Q4 2021 Shenandoah Telecommunications Co Earnings Call
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Okay.
Welcome to conference call. Please continue to stand by your conference will begin shortly.
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Good morning, everyone welcome to Shenandoah Telecommunications fourth quarter 2021 earnings conference call.
Today's conference is being recorded.
At this time I would like to turn the conference over to Mr. Cook Andres <unk> director of financial planning and all the analysts for Santos.
Good morning, and thank you for joining us the purpose of today's call is to review <unk> results for 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 Centel dot com.
Please note that an audio replay of this call will be made available later today.
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 and remind you that this conference may include forward looking statements subject to certain risks and uncertainties.
These may cause our actual results to differ materially from the statements.
Therefore, I have provided a detailed discussion of various risk factors.
Our SEC filings, which you are encouraged to review.
You are 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.
That I will now turn the call over to Chris go ahead, Chris.
Thanks, Kirk we appreciate everyone joining us this morning, and trusted you're staying healthy and safe.
As summarized on slide four 2021 was truly a transformative year for <unk>.
We successfully divested our wireless business, our largest business segment at a time for $1.94 billion and used the proceeds to pay off pay almost $940 million and a special dividend to shareholders and to pay off all of our debt.
Simultaneously with the Divesture, we raised $400 million and growth capital to fund our ambitious fiber first growth plan.
We invested $82 million in 2021 to grow the glo fiber network and customer base, achieving a record year for glo fiber construction and net additions.
We also secured franchise agreements for 175000, new passing.
And were announced as the winner of over 54 million and state and local grants that will subsidize construction to 16000 Unserved homes.
We start 2022 with a fiber construction backlog of over 255000 passing.
In addition to the 75000 glo fiber homes and businesses passed as of the end of 2021.
We now have franchise approvals to build over two thirds of our two of our 2026 goal of 466000 fiber passes.
We expect by the end of 2023 to pass more homes and businesses with fiber and our incumbent cable network.
We're very excited about the creation of this platform that will provide sustainable growth for the next several years.
Additionally, as we resize the organization to reflect our smaller broadband focused business, we obtained $4 million in annual run rate expense savings.
We continue to take opportunities to drive non employee cost out of our business through changes in procurement practices software automation and lower facility costs.
We have now identified an incremental $5 million in annual operating cost savings that we expect to achieve by the beginning of 2023.
Shifting now to our broadband network expansion on slide five we ended 2021 with over 75000 Glo fiber passing.
We've increased the pace of construction each year since our first year of construction in 2019.
We added over 46000, new pass things in 2021, 73% improvement over 2020, we.
We expect to add 75000 pass things in 2022, as we continue our strong construction momentum.
As we announced in October we have stopped expansion are being fixed wireless with passing is now likely to stay steady at approximately 27007 hundred.
In total our integrated broadband network into 2021 with approximately 314000 passing.
And we're well on our way to reaching our 2026 targeted broadband passing <unk> of 730000.
Turning to slide six 2021 was another strong year for broadband data net additions of approximately 15900.
We had a record year for Glo fiber net additions of 7200, driven by our network expansion.
Our incumbent cable business added approximately 7300 net data additions below the elevated additions in 2020, when the pandemic stimulate additional demand, but 15% higher than net additions in 2019.
And our first full year of operations, we had approximately 1400 being net additions.
The underlying theme across all three of our branded Internet products.
Polity broadband services outstanding local customer service and fair pricing.
This approach drove a record year of broadband data churn of one 5%.
We expect modest growth in our incumbent cable and being data subscribers in 2022 with the majority of our growth expected to be driven by another record year of Glo fiber additions as we enter new markets and doubled the reach of our network.
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.
Before I review our results for 2021. Please note that we made a few changes to the presentation of our financial statements and non-GAAP metrics for the year 2019 2000 22021.
We have changed the non-GAAP metric previously reported adjusted EBITDA to adjusted EBITDA.
Changes in description only and did not impact current where prior period results.
During the fourth quarter, we discovered an error in our previously issued financial statements related to the capitalization of labor and overhead costs associated with certain customer installation activity in our broadband segment.
Although we determined the <unk> to be immaterial to our prior annual and interim financial statements.
The cumulative effect of the error would be material is corrected in the current year.
Therefore, we have revised our historical financial statements for 2019, and 2020 to properly reflect the impact of expensing certain fulfillment costs previously capitalized as a contract asset.
The impact of the error increased broadband cost of service by approximately $900000 in 2021.
