Q3 2022 Shenandoah Telecommunications Co Earnings Call
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Good morning, everyone welcome to the Shenandoah Telecommunications third 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 first Intel. Please go ahead Sir.
Good morning, and thank you for joining us.
The purpose of todays call Mr abuse, Intel's results for third quarter 2022.
Our results were announced in a press release distributed this morning and the presentation. We'll be reviewing is included on the Investor page at our website Www Dot Centel dotcom.
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, Dave 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 call may include forward looking statements subject to certain risks and uncertainties.
These may cause our actual results to differ materially from the statements there.
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.
That is required by law, we undertake no obligation to publicly update or revise any forward looking statements.
With that I'll now turn the call over to Chris go ahead, Chris.
Thanks, Kirk we appreciate everyone joining us this morning, and I hope everyone is staying healthy and safe.
I'd like to start with a couple of observations on house until is well positioned in the current environment and how we're differentiating ourselves from our peers.
Please refer to slide four.
First as we reported this morning, we continue to grow our broadband data subscribers and topline revenues, our glo fiber product continues to take share as our fiber to the home symmetrical speeds outstanding local customer service and fair static pricing gives us a sustainable competitive.
Age over our cable DSL competitors.
Second we ended the third quarter with approximately 131000 fiber passing with clear visibility to an additional 326000 pass things over the next four years.
Unlike some newer entrants in the fiber to the home space. We've had the same network leadership team in place since we launched our glo fiber strategy in 2018.
Have long standing relationships with are outside playing contractors and the local power companies that are critical for aerial construction and access to poles.
We were able to get ahead of supply chain constraints and have six to nine months of fiber and network equipment inventory on hand.
All of these factors are valuable contributors to the strong construction momentum that we expect to continue into 2023.
Third we have over 400 million in liquidity as of the end of September .
Our business plan is fully funded and we have no material debt maturities until 'twenty 'twenty six.
We're in the fortunate position to be able to continue to invest aggressively in our fiber first strategy without having to access the capital markets to fund our plan.
Lastly, we de Levered, our balance sheet last year, when we sold our wireless business. We currently have 25 million in outstanding debt.
In a period of rising interest rates. We feel this provides a financial advantage over many of our peers, who are highly levered and therefore more sensitive to the increasing cost of capital to fund their expansion.
We also feel our low leverage and noncore tower assets uniquely position us to be opportunistic if the right opportunity should come along.
Summary, the economic conditions have changed dramatically over the past year with higher inflation rising interest rates tightening of the credit markets and decline in the equity markets perceive value for cable companies.
The fundamentals of our business and prospects have largely remained the same.
I'll now provide an update on glo fiber results in the third quarter as noted on slide five we had another record quarter with Glo fiber data net additions of approximately 4000, increasing sequentially almost 19% as our fiber network expanded and our brand awareness grew.
We expect net adds to trend up as we continued to expand our network and build the glo fiber brand.
Turning to slide six we added over 18000, new Glo fiber pass things in the quarter and ended the third quarter with approximately 100 and 131000 passengers.
Our government relations team continued its progress and securing new glo fiber franchises and government grant agreements bring our total franchise and Grant award passing to 457000 or 95% of our 2026 targeted fiber passing.
We executed all of Virginia Grant agreements during the third quarter and engineering and construction planning is now underway.
We expect to have our first fiber pass things in subscribers and these unserved areas in the first half of 2023.
With that I'll now turn the call over to Jim to review the details of our financial results.
Thank you Christy and good morning, everyone.
Please refer to slide eight to review our findings both for the third quarter 2022.
Broadband revenues grew seven 7% to $62 4 million driven by an increased eight 7%.
<unk> and F&B revenue.
Primarily to a 127, 6% increase in glo fiber data RG use and a three 8% increase in income cable data our Gs.
Glo fiber revenues grew over 20% sequentially.
Second quarter, and 116% from the third quarter of 2021.
Commercial fiber revenue grew five 1% over the same period last year.
<unk> 5 million due primarily to growth in service.
T mobile backhaul revenue was $5 1 billion consistent with the second quarter 2022, and included 75000 and early termination fee related to eight backhaul site disconnects.
We are now expecting most of the backhaul revenue churn and.
Related early termination fees to occur in 2023.
Broadband adjusted EBITDA of $22 2 million for the third quarter was flat with the third quarter 2021.
<unk> expenses increased $4 5 million from third quarter, 2021, and 700000 sequentially from the second quarter of 2022.
