Q3 2022 Consolidated Communications Holdings Inc Earnings Call
Speaker 1: VidiNet work in January , offering a simple, highly competitive fiber broadband service to small businesses and an awesome app for easy management. VidiNet work will leverage a digital online sales channel and offer plans including 2GIG over our XGS PON network, targeting the small business customer at a highly competitive price. Carrier data and transport revenue increase 1% driven by a delay in tower negotiations combined with capacity upgrades in the fiber to the tower business, which have largely offset expected market rate adjustments. New fiber passings within our unique routes provide opportunities for us to leverage the same fiber to grow both carrier and commercial data transport services. We increased our lit buildings by 7.5% in the third quarter, which correlates to higher margins, increased opportunity to upsell, and a greater ability to ensure the best customer experience. I'd like to also highlight our commitment to sustainability and our ESG priorities. As a leading fiber broadband provider, our role within our communities has never been more important. Our community values inspire us to be good neighbors and to deliver the most reliable services through a great customer experience and to connect people in all that we do. Our work with all areas of ESG continues and guides us as we conduct business and help our communities to thrive. I will now turn the call over to Steve, who will provide more insight on our third quarter financial results. Steve? Thanks, Bob. Good morning to everyone. Let me start with the major event of the quarter, which was the September 13th closing on the sale of our five wireless limited partnerships, Interest Verizon. The sale generated $490 million in gross cash proceeds, which will be used to support our fiber broadband expansion and growth plan.
Speaker 1: We expect the federal taxable gain will be fully shielded by our net operating losses and we also estimate incremental state cash taxes will be between $10 to $13 million. The wireless cash distributions from these investments are paid one quarter in arrears. We received $5.5 million in the third quarter which was lower than what we had expected lower than historical run rates.
Speaker 1: The primary reason for the lower than expected distributions was that Verizon significantly accelerated their capital spend on 5G overbuild to access the C-band frequency in a couple of our partnerships in the second quarter.
Speaker 1: We currently estimate that our Q4 distributions will be approximately 4 to 6 million. Our distributions will be based on Verizon's Q3 performance and our prorated share based on the time of ownership in the quarter.
Speaker 1: We estimate our full year 2022 wireless cache distributions to be between 30 and 32 million. There will be no distributions of 23.
Speaker 1: I'll now provide an overview of our third quarter results.
Speaker 1: Total operating revenue for the third quarter was $296.6 million and adjusted EBITDA was $97.2 million, representing a 32.8% adjusted EBITDA margin for the quarter. As we consider this level of EBITDA margin, it is important to note that we are making significant investments in our operating expenses to support our fiber transformation and growth plan.
Speaker 1: We are encouraged by the early results from this investment in the business as evidence of our consumer fiber revenue growth and strong take rate for our fiber product offering as indicated by strong net fiber ads.
Speaker 1: Looking over the long term upon the execution of our growth plan and return to revenue growth, we believe we will see significant margins expansion and even margins have upside to the mid to high 40% levels.
Speaker 1: As a reminder, effective January 1st of this year, our annual $48 million in CAF II funding transitioned to an annual $6 million under the Rural Digital Opportunity Fund. The subsidy reduction impacts our 2022 quarterly revenue in EBITDA by approximately $10.5 million.
Speaker 1: In addition to the subsidy reset, adjusted EBIT on the quarter was impacted by the following items on a year-over-year basis. 5.6 million lower wireless cash distributions as previously discussed. Approximately 7.8 million higher voice erosion across all customer channels.
Speaker 1: approximately $3 million for inflationary impacts from energy and fuel costs, and $2.5 million for normalization of New Hampshire property tax rebates, which we received last year.
Speaker 1: Committed capital expenditures totaled $139.9 million in the third quarter in our $476.8 million year-to-date. As Bob mentioned, we are making excellent progress in our fiber build plan and are on pace to meet our upgrade target of 400,000 fiber passings in 2020 to them.
Speaker 1: As we have discussed, we have significant cost to build advantages, especially in our Northern New England markets where 70% of our 1.6 million upgrades are targeted. We have been leveraging the Northern New England footprint, which has a lower cost to pass. As we discussed in the Q2 call, we are seeing some inflationary pressures in the form of equipment surcharges and increased contract labor. We estimate our average cost per passing to now be in the $600 to $650 range. This is still significantly below our peer group.
