seen record demand for a broadband service achieving the best mom ever quarterly performance with 50,000 Broadband net additions, excluding a disadvantage Additionally the pace of voluntary Broadband speed upgrades almost doubled in March month on month and we saw a 24% increase in network data usage to support this ongoing Network demand. We accelerate our deployment of 1-gig speeds which is now available in more than half of our Optimum Footprints and over 75% off of the Suddenlink liquid adjusted every day with flat year-over-year and up 1% excluding mobile losses, and we saw strong growth in free cash flow up 80% year-over-year.
Given the severe dislocation in our share price following this Market sell-off. We opportunistically accelerate our share repurchases for this year completing 750 million in the first quarter then over 1 billion including April 30th. This means if we retired almost 7% of total shares outstanding and 14% of our free flow in only four months our buyback Target for this year remains 1.6 billion. So she you should expect a bit of a Slowdown in the pace of repurchases from here on as we remain committed to our year in leverage Target a four-and-a-half to five times net debt-to-ebitda a as an organization. We are well-positioned giving the increasing Reliance on our Network and services which have been performing very well. There are there are some uncertainties around there SMP and advertising businesses as many as our peers have highlighted as much for that reason we intend on providing an update on the outlook for revenue and even expectations later this year as we gain more visibility.
However, as Michael outline later, we remain confident in our ability to do with our Revenue even and free cash flow growth in 2020 driven by ongoing cost management reduce capex expectations reduce cost and Improvement in working capital.
Moving on the flight for although the impact from covid-19 were relatively Limited in q1. We wanted to spend a minute highlighting where we expect to see more of an impact than as well. How about recent initiatives to respond to the pandemic first on the positive side? We've seen significant increases in demand for higher Broadband speeds within both our residential and SMB businesses came home instructions have been many of our customers have had to temporarily close their retail operations, which raises the possibility of increased bad debt and it's impacting local advertising revenues. Additionally, we close 86% of our own retail outlets and reduced our own marketing spend which is impacting our Mobile sales in Hansard volumes in particular.
We are taking this as an opportunity to.
Celebrate the digitization of our whole business from driving more digital sales to adding online online support tools for payments and account management else where we are seeing some permitting delays impact damage to the home network rollout, which is driving reduce capex expectations for this year the health and well-being of our employees and customers are Paramount. So we've established programs such as enhanced off safety initiative and remote Working Solutions and we've taken many steps to support customers and local communities. For example, we sign the ftc's pledge to help consumers and business they connected during this time. We've been collaborating with hospitals Schools and Government agencies to ensure that we have connectivity Services. They need to assist the public including waiving fees for First Responders and other critical entities.
We have made several programs like a disadvantage internet and student Wi-Fi available at no cost to the end of the school year for students. Finally. The company is committed ten million dollars in commuter relief to support our small business customers and their recovery efforts. Additionally. Our management team has pledged the percentage of our salaries to support Charities like feeding America and the Boys & Girls Club of America, which are also committed to supporting our local community in summary. Although this is a challenging time. We think this is time that I've presented that presents a lot of opportunities for us as a business.
Moving on to slide five and speaking of our business. We continue to see solid Revenue performance in q1. We continue to perform well in our core residential business which is up which is about 80% of our total revenues residential Revenue grew 0.5% year-over-year, which was driven by Broadband Revenue growth of 14% This strong Broadband growth is being driven by mixing towards stand-alone Broadband products on going up to your entire Broadband speed and our recent raid event from which we saw about a half quarter impact in q1 Business Services grew 3.9% in q1 news and advertising grew at 11.4% in q1 driven mainly by growth of our targeted advertising business a four and cheddar.
32 flight 6E illustrate the best ever quarterly performance for a core residential business at the customer relationship and Broadband addition. We added 35 thousand unique residential customer relationships or 44,000 including 9,000 disadvantaged student customers this translates to a record 50,000 net additions or 60,000 including Advantage. This compares to 37,000 Broadband editions in q1 2019, which was in itself an exceptionally good performance last year and we've seen also good performance continued through April on video. We continue seeing accelerated pace of declines with 42000 losses in q1 as we highlighted last quarter. This is driven mainly by bigger pack is a programming cost inflation with our Raid event this year and a lower video attachment rate for gross add customer additions. The lower attachment rate on Gross additions is actually a very positive free cash wage.
front press with a reduced
But outlets and better margins as bundle video on promo is not attractive economics as well. However in April we have seen these losses also slow down materially additional we rolled out with one in in Suddenlink at the end of 2018 which contributes to better video performance in q1 2019. However, video remains an important business to us. We still have a significant number of customers that are long ten years and highly valuable double and triple play bundle customers. For example, approximately half of our customers have been with us for five years or more 1/3 have been with us for ten years or more that was customers are paying closer to our Rock great for videos and customers coming in on promo.
