Q4 2020 Consolidated Communications Holdings Inc Earnings Call
Yeah.
Good morning, My name is Casey and I will be your conference operator today.
At this time I would like to work out very low to the consolidated communications fourth quarter earnings Conference call. Please be advised that today's conference is being recorded.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask the question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question press. The pound key. Thank you I will now turn the call over.
Jennifer Saudi Senior Vice President of Investor Relations and corporate Communications, Jennifer you May begin your conference.
Yeah.
Thank you and good morning, I would like to welcome everyone to consolidated communications fourth quarter, 'twenty and 'twenty earnings call.
On the call today are Bob Udell, 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 our accelerated growth plans and Steve will provide some details on our fourth quarter and full year financial performance and outlook for 'twenty and 'twenty one.
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 the Investor Relations section of our website, which can be found at consolidated Dot Com. Please review the safe Harbor provisions on slide two of the presentation. Today's discussion includes statements about expected.
Future events and financial results that are forward looking and subject to certain risks and uncertainties of discussion of factors that may affect future results is contained and consolidated filings with the SEC and our 10-K will be filed tomorrow.
Today's discussion will also include certain non-GAAP financial measures. Our earnings release includes the reconciliation of these measures to the nearest GAAP equivalents.
I'll now turn the call over to Bob Udell.
Yeah.
Thanks, Jennifer and good morning, everyone I'd like to welcome all of you to consolidated Communications fourth quarter 2020 earnings call.
Yeah.
And I'm very excited to talk to you about how 2020 year.
Was a pivotal year for consolidated communications.
Pandemic brought unforeseen challenges and get our business performed very well this past year highlighted the critical importance of the services and support we provide the consumer commercial and carrier customers as well as our success and adapting to meet and exceed our customer expectations.
We were part of the keep America connected pledge and rapidly installed upgraded and maintain services to our customers. Our fiber network successfully handled the increased traffic levels and performed very well our teams ensure customers stayed connected with stable and upgraded broadband connections wherever they are and make safety a priority.
At all times and their work I'm proud of what we accomplished and our business and for our customers. While at the same time growing strategic revenue and increasing our adjusted EBITDA year over year.
2020 also brought a strategic partnership with us for Us with Searchlight capital partners, who committed to make of $425 million total investment, resulting in an immediate capital infusion of $350 million, which we announced in September of last year and can.
Junk conjunction with this investment we refinanced our capital structure, which provides us the capital and financial flexibility to accelerate our fiber network expansion, we have over $600 million of liquidity and extended the debt maturities until 2027.
With our strong balance sheet and strategic partner and search like we will upgrade $1 6 million of fiber passengers over the next five years. We're building on an excellent platform for the future. We are well on our way to becoming of fiber one broadband company. Our goal is to provide and excellent customer experience grow our consumer and commercial.
Broadband penetration rates and increased data arcos and ultimately returning the company to revenue growth, we couldnt be more excited about what lies ahead as we have a fully funded growth plan and a strong balance sheet and increased liquidity.
Our fourth quarter results were very positive and demonstrate the stability of our business the strong execution and improving revenue trends and increased adjusted EBITDA.
Coming into 'twenty and 'twenty, we committed to produce stable earnings and growth free cash flow and that's just what we did in the fourth quarter and for the full year of 2020. Despite the challenges of COVID-19 presented the pandemic has certainly changed how we do business, but it has not had a material impact on our results.
The new trends are improving and we were able to grow adjusted EBITDA for the recent quarter and the year.
Turning to commercial and carrier, we grew data and transport three 2% and the fourth quarter and one 9% for the year you of a very consistent track record of growing the strategic revenue stream as youll see on slide five.
Our carrier channel continues to support <unk> backhaul upgrades at tower sites and core network upgrades to support fiber to the tower initiatives for our National carrier partners as we build out carrier grade capacity, we increased our net buildings and 11% year over year.