Speaker 1: was $69.6 million, up 1.5%. Consumer fibernet ads were up three times from a year ago, based on the excitement around the Fidium brand, our superior product in the enhanced customer experience compared to any other product in the market.
Speaker 1: Consumer fiber revenue was 21.6 million, up 6.1 million or 40% year over year, and we have added over 12,000 consumer fiber gig plus connections during the quarter.
Speaker 1: For the second consecutive quarter, we delivered total company consumer net positive broadband ads.
Speaker 1: Consumer fiber revenue. Our Poop was 65.61 cents in the quarter, up 66 and sequentially driven by speed mix as customers continue to take higher speeds of our fiber services. The fiber speed mix of Gigplus is up 17 percentage points on a year over year basis.
Speaker 1: Approximately 80% of our customers are new to CCI, and over 70% of our new Fiverr subscribers are taking 1 gig or higher product.
Speaker 1: Consumer voice revenue was about $4.1 million, primarily due to the continued erosion of access lines and associated services.
Speaker 1: Video revenue declined 2.6 million or 16.2% year over year as we continue to de-emphasize our linear video. We are accelerating our efforts to transition customers to streaming and over-the-top video services. That will drive higher speed broadband adoption. This is also driving a reduction in video programming cost to 2.4 million year over year, improving margins and free cash flow.
Speaker 1: Commercial revenue is 102.2 million, down 4 million or 3.8 percent.
Speaker 1: Data services revenue was $56.8 million in the third quarter, down 1.3% year over year.
Speaker 1: Primarily driven by the loss of a large customer combined with some delayed decision making.
Speaker 1: by customers and prospects. Despite these challenges, our team is seeing an increase in larger sales, including multi-site product solutions utilizing our advanced services portfolios and products. And we are encouraged by the new sales trajectory. Additionally, the commercial team will benefit from increased market opportunities with our fiber expansion and new products for the SMB market, including Fiti and network. We expect a return to data services growth in 2023. We expect a return to data services growth in 2023.
Speaker 1: Voice services were down 3 million in the recent quarter, primarily driven by access lines to clients, lower long distance, and the migration of our customers to VoIP solutions, which we include in data revenue.
Speaker 1: Carrier revenue was $38 million, essentially flat from a year ago. Red transport service revenue was $33.9 million, up 1%.
Speaker 1: As discussed on prior calls, our fiber-to-the-tower business is under pricing pressure due to contract renewal negotiations with the major wireless providers. Our Q3 revenue benefited by the delayed timing of new pricing on our wireless backhaul contracts. As a result of the ongoing negotiations, our carrier team is pursuing new capacity upgrades for our wireless and wholesale customers, and we have the opportunity to add new towers and pursue other business with the major carriers.
Speaker 1: As discussed on previous calls with respect to the fiber to the tower contracts, for full year 2022, including the effect of churn and pricing step downs, we had expected to see revenue reductions in the range of $10 to $12 million. Our original views would be spread radably over the year.
Speaker 1: Based primarily on timing and finalizing some of these contracts through Q3, we have recognized approximately $3 million today, and we expect to recognize another $3 or $4 million in Q4. For 2022, the total impact is now estimated to be between $6 to $7 million.
Speaker 1: We still expect the run rate impact for 23 to be in the range of 10 to 12 million.
Speaker 1: Wireless tower sites under contract now total almost 4200, up 12% year over year. Our team continues to leverage our core network upgrades to provide a path to 10 gig backhaul capabilities at the tower site for carriers.
Speaker 1: Network access revenues totaled $27.3 million, down $2.6 million year-over-year, primarily due to the client's special access circuit revenue as carriers move from TDM to Ethernet-based transport solutions.
Speaker 1: Cost of services and products expense declined $1.3 million due to savings from video programming costs offset by slightly higher utility and fuel expense.
Speaker 1: On a year-to-date basis, the clients of video programming costs have outpaced the client revenue, improving EBITDA by over $2 million.
Speaker 1: Selling general administrative expenses increased $8.7 million primarily due to higher marketing costs related to our customer fiber product expansion, coupled with a non-recurrence of certain property tax rebates in the third quarter of 2021.