Moving on a page seven. You can see the exceptionally strong demand for Broadband offering underpinning our customer and revenue growth as I mentioned before our Broadband speed upgrades mortgage double in Optimum in March month-over-month benefiting from stay-at-home restrictions put in place Total data usage was up 24% over the same period averaging close to 400 gigabits per customer in March 5th growth was driven mainly by a similar percentage increase in video streaming. We also saw material increases the usage of other popular internet applications such as online gaming off the VPN and video conferencing Services as many of my peers have seen as well. We're also seeing a Resurgence are fixed voice line usage in a reduction in out-of-home Mobile roaming costs money as many of our customers are currently working from home. We invested a lot in our Network in the last few years and is performing very well right now with plenty of capacity to handle these increase usage trends.
With the continued deployment of cable DOCSIS 3.1 and Fiber Technologies. We have now made one gigabit broadband service available in more than half of the optimum footprint as a result. We've already seen an acceleration one big sales up 56% in March, but as the next slide closed, we're only starting to get started right now.
Turning to slide eight. You can even more clearly see the long-term progression of higher speeds among our customers. The average Broadband speeds taken by customer base is now 213. You do make a bit down more than triple what we saw just three years ago.
But more importantly about two-thirds of our base still only takes two hundred megabytes or less. That's about two point eight million subscribers that we are certain will upgrade over time. We have rapidly deployed one gigabit of capability with the expansion across Optimist Footprints more than doubling our overall availability in q1 2022 $63 per month including Suddenlink across. The 1-gig selling rate was 13% of all gross additions in areas where available increasing 1-gig availability to age of options footprint through the rest of 2020 increased opportunity to continue to up-sell higher Broadband speeds, and we're still on track for commercial launch for a bundle fiber offerings later this year.
a long-term fiber the home
Opportunity will allow us to deliver even faster speeds to our customers with significant opportunities for additional capex and Opex Savings in some way. We remain very optimistic of our core connectivity.
Flight nine provides an update on our mobile business. We've had good momentum in q1 with 41,000 subscribers net additions reaching 110000 Total Lines since we launched September last year that's almost a 3% penetration of a Broadband subscriber base. However, since we have ended our introductory offer and retail stores closed in March we've seen in slow down involved for q1 will likely be lighter in terms of line added and revenues. There are two positive impacts on our margins though first. We've seen a 20% decline in cellular data consumption and loss reducing our ran cost from increased Wi-Fi network offload during stay at home. And secondly, we reduced our sales and marketing spend while the stores are closed.
We remain focused on improving customer experience and broadening a product offerings with a continued expansion of our handset lineup and preparations. Well underway for a 5G service launched. We are also very excited to share that we've begun our new partnership with to T-Mobile and are actively working with them to accelerate opening up their Network to all of our customers.
On flight ten turning the business services. We want to provide some color on how the business is performing given this unique time. First of all, it's important to flag that business services is only 15% of our total revenue of that roughly two-thirds of our Market in Business Services is SMB, but only a small percentage effect is in affected sectors such as restaurants Hospitality with an auto dealers. We expect our SOB customers may be more impacted by covid-19 Amar other Enterprise customers. We have seen a Slowdown in growth addition since March however, churn off remain stable, which is very encouraging additionally similar to our residential business. We are seeing increased demand for higher Broadband speeds from our SMB customer base.
It is also important to note that the vast majority of our estimate customers take voice and use our service for connectivity to their alarm systems. Both of these elements increase the utility in retention value our services to our customers during this difficult time. We've been extremely focused on retention efforts including introducing customer credits during the shutdown and our community relief program aimed at small business or large Enterprise customer base, which is light past accounts for about one-third of our total Business Services revenue and key verticals such as Government Education Health Care and Carrier wholesale represents over half of this as we are a leading Provider by market share in our footprint in these sectors,
He's verticals have been less affected by covid-19 disclosures and we expect that to continue to be the case. We are also seeing increased the number of Enterprise customers upgrading their service to support remote work with them with services like secured internet and conferencing Solutions at this point. We have limited visibility into one of our markets will reopen with that said, however, Texas and I are already in the process of reopening this week which provide a good indicator early indicator for us on how business is perform. You can see in the chart here that suddenly SMB represents about 22% of our business services Revenue overall. We're confident our telecoms infrastructure and secure network services are essential services for these businesses.
