Q1 2022 Shenandoah Telecommunications Co Earnings Call
Good morning, everyone welcome to the Shenandoah Telecommunications first quarter 2022 earnings conference call.
Today's conference is being recorded at this time I would like to turn the conference over to Mr. Kirk Andrews director of financial planning and analysis portion.
Good morning, Thank you for joining us the purpose of today's call is to review <unk> results for first quarter 2022.
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 cash Intel 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 <unk> 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 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 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.
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'll start with an update on our broadband network expansion on slide four.
We had another record quarter for newly constructed glo fiber passing of 18000.
<unk> ended the first quarter with almost 94000 glo fiber passes.
Bringing our total pass things across all of our broadband networks to over 332000.
Our engineering construction teams are executing very well.
We're well on our way to reaching our goal of 150000 globe passing by year end.
Turning to slide five we added about 3600 net data additions during the first quarter with Glo fiber contributing 2400.
The glo fiber net additions were 14% higher than the fourth quarter 2021 and.
76% higher than the first quarter of last year.
We finished the quarter on a high note with almost 1000 Clos data net adds in March and have seen this momentum continue into April .
Our incumbent cable business added over 900 data net additions during the first quarter.
With our incumbent cable data penetration now near 51% and approaching our expected terminal penetration in the mid 50% range, we expect slower but steady growth in the coming periods from this business.
Similar to recent quarters, we had another strong quarter of delighting and retaining our customers with churn of one 3% across all of our data products driven by high quality broadband services outstanding local customer service and fair pricing.
Before turning the call over to Jim I'd like to comment on the priorities that we've set for ourselves to achieve our long term financial goals.
To accomplish our aggressive fiber first growth strategy, we have.
Increased our focus in a couple of important areas.
One priority is further investing in our people.
Todays highly competitive labor market, we've increased our salary scale to attract and retain key team members.
Although these adjustments have put short term pressure on our compensation expenses and operating margin continuing to have the best team and maintaining continuity are key drivers towards long term financial success.
On a similar note we've made long term decision to upgrade our operations support customer relationship management and ERP systems.
In the first four months of this year, we've converted to a new ERP and lease accounting system launched a new website for <unk> dot com that allows online customer ordering for our incumbent cable business and deployed a new workforce platform for scheduling customer installations and dispatching technicians.
These technology investments along with another half dozen system conversions that are in progress have added expense in our first quarter results as we incurred conversion and overlapping maintenance fees for the legacy replacement software.
As we complete our system upgrades and retire the legacy systems in the next 20 months, we expect the conversion overlapping expenses to phase out.
Leading to a run rate reduction of approximately $2 million.
The upgraded automation will create operating efficiencies and we expect to realize additional savings in the years, following which will help scale, our business and improve our margins in the long term.
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 seven to discuss our financial results for the first quarter 2022.
Broadband revenue grew eight 3% to $59 7 million driven by an increase of nine 3% and residential and SMB revenue.
Primarily from a 14, 1% increase in board broadband data RG use.
Commercial <unk> revenue grew six 9% to $9 1 million due primarily to growth in service.
T mobile backhaul revenue was consistent consistent with the fourth quarter 2021.
Adjusted EBITDA for the first quarter declined five 4% to $21 1 million.
Broadband expenses increased at a faster rate than our revenues in the first quarter due to the following major drivers.
First $2 million of the expense increase supported the expansion of our Glo fiber services.
One 8 million related to higher medical benefits salary and vendor rates.
700000 related to the upgrade and conversion of our ERP CRM and Oss systems as Chris just noted.
600000 was due to the change in accounting practice for cable replacements that we made in the fourth quarter of 2021.
Excluding glo fiber and be negative adjusted EBITDA and the software upgrade and conversion costs are broadband adjusted EBIT margins would have been 41% this quarter versus the 35% recorded.
We expect broadband adjusted EBIT margins to improve modestly in the second half of this year and grow to over 40% by 2024.
As we streamline our beam operations.
<unk> fiber turns EBIT positive in the software development cost shrink.
Sure.
On slide eight.
Tower segment revenue grew 100000 to $4 8 million in the first quarter due primarily to a five 6% increase in tenants, partially offset by three 6% decline in lease revenue per tenant.
T Mobile tower lease revenue was consistent with prior quarter.
Adjusted EBITDA was flat with prior year period as well.
Moving to slide nine.
<unk> revenue grew seven 9% to $64 4 million in the first quarter due to growth in broadband and tower revenues of eight 3% and three 9% respectively.
Consolidated adjusted EBITDA for the quarter grew two 4% to $17 4 million due primarily to an 18% decline in corporate expenses driven by the previously announced reduction in force and lower professional fees.
As announced in February we expect to achieve $5 million in annual run rate cost savings by the end of 2022 as we implement several non employee cost reduction initiatives.