Speaker 1: Net interest expense was $32.1 million, a decrease of $11.1 million compared to a year ago, primarily as a result of non-cash interest of $10.9 million on the Searchlight note, which was converted to perpetual preferred stock last December .
Speaker 1: The pending sale of our Kansas City assets, which we announced in March, is expected to close by year-end following routine regulatory approvals. It is currently under review with the FCC Team Telecom. During the quarter, we recognized the $5.2 million non-cash impairment charge associated with an increased McCarran value of the assets held for sale and increases in our estimated closing cost.
Speaker 1: We estimate this asset as annual revenue of approximately $45 million and adjusted EBIT of approximately $12 to $14 million for 2022.
Speaker 1: This asset sale is estimated to generate gross proceeds of approximately $90 million.
Speaker 1: In the third quarter, we realized a gain on the cash proceeds from the sale of certain non-strategic communication towers and related equipment totaling $19.2 million.
Speaker 1: To date, in 2022, we have announced over $600 million in aggregate cash proceeds from the investors of certain non-core assets.
Speaker 1: We continue to review all markets in our portfolio for investment or monetization. We believe we have the ability to source additional capital through potential asset divestitures.
Speaker 1: Our criteria in this review includes evaluating the economics of the fiber build opportunities, market level competition, and potential valuations.
Speaker 1: Moving to our debt, approximately 77% of our total debt is fixed. Recall that we have a $500 million interest rate hedge against a $1 billion term loan and $1.1 billion of senior notes with fixed coupons. Notwithstanding the heightened interest rate environment, our overall cost of debt is 6.2%, abnormally from 5.86% in the prior quarter.
Speaker 1: Our net debt leverage was 3.82 times at September 30th and our liquidity is 686 million with cash on hand of 462 million and available revolver capacity of 224 million.
Speaker 1: Additionally, on slide 13, we provided a pro forma view of our liquidity of over $770 million, which includes the effect of the Kansas City asset sale.
Speaker 1: Given our strong liquidity, coupled with no debt maturities until 2027, we are well positioned to continue executing our fiber expansion plan.
Speaker 1: Today we are reaffirming our 2022 guidance which is outlined on slide 14.
Speaker 1: We will provide 2023 guidance on our Q4 call in February . As we consider 2023, we've outlined the impact of investitures in the fiber-to-the-tower contract negotiations.
Speaker 1: However, we expect growth in consumer broadband on the hills of the positive momentum of our 500 gig plus product offering. We believe this will contribute to an inflection point in our overall revenues.
Speaker 1: and we expect to see sequential revenue growth in the second half of the year. I'll now turn the call back over to Bob. Thank you Steve. In closing, I'll reiterate consolidated fiber transformation is well underway. We're executing well on our consumer fiber expansion plan, having achieved another record quarter of fiber subscribers and net positive broadband connections.
Speaker 1: We're enhancing the customer experience across all channels and we're excited to launch BIDIEM at work early next year. We're disciplined and focused on ensuring we have a capital structure to support our growth plan. We've simplified our strategy and significantly improved our liquidity. We are well positioned to continue executing on our plan, bringing the fantastic benefits of BIDIEM fiber broadband to more communities, creating long-term value for our shareholders.
Speaker 1: Operator, we will now take questions at this time.
Speaker 2: At this time, I would like to remind everyone in order to ask a question press star and then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.
Speaker 2: And your first question is from the line of Greg Williams with Cowan. Please go ahead.
Speaker 3: Great, thanks for taking my questions. Just wanted to talk about the cost to build that sounds like you're increasing it a little bit to $600 to $650. What are the components of this rising cost? I assume it's mostly labor. I know earlier in the year Bobby spoke about the cost of resin going up, etc. I'm just wondering if we can parse that out. Second question is a little more philosophical. What is the IRR or returns on your fiber builds today with these rising costs? What I'm thinking about is...
Speaker 3: if it's in the low to mid teens for a return and you know the way your bonds are trading you know if they get to the low to mid teens do you think about you know buying back you know your debt in the public markets you know as we think their holder value etc I'm just wondering if that has fact I've been to your calculus thanks
Speaker 1: Thanks, Greg. And I'll take the cost to pass first. First of all, I would say I want to remind you that the proximity we have of our network, fiber-deep, is going to position us versus our competitors and others in the industry even to have a very competitive low cost to pass. And that includes the percent of aerial plant. So...
