Q2 2021 Consolidated Communications Holdings Inc Earnings Call
[music].
Good morning, My name is Adam and I'll be your conference operator today.
At this time I would like to welcome everyone to the consolidated Communications second 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 would like to ask a question during the session simply press star followed by the number 1 on your telephone keypad.
If you would like to withdraw your question press the pound key.
Thank you I'd now like to turn the call over to Jennifer <unk> Senior Vice President of Investor Relations at <unk>.
Communications, Jennifer you May begin your conference.
Thank you and good morning, I'd like to welcome everyone to consolidated Communications second quarter 2021 earnings call on.
On the call today are Bob Udell, President and Chief Executive Officer, and seats Childers, our chief financial.
Corporate from there.
Bob's comments today will highlight our strategic initiative and progress with our fiber build plan.
Steve will provide details on our second quarter financial performance and an update on the search lightened up on it.
Following their prepared remarks, 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 at consolidated Dot com.
Please review the Safe Harbor provisions on slide 2 of our presentation. Today's discussion includes statements about future.
These events and financial results that are forward looking and subject to risks and uncertainties on this.
<unk> net factors that may affect future results is contained in consolidated filings with the SEC.
Today's discussion will also include certain non-GAAP financial measures. Our earnings release includes reconciliations of these measures to.
<unk> GAAP equivalent.
I'll now turn the call over to Bob <unk>.
Thank you Jennifer and good morning, everyone. We've had a highly productive second quarter delivering stable revenue strong broadband growth and exceeded our very aggressive build plans.
In the quarter, we upgraded 70.
<unk> 6000 gig capable fiber passing and for the year. We have completed 122000 fiber upgrades, which is a great start to our 5 year, 1.6 million location build plan.
The first half of the year demonstrates our team's strong execution on our fiber first strategy I am proud of what the team is.
The nearest police in just 6 months and the transformation that is taking place.
With that we are on track to achieve our target an upgrade over 300000 locations by 2021.
Our build plan as outlined on slide 6 of our Investor presentation.
The recent upgrades were primarily in northern New England, California.
Texas and Minnesota markets.
Cruise constructed on those 4 to 800 miles of new fiber based second quarter, which is double the miles constructed the first quarter.
<unk> 288 fiber count or larger cables to meet the high capacity needs of our consumer commercial and carrier customers for years to come.
As a comp or near net regional fiber networks allow for very attractive average cost per passing our cost per passing is approximately 465 year to date, which includes edge access equipment labor and fiber components. This is well within our expectations.
Our go to market strategy has been meticulously planned out.
We're operating simple packages with highly competitive pricing and an optimized customer experience.
Our gig capable symmetrical product offering with no data caps will be a key differentiator compared to cable.
We are installing fiber services within 3 days and on time for our customers.
For their appointments.
We significantly improved our contact center performance and productivity.
Our premium tech support which comes with all fiber connections and ensures the best possible experience.
Okay.
Additionally, investments, we're making on our digital transformation projects will give our customers new self serve options, making it easy to do business.
With us the way they want in short all of these factors support a highly competitive differentiated fiber product.
Transformed customer experience.
Key key New Hampshire is a great example of a recent local market launch with very positive receptivity to our new fiber product.
And we are marketing strategy included a community event local sponsorships and a competitive offer that is making it easy for residents to choose consolidated.
We have been working very closely with our partners and vendors to understand supply relative to our forecast. We are cautiously optimistic that we have sufficient CPE to meet our forecast.
And during the year and from a construction perspective, we have high confidence we can achieve our 2021on fiber build objectives and are already in the planning stages with our vendors for 2022 and beyond.
Okay.
We are seeing early successes and penetration rates.
And they are in line or exceeding our plan.
Early Q1 build areas with cable competition have already achieved double digit penetration.
We added approximately 3000 consumer fiber gig capable subscribers in the second quarter and nearly 7000 fiber subscribers year to date in fact, some of our late Q4 cohorts in rural areas with less competition.
For the remaining 51% penetration.