Our glo fiber service reached an important milestone.
Leaving its first full quarter of positive incremental adjusted EBITDA, we expect low fiber to can sheet.
Tribute positive incremental adjusted EBITDA going forward.
The favorable sequential increase and glo fiber adjusted EBITA was offset by 500000 and noncash nonoperating charges for inventory cancel projects under construction.
200000, and higher fuel expenses and <unk>.
100000, and slightly higher software development expenses related to our system upgrades.
We also announced this morning, the sale of our two five gigahertz wireless spectrum that is used to provider be fixed wireless service for $21 1 million, including $17 3 million in cash.
$3 8 million and assumes spectrum lease liabilities.
We expect the transaction to close in the first half of 2023, following regulatory and customary closing conditions.
As a result of this pending transaction, we will see you.
All beam services prior to closing.
We expect to incur a $1.5 million gain on the sale of the spectrum.
400000, new transaction fees that we accrued in the third quarter.
One 4 million in estimated restructuring charges related to the termination of beam operations.
$5 8 million in accelerated depreciation related to the remaining B network assets in the quarter, we cease operations.
As we look forward to future periods, we expect broadband adjusted EBITDA margins to improve modestly each year as glo fiber scales, we eliminate the negative EBITDA negative EBITDA and.
And our software development cost begin to decline.
Yeah.
On slide now slide nine towers segment revenues grew 300000 to $4 7 million in the third quarter due primarily to an 11% increase in the average revenue per test.
T Mobile tower lease revenue was consistent with prior quarter.
Similar to backhaul, we now expect most of the tower lease turn to occur in 2023.
Adjusted EBITDA increased 15, 1% due to the increase in revenue.
Moving to slide 10.
Consolidated revenues grew seven 5%.
The $66 9 million in the third quarter due to growth in broadband and tower revenue increases of seven 7% and five 1% respectively.
Consolidated adjusted EBITDA of $19 million for the quarter was consistent with the same period last year.
Moving to slide 11, we had $408 million of liquidity as of September 30.
Negative free cash flow year to date was $76 million as we accelerated our fiber construction.
We drew the first 25 million on the delayed draw term loans in the third quarter now.
Now that most of the government grant agreements have been executed we expect the pace of capital expenditures and borrowings under our credit facility to increase.
As reflected on slide 12, we have no material debt maturities until 2026.
In addition to our credit facility availability, we expect to supplement our liquidity was $30 million in income.
<unk> refunds $4 million in deposit refunds for the CD or a spectrum auction.
And $17 million in cash proceeds from the sale of the two five gigahertz spectrum in the first half of 2023.
As Chris noted earlier, we are in a strong liquidity position to invest in our fiber network with it too.
To invest in our fiber network expansion plants without having to raise additional capital.
And now I'll turn the call over to Ed.
Thanks, Jim and good morning, I'll start on slide 14, where we show our rapidly expanding broadband network. Now consists of over 8000 route miles of fiber.
We continue to execute on our glo fiber build plan, adding over 18000 additional passengers in the quarter.
With the launch of Lancaster, and York Counties in Pennsylvania.
Now all for Glo fiber symmetrical multi gig service in 15 markets.
In addition, our fiber construction is now underway to bring gigabit services to approximately 19000, Unserved homes, where we have one government grant funding.
Turning to slide 15, we now have approximately 438000 approved glo fiber passes with franchise agreements in place.
These are all greenfield builds outside of our current incumbent cable footprint.
With a combination of glo fiber and our government grant projects. We now have a construction backlog of 326000 fiber passing in addition to the 131000 glo fiber passes already constructed.
Turning to slide 16 for our operating results for Glo fiber business, we had our best quarter ever for customer growth and ended the period with over 27000 total Archie use and a 16, 1% aggregate broadband data penetration rate across all markets.
Our growth fiber customer relationships also more than doubled during the past year to end the quarter at over 21000.
Okay.
In the third quarter of 2020 to apply.
<unk> 43 per cent of our new subscribers adopted speed tiers, with one gig or higher including over 5%. They took out two gig service.
Broadband data average revenue per user declined about 1% year over year to $72.75 as we rolled out a lower speed tier targeting more price sensitive customers.
Approximately 9% of our new subscribers adopted this 100 Meg speeds here during the quarter.
[noise] attachment rates for our streaming TV and voice services were 13% and 11% in the quarter respectively at.
