Q1 2022 Consolidated Communications Holdings Inc Earnings Call
Turning to total company net positive for broadband connections, which we expect to occur in early third quarter. This will be our next major inflection point in our transformation to a fiber one broadband service provider and aligns with a roughly three times growth in fiber connections for 'twenty two compared to 2021 the.
<unk> for <unk> is significant and we are just getting started.
We're excited to bring video fiber to 50 additional markets. This month, which brings us to a total of 150 communities where video will be available by the end of second quarter.
We've had a great response to our community launch announcements, which have generated hundreds of pre sign ups now let me tell you more about our pre and post launch plants, we're using a targeted digital and local media strategy to announce video and provide easy options to pre sign up via our self serve and enhanced website our.
Our strategy is to win subscribers at the neighborhood level and provide a frictionless digital order experience in fact, we're using the construction process to build relationships with local community leaders, who are very excited about our mission to improve the economic future of their community. We are creating some great buzz with video Influencers and we're creating premium fans while general.
And great interest at local community events, you can see some of this excitement on slide six.
Our new digital customer experience provides intuitive self serve options, which make it easy for customers to do business with us These tools significant significantly enhance the customer experience throughout the service delivery process. For example, before we launch a new stadium fiber market prospects can enter their contact information and they will be.
<unk> notified when fiber services available and ready for sale on their street.
Consumers can order new service on fee and fiber dotcom schedule their appointment and the order is automatically provisioned when they install was complete.
We're using web chat bots to address the most prominent service request and our new portal offers customers the ability to manage payment preferences and even the link multiple accounts to a single account all at video and fiber Dot com.
In addition, our new stadium Attune Wi Fi Smart home App allows customers to view active devices on their network run speed tests create and manage user profiles and controls under network.
Many security for every device on your network and filter suspicious activity consumers can manage their home Wifi for an overall optimal network experience.
On slide three you can see the pace of our ability, including our plan to upgrade 400000 locations. This year 265000 upgrades will occur in our northern New England States of Maine, New Hampshire and Vermont.
The remaining upgrades are in Texas, California, Illinois, Minnesota and Pennsylvania.
Our team has demonstrated the ability to accelerate the fiber build creating a machine capable of scaling to a pace of over 100000 locations per quarter, and we anticipate upgrading 100000 locations in the second quarter.
We are smoothing out the release of new locations for sale on a monthly basis, improving our marketing efficiencies and effectiveness. This rapid expansion as the first critical step in achieving broadband revenue growth.
To ensure we keep the schedule, we opportunistically accelerated projects and many of our markets. An example of this is the speed with which we have completed underground work and several of our largest communities. This is a result of favorable weather and the ingenuity of our internal construction crews knowledge of existing conduit plant.
In addition, we have inventory to ensure continuity of our construction plan.
To this point in our plan, we have secured over $87 million in broadband partnerships and grant funding support supporting over 60000 locations. This funding supports the buildout of rural high cost passing we are well positioned to capitalize on government programs and public private partnerships with a very successful track record as we.
<unk> to pursue all broadband infrastructure grant opportunities that makes sense for us.
On slide five you'll see our <unk> expansion markets in Green. This largely represents the states, where we are actively upgrading $1 6 million locations by 2025.
Blue States provide upside for future builds or rationalization of assets, which we continue to evaluate discussions.
Discussions are ongoing with multiple parties.
By the end of 2020% to 37% of our locations will be fiber to the premise with multi gig capable speeds that's up from 10%. When we started this plan at the beginning of 2021.
We doubled our fiber passing in 2021, and we will nearly double them again in 2022.
We are well positioned competitively and 90% of our service area has one or no competitor and the demand for high speed broadband continues to increase with fiber and symmetrical speeds is clearly the best product to meet this rising demand.
Our fiber expansion plan is our path forward for growth and also provides opportunities for commercial and carrier channels to use the same asset for multiple revenue opportunities our network architecture and core upgrades enabled 10 gig capabilities and eventually 100 gig services to the edge future proofing our product portfolio.