Tony
11:00 or a news and advertising business like our peers we have seen some local at cancellations and some of the most affected Industries such as hospitality and Autos it's important to put in perspective that news and advertising represents only 4% of our total revenue and local advertising which is the most effective makes up roughly only one third of that 4% as the wage is typically order one to two months ahead this is likely to impact to to more than we've seen in q1 the outlook for National advertising partly depends on duration on duration of stay-at-home restrictions
For example, we've seen National brands in with retail presence to spend their marketing spend all together.
Our full-year expectations for the business would depend on a lot of factors namely the return of large National advertisers to their normal schedule and spend levels. The good news is that some of our West markets are in the process of opening as I noted earlier, which is a necessary leading indicator of advertising coming back remember political advertising is still likely to contribute positively in the second half which was roughly about forty million in incremental Revenue in the last political Year back in 2018. And on the news side of the business, we are seeing very positive viewership Trends with a 577% increase shutter website traffic 131% increase in chatter TV viewership and a 48% increase in News 12 to the dealership and now I'll hand over to Mike who will take you through the financials in more detail.
Thank you Dexter. And thank you everyone for joining alcohol. We certainly hope you are all staying safe and well.
On slide 12 you can see that I'll teach USA's adjusted ebitda margins in the first quarter of 2020 are in line with last year excluding mobile losses at 43.1% margins would be higher except for the recent cheddar acquisition which has slightly diluted the margins since this business only just turned break even and remember this represents about a 10 percentage Point increase from when we first acquired not linking cable vision, and we have been able to sustain margins at these elevated levels while investing in all of our new growth initiatives.
In q1 our net impact from covid-19 Lo and we estimated to be less than ten million dollars.
Or even less capex margin reflects edit Capital outlays related to our fiber Investments beginning towards the end of 2018, but we expect to additional opportunity to expand our operating free cash flow month and going forward.
That's Dexter mentioned earlier. The mix shift towards Broadband is also contributing positively offsetting the video customer loss and programming cost inflation and added further aided further by additional efficiency measures, which she continued to adopt every year.
Turning to slide 13, we can see a breakdown of cash Capital expenditures which decreased year-over-year partly due to lower mobile Investments given the initial Associated launch Catholic schools are total Capital intensity was 12.2% in q1, but without fiber and new home build Investments that this would have been less than 9% We still expect that a bond often about fiber build. We will be able to reduce capex significantly with additional opportunity of further reducing objects as well.
but given the
reading delays that extra mentioned the fiber rollout will likely be slower than we anticipated entering the which is the primary reason we are lowering our capex expectations to be sub one point three billion dollars for the month
we are currently more focused on expanding 1-gig availability with our DOCSIS 3.1 upgrade enabling more bandwidth and delivering on the next generation of gig capable Broadband gateways
additionally we are excited for the commercial launch about fiber double and triple play products later this year and look forward to updating you on progress there
In the same way the Covetous us an opportunity to evaluate digitally transforming of business. We expect that many of our customers are also rethinking the manner in which they managed and utilized their Broadband connections accordingly. We are investing in our Network anticipate seeing that we will see some permanent chambered changes in consumption behaviors among our customers. We will be ready to accommodate their preferences.
Turning to slide fourteen. You will see our free cash flow in more detail. We generated $294 million of free cash flow into one which is up 80% year-over-year in large part returned by lower cash capex. We just discussed and improved working capital cash flows.
Remember cash interest is higher in the first and third quarters because of the timing of coupon payments. We are seeing a benefit from refinancings we executed on last year from the recent fall and are floating rate of debt off. I'm from the benefit of of amending prior interest rate swap contracts.
We also have still have some large bonds becoming cold while later in 2020 which depending on market conditions should bring further cash interest savings into 2021.
Cash tax payments were just 1 million dollars in q1. I want to highlight that the recently-passed cares act allows us to extend our nols by more than a year. We now do not expect to be a significant fed cash taxpayer until 2022.