At the end of Q3, 70% or 76% of Glo fiber customers were single play broadband data only 19% where in a double play and 5% were in a triple play.
Our technicians and local customer service team also continued to take great care of our customers and we saw churn improved by 12 basis points year over year to one 2%.
Slide 17 demonstrates our data penetration as markets age.
Our neighborhoods launched in the second quarter of 2022 have already reached a penetration rate of over 12% just one quarter later.
Our initial neighborhoods launched in the fourth quarter of 2019 have reached a penetration rate of over 35% and less than three years, and we continue to see steady growth.
It's mature and brand awareness increases.
Let's move on to our incumbent cable operating results on slide 18.
Oh Boy band data Archie use grew approximately three 8% year over year in the quarter at over 109000.
Our data penetration increased from 49, 8% last year to 51, 5% this quarter.
They didn't net additions were approximately 1300 for the third quarter.
Okay.
Total argue use grew 2% year over year to approximately 191000 at the end of the third quarter.
We continue to see declines in our video service due to cord cutting.
Growth in our commercial voice or would you use is more than offset declines in residential voice services over the past year.
Broadband data average revenue per user increased approximately two 7% year over year to $81.43 in.
In the third quarter as customers continue to migrate to higher speed tiers.
Our local approach to customer service continues to pay dividends.
Prove broadband data churn by four basis points year over year to 173% for the quarter.
Yeah.
Broadband data utilization per customer continues to increase by approximately 20% annually in.
Slide 19 highlights our incumbent cable network roadmap to support this increasing demand.
We plan to invest approximately $74 million over the next five years to upgrade our cable networks to support multi gig services.
This includes overbuilding approximately one quarter of our cable passed with fiber to the home.
These fiber upgrades will focus on our dense markets and our remaining passengers will be upgraded to either a mid split or high split architecture with DOCSIS four data.
Once these upgrades are complete we expect to realize about $2 million in annual maintenance expense savings.
In addition, we will be spending less capital for ongoing capacity additions.
We will also be investing approximately $14 million as we migrate customers to fiber in place coax drops and customer premise equipment.
Slide 20 highlights our evolution to a fiber centric network service provider.
Currently approximately 38% of our 343000 broadband passage or fiber to the home.
Over the next five years, we plan to grow our total number of broadband past seems to more than 700000.
With over 75% served with multi gig symmetrical fiber to the home service.
You know our incumbent cable markets, we're taking two different approaches based on density upgrade costs and the competitive landscape.
We will be overbuilding, approximately a quarter of our incumbent cable passengers with fiber.
This will primarily be in our dense markets, where fiber or cable cable over builder competition is more likely.
We will deploy 10 gig technology and expect our average cost for network up rates to be in the range of 475 to $575 per passing.
These multi gig networks will allow us to offer higher speeds provide more value to customers lower our maintenance expenses and compete very effectively when we do encounter broadband competitors.
Currently about 13% of our incumbent cable passing them to have a cable or fiber broadband competitor.
With recent competitors announcements, we think it is possible that another 10% of our homes, we will see over builder competition in the next several years.
All remaining cable markets are primarily world with low density in these markets, where we anticipate less competition, we will focus on DOCSIS upgrades, including migrating customers to DOCSIS four <unk>.
We will offer multi gig services in these markets and we expect our average cost per passing them to be in the range of 250 to $350.
Overall, we believe we have headroom to grow our overall penetration in our incumbent cable markets to a terminal penetration rate of approximately 55%.
Okay.
Well Hello markets, we have clear line of sight to over 450000, passing by year end 2026, and we are still on target for an average cost capacity between 1000 and $1400.
Our cost to date have been in the lower half of this range, but we do expect increasing labor and material costs to push us higher than this range in the coming years.
And finally, we are still targeting approximately 30000 passengers in rural Unserved areas as we continue to pursue government grant funding.
To date, we've been awarded approximately 69 million in grants.
Our average cost per passing net of government grants to be in the range of 2900 $3300.
Although the cost per pass is higher than our glo fiber underwriting practices, we do expect the penetration rate to be approximately 65%.
We will be the only broadband provider in these markets.
Turning to slide 21, we highlight our broadband enterprise and wholesale commercial fiber business.
During the third quarter, we booked new sales with lumpy revenue totaling over 230000 up more than 90% over Q3 2021.
We also installed new services in the third quarter totaling 123000 incremental monthly revenue.
Although this is down from Q3 2021.