Turning to our commercial and carrier channels. We are focused on growing data transport revenue and we did just that in the first quarter.
We're seeing solid demand for emerging <unk> opportunities across our regions and with major carriers and Hyperscale.
In the commercial channel, we're leading with best in class fiber based solutions and we do this by leveraging <unk> sales channels, our direct channel inside channel and an agent channel, we referred to as partner one.
Our commercial go to market strategy Leverages, our extensive fiber network and our solutions based sales approach, allowing us to become a trusted provider to our customers, while providing simple solution to their complex business problems.
New fiber passing with our unique routes provide opportunities for us to leverage the same fiber to grow commercial revenues, we increased our lit buildings, 11% in the first quarter and had 90% of our new sales activity on our network, which correlates to higher margins increased opportunity to upsell and a greater ability to ensure the best.
Customer experience.
Now I'll turn the call over to Steve who will provide more insights on our first quarter financial results. Thanks, Bob and good morning to everyone. As Bob mentioned, we are continuing to make significant progress with our five year value creation plan and fiber <unk> strategy. This year, we will increase the pace of our fiber network construction to over 400000 gig plus upgrades.
And we are seeing significant progress on our fiber sales capabilities and penetration take rates today I will provide an overview of our first quarter results and I will reiterate our 2022 full year guidance before I do that I want to call out some updates to our reporting first as you can see our revenue schedules. We are now separate.
<unk> commercial and carrier revenues, which is a change from our past practice of showing these customer channels on a combined basis.
We have made enhancements for our metrics tables, we're now splitting out the network composition and subscriber metrics between northern New England, where we are targeting approximately 70% of our fiber upgrades and all other markets.
Also in that same table, we are breaking out consumer broadband revenue between fiber and copper in calculating <unk> on the same basis.
Our first quarter financial summary is on slide seven of our investor deck.
Total operating revenues for the first quarter was 300 <unk>.
3 billion down seven 5% as compared to a year ago.
Adjusted EBITDA was $107 2 million and represents a 35, 7% adjusted EBIT margin for the quarter.
As previously disclosed effective January one 2020 to.
$48 million in annual Caf II funding transition to $6 million under the rural development opportunity fund the subsidy reduction impacts Q1, 'twenty, two and subsequent quarters revenue and EBITDA by $10 5 million cap.
Capex for the quarter was $157 7 million, while I will reiterate our full year capex guidance in a few minutes I want to call out a few things first our cost to pass on cost to connect is still in line with our targets and second our Q1 Capex includes approximately $20 million of cost associated with <unk>.
They will benefit future periods and accelerate underground work for two of our larger markets.
Third in light of supply chain concerns, we continue to build inventory for construction and CPE of roughly $17 million to ensure execution on our build subscriber plans.
Let me remind you of our fiber to the Prem investment thesis and our commitment to our fiber first strategy that will future proof our business, we have several meaningful fiber deployment advantages compared to our peer group. These include the following the first is our incumbent position. We know these markets very well and we have a fiber rich carrier class.
Work, then we can cost effectively extend second we own or have large long term leases on the local and long haul networks and have existing conduit facility for berry facilities and pull access where we have aerial fiber.
Third in northern New England, approximately 80% of our fiber is Ariel in close proximity to our existing fiber backbone facilities.
And we have a very experienced teams, including internal and external resources, we can flex to ensure we complete the build on time.
With this plan, we have a tremendous cost advantage, specifically in new England, where we can with what we plan to upgrade over 1 million passengers over the five year build plan.
We have the greatest opportunity to drive significant returns in New Hampshire, Maine, and Vermont, where more than 90% of our markets have a single or no competitor. We also have a very economical cost to upgrade the majority of the network to gig plus enabled services and we are confident we can acquire a significant market share.
Now I'll review revenue by customer channel.
Turning to our consumer channel total revenue was $117 7 million down four 3% compared to the year ago.