We are very pleased with the sales activity and receptivity to our fiber offering is a powerful combination of delivering not only the fastest symmetrical speeds, but also a truly differentiated customer experience, which is key to our value proposition that comes with our new fiber services.
We have completed 5 public private partnership builds this year totaling roughly 808000 pass things and are well positioned to participate in any additional funding opportunities that allow us to expand broadband to rural America.
This year alone we have won bids for 16 additional municipal partnerships dozens more in the planning.
On stages not to mention a very solid track record with state and federal programs simply put we understand the funding sources have good relationships with our community partners and have the infrastructure in place to build fiber at scale and support the network for the long term.
Within our commercial channel, we are experiencing an increase.
Increase of face to face meetings in most markets, which is good news, however, sales cycles or time from quote to close still seems extended due to lingering COVID-19 concerns.
Our commercial go to market strategy is based on leveraging our fiber network to provide application solutions, which grow data and Ethernet.
Revenue our sales teams are always focused on network and we utilize a solutions based sales approach, which we call CCI ignite.
We work to become a trusted adviser to our customers and provides simple solutions to complex problems.
Data and transport revenue grew 1.4% year over year and it's up.
Up from roughly 1% growth in the first quarter.
We are pleased with the momentum of our sales teams and the sales activity around Ethernet unified Communications, and SD Wan, which are leading solutions.
As we build on carrier grade capacity, we increased on net buildings by roughly 4500 or 11% year over year.
We had nearly 200 strategic build in the quarter and on net revenue represents roughly 90% of our revenue for commercial our strong balance sheet enables us to support this channel and commit the capital needed to grow the business with the highest return projects and focus.
Our partner agents.
Total performed well on the recent quarter and it's highly engage this.
This provides us a 158.150 agents selling on our network. We continue to move upmarket and also to help bring in new logos.
Our carrier team is actively engaged with emerging <unk> network opportunities across all the major carriers.
Take care of your product mix like commercial is weighted toward Ethernet and we are seeing more interest in carrier grade wave solutions.
Our carrier sales team has experienced nimble and proactive in pursuing network growth opportunities as we manage the pressures of price compression on second generation contracts and an increasingly competitive.
Landscape.
We continue to be optimistic about business recovery and are pleased with the receptivity receptiveness for meetings and resolving projects.
I'll now turn the call over to Steve who will provide more insight on our second quarter.
Financial results.
Thank you Bob and good morning, everyone. It was another exciting quarter.
<unk> team as we made great progress on our transformational fiber first build strategy today I'll provide an update on our second quarter results reiterate our full year 2021 guidance and remind you of the strength of our balance sheet. Our second quarter highlights can be found starting on slide 4 of the presentation on.
Operating revenue for the quarter.
For our $324 million down just 1.5 per cent compared to a year ago. Adjusted EBITDA was $126.7 million, which is in line with our guidance, which factors in the startup investments into the sales and support functions on the fiber build plan.
The quarter also included a $3 million increase in wireless cash distributions.
<unk> was which was largely offset by increased marketing costs to support the rollout of our new 1 gig plus fiber products.
Now looking closer at revenue total commercial and carrier revenue was $143.8 million in the second quarter down 2 points.
$2 million or 1.4% data and transport.
<unk> revenue was $90.8 million up approximately 1.4% in the second quarter.
Growth continues to be led by customers, adding dedicated internet bandwidth and Internet services as well as our commercial Voip solution broken at.
Voice revenue declined $2.3 million or 5.1% driven by a reduction.
On an access lines and the migration of our customers to Voip solutions, which we reported data.
Turning to our consumer channel total consumer revenue was $125 million, which represents a year over year declined 2.3% consumer.
Consumer broadband revenue was $68 million up 3.7% and reflect.
Biased growth rate on a year over year basis that we have realized over the past few years. It also represents more than 2 years of consecutive year over year growth in broadband revenue. While we are laser focused on the execution of our fiber to the prim.
Build plan our growth is driven by driving data are approved through speed upgrades.
Both fiber and copper customers combined targeted rate increase activity.
