Q3 2021 Shenandoah Telecommunications Co Earnings Call
Today's conference is scheduled to begin shortly please continue to standby and thank you for your patience.
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Okay.
Good morning, everyone welcome to Shenandoah Telecommunications third quarter 2021 earnings conference call.
Today's conference is being recorded.
At this time I would like to turn the conference over to Mr. Kirk Andrews.
Correct, our financial planning and analysis Chantelle.
Good morning, and thank you for joining us the purpose of today's call is to review <unk> results for the third quarter of 2021.
Our results were announced in a press release distributed last night and the presentation. We'll be reviewing is included on the Investor page at our website Www Dot Chantelle dot com.
Please note that an audio replay of this call will be made available later today. The details are set forth in the press release announcing this call.
With us on the call today are Chris French President and Chief Executive Officer, Ed Mckay Executive Vice President and Chief operating Officer, and Jim Volk, Senior Vice President of Finance and CFO.
After our prepared remarks, we will conduct a question and answer session as always let me refer you to slide two of the presentation, which contains our safe Harbor disclaimer.
Mind you that this conference call May include forward looking statements subject to certain risks and uncertainties.
These may cause our actual results to differ materially from the statements. Therefore, we have provided a detailed discussion of various risk factors in our SEC filings, which you're encouraged to review.
You're cautioned not to place undue reliance on these forward looking statements, except as required by law, we undertake no obligation to publicly update or revise any forward looking statements.
And with that I'll now turn the call over to Chris go ahead, Chris.
Thanks Kurt.
We appreciate everyone joining us this morning, and I hope everyone is staying healthy and safe.
I'd like to start by providing an update on our strategy and future capital allocation plans.
We continue to target 730000 broadband passing so about 2026.
With strong momentum on business development construction and sales we are upgrading our target for glo fiber from 300000 to 450000 serviceable addresses about.
About 2026.
Our government relations team continues to get a warm embrace by municipalities looking to offer a choice of broadband providers for their local residences and businesses.
We have executed 17, new franchise agreements in 2021.
Adding approximately 160000 future passing for a total of 304000, passing with franchise approvals.
Further we have an attractive funnel of additional markets that have met our investment criteria, which we expect will lead to franchise agreements in the coming quarters.
We're very bullish about our glo fiber results and prospects over the next five years plan to invest more than $500 million building fiber to the home and connecting customers.
In addition to investing in glow our team has been analyzing new opportunities to build broadband to unserved homes.
<unk> has a long history of investing in the latest technologies. So rural communities can enjoy the same state of the art Telecommunications services that are provided in rural markets excuse me in urban markets.
Our proven track record positions us well to partner with county, and state governments to develop cost effective and timely broadband solutions to reach these unserved locations.
And uncertain as currently defined but most government agencies as a home without access to speeds of 25 Megabits per second down and three megabits per second up.
In the five states that we operate in there are over one $3 billion in government grant funds available to subsidize building broadband to these unserved locations.
Most of the state grants are being funded by the American rescue plan that was passed by Congress in the first quarter.
While the Unserved opportunity for us is less than 10% of the glow target market. We have identified several attractive opportunities that we're pursuing in the region.
We expect these will be accretive to our broadband business. If we're successful in being awarded government grants.
I'll provide more detail on the opportunities by each state.
Excuse me.
As we stated in the past one of our governing investment principles is to offer the best Internet service in the markets we serve.
With a large amount of government grant funds now available and possibly growing if the infrastructure Bill in Congress has passed.
We are pausing our beam expansion plans.
These plans have focused on providing a fixed wireless service to the same low density grew unserved homes that may be eligible for government grants to build fiber.
Going forward, we are adopting a success based investment model for beam, where we've been awarded government grants to build fiber networks with wireless last mile connections for certain difficult to reach locations.
The hybrid fiber fixed wireless network design is unique to <unk>, given our product offerings and licensed spectrum position.
It allows us to lower the subsidies required by the local partner counties and shortens the time to deliver broadband services to Unserved homes.
We plan to share more details in the coming quarters on this segment of the market.