Please see note one of our financial statements filed last night.
The appendix to the earnings call presentation posted on our website. This morning for more details and recasting our prior period results.
We also had an unusual number of nonrecurring period adjustments embedded in our fourth quarter financial results that I'd like to highlight.
We recognize the $5 9 million impairment charge related to our decision to cease expansion of <unk> network that we announced in October .
We also began to expense certain cable replacement cost in the fourth quarter, when we replace a cable or fiber drop or other small section of our outside plant.
The other period adjustment of $2 4 million was recorded in broadband cost of service.
We recorded an obsolete inventory reserve of $1 million for slow moving equipment and our broadband cost service.
And our tower segment, we recorded an out of period adjustment to defer 900000.
Application and structural analysis fees charged and collected from perspective tenants prior to the execution of a lease.
We will now recognize this revenue over the term at least.
And our corporate expenses, we accrued 800000 for out of period professional fees.
The cumulative effect of these out of period adjustments in the fourth quarter and the Aircard, Andy Eric correction adversely reduced earnings before income taxes, and adjusted EBITDA by $11 9 million and $6 million respectively in 2021.
However, please note that we expect the net impact in future periods to be relatively small reducing earnings before income taxes, and adjusted EBITDA by approximately $2 million annually.
With this background. Please refer to slide eight to discuss our financial results for 2021.
Broadband revenue grew 11, 6% to $228 1 million.
Driven by an increase of $22 5 billion or 14, 5% and residential and SMB revenue.
Due primarily from 15, 9% increase in broadband data rgs.
Commercial <unk> revenues grew $2 million or six 6% to $34 9 million due to growth in circuits.
700000, nonrecurring amortize revenue reduction in 2020.
500000 of non recurring dark fiber sales type leases in 2021.
Our <unk> revenues declined five 7% to $15 6 million due to a decline in residential DSL subscribers and lower switched access revenue.
Adjusted EBITDA grew four 5% to $83 7 million Rev.
Revenue growth of $23 $7 million was partially offset by $28 million and higher operating expenses.
Seven 4 million of the expense increase supported the expansion of our glo fiber and being services.
Maintenance expenses increased $5 8 million due to an increase in the previously discussed cable replacement cost and obsolete inventory charges.
And nonrecurring expenses and expensing of software development costs related to our current ERP system that we are planning to replace in 2022.
Software fees increased $2 4 million due to enhancements to our back office systems.
And programming and Retrans fees also increased $1 $7 million.
On slide nine.
Power segment revenue grew 600000 to $17 7 million in 2021, due primarily to a 13, 6% increase in tenants.
Partially offset by a three 2% decline in lease revenue per tenant.
The previously discussed decline in lease application revenue.
Adjusted EBITDA grew three 2%.
To $11 1 million due primarily to a three 8% revenue growth offset by higher ground lease expenses.
Moving to slide 10.
2021 consolidated revenue grew 11, 1% to $245 2 million in 2021 due to growth in broadband and tower revenues of 11, six and three 8% respectively.
Consolidated adjusted EBITDA for the year grew 17, 8% to $65 7 million due primarily to broadband.
Tower growth of four 5% and three 2% respectively and.
And a 17% decline in corporate expenses.
And by the previously announced reduction in force and lower professional fees.
Yes.
Moving to slide 11.
Cash on hand declined $448 million sequentially from September 30.
We paid $434 million in income taxes related to the gain for sale of our wireless assets and operations.
We ended the fourth quarter with strong liquidity.
$484 million, including $84 million of cash and equivalents and $400 million available from our credit facility.
Free cash flow from continuing operations was negative $67 million in 2020 and negative $97 million in 2021, as we increased our investments in global.
We expect to draw $125 million to $150 million.
On the delayed draw term loans in 2022.
The negative free cash flow expected in 2022, as we increase the pace of our glo fiber investments.
And we will provide guidance on our capital expenditures for 2022 later in the call.
Okay.
As we look forward, we are not planning to provide 2022 revenue and adjusted EBIT guidance.
Partially due to the uncertainty related to revenue from T mobile our largest customer.
We generate approximately $20 million in revenue annually for T mobile with approximately half from leasing space on our towers and half from providing fiber.
From providing fiber to the tower backhaul and other transport circuits.
As we discussed during our last earnings call, we expect T mobile to rationalize their network and our former wireless service area. Following the decommissioning of the National Sprint CDMA LTE network.