Speaker 1: Yes, while we see some increase in the cost, it is primarily labor and some of the subcontractors from a labor and specialty equipment getting diamond blades for different directional boring in some rock areas. And so while it's a bump, I don't think it's significant, comparatively speaking, and we don't think it gives us a...
Speaker 1: in the whole scheme of our returns at this stage of significant impact.
Speaker 4: Go ahead Steve. Yeah, hey, Greg, I'll take the 2nd part of your question. I'm kind of like the IRR's Bob was talking about. I think we're, you know, as the unit economics as we rolls out the fiber plan, you know, we were expecting kind of a high team low 20% IRR. Again, with that for your question, with the cost of passing going up modestly, which is still a really strong competitive advantage compared to anybody else that we're competing for capital for, or equity holdings for.
Speaker 4: fully committed to investing every dollar free cash flow we have into the build plan over time. That's where we think, you know, five years from now, that's where we're going to get the most value from versus buying back bonds today at a discount.
Speaker 5: Got it. Makes sense. Thank you.
Speaker 6: Next question.
Speaker 2: Your next question is from the line of Michael Rollins with Citi. Please go ahead.
Speaker 1: Good morning.
Speaker 7: Hi, good morning.
Speaker 3: Just two questions. First, I was curious, looking at some of the KPIs, the DSL losses were a little higher. Are you seeing that as a function of migration to your fiber service or is there some kind of change in the competitive climate for your copper subscriptions?
Speaker 8: And then secondly, you mentioned, oh, go ahead, I'm sorry. Go ahead.
Speaker 8: I was going to say for the second question, I was just curious if you could size in some way the potential to further optimize your footprint per the comments during the prepared commentary. Thanks. Can weNC athletes use their screens to promote workplace engagement and help reduce social
Speaker 1: Yeah, let me take the first question and then I may ask you to clarify the second. With regards to DSL losses, it's really two things. We lose DSL to our
Speaker 1: take the first question and then I'm asking to clarify the second. With regards to DSL losses, it's really two things. We lose DSL to our...
Speaker 1: focus on converting them and transitioning them as we do fiber upgrades. And we're putting a lot more attention on the DSL customer base going forward. We've been studying that. And so we're getting more aggressive and letting them know our build schedule as we map that out more concretely for future years. And so we think we're going to have some greater impact on that going forward. The third quarter is typically a higher move season and while it's somewhat muted.
Speaker 1: That is where we see more DSL churn because of the speed competitive nature. We have a good footprint of 100 meg. Still in the lower speed areas, we're more at risk, and that's why we're working more aggressively to get those areas passed and let them know that we're coming in the near-term future. But in the move season, that takes a little bit more of a tick.
Speaker 1: The second question, looking at the
Speaker 1: I think you're referring to the vestiges, is that right?
Speaker 8: Yeah, so you mentioned earlier in the discussion that you're continuing to consider optimization and I was just curious if there's a way to size that, whether it's in the footprint size or the dollar potential or the EBITDA potential, just some way of thinking about what the total potential of that opportunity looks like. Yeah, got it. And so as we said in the past, there's roughly, we think, 200 million of assets.
Speaker 1: over time that we would still consider as
Speaker 1: as a divestiture opportunity. Having said that, we're in conversations.
Speaker 1: always with some parties that have interest and yet nothing active to the point where we could announce it. And so we're going to continue to work through those things that we've announced and optimize the ones that we haven't with the public-private partnership opportunities we have. Having the regional diversity that we have, we have a number of bites at the apple on all the state programs that are at different stages of evolution. Some we wish would move faster than others. So I think we've got upside to increase their value.
Speaker 1: Over time and in the meantime, we talk to folks that have interest and explore opportunities, but nothing to announce or add at this time.
Speaker 6: Thanks for the question.
Speaker 6: Thanks.
Speaker 2: Your next question is from the line of Jason Kim with Goldman Sachs. Please go ahead.
Speaker 9: Great, thank you very much. A couple of questions from me. I know it's still early, but any thoughts on how next year's CapEx may look like?
