Q3 2020 Consolidated Communications Holdings Inc Earnings Call
[music].
This conference call at this time, all participants are in a listen only mode. After the speaker presentations will be a question answer session. Cascade question. During the session you'll need to press star one on your telephone. Please be advised that todays conference is being recorded you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today.
Prescribing. Please go ahead ma'am.
Thank you and good morning, I would like to welcome everyone to consolidated Communications third quarter 2020 earnings call.
On the call today are Bobby Dal, our President and Chief Executive Officer, and Steve Childers, Our Chief Financial Officer.
Following their prepared remarks, we will open the call up for questions.
Where we precede I will remind you our earnings release financial statements and presentation are all posted on the Investor Relations section of our web site, which can be found at consolidated dotcom.
Please review the Safe Harbor provisions 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 certain risks and uncertainties.
A discussion of factors that may affect future results is contained in consolidated filing with the SEC.
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 to Bobby you don't.
Thank you Jennifer and good morning, everyone I hope, you're all doing well in staying safe Wow, We've got great things to talk about today I'm going to kick it off with an overview of our strong Q3 results and our new strategic partnership with Searchlight, Steve will provide an update on the financial results and an overview on the new capital.
Structure I'll close with a discussion on our strategic imperatives in fiber build plans that will enable us to return to growth and future proof our business.
I'm very pleased that our third quarter results demonstrate both the resiliency of our business in the very strong execution and improving revenue trends growing adjusted EBITDA and strengthening the balance sheet in.
In addition to our very strong third quarter results. We recently completed a recapitalization, which included both a strategic investment and a global refinancing in which we raised 2.25 billion in new secured debt.
This new capital structure and capital infusion will significantly bolster our growth plans, which I'll discuss later.
First let me remind you that we set out on a path a year and a half ago to transform the business when we announced a deliberate capital allocation plan and that's exactly what we've done I fully expect consolidated communications transformation to continue and will look very different than another 18 months from today.
We now have the foundation to do this with a strong balance sheet increased capital and liquidity.
Before jumping into quarterly results, let me provide an update on how the pandemic is impacting our business.
In this new normal our communication services remain critical and play a fundamental role in keeping consumer commercial and carrier customers connected.
We turn technology into solutions connecting people wherever they work and live.
People are depending on connectivity now more than ever and as.
And we are working harder than ever to ensure reliable and continuous high quality services for them.
As we look back on the past six months Cove. It has certainly changed how we operate but we're determined to ensure resilience in our business and we are fortunate to have a team that has adjusted quickly and continues to adapt as needed.
Network architecture continues to successfully handle the increased traffic and usage the.
The proactive majors, we immediately implemented have kept our employees and customers safe.
At this time, we have not experienced any material impacts to our business as a result of the pandemic.
Now turning to third quarter results I'm very pleased with the solid and stable results. We delivered in the recent quarter and year to date revenue growth trends in both broadband and data transport services combined with lower operating expenses contributed to our overall results.
Starting with commercial and carrier, we grew data and transport, 1.6%, which further demonstrates our consistent track record of growing this strategic revenue stream.
Our carrier channel is active with Fiveg fiber and new wireless backhaul prospects. Our sales team is doing an excellent job of maintaining strong relationships and collaborating closely with carriers to identify upgrade opportunities.
Our tower connections under contract increased roughly 2% year over year totaling approximately 3900 connections.
As we build out carrier grade capacity, our fiber network investments allowed us to increase on net buildings, 12.5% from a year ago totaling approximately 13200.
The vast majority of our new sales across all customer groups, our on net which correlates to higher margins increased opportunity to upsell and a greater ability to ensure the best customer experience ultimately contributing to customer retention.
Within our commercial channel, we continue to see demand for bandwidth upgrades in our Proconnect Voip revenue is up 12% year over year.
We recently launched enterprise at home, which is a direct response to business customer needs right. Now this new service provides business class Internet and full featured unified communications to remote employees, removing obstacles to productivity.
And providing priority of service and support for our commercial clients when working from residential locations.
In addition, we launched Webex contact center and expanded our Microsoft productivity suite to all markets.
Our commercial sales teams Ccs ignite sales approach fits the market and environment using a hybrid of virtual tools to meet customers, where it makes sense for them.