Our new installed monthly revenue was in line with 2021 year to date as we had a strong start to 2022.
A number of cell site backhaul connections be quite decreased slightly year over year to 701.
We continue to grow backhaul connections with other carriers with this growth is offset by a reduction in T. Mobile connections as they begin to rationalize their network and turned down legacy sprint cell sites.
Jim mentioned, we are now expecting most of the T mobile backhaul disconnects to occur in 2023.
Monthly churn and revenue compression for our commercial fiber business improved significantly year over year with a combined total of just 0.2% for the third quarter of 2022.
Turning to slide 22, and our tower segment, we decommissioned one tower in Q3 due to a highway relocation project, bringing our total number of towers down to 222.
Our third party leases remained steady year over year at 436, However, our intercompany lease since decreased to 21, as we turned down beam fixed wireless sites we.
We ended the quarter with 457 total tower tenants.
Finally, slide 23 provides our year to date capital spending and our guidance for the full year.
Year to date capital expenditures through Q3 were approximately 132 million in 2022 compared to about 119 billion last year.
The primary driver of the year over year increase was the acceleration of our Glo fiber network construction.
For 2022, our full year guidance remains in the range of $190 million to $210 million.
We continue to invest aggressively and accelerate construction of our greenfield fiber to the home networks.
Thank you very much and operator, we're now ready for questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys if at any time. If your question has been addressed and he would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Yeah.
Your first question comes from Frank <unk> with Raymond James.
Great. Thank you I apologize if you've covered this but what can you give us an idea of the revenue and EBITDA impact from the <unk>.
From an annual basis, and when will that close.
Dealing with it as well and then as a follow up any thoughts on the longer term more permanent financing for the fiber build thanks.
Right.
Yes, Frank.
We expect the spectrum sale to close.
Yes in the first half of <unk>.
<unk> of 23.
Yes, it does require FCC approval. So those that's part is in the works as we speak today.
And the amount of revenue related to our beam business. We had about six we have about 600 customers and.
The amount of revenue looking it up right now you are now at the top of my.
Hi.
Tom here is.
Annually. It we're going to do about $1 2 million in revenue this year.
The EBITDA has been negative.
Since we since we launched the product and then with.
With the upcoming Gulf.
Government grants to build fiber to the home to the state markets. We really made a decision a year ago to stop investing and now we've been looking for solutions what to do with the existing assets and we thought the value of our spectrum.
<unk> had had grown slightly and we thought this was a good opportunity to exit the business.
Hum.
And Frank could you any concerns that they're going to take that they might what are they going to do with it or are they going to continue to compete there any any thoughts there and then if you can address the permanent financing.
Yeah.
Doug.
Got it got it.
Yeah, I'll, just say with the sale of the spectrum, we expect.
You know T mobile to use that to augment their current capacity.
Ill.
We still don't see a major issue from fixed wireless in our rural markets I think the majority of the fixed wireless services available today have a data caps on them. So I think the maximum speed you can get a 300 Meg.
We currently are broadband customers currently average well over 500 500 gigs a month excuse me the capital to date is 300 gig our average customer averages over 500 gig per month. So we don't think that necessarily competes well with either cable or fiber to the home offering.
Yeah.
Okay.
Frank could you repeat your second question. Please.
So longer term what do you what are your thoughts on the permanent financing for four of the fiber bill you're using kind of the revolver and the cash on hand for for now, but any thoughts on how to put that in a more permanent financing.
Yeah. So we have a $400 million credit facility, we've only draw down 25 million to date.
We do expect over over the next three years do we use all 400 million to fund the expansion at this point in time with roughly looking at 700 700000 homes pass we don't know the.
The plan is fully funded and we don't anticipate raising any additional capital.
Yeah.
Okay, great. Thank you.
Okay.
Yeah.
Thank you. Your next question comes from Lucas pipes with B Riley.
Hey, Hey, guys. This is actually Dan day.
Thanks for taking my questions.
In the slide.
The slide deck, you mentioned possible opportunistic M&A and just any commentary on.
Whether there is an active pipeline there right now I'd imagine maybe some of the smaller players out there struggling to adjust this cost of capital environment. So could could present, some M&A opportunity. So just curious your view there and whether you can give us anything else on M&A.
Maybe whether that would be only directed at broadband assets or if there's anything else you're looking for out there.
I'll say, yes, there's a few smaller opportunities in the pipeline.