Consumer data on <unk> second quarter was $57.26 up approximately $4.50, or 8% from a year ago <unk>.
Consumer voice revenue was down 6.8% or $2.9 million video revenue.
<unk> from $2.4 million on on Standalone basis. This product have a slightly negative margin the pace of our video revenue declines has increased this year as we sunset, our linear video services and transition to new and in demand streaming partnerships.
Our current over the top partner strategy allows us to meet our customers' needs and manage.
Any rising content cost or capex spend on the decline in linear video revenue actually improves gross margins and free cash flow.
Network access revenues totaled $31.1 million up slightly from a year ago special access declines were offset by increase in Universal Service Fund revenue.
That was driven by higher rates to end users during the quarter.
Subsidy revenue was down approximately 600000 due to a mandated reduction in state funding from the Texas High cost fund we.
We are part of an appeal, which is being filed with the Texas telephone Insatiate Association on their recent ruling in an effort to restore funding.
Pandit to prior levels.
Now turning to operating expenses exclusive of depreciation and amortization were $214.3 million up $10 million or 4.9% from the second quarter of 2020.
Cost of services and products increased $5.8 million, primarily due to 2 factors first universe.
Service fees increased $3.6 million as a result of higher end user rates from the second quarter. As a reminder, these fees are a pass through expense are neutral to EBITDA second in the quarter, we recognized a 3.4 million onetime charge related to asset sale, which we treated as an add back to adjusted EBITDA.
SG&A.
<unk> costs increased $4.2 million or $6.5 million or $6.5%, primarily due to an increase in marketing expense targeting customers, where we have completed from 1 gig upgrades and rolled out our new fiber products and as Bob mentioned, we have upgraded more than 122000 passing to year to day.
Net interest expense.
For the first quarter was for this quarter was $45.4 million, an increase of $14 million from a year ago as displayed on slide 7 the increase reflects our new capitalized balance sheet with a search light investment and global refinancing. We completed last last October which allowed us to extend maturities increased.
<unk> liquidity and reduce leverage per quarter non cash interest on the search lineup combined with amortization and deferred financing costs and the related discount totaled $10.9 million. The remaining increase in interest expense is primarily due to the higher mix of senior notes as compared to 2020.
As.
Early April we completed a repricing of our term loans further strengthening our balance sheet repricing combined with a $400 million bond offering reduced our annualized cash interest cost by approximately $18 million.
At the end of the second quarter, we have over $500 million on liquidity and we expect to.
It reminded the $75 million from the second stage of the search on like transaction. Once we receive FCC approval later this year.
Our new capital structure and strong liquidity position provides us with a fully funded bill plan to return to growth.
At June 30, we recognized non cash loss of $39.
To receive related to the inquiries from the fair value of the contingent payment ranked searchlight.
Slide 8 of our presentation outlines the investment steps of our search like partnership we have received approval under the Hart Scott Rodino Act and in April we received overwhelming support from shareholders, who approved all proposals.
Related to the investment. Additionally, subsequent to the end of the second quarter on July 15th we received all required PUC regulatory approvals necessary from the conversion to the CPR issue that certainly.
The second stage of the investment, which is $75 million will occur following FCC approval, which is expected by.
Year end the change in administration in late FCC and team Telecom review processes have impacted the timeline for approval. However, we are aware of no substantive issue or challenge to the petition.
The in state with a search lights with searchlights full investment of $425 million will result, with search like holding approximately.
<unk> <unk>, 35% of an estimated 112 million shares of common stock pro forma reflecting the full conversion of the CPR and upon the second closing searchlights convertible equity interest or note will convert perpetual preferred stock and well retain a 9% coupon.
Cash cash distributions from the.
Wireless partnerships totaled $12.7 million in the second quarter, and our $22 million for the first half of 2021 as compared to $19.7 day for the first half of 2020.
Capital expenditures totaled $119.2 million in the second quarter of just over 195 in the first half of the year.
Company is 40% of our Capex year to date is supporting our fiber network expansion and our digital transformation technology.
Our fiber growth plan is fully funded on a 5 year plan to upgrade at least 70% of our service area with fiber gig plus capable services, enabling highly competitive broadband services is off to.