Now turning to the consumer channel, we grew broadband revenue, 2.6%, representing the sixth consecutive quarter of broadband revenue growth. Our broadband services are competitive and we are even more excited about our fiber expansion, which will accelerate this growth in 2021.
CCTV our streaming video service is fully launched in northern New England, Texas, and most recently in California and Illinois.
We continue to see the majority of subscribers, bringing their own device and higher broadband speed adoption with CCTV. This easy self installed product reduces the capital intensity compared to traditional video.
We have nine public private partnership fiber builds and process most in new Hampshire totaling approximately 10000 homes passed when complete.
Our fiber density positions us well to partner with communities through public private agreements and federal cares funding.
This gives us additional opportunities in rural areas that would otherwise be difficult to justify financially.
These nine public private community builds are all slated for completion in late 2020 or early 2021.
Our consumer channel has been stable and were eager to accelerate our fiber growth plans to build a best in class consumer service experience.
We executed well across.
All of our three customer channels and our teams are laser focused on the right priorities.
I will now turn the call over to Steve who will provide more details on our financial results for third quarter Steve.
Good morning, everyone as Bob said it was an exciting in a dental quarter I'm happy to share with you. The details of our strong third quarter results as well as to provide an overview of our new capital structure, our financial summary for the third quarter begins on slide four of our presentation.
Operating revenue for the third quarter totaled $327.1 million, a decline of 1.9%, which is more than a two X improvement compared to the 4.2% decline a year ago. This is the result of the continued strong performance realized across all of our customer channels.
As a result of improved revenue trends and continued cost structure improvement third quarter, adjusted EBITDA was up 1% or $1.3 million from a year ago totaling $132.2 million for the quarter.
Now lets review revenue, starting with commercial and carrier where revenue totaled $146.4 million in the third quarter.
Before moving into each component of commercial and carrier revenue I want to note that as discussed on prior earnings calls due to the potential impact of colder that our SMB or small business revenues or approximately 8% of total revenue as of today, we have not seen a material change in our SMB revenue trends data and transport.
Revenue grew 1.6% and totaled $90.2 million. This growth continues to be fueled by our investment in our fiber network and the addition of new business products and enhancements.
Commercial voice revenue declined $1.3 million or 2.7%, which was reduced by more than one half from a year ago.
Other revenue declined approximately 900000 in the recent quarter and is down $7.4 million in the nine month period, primarily due to lower equipment sales equipment sales and is the one area. We are seeing seeing a slowdown due to the COVID-19 economy and we expect decisions on equipment purchases to continue to be deferred.
As customer stay cautious to current economic conditions, the impact on earnings and cash flow with this low margin product will be nominal.
Now turning to our consumer channel were revenue totaled 128.4 million total revenue total consumer revenue was down 2.3% or $3 million in the third quarter. However, the recent quarter decline rate improved 140 basis points from a year ago and the channel showed overall growth sequentially.
For the second quarter in a row.
Consumer broadband revenue grew for the sixth consecutive quarter, and it was up 2.6% or $1.7 million for the third quarter.
Consumer ARPU increased 4.6% year over year now totaling $76.
Our strategy of leading with broadband specifically in our newly upgraded areas is working and driving retention as well as a higher ARPU ARPU.
Consumer voice revenue was down approximately 6% or $2.7 million year over year. The decline in consumer voice was reduced almost in half from a year ago. We attribute this to a more robust and competitive broadband offering which contribute contribute a higher voice retention.
Video revenue declined 9.8% the 2 million dollar decline was offset by reductions in video programming expense and lower Capex in part. This decline reflects our change in strategy to streaming over the top services bundled with broadband services.
Network access revenues declined 2.2 million largely due to special access declines and subsidy revenue was flat and is expected to remain at $18 million per quarter run rate.
With respect to the rural digital opportunity fund, we will be participating in participating in the RF auction, which starts today, we will continue to evaluate evaluate our options throughout the bidding process, but due to strict FCC anti collusion rules, we cannot comment further at this time.
Now turning to operating expenses exclude excluding depreciation and amortization other operating expenses totaled $209.5 million, an improvement of $7.2 million or 3.3% from the prior year.
Free cash flow increased $39.6 million year over year and is up $120.9 million year to date.
Cost of services and products declined $2.2 million driven by lower video programming expense and sat lower salaries and benefits associated with ongoing cost savings initiatives.