Approximately $4 million of the annual savings will kick in in the second quarter of this year with most of the savings benefiting corporate expenses.
Moving to slide 10, free cash flow and cash on hand declined $30 million in the first quarter.
We ended the quarter with a strong liquidity position of $454 million.
We expect to begin draws on.
On the delayed draw term loans in the second quarter and expect to draw of $75 million to $100 million in 2022.
Down slightly from prior guidance as we now expect to receive an income tax refund of $30 million in the second half of 2022.
And now I'll turn the call over to Ed.
Thanks, Jim and good morning.
I'll begin on slide 12, where we depict our rapidly expanding broadband network.
Despite the winter weather, we had our best quarter ever for new construction, adding over 200 route miles of fiber, bringing our total to over 7600 <unk>.
Now launched Glo fiber services in 13 markets with the addition of Blacksburg, Virginia.
Year to date, we have added five new franchise agreements with a total of 21000, new targeted passes including the new market of Salisbury, Maryland.
Engineering and construction work continues to ramp up in both of our existing markets and the four additional markets. We plan to launch in 2022, and we are well on our way to achieving our goal of over 75000, new homes and businesses passed this year.
Turning to slide 13, we now have approximately 339000 approved globe passive with franchise agreements in place and we are 75% of the way to our goal of 450000 passengers by 2026 it's.
As Chris mentioned, we had a record quarter for construction and now have service available almost 94000 homes and businesses.
As we previously announced Intel has been awarded approximately $54 million in state and local grant funding, which will be used to bring gigabit broadband over 16000 Unserved homes.
Based on our preliminary design work, we anticipate being able to pass more homes with fiber than originally planned.
Engineering is currently underway and we plan to ramp up construction in the second half of 2022. After we execute the government grant contracts with each county.
In total we have the construction backlog of approximately 261000 fiber passing.
Addition to the 94000 glo fiber passing is already constructed.
Turning to slide 14 for our operating results for Glo fiber business, we had another record quarter for customer growth and ended the period with over 18000 total RG use and a 14% 14, 7% aggregate broadband data penetration rates across all markets.
Our penetration rate is lower than the same period in 2021. However, we have grown our number of passengers by over two five times in the past year.
Our glo fiber customer relationships also increased by about two five times over the past year to end the quarter at almost 14000.
Our broadband data churn remains very low 0.87% in line with our results from the first quarter of 2021.
In the first quarter of 2022, approximately 48% of our new subs adopted speed tiers of one gig or higher.
And our data <unk> remained consistent at $74 33.
Our streaming TV and voice services continue to perform well with 18% and 14% attachment rates for the quarter respectively.
At the end of Q1, 73% of our Glo fiber customers were single play broadband data only.
21% were in a double play and 6% were in the Triple play.
Slide 15 demonstrates our data penetration as our markets age are passing is launched in the fourth quarter of 2021 are already at an eight 4% penetration rate and that jumps to nearly 15% from markets launched nine months ago in the second quarter of 2021.
We see steady growth as the markets mature and our initial neighborhoods launched in the fourth quarter of 2019.
I'll have a penetration rate of 33% after 27 months.
Let's move on to our incumbent cable operating results on slide 16.
Total RG use grew one 7% year over year to approximately 188000 at the end of Q1 2022, and our broadband data Archie used grew approximately five 6% year over year in the quarter with over 107000.
Alright come in cable broadband data penetration increased from 48, 3% in the first quarter of 2021% to 57% this quarter.
Our customers continue to see value in our powerhouse rate card, our local ties to our communities and our local customer service.
Broadband data average revenue per user increased approximately three 5% year over year to $80 88 in Q1 2022 as customers migrate to higher speed tiers, and our average subscribed download speed is now approximately 100 megabits per second.
Broadband churn continues to be near record lows, finishing the quarter at 132%.
On slide 17, we highlight our being fixed wireless broadband service.
Originally launched this service in Q4 2020, and we now have approximately 1700 customers and our penetration rate is just over 6% of our target households.
Our average revenue per user remains steady at over $73 and our churn remains very low.
Zero point, 79%.
As we previously announced we have ceased further being fixed wireless expansion.
Influx of government broadband grants for Unserved areas has fundamentally undermined our <unk> model and many of the sites, we constructed no longer have a path to profitability.
We plan to decommission approximately 20 unprofitable sites with very low penetration rates at the end of the second quarter.
We expect to recognize an impairment charge of approximately $4 million and restructuring charges of approximately $1 million in the second quarter, primarily for early termination liabilities for tower leases and backhaul agreements.
With these changes we expect the remaining being fixed wireless business to be EBITDA breakeven starting in the third quarter.
Moving on to Slide 18, we have provided an updated view of our primary product offerings.