Normalizing for the impact of our Ohio assets revenue declined three 5% year over year.
Overall consumer broadband revenue in the first quarter was $65 9 million up approximately 1% after normalizing for our Ohio sell consumer net adds are up over 70% from Q4, 'twenty, one as our customer acquisition engine ramps.
Consumer fiber revenue was $17 2 million up $3 1 million or 22% year over year, and we added over 19300 consumer fiber connections in the last 12 months for.
For the first time since the inception of the build plan, our northern New England markets achieved net positive broadband adds.
We are now providing a new metric for consumer fiber RP, which was $63 88 in the first quarter.
Consumer voice revenue was down $3 million or seven 3%, primarily due to the continued erosion of access lines and associated voice services video revenue declined $2 4 million or 14, 4% year over year, our transition to over the top video services has enabled us to tap linear video deployment.
And improve margins for free cash flow.
Commercial revenue totaled $105 8 million down 358000, or <unk>, 3%.
Data and transport totaled $57 9 million in the recent quarter up one 4% year over year, primarily driven by growth in dedicated Internet services.
Q1 was a strong quarter for business systems equipment, and custom job installations, driving up revenue $1 $5 million year over year momentum is strong in this area and our teams are having their best equipment sales quarter since 2019.
Offsetting this growth is continued voice erosion, which is occurring in a slightly higher rate in Q1 access line erosion.
Combined with lower slick and long distance usage charges drove the decline.
Carrier data and transport revenue was $33 5 million up roughly 200000 year over year benefiting from our carrier team's ability to win additional new business and the timing of the pricing reductions from the tower contract renewals are Q1 carrier revenue was solid and as a reminder, we still estimate revenue pressure on the tower Contra.
Fact negotiations to be in the range of $10 million to $12 million of 'twenty to establishing a new run rate for carrier fiber to the tower revenues.
Network access revenues totaled $26 2 million down $5 $4 million year over year over half of the decline was driven by lower Universal Service fund revenue with the balance coming from the special and switched access declines as a reminder, the PUC charge as a pass through.
So it should be EBITDA neutral.
And other revenue, we continue to add incremental rural fiber locations through our public private partnerships, allowing us to deliver enhanced and increased broadband services to rural markets, where we have little to no competition.
In the current quarter, we completed built in five communities encompassing approximately 5000, passing and we recognized $4 5 million in nonrecurring revenue. This compares to $6 5 million in one time revenue related mainly built in Q1 'twenty one.
Operating expenses, excluding a loss on impairment of assets held for sale were $209 2 million, an improvement of $1 6 million or 8% from a year ago. The primary drivers were lower expenses associated with public private partnerships and reduced direct product related cost offset slightly.
By increased marketing and branding expense.
Net interest expense for the first quarter was $29 5 million a decrease of $118 9 million compared to a year ago. This was resolved in 2021, including noncash interest of $2 2 billion on the search like note, which was converted to preferred perpetual preferred stock last December the remaining.
<unk> interest expense was primarily result of favorable repricing of the company's term loan in April 2021.
Additionally, as you can see from our capital structure on slide 14, we have no debt maturities until 2027.
Our net debt leverage ratio was four four times at March 31 up from $3 78 at year end 'twenty one.
At the end of the first quarter, we have approximately $410 million in liquidity, which provides us with ample flexibility to execute on.
Our build plan and return to growth.
Cash distributions from the company's wireless partnerships were $8 2 million in the first quarter compared to $9 6 million a year ago.
As a reminder, we owned five Verizon wireless limited partnerships with interest ranging from 2% to 24%, providing consistent and stable cash flow. We anticipate these partnerships gerrick between $39 million to $41 million of free cash flow this year.
Now I'll recap, our two divestiture announcements from the first quarter.
Sure.
First we closed on the sale of our Ohio assets on January 31, which generate $26 million in proceeds this transaction did not materially impact our passing and was also not in the fiber expansion plan. Our Q1 metrics have been adjusted to exclude Ohio operations.