As cdna costs were reduced by $5 million in the recent quarter, primarily due to lower labor and benefits expense combined with operational efficiencies.
Net interest expense in the quarter was $31.7 million down 2.6 million from the same period last year.
The decrease was primarily due to declines in variable interest rates on the term loan and repurchases and the company, 6.5% senior notes in prior periods.
Cash distributions from the wireless companies wireless partnerships totaled $12.4 million in the third quarter compared to $10.9 million a year ago year.
Year to date, we have received $32 million in wireless casters distributions in at the beginning of the year, we expected to be in the range of $37 million to $39 million for the full year 2020. At this time, we have limited visibility to Q4 distributions from Verizon wireless.
Adjusted net income per share was 23 cents compared to six cents per share a year ago. The improvement reflects the consistency of our operating results and a decline in depreciation expense.
Capex was approximately $56 million in the third quarter $152 million year to date, our capex spend supported success based fiber projects and broadband network infrastructure expansion.
As we pivot to execute on our growth plans in the fourth quarter, we expect full year capex to be at least $210 million as we prepare for a fast start in 2021, our fiber expansion and build plans.
Total liquidity, including cash on hand, and availability under our revolver was approximately $191.6 million.
Our business is strong and stable and we have demonstrated our ability to improve revenue revenue trends and manage costs and we have made notable progress on our capital allocation plan.
Our leverage ratio improved from 4.33 times at the beginning of the year and we actually achieved our year end target of four times at the end of the third quarter pro forma for the October 2nd Recapitalization, which allowed us to reduce debt by approximately $200 million. Our net debt leverage would have been 3.5 times, we closed on the rig.
Capitalization on October 2nd and we now have an even stronger balance sheet enhance flexibility increased liquidity and extend maturities.
We were very pleased with the strong support from lenders and bond investors on our refinancing the debt structure consist of the following a five year $250 million revolving credit facility, which has been upsized to respond to the letter of credit requirements for art off.
A seven year 1.2 billion unsecured term loan priced at LIBOR, plus a coupon of 4.75% with a 1% floor.
And senior secured notes of $750 million at a coupon rate of 6.5% due in 2028.
The successful refinancing combined with the strategic investment provides us with much greater point financial flexibility to support our fiber expansion growth plans.
We will not be restating guidance for the fourth quarter full year 2020, however in the fourth quarter, we will offer the following color uncertainly around the threat from COVID-19 persist we continue to navigate the pandemic pandemic led economic crisis with nominal effect on our overall results.
However, we are closely monitoring all aspects of our business and we are very focused on the safety of our employees and customers.
We expect to see normal levels of seasonality within our northern New England residential markets as snowbirds migrate from warmer weather.
Last year, we estimate we estimate in the fourth quarter impact to revenue primarily in data and voice net of a price.
The increase in the fourth quarter to be about $2.5 million.
Since that since we announced the September 14th announcement of the partnership with search like we have been accelerating our fiber and growth expansion plans and we will use the fourth quarter to get off to a fast start our build plans for 2021.
We could have some startup operating expense for the for the new fiber build in addition to the capex being at least $210 million for that for the full year as I mentioned earlier.
We have outlined our new capital structure and with respect to the searchlight investment we will we will be electing to pick interest for the fourth quarter of 2020 and throughout 2021 with that ill now turn call back over to Bob discussed strategic priorities.
Thanks, Steve the consistency of our results the strength in depth of our team and the quality of our assets helped us attractive to treat a strategic partnership with searchlight, we're gaining experience partner, who brings valuable research and development capabilities and knowledge of the industry. In addition to their investment.
We are pleased to have recently welcomed Dave Fuller to our board as one of their designated board members.
Searchlight capital infusion enabled our global refinancing and allows us to pivot to accelerate our growth and ramp our fiber expansion plans beginning next year.
We are embarking on a multi year investment initiative, where we will upgrade more than 1 million.
Passings addressable homes with fiber, enabling us to provide superior service across all three customer channels and deliver revenue growth. While we have been successful in growing broadband. We're now positioned to immediately bolster our fiber expansion plans and becoming even more competitive provider.
We are focused on finishing the year strong and we are already deep into the planning and execution on our accelerated fiber builds we haven't experienced fiber construction, we have experienced fiber construction teams and have firmed up our plans, which include upgrading 250000 homes to gig speeds in 2021.