Our sales team is doing an excellent job of maintaining strong relationships and collaborating closely with carriers to identify upgrade opportunities.
Our focus is on targeting on net sales, which make up roughly 90% of new sales activity. This correlates to higher margins increased upsell opportunities and of greater ability to ensure the best customer experience ultimately contributing to higher customer retention.
Within our commercial channel Unified Communications demand remained strong our pro connect Voip revenue grew 10% and the quarter and 12% for the year.
We're pleased to have recently received the UC Excellence Award you see for unified Communications, recognizing our <unk> solution for the outstanding valued offers businesses. We also expanded our Microsoft productivity suite to all markets and announced the partnership with Sienna and its adaptive IP solution, which offers of.
Central IP capabilities to support new applications, using cloud like scale and intelligent automation and the result, simplifies administration troubleshooting and reduces cost for our customers.
Our CCI ignite sales approach remains key to our success of recent win with the educational network and the east includes more than 300 circuits across 80 locations are dense fiber network enabled us to win the steel upgrade bandwidth the one gig and add additional locations.
Now turning to the consumer channel, we grew broadband revenue two 8% and the fourth quarter as shown on slide seven of our presentation. This represents the seventh consecutive quarter of year over year broadband revenue growth.
And 2020, we completed five fiber overbuild across four communities passing just 2000 locations with Federal Cares Act support and first quarter, we will complete fiber oat fiber overbuild of its across five additional communities, adding more than 8000 and fiber passing.
We continue to see significant demand for rural broadband networks and partnership opportunities of dozen towns representing 20000 and additional passengers have accepted our bill of proposals with work. Starting later this year and additional towns are currently evaluating bids.
Cause of our dense fiber network proximity we are well positioned to partner with world communities to build fiber, where it typically would be difficult to justify financially.
Customers are clearly seeing the benefits of these fiber based services and the new areas. We just released and for fourth quarter, we were seeing penetration rates consistent with other recent fiber builds at the same stage and.
The build we completed the last year and Chesterfield, New Hampshire, where we have limited competition, we were at 50% penetration after one full year and rural New York, where our fiber build passes over 10000 locations with cable with significant cable overlap, we realized 32% penetration and two years.
These take rates are consistent with our plan about one third of sales at our new connections on the network with the majority of all subscriptions at one day one gig symmetrical.
These bills are and optimal test of our process product and pricing for our larger fiber build plans and we're off to a fast start crew.
Cruise of built nearly 400 miles of fiber since early January we will upgrade more than 300000 pass things and total for 2021, enabling fiber multi gig speeds. The majority of these upgrades will be in northern New England.
And in addition, we will also target areas, and California, Texas, Illinois, and Minnesota. This is the first step to extending fiber to more than 70% of our total pass things and to be clear. Our plan is about more than just building fiber. Our go to market strategy has been meticulously planned out we will offer multi gig.
The metrical broadband speeds simple plans and highly competitive pricing and a stellar customer experience all to create a truly differentiated service offering.
We are replacing a concentrated focus on delivering the best in home experience possible using the latest Wi Fi six technology and advanced troubleshooting tools, we will update you regularly on the new fiber product offerings and go to market plans throughout the year.
I'm very pleased with how resilient our team was in 2020, and how well they executed across our three customer channels and.
Incredible amount of work has been done to position us for the future and we are executing on our fiber expansion plans I will now turn the call over to Steve who will provide more details on our fourth quarter and full year of 2020 financial results Steve.
Good morning, everyone as Bob said 2020 was a pivotal year and I would like to ask all of his comment I cannot be more proud of what our team accomplished and I'm very excited about how well positioned we are to execute on the fully funded five year build and growth plan. So for today I'm happy to share with you the details of our strong fourth.
Quarter resolved as well as provide outlook for 2021.
Our financial summary for the fourth quarter begins on slide five of our slide four of our presentation operating revenue for the fourth quarter totaled $326 1 million of decline of one five per cent or 250 basis point improvement compared to a year ago. This is the result of the continued improved performance.