Although we had visibility of about 80.
That are likely to churn.
We do not have visibility in the number of backhaul and transport circuits that could be part of the rationalization.
It is important to note that our backhaul circuits have approximately two five years left under a term contract and there are early termination liability.
That would be triggered it's disconnected prior to the end of the terms that will add another degree of complexity and forecasting.
Ignoring the impact of early termination fees and the exact timing, we expect annual revenue churn from T mobile to be in the $7 million to $9 million range.
We'll update you on future calls when we have more clarity.
Despite these T mobile headwinds our glo fiber expansion strategy provides a significant incremental subscriber penetration opportunity that is well above pure play cable companies and will provide us sustainable revenue growth for several years.
And now I'll turn the call over to Ed.
Thanks, Jim and good morning, So I'll begin on slide 13, where we summarize our primary product offerings, our sense Helen come with cable networks offer data voice and video services to 211000 homes and businesses in small towns and rural areas in Virginia, West, Virginia, Maryland, and Kentucky.
We offer gigabit speeds to 99% of our passing and we expect our total number of passengers to grow to 220000 over the next five years.
Pulp fiber targets higher density urban and suburban areas in tier three and tier four markets and we continue to make significant progress toward our goal of 450000 passengers over the next five years.
In addition to constructing over 46000, new passing through 2020 . One we executed 20, new franchise agreements and now have a total of over 318000 franchise approved passes.
Chris mentioned earlier, we are on track to double our current glo fiber passing us to over 150000 by the end of 2022.
As we previously announced we have ceased further being fixed wireless expansion due to the influx of government broadband grants are for unserved areas and we do not participate anticipate any additional been passing in 2022.
However, we are actively pursuing government grant funding and a target of 32000, passing from Unserved areas over the next five years.
We expect to serve at least 16000 of these via fiber.
Central has had early success with government broadband grants and in December we were announced as the winner of over $36 million in Virginia Telecommunications initiative grants through a partnership with five counties.
Chantelle, we'll leverage these grants along with an additional $18 million in matching funds from the counties, which will likely be sourced primarily from their local share of your American rescue plan Act infrastructure funding.
These projects will bring broadband over 16000, unserved homes, primarily through multi gigabit fiber to the home connections.
We continue to pursue additional grant opportunities, including the states of Maryland, West, Virginia and Pennsylvania.
Turning to slide 14, we have depicted our rapidly expanding network that now consists of over 7400 route miles of fiber connecting our incumbent cable glo fiber and fixed wireless broadband networks.
In the fourth quarter of 2021, we launched Glo fiber service in Carlisle, and Hanover, Pennsylvania, Martinsburg, and Jefferson County, and West, Virginia, and Frederick Maryland.
These market launches along with our Lynchburg, Roanoke in Salem, Virginia launches earlier in the year, bringing our total to eight new markets launched in 2021, and 12 active glo markets in total.
In addition to expansion of our existing markets engineering and construction work is underway in five additional markets that we plan to launch in 2022.
The five counties outlined in Red highlight our Virginia Telecommunications initiative Grant wins, we primarily target areas surrounding our major cable systems, where we already had significant fiber infrastructure in place.
Yes.
Let's move onto our operating results starting on slide 15.
In our cable business total RG use grew two 5% year over year to approximately 186900 at year end 2021 compared to about 182300 in the prior year.
We added approximately 7800 net broadband data RG use including 500 acquired from Canadian cable to end the quarter with over 106300.
This is a significant increase of seven 9% compared to the prior year.
Our incumbent cable broadband data penetration increased from 47, 2% in the fourth quarter of 2022, 54% this quarter.
Our continued success is driven by the value of our powerhouse rate card, our local ties to our communities and our local customer service.
Broadband data average revenue per user increased one 3% year over year to $79 in 2021 and grew to $80 three in the fourth quarter.
83% of broadband data subscribers are now on plans of 25 megabits per second or higher.
Average subscribed download speed is now over 96 Megabits per second.
Churn in 2021 reached a record low of 1.54% and this strong performance continued into the fourth quarter with churn of 149%.
Turning to slide 16 for our Glo fiber business, we had another record quarter for customer growth and ended the year with approximately 15300 total art Hughes and a 15, 1% aggregate broadband data penetration rate across all markets.
Our glo fiber.
From a relationships increased by over 7200 year over year to end the quarter at approximately 11400.
Our broadband data churn rate remains very low at 1.09% for the year at 1.0% to 2% for the fourth quarter.