We will significantly improve our infrastructure and our digital transformation project will create a best in class customer experience as we become a dominant fiber based broadband provider be.
The accelerated build plans leverage our near net fiber network to significantly boost customer speeds and expand gigabit fiber services to more than 50% of our addressable market as we enter the next phase of our growth and transformation. We've sharpened our focus on strategic imperatives, which are outlined on slide 11.
In our investor deck.
First we're significantly accelerate our growth plan with this strategic investment in partnership with search site, our fiber expansion will allow us to return to topline growth and this return to growth is very exciting for this team next.
Next we will leverage our fiber assets and expansion across the three customer channels as we have in our past.
As we work to deliver best in class customer experience and the most competitive services.
Third our new capitalization has extended maturities and increased liquidity to position consolidated for accelerated growth providing enough runway to complete our fiber build plan will targets of substantially all free cash flow to focused on highest return fiber expansion projects and we will continue to evaluate the assets in our portfolio.
So as a normal course of business to ensure all assets have a long term strategic fit in.
In closing I want to reiterate when an important time. This is for our company and how excited we are to be executing on our fiber expansion plans, we have a strong stable business and experienced management team and a significantly improved financial position I couldn't be more excited for what the future holds.
With that operator.
Operator will be glad to take questions.
Thank you as a reminder to ask a question you'll need to press Star 100, Hong Kong with prior question Crystacomm, Keith we stand volume coupon Cumulus there.
Our first question comes from Greg Williams with Tom You May proceed with your question.
Hi, guys nice quarter high.
A couple of questions one on the horizon cash distribution I know you just said you don't have the visibility but.
It was north of $12 million and looks like it's trending ahead, but.
Can I take your comments, maybe suggest that the 37 to 39 million that you get in the guidance is still the right way of looking at it.
As you are anticipating having iPhone promotions in the fourth quarter as you've seen in the past.
Second question is just on the EBITDA.
Full year, you said you did not reinstate EBITDA guidance, but it seems like you're trending in a place where you should be getting at least at the high end if not north of that.
You did mention some heavy startup costs for the acceleration of year fiber deployment.
So can you maybe unpack and provides more color to such startup costs in the fourth quarter on how we should think about the margin trajectory and the last one is just on the fiber acceleration can you just help us with the fiber build cadence.
Where are you now engineering and planning when do you plan on ramping up.
How many homes passed in 2021 will be more front end loaded.
And over the building more linear and maybe would you be fighting some milestones or men's and excess.
With the fiber build thanks.
Yes, Hi, Greg that's a that's a loaded question. So let me unpack that and I'll start with the last one first.
On the fiber build cadence and and Steve will pick up on the.
The probably the Verizon Castro's and annual comments on.
On EBITDA Im sure.
But let me start with.
As I said in the prepared remarks.
We're looking at 250000 Passings at.
Added in.
In 2021, and I would expect the cadence to be similar to that and I really think that thats a minimum what we what we always find that we found this in past builds like the state of New York, We did.
We find more passings just by nature of of our conservative approach to engineering to each location each address that we're targeting.
[music].
We find that there's economies when we're in the market and we usually get a little a little bit of Overachievement. So I think to 250000 as a minimum upgraded to one gig or fiber passing that we'll see in in 2021.
What we're we're doing right now to to get a jump on that is is taking the cares act teams I mean, just to give you. An example will build 500 miles of fiber in roughly 120 days.
And we're about two thirds of the way done with it.
For for those public private partnerships that we mentioned earlier because they are in very rural places.
So we've already got the infrastructure rolling.
But we're what we're doing is bolstering those teams, making sure that we.
We can have a pretty strong cadence of of construction coming out of the the harshest winter time in northern New England in particular.
And and that we have no risk of.
Of not having that market available that 250000 passings by the end of 2021 I think the net adds will be somewhat backend loaded in 2021, I'm just by nature of getting the digital transformation. Some some upgrades were doing on the user interface for for customers to to order service electronically and through the year.
Experience, we're significantly simplifying that in this in this.
Effort.
And and and really changing the customer experience from from top to bottom so that.
We can we can benefit from all the reliability and flexibility of fiber product can give us owing to the end user.