<unk> realized across all of our customer channels.
As a result of the improved revenue trends and ongoing disciplined cost management fourth quarter, adjusted EBITDA and EBITDA totaled $132 3 million and was up one 1% of one 4 million from a year ago.
The EBIT margins remained strong and approximately 41% now lets review our revenue results commercial and carrier revenue totaled $149 $8 million and the fourth quarter of two 6% year over year data and transport revenue performed particularly well and totaled $92 8 million and increase of $3.
2% year over year. This growth continues to be fueled by our investment and the fiber network and success within the carrier and commercial channels voice revenue declined one 6 million of three 5%, but represents a notable improvement from the decline of five 7% and the fourth quarter of 2019.
We continue to close to the closely monitoring of our SMB channel and are increasing the customer touch points to cultivate stronger relationships and provide value for this group of customers.
Looking forward to 2021, we would expect data and transport to grow at least at a rate of 2% for 'twenty one.
And we'd also expect voice to perform consistent with 2020 trends.
Turning to our consumer channel revenue totaled $125 2 million, which represents a year over year decline of two 6% and the fourth quarter, primarily due to the fourth quarter seasonality impacts and northern New England.
Notably consumer broadband grew for the seventh consecutive quarter on a year over year basis totaling $66 3 million, which represented a two 8% increase versus a year ago.
And our earnings presentation, we introduced a new metric consumer data are true, which emphasizes our strategy of leading with the highly competitive broadband service data are proof of the fourth quarter was 50 to $54 41 up six six.
And 6% over.
A year ago. We continue we expect to continue to grow day to our pool, as we increase speed and upsell customers.
We also continue to see improvement and the trajectory of consumer voice revenue for the quarter revenue was down six 3% or $2 8 million from price from the prior year. This represents significant improvement as full year 2020 compared to 2019 the rate of voice erosion was cut in half competitive.
The competitive broadband offerings combined with measured rate increases are contributing to the improved revenue performance in this area.
Video revenue declined 11, 5% the $2 3 million of decline was offset by reductions in video of.
Programming expense with lower Capex. This decline reflects our change in strategy to streaming over the top services bundled with broadband services, we are pursuing new OTT partnerships, reflecting our focus on low to no Ken.
No Capex of video partnership agreement network access revenues declined $1 7 million largely due to special access declines.
Subsidy revenue was down approximately $700000 due to the anticipated lower funding from the Texas high cost of one for November and December.
Now turning to operating expenses, excluding depreciation and amortization operating expenses totaled $224 3 million and increase of $11 $6 million of five 4%, including $7 6 million and acquisition and transaction costs related to the search light transaction.
Cost of services cost of services and products increased $2 7 million, primarily due to the higher products expenses supporting the growth and commercial and carrier data transport revenue and overtime associated with the storm cleanup and northern New England.
SG&A costs were up $1 2 million and the recent quarter, mostly due to nonrecurring items related to sell property and tax settlements received in 2019.
Net interest expense for the quarter was 48 4 million and increase of $15 million. The change. The result of our October 2nd refinancing and the receipt of the first $350 million searchlight strategic investment.
Interest expense increased $3 5 million due to the higher mix of our six 5% senior notes and our external debt $7 9 million and Pik interest on the search like note and $2 2 million and noncash amortization of the deferred financing cost and discount on the debt.
As part of the quarterly valuation of the search slight contingent payment rate, we recognize the gain of 23.8 million and the fourth quarter related to the client and the fair value of our contingent payment obligations as of December 31.
Upon receipt of all of of all the approvals and the completion of the second close of the search like transaction, which we expect to occur mid year, the CPR will convert to common stock.
Cash distributions from the company's wireless partnerships totaled $9 5 million and the fourth quarter and 41 $5 million and 2020.
And up $5 7 million from the $35 8 million of 2000.
Total distributions received the 2019 for 2021, we expect distributions to be in line with cash rental rates and and the range of 37% to $39 million.