Taking in summation. We are confident that we will be able to deliver on free cash flow growth in 2020 even with slightly more Revenue uncertainty in some parts of our business.
Turning to share repurchases. We repurchased $750 of stock in q1 and approximately 300 million additional through April having opportunistically accelerated accelerated our buyback extra explained in order to take advantage of the volatility in the market. We still expect to complete one point seven billion in share BuyBacks this year.
It's showing it's like 15. We continue to have a very strong balance sheet position. We have no significant Bond maturity is greater than 1.1 billion until 2025 as you can see on the maturity schedule Thursday 6 to this presentation with none in 2020 and it weighed and a weighted average life of debt of 6.2 years.
We have significant liquidity of two point five billion dollars at the end of q1 with an undrawn revolver and cash on hand on the balance that's on top of the free cash flow. We continue to generate from our recurring Revenue off every day. I weighted average cost of debt is now 5.6% compared to 5.9% at the end of 2019.
as I already mentioned
We have additional opportunities to further reduce our cost of debt. We will continue to proactively manage maturities that we can afford to wait and be opportunistic about when we go to market in that regard.
Finally on slide sixteen we provide our updated Financial outlook for 2020 much of which most of which we have already touched upon.
Due to the current market uncertainty we intend to provide an update to our revenue and margin guidance later this year. We are taking down guidance on cash Capital expenditures to below one point three billion package would really reiterate that we continue to expect to grow people died less capex and free cash flow this year with ongoing cost management activities lower Capital expenditures and improvements and working capital cash. Lastly. Are you in leverage Target remains 4 and 1/2 to 5 times on the last two quarters annualized basis and we are reaffirming our annual share buyback Target at one point seven billion dollars.
And with that we will now take any questions.
As a reminder, if you would like to ask a question, press star then a number one. That is star one for question. The first question comes from the lineup consists with JPMorgan.
Hey guys, thanks one certification first test drive. I think you say in your prepared remarks that you're looking for gross revenue in but as well as a cash flow this year. Did I hear that right or it was on mistake? Yeah. I mean listen, we we we've always had withdrawn our guidance between in this level of uncertainty today. We can't really for Thursday. Yes what we think's going to happen throughout the rest of the year, but what we see today we continue to expect to see revenue and even dog wrote this year.
Scott okay. She's a little confused and then maybe just talk about the strength of broadband in the first quarter. Did you see forward of seasonality? Invest of summer months are summer homes of Eastern Long Island, or was there other things going on sort of pre?
Miskin and it's really a tale of some of two little ships in terms of time. Which is you know, the ultimate Footprints went into lock-down. Let's call it March 10th or probably more like middle of March and so we saw a very very strong increased activity in the options between going through the end of March going to be Thursday April and then many of the western and Midwestern states didn't come into lockdown until towards the end of March beginning of April and so we are seeing right now a very very strong performance coming from the West Market today. What is clear is there's a one additional strength happening which is as the growth add numbers start to slow down on the option footprint given they're they're they're the the Resurgence in March we're seeing dead.
Paul
Even quicker if which which does not surprise us given that people on lockdown people are not moving. There's much much less voluntary churn and people want to maintain disability Thursday. So we're we're really seeing benefits from all funds in terms of the lockdown relative to our residential business.
Okay, and and one more if I can you still have been residents per user accelerated pretty dramatically. How much of that is is either the price increase or change in allocation versus sort of real incoming demand of people shifting upward is that yeah, material a question active grocery. Yeah. So if you just sign a break it down a little bit about four to five percentage points of that ten of that. Sorry about 14 is allocations based on Iraq rate, right? So that's an accounting change. But you know, we've been consistently in those double digits Revenue growth numbers, but true Cash numbers is about 10% The remainder of it is about half of it is dead is up tearing.
True up tearing and and subscription about a 1/4 of it is volume-based and a quarter of it is the pricing.
Yeah, that's helpful. Thank you.
The next question comes from the line of Craig moffatt with market and Nickerson.
Yeah, hi to questions if I could one just to follow up on the last question how much Headroom do you think there is with respect to broadband arpu? You're now took over $70. I know there's an allocation element of that that that I'd set to some extent from at least bundled customers. But what have you down and about Broadband price sensitivity and and how do you think about the sustainable?