In summary, our target remains at 730000 serviceable addresses with the shift to a fiber one future proof network.
Shifting now to our broadband network expansion on slide five we continued our strong construction momentum in the third quarter was 17000, new passing is being added.
Total passing is now approximately 296000.
Glo fiber had another record quarter of construction, adding over 14000, new passing.
We expect similar construction results in the fourth quarter with approximately 75000 glo fiber passing us by the end of the year.
Being pass things grew to 24000 during the quarter.
With a more targeted approach to beam expansion, we now expect our beam network to reach 28000, passing and our integrated broadband network to reach approximately 314000, passing by the end of 2021.
Turning to slide six broadband data net additions were over 4100 during the third quarter <unk>.
Low fiber contributed 2100 or over half of our net additions, reflecting a 43% growth rate over the same period a year ago.
We have added over 16000 net data additions over the past four quarters. Despite the COVID-19 tailwind on our incumbent cable business now being well behind us.
We have great momentum to continue this pace and increase it as we launch new Glo markets.
On slide seven we turn to the annual dividend.
Tuesday, our board of directors declared a <unk> <unk> per share dividend payable on December <unk> to shareholders of record on November eight.
This is the 62nd consecutive year, the Shinto has paid an annual dividend.
The dividend realigned with our now smaller company as a result of the sale of our wireless operations.
The annual dividend is in addition to the $18 75 special dividend that was paid to shareholders in August following the sale of our wireless assets and operations.
Special dividend was equal to 95% of earnings per share from discontinued operations.
With that I'll now turn the call over to Jim to review the details of our financial results.
Thank you, Chris and good morning, everyone.
Please refer to slide nine to discuss our financial results for the third quarter.
Broadband revenue grew 14, 2% to $57 9 million driven by an increase of $5 3 million or 13, 4% and residential and SMB revenue.
Primarily from a 17% increase in broad broadband data rgs.
Commercial fiber revenue grew one 8 million or 24% due to a combination of growth and customer connections seven.
700000, nonrecurring reduction in amortized revenue in 2020.
And 500000 nonrecurring fiber sales type leases signed in 2021.
Broadband adjusted OIBDA for the third quarter grew $3 million or 15, 4%.
$22 6 million for the same period a year ago.
The revenue increase of $7 2 million was partially offset by $4 2 million and higher expenses.
$2 million of the expense increase supported the expansion of our glo fiber and beam services.
On the cable expenses increased $2 2 million, primarily due to a $1 million and higher maintenance costs, and 600000 and higher software fees due to enhancements in our back office systems.
On Slide 10 towers segment revenue declined one 2% to $4 4 million in the third quarter 2021.
Tenants increased 13% offset by a 14, 1% reduction in the average revenue per tenant.
During the third quarter T mobile exercised an option to convert 80 gets in tower leases to a month to month term, resulting in a change in revenue recognition accounting driving the decline.
We anticipate these leases what churn in the next year or two as T mobile rationalize their network and our former wireless market.
T mobile will continue to be our largest tenant post rationalization with a 182 leases with an average lease term of approximately seven years.
We also signed our first lease with dish as they build out their national network.
Anticipate there was a sizeable opportunity with dish to lease tower space in the coming periods to replace a large portion of the current expected T mobile.
Adjusted EBITDA declined eight 7% to $2 6 million for the third quarter due to the revenue decline and higher ground lease expenses.
Moving to slide 11.
Solid data revenues grew 12, 8% to $62 2 million in the third quarter.
Consolidated adjusted EBITDA for the quarter grew 31, 7% to $19 3 million, marking the third consecutive quarter of double digit revenue and adjusted OIBDA growth rates.
The increases were primarily due to strong broadband revenue and.
And a 24% decline in corporate expenses.
The decline in corporate expenses was due primarily to lower compensation and bank fees.
The lower compensation expenses were due to a combination of savings from the previously announced reduction in workforce and lower expected incentive bonus accrual.
We realized approximately 800000 and workforce reduction expense savings in the third quarter and expect expect to realize $3 $3 million in annual run rate cost savings in the fourth quarter and $4 million as we enter 2022.
Turning now to full year 2021 outlook on slide 12.