Adjusted net income per share, including the $6 3 million new common shares issued the search line was 12 <unk> compared to <unk> <unk> per share a year ago. The improvement reflects the consistency of the operating result, and the decline of depreciation expense.
Capex was approximately $65 $3 million and the fourth quarter, reflecting the start of the higher level of spending support supporting our fiber network expansion projects for the full year, we invested $217 6 million supporting success based fiber projects and broadband network infrastructure expansion.
Our five year of fiber expansion plans are fully funded the strategic investment from Searchlight capital partners enabled us to complete a global refi of our external debt and the fourth quarter, our new debt structure is outlined on slide nine and consist of a five year revolving credit facility of $250 million, which will provide additional liquidity.
To support our build plans and a seven year secured term loan of $1 4 billion currently price at LIBOR, plus a coupon rate of four seven and 5% and of 1% floor and.
And the secured secured notes of $750 million at a coupon rate of six 5% due in 2028.
We ended the year with the $156 million of cash and the balance sheet and in January we raised proceeds of and.
Net proceeds of $148 million with the add on to our term loan b. So we have approximately 554 million.
And the liquidity.
Pro forma cash.
304 million and with access to our untapped revolver of $250 million and as I mentioned earlier, we expect to receive the $75 million from searchlight and the second stage close when we get the requisite regulatory approvals mid year.
As we reflect on the past nine months Covid has certainly changed how we operate that our business remains stable to date, we have not experienced any material impacts to our business as a result of the pandemic. We continue to keep a close watch on several areas, but we are cautiously optimistic.
And I am pleased to provide guidance for the full year 2021, which is outlined on slide 10 of our deck for.
For 2021, we are providing outlook based on the company's current operating performance, our fiber build plan and our new capital structure.
Our outlook for adjusted EBITDA reflects strong operating momentum entering 2021 investments and operating expenses associated with the startup and acceleration of our fiber build plans of approximately $15 million to $20 million and the normalization of cash distributions from our wireless partnerships, which are.
Back to <unk> to be down by the in the range of $3 million to $5 million.
As we pivot to growth the expected 2021 EBIT of range is $500 million to $510 million.
Cash interest expense based on the current capital structure, including the $150 million term loan B raise we did in January is expected to be and the range of $142 million to $152 million in light of the strength of the capital markets. We are constantly monitoring markets to see if we can opportunistically reduced our cost of capital.
And we expect to pick the search light investment at least through 2022, and we have the election to do so through 2025.
Cash income taxes are expected to be and the range of 2% of $4 million.
We do not expect to be of federal cash taxpayer until 2026.
Capital expenditures are expected to be and the range of 400 million and to $420 million, reflecting a higher level of spending to support the fiber to the prim build plan, which includes over 300000.
Gig plus upgrades and related success based capital.
And I am very pleased with 2020 resolved and very excited to be operating from a position of financial strength and flexibility as we enter 2021 and start the future proof of our business with a fully funded growth plan with that I'll now turn the call back over to Bob for closing.
Thanks, Steve.
So as we enter the next phase of our growth and transformation, let's talk about strategic priorities, which you see in our.
Our.
The earnings release deck on slide 11, our number one priority is accelerating our fiber build to scale and grow broadband services and as we've talked about we are embarking on a five year investment initiative, where we will upgrade $1 6 million, passing with fiber and enabling multi gigabit speeds across more than 70% of our footprint.
Our second priority and leveraging our fiber assets to continue to grow commercial and carrier services. That's a solid revenue source for us and a source of growth we were targeting 2% data transport revenue growth and 2021, and we will continue to target, 90% plus of those new sales being on net and third we are transforming the customer.
The experience, we're going to make it easier for our customers to upgrade bandwidth and just do business with us and general our digital transformation project will be instrumental and improving order and support processes and we're striving for and industry, leading net promoter score. It is our intent to deliver a superior fiber product offering with the.