To a great start.
Today I'll firm, our previous guidance from 2021, which is outlined on.
On slide 9 capital expenditures are expected to be in the range of $400 million to $420 million. This guidance reflects increased investment levels driven by our build in success based capex related to the fiber expansion plan.
Adjusted EBITDA is expected to be in the range of $500 million to $510 million cash.
Cash interest expense is expected to be in the range of a $130 million to $135 million.
We expect to pick the search like investment at least through 2022 and have the option to do so through 2025.
Income taxes are expected to be in the range of $2 million to $4 million with that I'll now turn it back over to Bob for closing remarks.
Thanks, Steve well, it's early on in our 5 year growth plan I am very pleased with the team's ability to exceed our fiber upgrade targets and to be on track with a very aggressive first year.
Build plan on.
I'm confident in our ability to deliver a differentiated superior fiber product with an excellent customer experience and with improved digital capabilities.
Furthermore, I am very confident in the fiber construction machine, we are developing as we continue to scale the.
The investments, we're making today is creating a new trajectory in past.
Path forward for the growth of consolidated communications.
Have a clear plan for growth and the expertise to execute on this strategy as demonstrated by our first half of the year results. Our balance sheet is strong and we have the support from an experienced strategic partner in search site.
We're on a path to return to total company top line.
In 2023.
In closing I want to thank our consolidated team who is working hard to deliver on this bold plan. Our path forward is all about building long term sustainability and value for our investors our customers and our employees I couldnt be more excited for what our future holds Adam we'll now take <unk>.
Questions. Thanks.
At this time I would like to remind everyone in order to ask a question Press Star then the number 1 on your telephone keypad.
We'll pause for just a moment to compile the Q&A roster.
And your first question comes from the line.
<unk> growth Williams with Cowen.
Great. Thanks for taking my questions I have 3 questions. If I may the first 1 is on the wireless cash distributions sounds like $12.7 million coming in a little higher than expected and trends and where do you see that chicken after end of the year I assume it comes down on the second half as you can.
Typically guided.
Greg <unk> 37 to 39.9 million for the year on just seeing if that still holds second.
Second question is.
Just on bottleneck on inflation, Bob you mentioned debt.
Our plans don't see any any bottlenecks now and in fact your orders for 2022.
Ready to go but maybe on the inflation side I think last quarter. You mentioned, you know resin was creeping up a bit from the conduit.
Got it are you seeing anything there.
Debt caused a little more scrutiny.
And then the last question is just on cables response to your fiber builds you mentioned some good penetration levels and what's cable doing in response to your fiber deployment in their footprint.
Yes, Thanks, Greg.
Do you want to start with.
The wireless debt drove and then I'll take the other 2 yes sure Greg a question on wireless.
I appreciate the question so you had.
Previously we have always said we'd be in a range of 37 to 39 per full year and to your point Youre exactly right. We are running ahead of where we thought we would be for the first half of the year and so if we would hit whatsapp.
Our internal models, we would be at 41, so we're cautiously optimistic to ordering on exceed that 39%.
We've been talking about but again that assumes.
Kind of hit our internal numbers for Q.
For Q3, and Q4 and I will remind you we don't yes, its limited partner and we don't have a lot on visibility to what's.
Coming down the Pike from Verizon So.
Wish them, the best and putting on good numbers the rest of the rest of the year and I will remind you that we did have $41 million on cash distributions at the end of 2020, but.
We're a little bit cautious since we don't necessarily have the control of the <unk>.
Both firms.
With regards to 2.
The second part of your question bottlenecks or inflation, we really don't see any bottlenecks.
At this stage on the fiber construction side.
Actually.
Seeing improved delivery on.
On commit dates and we feel pretty good about even the start of 2022 from a terminal.
And miscellaneous equipment perspective on the CPE side.
Little more cautious from a chip.
Perspective.
<unk>.
We're all trying in this industry make the transit.
And from Wifi, 5 to Wifi, 6 and so seeing that product delivery.
Slip a little bit.