Speaker 9: and your net leverage ratio declined this quarter given the asset sale proceeds and looking ahead, and how should we think about the peak net leverage for the company as you complete your Fiverr investments?
Speaker 4: Hey Jason, this is Steve, so thanks for the question. I think in CAPA, as you said, we are not giving guidance today, but I think you probably think that we are still going to be in the $500 million plus range.
Speaker 4: The kind of current pace of the build is under consideration. And that's really what we're focused on. So I think with the to your point on kind of combine this questions, but today with the benefit that we had from the Verizon asset sale and the $490 million in proceeds in the bank today, that obviously did really impact leverage the positive side for right now. But we are, I mean, to your point, we will.
Speaker 4: based on the size of the CapEx envelope versus kind of the lag on the sales penetration ramp up. We will probably have a negative cash burn rate for this year in 23. So I think it said differently, if it hadn't been for the Verizon sale, as we had mentioned early in the year, we would probably be kind of like approaching five times or maybe like five and a half times for kind of peak leverage for the build. That's still kind of where we're.
Speaker 4: kind of where we're thinking at subject to how we perform in the business, you know, how we can grow EBITDA faster going into 23-24. And as Bob mentioned about the opportunity for additional subsidies, grants to help offset additional cost to build costs going forward.
Speaker 9: Great, that's helpful. And then as for the broadband stimulus funding, what do you expect consolidated share of the cost to be on a per home basis to the extent to which you win this funding?
Speaker 1: Yeah, I'm not going to disclose the specific offset on a cost per pass, but what I, because it varies from project to project. But what I can say is when we look at it, our model, it conservatively on the high side can withstand higher than what our average cost for passing is now. And so what we're going to do is use the public private partnership, the B, the ARPA, the NTIA.
Speaker 1: cost if we time our projects correctly. And so that's what you'll see us do is as this process unfolds and it's a bit unpredictable, we're in one now where we're delayed seven, eight months because of NTIA administrative processing and that ends up longer if you get pushed into winter construction months. So we're really going to keep flexibility and we're in a perfect cash position to do that so we can optimize every dollar we can get access to across our markets.
Speaker 1: And so we feel really well positioned to maximize those opportunities.
Speaker 9: Understood. Thanks very much.
Speaker 2: At this time, I would like to remind everyone in order to ask a question, simply press star, then the number one on your telephone keypad.
Speaker 2: Our next question is from the line of Steven Sykora with Aetna. Please go ahead.
Speaker 1: Hey guys, got a couple questions here. So the first one, a follow up on the DSL question, are you seeing any impact at all from either cable getting more aggressive trying to win those copper subs, fixed wireless competition, or just general economic weakness hurting those specific customers? And then second, if I look back at the QQ presentation, you guys outlined a 400k fiber home pace in 22 and 23, 300k.
Speaker 1: in 2024 and 250k in 2025. In the 3Q presentation, it's 1 billion passings from 2023 to 2025, and it looks like you'll beat that original 400k guidance in 2022. So is that an indication, along with your current build pace, that you might accelerate builds versus your original plans? And if so, what kind of variables go into that decision? Thanks.
Speaker 1: Thanks Stephen, that's a lot packed in there. So let me start with the DSL piece. We really see DSL losses from the DSL piece.
Speaker 1: three major places and two that are the largest. One is moves and then replacement with a more competitive offer that would be coming from cable and in some very limited cases maybe fixed wireless. We're not seeing a lot on the economic front, which we watch closely and as we look at that face it's driving some of the
Speaker 1: the priority in where we build. And so, I think it's for us, it's probably more cable competition, not a lot of aggressive promos necessarily across the DSL base that we have because it's more distributed and rural. But I would say that that's probably still the larger factor. And then on the economic side, I can't see that. You can also take an ad on literally any Dana
Speaker 1: right yet being a factor. I do think there'll be some headwinds from an economic perspective, but we also believe broadband is a very resilient product in tougher economic times because everyone needs connectivity, especially in the more distributed work environment we live in. So, if I had to prioritize, I'd say that there is pressure from cable in that space. Regarding Cath Immienced participants, what do we expect to see from the Government for the coming year 22?