Alright, telecom and cable networks offer gigabit data speeds in small towns and rural areas using DOCSIS three one technology.
Our glo fiber service 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, new Greenfield passengers over the next five years.
Chris mentioned earlier, we are on track to double our current glo fiber passing us to over 150000.
By the end of 2022.
Four are being fixed wireless service, we have adjusted our number of target passing to 19000 to account for the turndown of the unprofitable sites.
And finally, we have updated our government grant opportunities and now expect that our 32000 targeted passengers will be constructed primarily as fiber to the home with limited DOCSIS cable extensions for small pockets of homes adjacent to our cable plant.
For grants that were awarded in 2021, we have verbally agreed with the accounting is to replace our proposed fixed wireless passes with either fiber to the home or DOCSIS.
Also continue to pursue additional grant opportunities, including in the states of Virginia, Maryland, West, Virginia and Pennsylvania.
We've updated our projected terminal penetration rate to 65% in these unserved rural markets, given the very limited broadband offerings from either the <unk> or fixed wireless providers.
In total we expect to pass more than 700000 homes and businesses with broadband services over the next five years with approximately two thirds of these served by fiber.
Slide 19 provides a view of our broadband enterprise and wholesale commercial fiber business.
During the first quarter, we booked new sales with monthly revenue totaling almost 115000.
Over 25% of this new revenue was driven by E rate contracts with two public school systems. This brings our total number of E rate customers to 51, including 36 public school systems, non private schools and six library systems.
We also installed new services in the first quarter totaling 112000 incremental monthly revenue.
This was a significant improvement of 47% over the same period in the previous year, driven primarily by a new dark fiber lease to a major wholesale customer in the first phase of a new contract with a large hospitality customer for Internet and data services.
Monthly churn and revenue compression for our commercial fiber business also improved significantly year over year with a combined total of <unk>, 4% for the first quarter of 2022.
The high compression in the first quarter of 2021 was primarily due to a five year contract extension at a reduced rate for a major wireless carrier.
Our number of cell site backhaul connections increased slightly year over year to 709.
Our largest backhaul customer is T mobile and we did see a reduction of seven circuits. If it turned down non traditional cell sites and repeater systems in Q3 2021, shortly after the sale of our wireless assets and operations.
As we previously disclosed we expect T mobile to rationalize the network and the former our former wireless service area decommission the National Sprint CDMA LTE network.
We do not yet have visibility into the number of circuits that will be part of this rationalization, but it is important to note that these backhaul circuits are under contract with over two years left in the term.
Our success in our commercial fiber business is driven by our local sales team our local operations team and outstanding support from our network Operation Center, we see significant growth opportunities for enterprise and wholesale services as we expand our glo fiber into new markets.
Turning to slide 20, total tower tenants increased five 6% year over year to 468 at the end of Q1 2022.
This includes 33 intercompany tenants primarily for being fixed wireless operations.
As we previously disclosed we believe approximately 80 of our 262 tower leases with T. Mobile will eventually churn as they rationalize our network and turned down legacy sprint cell sites.
We continue to grow our relationship with dish as they build out their national <unk> network with seven executed leases and 13 more in the pipeline.
Finally, slide 21 provides our 2021 capital spending and our guidance for 2022.
Capital expenditures were $45 7 million in the first quarter of 2022 compared to $39 5 million in the first quarter of 2021.
The primary driver of the year over year increase was the expansion of our Glo fiber network.
For 2022, our guidance for the full year remains at $220 million to $240 million as we continued to invest aggressively in the expansion of our fiber to the home networks.
Of the $165 million to $175 million investment in <unk> and fiber to the home.
$12 million related to connecting new subscribers and approximately $40 million is for expanding broadband unserved areas as part of government grant projects.
The remainder is focused on completing 75000, new passing in 2022 and ramping up construction for over 100000, new passengers in 2023, including materials engineering and preliminary construction work.
Thank you very much and operator, we're now ready for questions.
As a reminder to ask a question you need to press star one on your telephone to withdraw your question press the pound key.
Please.
Composite kidney roster.
Our first question will come from the line of Frank Louthan from Raymond James You May begin.
Great. Thank you Lucas.
Walk us through sort of the expectations for ramping the marketing for the broadband as you're as you're doing the growth and then.
Second question on the pace of the grant funding.
When do you expect to receive those funds and.
And how is that going to be accounted for as a show up as revenue is or is it offset to capex and when should we expect.
That construction will be finished.
Sure so as far as the.
Capital capital reimbursement from the government grant projects, we expect the cost recovery to lag of three to six months behind our construction.
We're targeting roughly two years.
To complete those government grant projects that we have on the table right now.
As far as the marketing and the new low markets one of the key for US is is the local community involvement so we think.