Is.
Is causing us to work even closer with those vendors that we have that integrate with our.
Digital infrastructure for service delivery.
And and create some additional options. So we got good good flexibility with the inventory we have on Wifi, 5 or access to inventory on LIFO.
We're being a little bit cautious on the move to Wifi 6 as far as pricing you haven't seen anything from an inflation perspective.
We've got some long term contracts.
Transition volume commitments.
The fall and so we feel like we're in a pretty good shape to to hedge at least for the next couple of years from a from a.
Inflation perspective.
With response with respect to your cable responds to favorability I think we're so small still that we don't get a ton of attention.
We've made some some.
Natural.
Speed upgrades by cable and some of our markets.
But.
It's a natural on pattern that we've we ourselves have deployed and with the 1 gig symmetrical product.
It is hard to compete with we feel.
Very confident in that product.
Simple service experience for how it's ordered.
So.
I don't think anyone can really match us in the reliability of what we're deploying.
Our fairly suburban and rural markets compared to it being more distant.
Cable.
Markets from a plant perspective so.
So I feel good about our product.
Great. Thank you.
And your next question comes from line of Eric <unk> with Wells Fargo.
Alright, great. Thanks for taking the questions just 2 from me.
So.
On the fiber build.
Obviously, good penetration level. So far maybe you could talk about the activity are they mostly net new customers to consolidated or are you seeing more of the early growth that is coming from existing customers that maybe upgrading from DSL or fiber to the node.
The sales profit might be.
A little easier.
And then secondly.
I'm curious your aspiration to get to the total company top line growth by 2023, I think we can get our arms around the consumer broadband business and the opportunity. There maybe you could talk about the commercial and carrier segment at what point.
Some of these growth areas Ethernet SD Wan that you talked about can offset.
It's kind of a legacy decline in products like voice. Thank you.
Yeah, great. Thanks for the question let.
Let me start first with.
The activity on the fiber builds from a packaging perspective.
We are really.
Benefiting from.
Probably 60 per.
Percent being new ads.
And net debt that is growing because we're we're upgrading.
We're hitting.
Hitting some of the areas where I.
I think competitive competitive activity on the.
Cable side.
As a.
Outpaced.
Our DSO loop shortening and so on.
While we have made the transition as we have and obviously started that process about a year ago and planning.
And are now executing on it so.
Going from 59% 60%.
Gross new adds.
2.
Higher.
As the quarters progress.
And we feel good about that.
In terms of the top line growth.
<unk>.
I would tell you that commercial and carrier continues to benefit from <unk>.
Transport and data growth.
That is not necessarily consistent across.
Across the industry and we've been able to do that because we continue to have a pretty strong net.
At work product that we extend.
For customers.
Between the $500.
On range and higher you know as soon as they go for a dedicated Ethernet product, we're doing almost all of that.
With fiber vs.
Bundled copper solution and so so that's allowed us to have consistent growth and high reliability in that.
Bucket and so when we do our planning and look at all the regions in which we're deploying fiber.
From a FTP perspective, we feel.
We're pretty confident debt will be in a good position to see those lines crossed from.
Revenue.
Decline on voice offset with a growing fiber based broadband growth curve, Steve anything debt.
Yes, I agree with everything that you said I guess the reminder to Eric.
And everybody else on the causal part part of the calculus, and saying we're going to return to growth as we're obviously very focused and very excited about the MTT plan on everything that you said on commercial and carrier side I think.
Demonstrated that we have best in class teams in that area I think we're 1 of the few putting up consistent growth on.
Free cash flow or on the enterprise side, and then I would just remind you that we do have the reset from R&R from Caf II, our golf on the January 1 'twenty sales I think everybody has built into their models right now on that is being taken into consideration in the top line growth number for 2023, I think you'll start seeing some sequential growth.
In 2022.
Plan and consistency on the commercial carriers.
Okay. Thanks for taking the question.
And your next question comes from the line of Ana <unk> with Bank of America.
Hi, Thanks very much.
So just to follow up on the prior question and comment so in the.
With the growth that youre getting on the.