Glo fiber data <unk> was down year over year to $74.02 How's.
However, this is due to a beginning of year change in accounting for deferred revenue from the account level to the product level.
<unk> has remained fairly consistent since the beginning of 2021 and.
And our Q4 <unk> was up slightly on a sequential basis to $74.38.
In the fourth quarter of 2021, 46% of new subs adopted speed tiers of one gig or higher and 46% of our overall glow customer base now subscribes to these higher tier services.
Our streaming TV and voice services continue to perform well with 20% and 12% attachment rates in the quarter respectively.
At the end of 2021, 72% of Glo fiber customers were single play broadband data only.
22% were in a double play at 6% where in a triple play.
Yes.
Slide 17 demonstrates our data penetration.
As our markets age our.
Our passing is launched in the fourth quarter of 2021 are already at six 4% penetration rate and we see steady growth as the markets mature.
Our initial neighborhoods launched in the fourth quarter of 2019 now have a penetration rate of 32, 2%. After approximately two years and this growth pattern supports our 38% target terminal penetration rate in our glo fiber markets.
On slide 18, we highlight our being fixed wireless broadband service. We originally launched this service in Q4 of 2020, and we added almost 1400 data customers in 2021.
We now have 55 sites on air and pass approximately 27700 target markets.
<unk> households.
Approximately two thirds of our customers continue to take are $80 per month 50 megabit per second plan.
Although we do not plan to construct additional sites in 2022, our beam service continues to provide reliable broadband service areas that we'd be otherwise unserved.
Churn remains very low at seven 8% for the year and 0.67% for the quarter.
Turning to slide 19.
Total tower tenants increased 13, 6% year over year to 485.
This includes 47 intercompany tenants, primarily for our being fixed wireless operations.
The end of the fourth quarter, we had a backlog of 154 open orders related to upgrades of existing tenants or the addition of new tenants, including 15 from dish as they prepare to build a national <unk> network and.
In addition, we have executed four leases with dish.
Finally, slide 20 provides our 2021 capital spending and our guidance for 2022.
Capital expenditures were approximately $160 million in 2021 compared to $125 million in 2020.
The primary drivers for the year over year increase with the expansion of our glo fiber and being fixed wireless networks.
For 2022, our guidance for the full year is $220 million to $240 million as we continue to invest aggressively to expand our glo fiber networks.
Of the $165 million to $175 million investment in globe, approximately $12 million related to connecting new subscribers and approximately $30 million is for constructing fiber in our Virginia Telecommunications initiative Grant award areas.
The remainder is focused on completing 75000, new passing from 'twenty to 'twenty, two and wrapping up construction for over 100000, new patents in 2023, including materials engineering and preliminary construction work.
Thank you very much and operator, we're now ready for questions.
Yes.
Thank you we will now begin the question and answer session. If you wish to ask a question you will need to press star one on your telephone to withdraw your question press the husky.
Based on by while we compile the Q&A roster.
Sure.
Your first question comes from the line of Tom Day from B Riley. Please ask your question.
Yes. Good morning, guys I appreciate you taking my questions just first one on the.
Segment level broadband EBITDA margin.
A little bit depressed in the quarter or just how should we be thinking about that for 2022. It seemed to approach you know high <unk> low <unk>.
Outside of that quarter. So is that number still kind of what we should be thinking about modeling moving forward.
Yeah Dan.
So there's a couple there's quite a bit of noise in our fourth quarter numbers as I made.
<unk> made in my scripted comments at the beginning.
So I guess first is.
We were still at 2021, we still were incurring losses related to both Dean and Clos those losses were about $5 million to $6 million.
In 2021.
We expect.
The glow to turn to be breakeven. This year. So we're on the cusp turning positive likely in the second half of the year.
But we do expect deem to be a drag on.
Ah.
Adjusted EBITDA in 'twenty two.
In addition to that there was some heavy out of period expenses that hit in the fourth quarter that I highlighted.
The impact going forward is about $2 million of incremental expense a year is what we're is what we're estimating on top of that so so to summarize.
Excluding glo and beam or adjusted EBITDA margins for for for broadband should be around 40%.
With the expected continued losses.
Coming from from the <unk> side of the house that number that EBIT margin number will likely be get windows in the high 30% margins until we go EBIT positive on those club Mindy.
Got it. Thank you and then just.
Anything you're seeing out there as far as like labor cost construction cost pressures as you build out glo fiber I know you guys did a good job with raw materials and all of that but just specifically on the labor security and got construction crews and all of that any any issues with that.