With Covid, hopefully a tailing off here and things are opening back up we think that provides a big advantage to us one of the areas. We focus on as local community events. So the spring already we've really started to engage so we think there's a big opportunity there.
So as the seasonality of good weather coming out of Q1 going to going to help should we start to see that that benefit and pull through.
We believe.
Good weather will not only help them this community events, but our door to door sales team.
Is more successful.
At times with more daylight hours and better better weather.
So we do think we do expect to see continued growth.
Alright, that's great. Thank you.
Hey, Frank.
On the accounting for the grants.
We will account for them as a construction so they will offset capex it will not be considered revenue.
Alright, great. That's really helpful. Alright, Thank you very much.
Our next question comes from the line of Dan <unk> from B Riley Securities. Your line is open.
Yeah. Good morning, guys. So just first one on glo fiber looks like.
Over the last year, and a half trending down from sort of high <unk> to mid seventies.
Just wondering if you can sort of provide your expectations for that moving forward.
Well I would say.
The downward trend was more of an accounting issue.
The actual <unk> really over the past year <unk> been steady has not has not declined.
Yes.
So I think going forward, we expect <unk> to be roughly.
In that same area.
We don't expect a large increase there because as we said almost half of our customers are currently taking gig service, there's probably not a lot of upside there for them to take take higher speeds at this point.
Got it Okay and then.
Commercial fiber and towers.
Any changes.
Changing the outlook on the T mobile churn that we sort of flagged over the last few months.
It looks like it sort of hasn't showed up in the revenue line on those two segments yet.
Any thoughts on the outlook for this year for those segments.
Yes.
Youre right, we have not seen any impact yet.
T. Mobile has publicly said June 30 is when they will start to shut down the <unk>.
Legacy Sprint CDMA LTE network.
We're still working with T mobile and as we mentioned, we don't yet have clarity from a backhaul standpoint, how many circuits are actually going to be impacted as they rationalize some of the work.
Great. Okay. I appreciate you guys, taking my questions I will turn it over.
Alright, Thanks, Dan.
Sure.
Once again Thats star one for any question Star one.
Our next question comes from the line of Amit <unk> from AWS financial your line is open.
Good morning.
Just wanted to understand if you're changing any of your marketing strategy with the glow.
What the reception has been like so far as far as the targeting of these.
Customers with those increase in home passes.
So we've seen excellent response at the at the Middle and high end of the market. We are taking a look at a rate card to see if there is what we can do to capture customers.
Lower end of that market, possibly.
We're very pleased with the with the higher end services that we're selling with almost half of our customers taking to gigabit speeds.
And is the response that you're getting in line with what you were expecting because like you said, you're increasing your passengers, but penetration rates declined a bit.
I would say, yes. It is in line with our expectations and a big factor. There was we released a significant number of households passed to the sales team at the end of first quarter, and Thats really whats driving down that that penetration rate.
But we expect that rate to ramp back up.
Going forward.
Okay, So something like maybe one to two year return on those home passing them.
Jim I'll, let you comment on that one.
I'm, sorry could you repeat that please.
Yes.
As to his home pass things that were just released in Q1 to expect something like a one one to two year return.
To get the.
Customers to pick up service.
Yes.
So on that is it.
You referred to the what we call the vintage slide where we show kind of the homes passed by when they were launched you.
You can kind of see the curve that develops but essentially after about two years.
We expect to penetration to be in the 20% range for the homes that were that were launched then and Thats generally about the time when those markets turned EBIT positive. So we already have several markets EBIT positive thats been talked today, and we expect the glow.
Sub segment or product line to be EBIT positive as a whole by the end of the year.
So we're making great progress on Yamana.
Monetizing.
The glo fiber investments here.
Okay. Last question is was the $30 million refund expected.
Is your plan just purely to invest in the Capex projects.
Yes. This was.
Due to.
Really 2021, the refund was coming out of 2021.
At the end of the year when we actually did our final accrual to start preparing the tax return.
We realized we had overpaid the estimate that we estimated payment that we needed in the fourth quarter. So that's where it's being driven from.
No understood.
Just wanted to understand.
The $30 million was going to be used for capex or is it going to be used for share buybacks or dividends or anything.
Yes, no it's going to we're mainly focusing on reinvesting our cash yet to deploy glo fiber going forward, we have a heavy investment plan in front of us on that so we will continue to be reinvested back in the business.
Okay, great. Thank you.
Alright, Thanks, Amit.
Thank you I'm not showing any further questions in the queue I'd like to turn the call over to Jim <unk> for any closing remarks.
Well, thank everyone for the continued interest and Chantelle and I hope everyone has a great Friday. Thank you.
And this concludes today's conference call. Thank you for participating you may now disconnect everyone have a great weekend.
Okay.
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