We are narrowing our 2021 outlook with consolidated revenues expected to range from $243 million to $246 million.
Adjusted EBITDA expected to be $70 million to $73 million consistent with our prior guidance.
Moving to slide 13, we ended the third quarter with a strong liquidity position of $933 million, including $533 million of cash and equivalents and $400 million available from our credit facility.
Pro forma for the $428 million and income tax taxes from the wireless sale expected to be paid in mid December our liquidity will be approximately $500 million as we enter 2020.
We expect to draw on the delayed draw term loan starting in the first quarter of 2022 with the upsizing of our target Glo fiber passing the 450000, we now expect negative free cash flow to peak in 2023, and we expect to return to positive free cash flow by 2020.
Thanks.
Our business plan is fully funded with our current credit facility and now expect our net leverage ratio to peak at two four times.
With that I will now turn the call over to Ed.
Thanks, Jim and good morning, I'll begin on slide 15, as Chris indicated earlier, we've updated our target 2026, passing is for each of our services are centel incumbent cable networks are now expected to reach 220000 homes and businesses as we urge all of our HFC network to build a new housing developments.
We have increased our glo fiber target passing from 300000 to 450000 or higher density tier three in four markets.
With the influx of government grant funding for Unserved areas, we are reducing our beam fixed wireless target passed into 28000.
Beam sites are either currently in service are already under construction and we expect to be complete by year end.
Pause further beam expansion until we have better visibility in areas, where government grants are awarded.
Finally, we have identified approximately 32000 unserved homes, where we are pursuing government grants to subsidize building block.
Band to these communities.
For your proposed fiber to the home fixed wireless or hybrid fiber and fixed wireless networks, depending on the terrain and available funding.
We expect terminal penetration to be approximately 70% in these rural Unserved markets, where we build fiber or the only true broadband provider.
Cost capacity net of subsidies will be dependent on grant awards and network architecture.
Our total target passing by 2026 remains at 730000, but with fiber passing is now approximately 64% of total passive and fixed wireless only 6%.
We expect to continue to have our broadband business have industry, leading sustainable growth as we build out our networks over the next several years.
Our shift to a fiber first strategy is really driven by two factors first our success in securing glo fiber franchise agreements and wrapping up construction and second the large influx of government broadband funding over the past quarter.
Slide 16 outlines the grant funding that is available within our current service territory.
Virginia has been a leader in broadband funding with the announcement of a $700 million Universal broadband program in July.
Addition to the current $50 million in annual funding through the Virginia Telecommunications initiative.
Maryland, West, Virginia, also recently announced extensive broadband programs.
<unk> partnered with multiple counties in Virginia, and Maryland to pursue broadband funding using both pure fiber to the home networks and hybrid fiber fixed wireless networks.
Actually awaiting funding details from other states in our region.
In addition to American rescue plan funding it is likely that $42 billion in broadband infrastructure funding will be distributed to states if Congress approves the federal infrastructure Bill.
This funding will also focus on broadband infrastructure for Unserved areas in the current version of the Bill provides a subsidy for low income customers. We believe this affordability subsidy would be very beneficial in many of our rural broadband markets.
Turning to slide 17, we have depicted our rapidly growing broadband network that now consists of over 7200 route miles of fiber connecting our incumbent cable glo fiber and fixed wireless broadband networks.
We have significantly expanded our glo fiber targeted passing just over 304000 with new franchise agreements in Suffolk, Williamsburg, James City County in Eastern Virginia, and Yorktown shipped in Spring Garden Township in Pennsylvania.
In addition, we added six additional franchise agreements in town surrounding our previously announced markets of Lancaster County, Pennsylvania in Harrisonburg, Virginia.
Let's move on to our operating results in the third quarter, starting with slide 18.
In our cable business total <unk> grew 3% year over year in the third quarter to 187000 compared to about 181500 in the same period during the prior year.
We added more than 9100 net broadband data Archie used to end the quarter with approximately 105100.
This is a significant increase of nine 5% compared to the same period in the prior year.
Our incumbent cable broadband data penetration has increased from 46, 2% in the third quarter of last year to 49, 8% this quarter.