Second we announced an agreement to sell our Kansas City assets. Our March this divestiture aligns with our ongoing market portfolio review as part of our capital allocation plan. We estimate net proceeds of approximately $90 million and expect to close in the second half of this year.
Following customary regulatory approvals.
In the quarter, we recognized a noncash goodwill impairment of $126 5 million related to sell of our Kansas City assets now being treated as assets held for sale.
Additionally, we continue to review markets in our portfolio for investment or monetization. We believe we have the opportunity to raise substantial funds and additional liquidity through additional asset divestitures. Our criteria. In this review includes evaluating with fiber build opportunities market level competition and potential valuations.
Today, we are reaffirming our previously stated 2022 guidance, which is also outlined on slide 13, adjusted EBITDA is expected to be in the range of $410 million to $425 million capital expenditures are expected to be in the range of 475 to 495 million.
Cash interest expense is expected to be in the range of $123 million to $127 million cash.
Cash income taxes are expected to be in a range of $2 million to $4 million and we do not expect to be a federal cash taxpayer until 2026.
In summary, this will be a year of strategic investments and continued notable progress with our fiber build plan, we will see inflection points as we facilitate a return total company revenue growth.
And significant margin expansion, we anticipate we will achieve positive fiber net adds on a total company basis in the third quarter with that I'll now turn the call back over to Bob.
Thank you, Steve our execution on our fiber <unk> strategy is accelerating nicely. We continue to be focused on our four key strategic priorities outlined on slide 10, which include executing on our consumer fiber expansion plan.
Growing commercial and data transport revenue.
Enhancing the customer experience across all channels and maintaining a disciplined capital allocation plan, which includes the strategic review of assets and our market portfolio.
Our fiber transformation is in process and you can see some of the milestones outlined on the timeline youll find on slide 11, as well as anticipated milestones in the coming years. We are currently in the stage, where we are scaling our customer acquisition engine as we work toward a return to revenue growth in 2023.
As we look to the future our path forward is all about executing on our fiber expansion plans and growing strategic revenue, we have a large opportunity in numerous competitive advantages as we execute on our fiber <unk> strategy and become the broadband leader in the markets we choose to serve.
We're focused on growth and creating long term value for our shareholders.
Operator, we will now take questions at this time.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
Your first question comes from the line of Gregory Williams with Cowen Your line is open.
Great. Thanks, guys. This is James on for Greg a couple of questions first on access to capital by our model, we see cash getting pretty low around 2023, and I mean, you guys talked a lot today about continuing to review the asset portfolio. We also had the 13D from search and I think they were interested in maybe increasing their stake. So if you could just add some color into how youre thinking.
About access to capital going forward and maintaining the self funded billed.
And then the second question just on margins last quarter, you mentioned, the $15 million incremental marketing spend could you just help us out with the timing of that as you guys continue to ramp the city can brand, especially in these expansion markets here, if you could help us out with cadence that'd be helpful. Thanks.
Yes.
Morning, James and thanks. Thanks for the question, let me let me start just with the few of the kind of sub tends to your question and then Steve will take the most of the majority of it.
First on <unk>, we're not going to chat obviously about that.
With regard to assets.
We've been working.
We've talked about in past quarters on assessment of our markets and that takes time and as you can see by the announcements. We've made that has picked up some momentum and and so we've got a dedicated team looking at that it's very contained work.
And it's managed.
In conjunction with all of our other priorities. So that we can maintain focus on executing on our build plan and an address interest in the properties that we decided to market Steve.
Yes, Hey, James This is Steve Thanks for the question.
Yes, we're obviously spending a lot of time on balance sheet management cash management, and we believe we still have a self funding.
Land with the ability to number one just grow the business from an execution standpoint, increasing margins in our models we have.
With the investment, we're making the fiber penetration rates and growth in our commercial and carrier business, we expect to see mid teens growth on EBITDA year over year. We also as Bob mentioned the asset sales. We are very focused on that right now and have a few in motion, although obviously nothing ready to report today. We're also.