Right now we believe there will be additional opportunities down the road, we think some of these fiber.
Over builders and some of the folks who've taken government grant funding they may struggle into current.
Economic environment, So we think theres opportunities down the road.
Yeah, Dan I was going to just to add to that.
With the rising cost of capital here. It does look like some of the broadband assets are.
The trading multiples are coming down some of the deals that were available over the summer I don't think have gotten done and I think expectations are coming down. So I think our ability to do accretive deals and be able to fund that in today's market is somewhat unique to some of the other our broadband peers.
And then it sounded like I might have heard this arnie you called the towers sort of noncore I think you've used that term before but I mean, just any change in your view on whether you might monetize those.
No.
I guess it would be if there was an M&A opportunity maybe it makes more sense to monetize the towers rather than raising the capital is that the way to think about it or.
Would you think about monetizing those even if there is nothing like M&A wise.
Yes, Dan I think you hit the nail on the head there.
We're fully funded to build out the plan that we have today if.
If we did an acquisition.
Igloo was issuing equity we would certainly look to monetize the towers, we again feel like those assets that have maintained their value.
Yes, some of the economics.
Changes here in the past six to 12 months.
Alternatively, if we decide to.
Size, our glo fiber expansion plans are well above what we're looking at today that could also be a reason to possibly monetize that.
Tower assets, but absent that that the.
The tax basis on the towers is relatively low we don't want is public towers today again incur a tax gain if we don't have a use of proceeds.
Yeah.
Got it and then just one more for me so we heard some commentary.
Larger peers about challenges with labor availability.
They're expanding their networks and you guys talked about strong relationships with your contractors and all of that just any any issues you're seeing in terms of the availability of labor and whether that's.
A part of.
Hello going from the lower end of the cost per pass range maybe.
Or higher end.
So I can say that's definitely a risk we're monitoring very closely we have lost a few contract crews that have gone to work on hurricane restoration work in Florida, We think that's.
Temporary, though we don't think it would be.
No material impact on our our targets for the year of reaching 150000 passenger. We're also closely monitoring the impact of Hurricane restoration work is having on power companies and their ability to do make ready work.
Pair of their calls for us to attach I think the good news from our perspective going into 2023, our shift we're shifting from.
A lot more aerial construction to more underground construction. So we're not going to have as big of an impact there, but again monitoring it very closely but nothing that's going to impact our long term build schedule at this point.
Okay.
Oh, Thanks for taking my questions guys.
Alright, Thanks, Dan.
Thank you. Your next question comes from how much of course, then with Dws financial.
Hi, good morning.
First off could you just clarify the strategy as far as offering a lower tier for your broadband service is it have you reached a.
Plateau as far as who's willing to pay the more premium pricing or is this just more incremental because you've already made the investments.
Yeah, No. We don't we don't believe we've we've reached the terminal penetration by any means on the customers are willing to buy the gig services.
I mentioned almost half of our customers are taking gig services are higher this was more going after some of the.
The board.
We challenged customers because we've already built.
The infrastructure, we've already passed the homes anyway.
Okay.
Okay, and then as far as just the.
Gaining incremental dig customer or are you having to spend more.
On advertising dollars to get that customer alright, how has that response been.
Well, we we are increasing our our advertising we're also.
Shifting our sales mix. So previously we focus a lot more on door to door sales, we've been able to successfully shift a lot of our sales to our website. So about 30% of all of our sales are now occurring online certainly lower cost to acquire a customer there we're taking some of the savings there and putting them into advertising to continue to grow.
Brand awareness.
Okay, and then finally, the on the beam sale.
What happens to those customers.
I'm, assuming that business. Eventually goes away. So are you going to be able to recapture those customers with globe.
So those customers are in very rural markets. So those are not customers, where we are typically targeting with the with glow a portion of those customers overlap our incumbent telephone company footprint.
The majority of those cases, we're actually building fiber to the home. So that's a small fraction of those beam customers, we will be able to recapture of the rest of those are going to be outside of our of our footprint with either cable or globe.
Okay, great. Thank you.
Okay.
Ladies and gentlemen, as a reminder, if you would like to ask a question. Please press star one.
Okay.
Since there are no further questions. This concludes our question and answer session I would like to turn the conference back over to Mr. Jim Volk for any closing remarks.
Well. Thank you everyone for joining us. This morning, we look forward to keeping you abreast of our of our plans as we move forward with that.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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Yeah.
Yeah.
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