The value of our powerhouse broadband rate card in our local customer service continue to be drivers behind our success.
Broadband data average revenue per user in the quarter increased modestly versus the prior year to $79 31.
And more than 81% of broadband data subscribers are now on plans of 25 megabits per second or higher.
Our average subscribed download speed is now 90 megabits per second and this continues to be well beyond the reach of our DSL competitors.
Turning to the third quarter decreased by 12 basis points year over year to 177% and this remains significantly lower than pre COVID-19 levels.
Turning to slide 19 for our Glo fiber business, we have approximately 12600 total or to use at the end of the third quarter with a 15, 2% aggregate broadband data penetration rate across all markets.
Our glo fiber customer relationships increased over 6400 year over year in the quarter and over 9200.
Our broadband data churn rate had increased 34 basis points year over year to 132%, but the prior year number was based on a very small customer base. We continue to be very pleased with our low churn and positive customer feedback and our glo markets. We offer the fastest speeds straightforward pricing and superior network reliability with a 100% fiber optic.
Network.
Glo fiber data <unk> was down year over year to $73 69 in the quarter. However, this is due to a beginning of year change in accounting for deferred revenue from the account level to the product level.
Our data <unk> has remained consistent over the past three quarters.
In the third quarter of 2021, 46% of new subs adopted the one gig speeds here and 46% of our overall glow customer base now subscribes to our one gig tier.
Our streaming TV and voice services continue to perform well with 20% and 14% attachment rates in the quarter respectively at.
At the end of the third quarter of 2021, 71% of our Glo fiber customers were single play broadband data only.
23%, we're going to double play and 6% were in a triple play.
Slide 20 depicts the status of our active and approve grow markets as of the end of the third quarter.
<unk> data penetration rates in our most mature markets of Harrisonburg, Staunton, Virginia have reached 23, 7% and 21, 9% respectively.
We now have approximately 60800 residential and small business passengers construct and released to sales.
Construction rate of more than 14400, new patents in the quarter was a new record and more than 55% higher than the same period last year.
Glo fiber target passing to all franchise the crude markets now exceed 304000, as we continue to add new municipalities and the surrounding counties to our plants.
Engineering and construction work is now underway in all approved markets as we work toward our goal of bringing multi gigabit symmetrical low latency service to over 450000 fiber passing through the next several years.
On slide 21, we have highlighted our beam internet fixed wireless broadband service.
We completed 11, new beam Internet sites in the third quarter. We now have a total of 47 sites on air we have service available to over 24000 target households.
We increased our beam broadband data Archie used by about 41% in the past quarter and our penetration is now four 9%.
<unk> increased slightly to over $73 and we continue to see approximately two thirds of our customers adopting our $80 per month 50 megabit per second tier.
As Chris mentioned earlier, we are pausing, our fixed wireless deployments until we have further clarity on government broadband funding for unserved areas in our markets.
However, we have proven that we can offer a highly reliable broadband service using our licensed mid band spectrum and our churn numbers for the third quarter were outstanding at 0.42%.
We believe this wireless technology translates well into a hybrid fiber fixed wireless network using wireless drops to bridge the last mile to the customers' homes in rural areas.
Turning to slide 22, total tower tenants increased 13% year over year to 470 <unk>.
This includes 34 intercompany tenants primarily for our beam fixed wireless operations.
At the end of the third quarter, we had a backlog of 213 open orders related to upgrades of existing tenants or the addition of new tenants, including 18 applications from dish as they begin to build out their national <unk> network in our markets.
Finally, slide 23 provides current year to date capital spending results and guidance for our continuing operations for 2021.
Capital expenditures were approximately $119 million through the third quarter of 2021 compared to $83 million at the same time period in 2020.
Glo fiber and beam Internet fixed wireless expansion on the drivers behind the increase with year to date capital investments of approximately $65 million and 12 million respectively.
Of the $40 million in capital spending in our legacy broadband business approximately $17 billion is success based in support of our continued growth in our commercial and wholesale fiber business and our increase in broadband data penetration.