Speaker 10: The
Speaker 1: 400,000 this year and the 1 million over the next few years. I think we're intentional in saying we've got flexibility. And so we're going to use, as I mentioned earlier, these public-private partnerships to help us prioritize getting every dollar possible because it just extends our reach. And we're best positioned to win those from a cost-for-passing perspective. For more information, visit www.fema.gov
Speaker 1: when it's a competitive RFP process. And so the timing of those can drive, for example, four times, five times the number of passings that you're being funded for in order to optimize when the crews are in place and to build the complete market at one time. And so we think with the economy slowing down, these are inverting those experiences because demand is still going up. We're busy in the spring months, where we're going to close it at 8. I'm just praying to go
Speaker 1: tougher access to capital for some, being in the liquidity position that we're in gives us the best flexibility to pace the build where we think we can get the best return and not only penetrate the market faster as we ramp our, continue to ramp our sales acquisition strategy, but also do it in a way we can maximize supplementary funds to build more rural passings.
Speaker 6: Great, thank you.
Speaker 2: Your next question is from the line of Ana Goshko with the Bank of America. Please go ahead.
Speaker 11: Hi, thanks very much. I wanted to ask you on the commercial side, so you referenced the large customer churn. I just wondered about the circumstances of that. Was that a competitive loss?
Speaker 11: If so, what were the factors you think that drove that? And I think you also mentioned delayed decision making on the part of some other customers. Is that economy based or what's that based on?
Speaker 1: No, and let me take the first part at that. The large customer churn was a unique situation that...
Speaker 1: that really occurred based on that customer's consortium that they led and we were an underlying supplier for. And so for confidentiality reasons, I won't go into details because I've got other things going on. But it was a contract that we thought we'd get renewals for and it wasn't possible. So it's a really unique situation. On the delayed decision making, we Roger and there was a question.
Speaker 1: I would say that's more of a general market cautiousness that we're seeing grow. And I think it may have something to do with election season. It also may have, we believe, you know, a lot of people are thinking about, you know,
Speaker 1: factor associated with the belief that a recession is coming and higher interest rates for folks that use leverage capital to make equipment purchases that align with network grooming and builds that we support. So the pipeline remains solid. It's just things have gotten a little more pushed and so we're being cautious but yet optimistic that both will be able to offset the large customer.
Speaker 1: that churned and see growth in commercial data. We've typically been a leader in this space in our ability to acquire more than our fair share and I expect with more fiber that we've deployed, we're going to have more opportunity.
Speaker 11: So what was the revenue or EBITDA impact of that customer? Is it material to the...
Speaker 4: Just about material, Ann.
Speaker 4: is not material, the overall results.
Speaker 6: Okay.
Speaker 11: And then secondly, I know there's a question or two
Speaker 11: quite a bit of discussion on cost to pass, on cost to connect, a variable cost, the success-based cost that you incur when you're...
Speaker 11: adding the fiber subs, how has that been trending?
Speaker 1: Yeah, it's actually been trending close to flat, if maybe not a little bit down, and I think that might be temporary, but we've been able to improve our drop. The connection between the pedestal or the pole to the customer, we've been able to improve that process and reduce costs substantially. We've been experimenting with different approaches to it, and we'll continue to work on that.
Speaker 1: We paid some expedite charges to get Wi-Fi 6 out and test our mesh Wi-Fi experience, which has had a positive impact on NPS scores. So we're going to continue to see that oscillate for inflationary reasons as well as our refinement and process, but I don't see it materially changing going forward other than maybe long-term to track with industry technology costs. But the technology is actually going to get cheaper.
Speaker 1: as we continue to buy more volume and I think that may be countered by inflation with some labor cost increase.
Speaker 11: Okay, so just as a reminder, what is that per gross ad now?
Speaker 1: It's roughly 700.
Speaker 11: Thank you very much. Thank you, Anna. Thank you,
Speaker 1: Next question, operator.
Speaker 2: Once again if you would like to ask a question simply press star then the
Speaker 2: And there are no further questions at this time. I would like to turn the call back over to Bob Udell for any closing remarks.
Speaker 1: Thanks, Dennis, and thank you all for joining the call today. We appreciate you tuning in and your support for our long-term vision and our evolution to becoming a fiber-focused...
Speaker 1: broadband company. Look forward to updating you on our next call. Have a great day.
Speaker 2: This concludes today's conference call. You may now disconnect.