So I think he said in his prepared remarks also looking at different.
<unk> to draw subsidy funding.
Grant money type things to help offset some of our cost to build so we feel like we're in a.
We feel like we're in a position to self fund based on our execution.
Of the business.
With respect to your marketing cost you probably we started.
<unk> are the brand actually launched in November of 'twenty.
One.
100 days into it now you saw a little bit of branding increase.
In the Q.
Q1, and that will ramp or what kind of as we as we launched the <unk> brand in may of this year.
Later this month were also youre going to see a little bit of incremental marketing brand expense related to that and as long as we continue to build at pace on the fiber construction plan, we're going to add salespeople to support that over time Youll see youll see a general ramp over the last three quarters in that a little bit Q1, but mostly it's still to come.
Got it thanks guys.
Again, if you would like to ask a question press star followed by the number one on your telephone keypad your.
Your next question is from the line of Jason Kim with Goldman Sachs. Your line is open.
Thank you it's good to see the momentum on the fiber side first question on the <unk> clearly fiber has higher ARPA and copper, but you're also adding subs that are at a promotional price as you launch new markets. How should we think about fiber <unk> for the balance of the year.
I think.
Good morning, Jason I think what you'll see is right now we're early into some markets and.
Sure.
Working through.
Promotional rate of $70.
That gives us some upside room, and remember, we're in suburban and and mostly rural markets and.
We've got a good amount of headroom.
When you look at the competitive dynamic.
The strength of the cable plant versus where.
We are rolling out a symmetrical fully fiber.
Product, so we've got pricing headroom.
<unk> with the promotional rate will take a little bit of a.
Dip, which you saw I think quarter over quarter, but.
<unk> to most of the industry peers, I think we're still going to maintain a higher <unk> and be able to build from there.
Okay, Great and then are you seeing any impact from fixed wireless, particularly in your DSL subscriber base.
We're really not.
When you look at our topography fixed wireless.
<unk> is really a niche play.
And.
As we look through the economics.
Fixed wireless bridges the time between DS.
DSO is bandwidth.
And demand growth too.
In a period of time, where you can afford to get fiber there and as we've looked at those economics, some fiber makes sense for us.
And it's fairly costly to put fixed wireless antennas out sufficient.
Northern New England to cover our geography, except for in a very very.
Low density areas and so we really don't see it as a as.
As a huge threat.
And haven't seen it as a.
Real impact on DSL base.
Understood and then with respect to the EBITDA growth, Steve I think you mentioned mid teens growth can you clarify.
What that meant if you're referring to absolute dollar growth or percentage growth.
So over what timeframe.
And then in the press release and.
During the prepared remarks, you talked about building momentum towards revenue growth in 2023.
EBITDA also grow next year and can we expect margins to improve as well.
Hey, Jason. Thank you. Thank you and I'll try to try to get all those pieces for you. So.
Yes, we do see EBITDA growth.
And when I referred to in the mid teen growth is kind of the 10 or 15% over the base. We obviously had a major reset this year with the Caf two funding.
Funding transition as well as our incremental investment.
Sales and marketing expense in the tower write down we've talked about.
The last call. So from this base, we do expect to start growing EBITDA.
10% to 15% year over year and as we've as we've talked in loose shared on this call in the past.
EBIT margins were probably down almost 40% in Q4 to about 35, 30% for Q1, we over time over the five year period as we had.
The penetration rates as we see the fiber operational cost efficiencies et cetera, et cetera, we do expect to see margins approaching.
On an EBIT margin basis high 40%, 50% margin over the five year build periods. So it will be an incremental transition as we build and take market share.
Understood. Thank you very much.
There are no further questions at this time I would like to turn the call back over to Mr. Bob <unk>.
Thank you.
Thank you all for joining the call today, we appreciate your support and interest in our transition plan and really appreciate you tuning in and we look forward to updating you on our next call have a great day.
Ladies and gentlemen. This concludes today's conference call you may now disconnect.