On the fiber to the home.
Can you clarify are those actually competitive wins from cable and so.
On what basis is that the superiority of the product or are you being promotional.
As well.
Yes, we're absolutely being.
Wrestles with marketing and.
And as demonstrated by our pop in marketing spend we're trying new things.
And cycling quickly through programs that work and so I would say there.
Theyre competitive wins from cable, where we have a duopoly.
And they are based on our local activity in the market we start what they saw.
Softening of the market with construction kind of like the the air attack. If you will set up a website very.
Very tightly managed 4.
Hello.
Soliciting interest do some PR than we do direct mail and indirect sales comes in and so that equation is really helping us drive both electronic on which is really low cost.
Customer on boarding and marketing and on boarding and in the direct sales.
Spreads.
Word of mouth.
As well as in itself produces.
Sales and so that that kind of air attack on ground troops coming in with door to door is really an equation that works quite well.
Okay, and then I was referring to pretty much on pricing I'm just on how.
Aggressive are you being on.
I am sorry, our pricing yeah, Yeah, I would tell you on commercial we really lean on.
Our relationship with the customer and so we take the.
The first of the customers' input on what Theyre doing with broadband and.
Spreads and then focus on providing them a solution and we have our building blocks on from a product perspective, whether its ddos or cloud secure debt.
Debt allows us to interest you answer them and it allows us to use.
Use the new technology to solve a problem for them.
And so we are definitely competitive on price.
And on the fiber.
High reliability and so the maintenance behind it after it's installed is high and I think that equation with our are aggressive.
<unk>.
Inc.
<unk> worked with the customer to understand what their use of broadband looks like.
Allows us quickly to assess how we solve a problem for them with a competitive price, but we are definitely competitive I wouldnt say were under pricing competition.
Okay and then okay. Thanks, and then secondly, just a follow up on the topic on yes.
On the debt.
Post pandemic impacts we're seeing on pricing.
Price and prices on inflation and then the labor market.
How do you have adequate labor now or.
Other unfilled positions in your company debt potentially.
Potentially it could.
Be a hindrance.
The rollout of other kind of other parts of their operation.
We have.
We have sufficient resources to meet our plan and we continue to iterate.
On the other areas that we might expand too so we don't see a labor.
Or inflation challenge right now, but we.
We watch the economy in the world around.
US I can't see that inflation or labor challenges hurting us any worse than any other competitor in fact, I think we're better positioned because of our culture and we've got a sticky culture, our tenure and retention of employees is.
Is outstanding and we have provided.
A.
On the new opportunity for employees to renew their excitement around bringing a wonderful service to the communities that we serve in suburban and rural areas. So theres a lot of energy in the company right now.
A lot of good candidates for positions that might become open and so I don't see any.
Any any.
Or.
Shortage thats impacting us.
In the foreseeable future, but we're always looking for good people and and so far have a good pipeline for them.
Okay. Thanks, and then final question I know you've got a lot on your plate right now, but yes.
It looks like there are.
Other local market.
Potentially available.
Around the country are you open to any kind of acquisitions or tuck in M&A.
Good point.
I would tell you that net.
Ever say never but we're really focused on executing our plan. That's in front of US now and we think there is more value in our organic.
Builds than trying to chase.
The price up on on additional M&A activity, but we've got some great partners and search light Theyre really good at assessing those opportunities and.
And so I'm really fortunate to have them as a specifically.
Andrew.
Fraser.
Mike lead contact there.
As a partner that allows us to see and evaluate opportunities that come across their radar.
Okay. So never say never okay. Thank you.
Okay.
And once again.
Ladies and gentlemen, if you would like to ask a question simply press Star then the number 1 on your telephone keypad.
Okay.
And there are no further questions at this time I would like to turn the call back over to Mr. Bob <unk>.
On.
Thank you.
Adam and thank you all for joining the call today. We appreciate you tuning in and we look forward to updating you on our third quarter results have a great day.
This concludes today's conference call you may now disconnect.
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Net.
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Good afternoon guys.
Moving.
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Moving on.
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