The best in class customer experience. These priorities put us on a path to return to top line growth by 2023 and this return to growth is very exciting. Our plan is fully funded and we are now positioned to execute on our fiber expansion plans as we build momentum and become a stronger fiber based broadband provider.
Now I'd like to take this opportunity to announce Eric <unk> will be joining our team next week as president of our consumer small business unit, Eric brings extensive industry experience, having led the fiber market expansion plan for Google fiber and the South East and we're thrilled to have Eric bringing his experience and perspective to our team.
In closing I want to reiterate what an important time. This is for our company and how excited we are to be executing on our fiber expansion plans and our path forward is about building long term sustainability and value for our investors our customers and our employees, we have a strong stable business and experienced management team and a significantly.
<unk> financial position I couldnt be more excited for what the future holds.
So now.
We will take questions at this time.
Great. Thank you at this time I would like to remind everyone in order to ask a question. Please press Star then the number one and your telephone keypad.
Pause for just a moment to compile the Q&A roster.
Okay.
Once again, ladies and gentlemen, if you would like to ask a question. Please press Star then the number one and your telephone keypad.
Okay.
And once again, ladies and gentlemen.
Star followed by the number one on your telephone keypad, if you would like to ask a question.
And you do have a question that has come through from the line of Greg Williams from Cowen. Please go ahead. Your line is now open.
Great. Thanks for taking my question.
Bob can you just talk about the margin profile as you get to the fabric of the home deployment.
And of mature state.
And what are your penetration goals of your fiber builds over the next few years. Thanks.
Yeah.
Thanks, Greg.
Let me start with the penetration goals first.
Our plan is conservative I can tell you what our experiences and our plan is built around mid thirties over the.
The three year period, so and the first two years I would expect us to be.
Close to 30%.
And that's starting if you look at of cohort or as we call and fiber distribution hub from the point, where its ready for sale too you know.
Zero plus two years.
And so so our plan is conservative, but I'll tell you our experience.
As I cited and some of the examples of.
A few minutes ago, our experience has been we can get the 20% and of year and.
And and we have some many areas, where we've been able to get to 30% and in two years. So I think.
Our our our expectations are to be in the in the duopoly parity state.
And you know not not long after the third year of anniversary of opening a new.
Neighborhood or of fiber distribution hub, so now to the to the margins on the product I mean fiber is higher margin than our traditional.
Telecom base because of the maintenance benefits that comes with the last mile of fiber. So I would say you can expect gross margins north of 70 per cent.
And you know in many cases I think you'd get.
Higher and I think EBIT margins.
For this.
Business as it transitions to the fiber based approach 50%.
And if not higher and the and so that's why we're so excited about accelerating the transition. It brings a lot of benefits that we havent, even factored into our plan.
Because we are conservative as you know as we built the <unk>.
Capital investment strategy.
Great. Thanks.
And once again, ladies and gentlemen, if there are any further questions. Please press star followed by the number one and your telephone keypad.
And.
And there are no further questions at this time I will turn the call back over to Mr. Bob <unk>.
Well, thank you Casey and thank you everyone for joining us.
This is a very exciting time for our company and a and a very important transition year for us and we appreciate you tuning in and look for look forward to updating you on our first quarter results have a great day.
And this concludes today's conference call you may now disconnect.
[music].
Yes.
And.
Non.
[music].
And.
And we will do.
And the growth.
And so.
And.
[music] growth.
And.
Okay.
And.
And with that.
And.
[music].
And later.
And then.
And.
[music].
And.
True.
And.
[music] accounts.
Okay.
And then.
And.
Other revenue.
Yes.
And.
And then.
[music].
And.
And then.
And then.
And.
Moving on.
And our clients.
Okay.
And then.
[music], Inc.
And.
And.
And with this matter.
Non.
And then.
True.
Okay.
[music] boom.
And the Illumina.
And then.
And <unk>.
[music].
And again.
[music].
Alright.
Okay.
And.
The two.
[music].