Yes, no no issues are.
During construction crews up to this point.
In previous calls we focused primarily on regional construction.
Companies, we've been we've.
We've had long term partnerships with them.
I think rates have gone up slightly but we're also seeing some efficiencies in our network architecture that we were able to keep our costs in line with what they were previously.
And then just last one for me on the EBV program.
Permit with the infrastructure Bill.
<unk> uptake with the sort of new permanent program, whether it's new customers.
Just wanted to increasing speeds or anything like that.
No additional significant traction at this point, we still have around a thousand customers on the <unk>, the EVP and the replacement programs, but no significant changes at this point.
Alright, I appreciate you guys, taking my questions I'll turn it over.
Okay. Thanks, Dan.
Okay.
Your next question comes from the line of Frank <unk> from J F. Please ask your question.
Okay, great. Thank you I missed part of the first part of the call on it but I still don't follow on the margin side can you. Just walk you said you said and that's the last question.
Looking at 30% EBITDA margins for the quarter it came in quite a bit below that.
Should we expect you to report on the EBITDA line for our margin on a go forward basis, how should we think about where that is going to be settling out in <unk>.
What are some of the bigger deltas in the quarter versus maybe what we were expecting in the street was expecting.
Yes, Frank.
Looking forward, we would expect the EBITDA margins for broadband to be in the high 30% range.
As we move forward.
As I look at my Crystal ball here that should grow as as I mentioned to Dan earlier.
Those margins should grow as being matures and becomes EBIT positive and starts to contribute which we expect in the second half of this year and then to be positive going forward from that aspect.
So we do expect the margins to grow and as we kind of look further out four five years out as.
As we scale up the the globe business, we expect EBIT margins essentially to reach about 50% as we get 567 years down the road.
Some of the consolidated.
Consolidated EBITDA margins for the company that you report on the EBITDA level.
Okay.
Consolidated numbers.
Okay.
Let's see.
So consolidated numbers are going to be.
Yes, a little bit lower than that when.
When you factor in the corporate expenses. So so in 'twenty, one we were in the high 20% range.
That will continue we expect in 'twenty, two and then again as we start to get contribution we scale up the glo fiber business and start to get contributions to EBITDA, we expect the margins to grow into the low to mid 40% range as we get five six years down the road.
Okay alright, thank you.
Okay.
Once again, if you wish to ask a question. Please press star one on your telephone.
Your next question comes from the line of how much <unk> B Ws financial please ask your question.
Good morning, So first off I just wanted to see.
It sounds like your intentions are to keep the beam business going is that true.
True.
Correct, Yeah, where we've already built towers, we plan to continue to operate the beam business. We've just.
Pause any construction on any new sites and don't plan on building any in.
In 2022.
So would you still be able to add subscribers to it.
Correct, Yes, we would we will actively be adding subscribers to the existing site.
Alright on the Glo fiber side.
The aggressive build out.
At what point would you expect to generate.
Subscribers on pass throughs this year would it happen immediately.
Amit.
Question could you repeat that youre talking about adding 75000 on the.
Home pass throughs right for this year.
And I'm just trying to gauge is the timing as to is the 75000 come on.
The timing be is your ability to actually add customers from the 75000.
So those 75000.
Roughly distributed throughout the year, we're completing construction probably.
Probably the number is slightly higher on the back half of the year, but as we complete the construction for the 75000 passes we will turn them over to our sales team and then start selling.
At that point, so it will be throughout the year that we're adding customers on these on these new household passage.
And given that close.
Growing larger in size geographically does that mean your AD spending will also will also increase.
I think the AD spending will be.
Probably slightly higher but it will increase as the number of our new passing as increases.
But that's not going to have an impact on your EBITDA numbers.
Correct, Yes, I think our.
Go ahead, Jim Yeah that that's factored into like I said, we're two 2022 were on the EBIT breakeven margin and that includes that.
<unk> assumes theres going to be an increase in advertising as we open up more and more markets.
Got it okay. Thank you.
Yeah.
Thank you I'm showing no further questions at this time I would now like to turn the conference back to Jim Volk, the guys at <unk> five a M.
Okay.
I'm not sure what that was but anyway. Thank you for joining US today, we look forward to updating you on our fiber first strategy and progress in future quarters have a good day.
That does conclude our conference for today. Thank you for participating you may all disconnect.
Okay.
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