Our total planned capital spending for the year is between 161 and $166 million, which is within range of our previous guidance. However, we have shifted investments from being fixed wireless to grow fiber as we invest in additional fiber inventory to accelerate our construction in 2022.
Thank you very much and operator, we're now ready for questions.
Thank you to ask a question you will need to press star one on your telephone.
Draw your question press the pound key.
Please standby, we compile the Q&A roster.
Our first question comes from Ric Prentiss with Raymond James Your line is open.
Good morning.
Good morning.
Couple of questions guys.
Boost.
On the dividend, obviously resizing to remove sides of the Clinton post along as well.
But walk us through a little bit about why pay a dividend at all I know you've got 62 years ago.
And our capital deployment.
And there's a very modest yielding.
Dividend, so just kind of walk us through the logic of how are you.
Not too different losses.
Hey, Rick this is Chris.
You know I guess the dividend is.
Trying to balance multiple issues as you are aware, we still have a large retail shareholder base.
So there is somewhat of a tradition and history of paying an annual dividend.
As you recognize.
We highlight that when we point out that we've done this for 62 consecutive years now.
So it is we did resize. It obviously the company is significantly smaller post the sale of wireless, but we also think with the growth prospects that we have and <unk>.
Pretty.
Fortress strength balance sheet.
We have the ability to both invest in those growth opportunities to create more value and then hopefully over time as that growth.
Phase and returns that we're able to share some of those returns with shareholders.
And how about stock buybacks were minus.
We are as long as the availability to do stock buyback appetite.
Yes.
Jim can correct me, but.
Right.
<unk>.
We were able to but at this point given the growth prospects that we have you know any excess cash that we have where we're planning to reinvest in the growth of the business and of course, we're keeping an eye also on the discussions in.
The federal government right now with some.
Discussion about potential attacks on buybacks. So we don't know how that's going to play out either.
Yeah, Rick we do have capacity in our credit agreement to do stock buybacks. If we so choose but as Chris mentioned, we are the best use of our capital right now is to invest in fiber to them.
Okay.
One other quick ones.
On call to love them.
Pointed out the corporate cost and obviously the depth in the quarter from that delinquencies.
You mentioned, though we want to take more costs out of the corporate side.
Run rate in the fourth quarter. The other 4 million run rate in early 'twenty should we then assume that.
Corporate costs.
On slide 12, and the 28 Green on one level came up with 121 more in I'm going to go even lower than that.
Rick there is some.
Yeah.
Expense reductions that we're seeing this year that won't repeat next year, specifically related to the to our incentive bonus we do expect that to go up and that's the data.
Dollar.
Lower expenses in the third quarter than what we would typically have so I would guide you through the for the near term.
<unk> expenses of around $7 million, a quarter is probably about right.
And then as we've talked about in the past. We do this is an area that we're focusing on but it will take us a couple of years to reduce it.
Meaningfully down to where we can get our total SG&A expenses to be about 20% of revenues, which is our goal as we get three or four years down the road and that will be due to a combination of lowering expenses and also growing topline revenues as well as scaling our fiber fiber indeed.
<unk>.
Okay and last one for me here.
You guys mentioned, how we got good service compared to the copper DSL out there as you roll fiber out there where do people turn to when I had an investor asked the other day I thought was really good question.
DSO was the only choice because the people that are just leaving the category completely or.
What where are they turning to and what's kind of the.
What's it called why they're leaving.
A lot of cases there.
Moving out of the area, we do have some involuntary churn in there but in most cases, they are not moving to the DSL competitor.
In the market.
Okay. Thanks, guys.
Thank you Rick.
Thank you. Our next question comes from Dan <unk> with B Riley Securities. Your line is open.
Yeah. Good morning, guys. Thanks for taking my questions.
Wondering if obviously the pivot here to the fiber as opposed to fixed wireless just if you could share some of the feedback you've gotten from municipalities on.
Why are they heavily prefer the fiber build as opposed to fixed wireless does it is it concerns around the price or the speed the reliability or whatever you know on the fixed wireless side or.
Kind of what's driving that and what's changed in your thinking.
So really it's the state that's driving that.