So that kind of covers the cadence in the in the build planning and yes, we'll have metrics that we.
Steve and I are still working through with the team that will metrics that we share the track of the addressable homes available and then how were doing in the in that ads across those upgraded areas so more to more to come on that.
Steve you want to pick up on Verizon, Yes, So Scott Greg. Thanks for thanks for the question so going back to the Verizon that cash distributed distributions. Yes. So we did we did receive over $12 million in Q3, and I think the point I was trying to make is we are not expecting to receive that same level for Q4, I think we will be I think.
We will be above.
37 to 39 million dollar range, unless we have a surprise from rising again, we're at this point in time, we have limited.
Visibility to that number, but I would expect us to be passed or above the $39 million for the full year and.
Then if you go to the thinking about the EBITDA number.
Not giving the guidance I think are not giving guidance is more because of the uncertainty relative to co bid.
And Bhavan, its probably more on capex sign on on how.
How much we might spend just to get ready right now I'm not we're not really seeing a material impact for operating expenses relative to getting ready for the fiber builds but if we have the opportunity to accelerate that position is.
To be to get onto a fast start in 21.
We will do so so I think the biggest things I would take away from the Q4 numbers are the impact of seasonality in the northern New England markets and there could be some startup expense relative to the fiber builds but again I think thats why we didnt give guidance, but not necessarily looking for that to be.
Hugely material number at this time, but again, we are motivated to get often or 21.
Got it great color. Thanks.
Thank you. Our next question comes from Perry will chart, we bounced.
Wells Fargo you May proceed with your question.
Great. Thanks for taking the question.
I'm wondering the components of your broadband growth as you look out you had nice performance in that market. So with your ARPU that 76, you didn't you can continue to grow that as customers upgrade speed tiers or you take pricing actions or you think more of the future growth is going to come from customer adds.
I think Eric.
Eric that it's both.
We have.
Had a history using the legacy consolidated markets as an example of matching speed tier increases with people coming off of promotions and and and as a result, <unk> always been able to increment up a couple of dollars ARPU.
Improvement so.
So that's been and natural trend for us.
I think that theres going to be a us.
Boost.
That comes from the.
The.
Net adds.
As a result of the fiber.
Addressable market.
Being increase, especially northern new England, where we have the lowest share.
And so I think I think it's really going to be both.
And it's.
It's probably a little bit too early for me to give you what the split might be on that but generally speaking I would say.
We're going to be aggressive in in pricing the the initial.
The launch of the fiber product and to make sure. We've got a very good competitive position.
So so.
So I think overall, we should see ARPU.
Stable, if not growing because there is room for ARPU increase in the markets, where we're going to launch the one gig product.
Great that's helpful and a follow up on the northern New England build I guess, what type of penetration rates are you assuming from the total homes passed that what do you think is achievable and maybe you could remind us what the competitive environment looks like in that region and kind of what gives you confidence you can take share from some of the incumbents.
Yes, I think I think the way to think about it is.
So we're starting there with roughly 910% share.
And Anna Anna.
Network architecture, that's very near net.
Customers, but hasn't been exploited for the consumer base and so were maybe a.
Yeah.
A bit.
Behind in some of the downtown areas and have done a very good job in the more rural areas of northern New England. So.
Essentially we are going to develop it into a duopoly.
The environment and and we think that what you'd see in typical duopoly type situations across.
Other markets is what's possible.
There's there's reports of 30, 40% and our business plan works.
At something.
On the lower range of that so we feel really good about our potential, especially when you consider the products going to be a symmetrical one gig.
Or two gig even out of the gate so with the technology, we have available to us and dedicated bandwidth from from the.
The the host or the node location, all way out to the customer on a port basis, we think our architecture puts us in an excellent position to have duopoly penetrations.
In three or four years as these.
As these fiber build areas mature.
Great. Thanks for the color.
Thank you and as a reminder to ask a question you'll need to press star one on your telephone. Please stand by we compiled kuni roster.
And im not showing any further questions at this time.
I would now like well call back over to Bob you don't for any further remarks.
Thank you. Thank you all for joining the call today, we surely appreciate your support and consolidate communications and look forward to reporting next quarter on our year end results and the progress on our growth plans. Thank you have a great day.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participation you may now disconnect.
[music].
[music].
[music].
[music].