And Virginia is the one that's furthest along right now, but it's really speeds that are driving the decision towards.
Towards fiber and with the level of funding that's out there there is.
Significantly more dollars that can fund fiber to the home, whether that's shouldn't tell building with fiber to the home or another provider building fiber to home in areas.
We believe there's going to be a lot more fiber.
As opposed to fixed wireless in the future.
Yeah great.
And then with the fiber build.
Kind of two years in I think October 19 was the first one can you maybe talk a little bit about your marketing approach here.
Changed what you've kind of learned works and doesn't work and getting people to take the product and then.
Specifically interested in how promotional you're kind of willing to get maybe one year teaser rates or something like that.
Induce that switch from the incumbent cable providers.
Up to this point, we have not done much in the area of promotions, we have been able to.
To win customers just based on the.
Superior speeds that we're offering particularly on the upstream speeds.
But as far as the competitive response, we have not seen anything that we haven't expected from the incumbent cable companies up to this point nothing that would change our projections.
Our projections were.
Our considering options for additional promotions going forward.
We continue to grow that customer base.
Dan the one thing I'd add there.
I think one of our keys to success.
With Glo fiber is we're differentiating by our customer service.
When they call their budgets, they're talking to somebody locally, Virginia, and we really think that makes it a very big difference.
Yeah.
Got you. Thank you guys and then last one for me.
It looks like in the markets, you've launched so far youre getting about <unk>.
12% 13 points of penetration a year. So that gets you to about three or a little over three years to get to that terminal, 38% penetration rate is that the right way to think about it you think you can accelerate that timeline and anything around that would be it would be great.
Yes, I think that's generally the Reits are right timeline it is somewhat more.
Specific.
Depending on the demographics in that market, but I think that's generally the right the right timeline those.
Markets that we launched back in the fourth quarter of 2019, they are in the low <unk> right now.
As far as penetration rate.
Great Alright, guys I appreciate you taking my questions I'll turn it over.
Alright, Thanks, Dan.
Yeah. Thank you as a reminder to ask a question. Please press Star then one on.
Our next question comes from Matt a question Tom.
WNS financial your line is open.
Hey, good morning.
Wanted to see if it is.
The risk here on the beam pause about.
It sounds like you're depending on the government to create the funding for two for future investment.
There are considerable risk that you're taking on that front.
Ends up being a doormat business.
So at this point, we think there is still significant upside in the areas that we have beam deployed.
With the rules right now for funding that government funding is not available in those areas, where we've already deployed that that beam broadband service. So we're continuing to to.
Support the beam product, we don't have any plan to terminate that service and we do believe there's significant upside there.
Existing households that we pass.
Okay, and then on the franchises for your fiber.
<unk> expansion is that really more about.
The local governments looking at fiber as the main draw or are they saying like look there's there's wireless opportunity as well is that becoming a competitive factor if you're winning those franchises.
Yes.
So those are the focus of those municipalities as they want fiber in there and they want a competitor in there. So I'd say at this point fixed wireless is not there.
Not really on the radar screen.
Within these municipalities they want fiber and they want it.
Local companies. The fact that we're local has helped us get a lot of traction with these municipalities as far as getting the franchise agreements.
Okay and have you seen any changes as far as the adoption curve is concerned with glo fiber is.
Now your multiple.
Multiple markets with us.
With customers adopting service and how much you have to invest in and to get those incremental customers.
We've not seen.
Significant change at this point, but as we go into these new markets brand awareness is very very important we're targeting really local marketing we've assigned a regional sales directors in each one of our markets that specifically targets that market's fills relationships in that market.
It takes care of both the marketing and sales. So we think that local focus will help drive growth.
Yes.
Okay, great. Thank you.
Thanks, Mike.
Thank you and I'm currently showing no further questions at this time I'll turn the call back over to Jim Volk for closing remarks.
Well I want to thank everyone for joining our call early on a Friday morning, I Hope everybody has a great day and a great weekend and we look for.
Forward to continuing to tell the story in future quarters. Thank you.
Yeah.
This concludes today's conference call. Thank you for participating you may now disconnect.
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