Q4 2022 Shenandoah Telecommunications Co Earnings Call
Speaker 2: Good morning, everyone. Welcome to the Shenandoah Communications 4th 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 for Shentel.
Speaker 3: Good morning and thank you for joining us. The purpose of today's call is to review Shintel's results for 4th quarter and full year 2022. Our results were announced in a press release distributed this morning and the presentation will be reviewing is included on the investor page at our website www.shintel.com.
Speaker 3: 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.
Speaker 3: With us on the call today, our Chris French, President and Chief Executive Officer, Ed McKay, Executive Vice President and Chief Operating Officer, Jim Volk, Senior Vice President of Finance and CSO.
Speaker 3: After our prepared remarks, we will conduct a question and answer session.
Speaker 3: 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.
Speaker 3: These may cause our actual results to differ materially from the statement.
Speaker 3: Therefore, we have provided a detailed discussion of various risk factors in our SEC filings, which you are encouraged to review.
Speaker 3: Recautions not to place undue reliance on these forward-looking statements.
Speaker 3: Except it's required by law, we undertake no obligation to publicly update or revise any forward-looking statement.
Speaker 3: With that, I will now turn the call over to Chris. Go ahead, Chris.
Speaker 4: Thanks Kirk. We appreciate everyone joining us this morning and hope everyone's staying healthy and safe.
Speaker 4: 2022 was another successful year for Shantel.
Speaker 4: We had solid growth across our incumbent cable, commercial fiber and tower businesses, and had remarkable growth with our glow fiber expansion.
Speaker 4: As noted on slide 4, we accelerated both our construction and sales of glow fiber in each of the past two years.
Speaker 4: Our annual construction pace increased 64% from approximately 27,000 new passings in 2020 to over 72,000 new passings in 2022.
Speaker 4: We have built a sizable construction backlog underwriting new markets, securing franchise agreements, and doing the field engineering and permitting work, which should enable us to construct 100,000 new passings in 2023.
Speaker 4: Our sales team has more than kept pace with our construction team with Glow Fiber Net Data Editions growing 79% from 4,020 to almost 13,000 in 2022.
Speaker 4: We expect data net additions to accelerate again in 2023. As reflected on slide 5, we highlight the outstanding progress we've made over the past four years since we began investing in glow fiber.
Speaker 4: We have successfully transitioned from the proof of concept stage to the rapid growth stage as all key metrics have met or exceeded our business plans. We ended 2022 with over 147,000 passings in 17 markets.
Speaker 4: All of our glow fiber passings are in greenfield markets, bringing us new customers in incremental revenue.
Speaker 4: We have now secured franchise agreements for 445,000 passings, rapidly approaching or 450,000 target.
Speaker 4: and preparing as well for accelerating construction.
Speaker 4: Our cost to pass of $1,170 is consistent with our underwriting assumptions.
Speaker 4: The metric I'm most proud of is our outstanding customer satisfaction score.
Speaker 4: Our most recent net promoter score was 65 percent. More than 10 times the average score for Internet service providers.
Speaker 4: We believe our local customer service is a competitive advantage as our employees, our neighbors with our customers, knowledgeable about the local markets and involved in the communities that they serve.
Speaker 4: We believe this local connection and care is a major driver of the NPS score and our data turn results of less than 1.1% since launch.
Speaker 4: We ended 2022 with 24,000 glow-fiber customers for about 16% of year-end passings.
Speaker 4: As we've stated in the past, we expect our average market to reach 38% terminal penetration, more than double or current level.
Speaker 4: Coupled with the growth expected as we complete construction of all franchise passings, we believe we're well positioned for significant revenue growth over the next five years.
Speaker 4: We've also been pleased by the strong demand for a glow symmetrical gigabit service.
Speaker 4: As of December 31st, 44% of our globe fiber customer base has purchased our 1GB or higher bandwidth speed, driving up our POO to over $73 since we launched service.
Speaker 4: We recently introduced a TOOP.4 Gigabit service to meet the customer demand for higher bandwidth services.
Speaker 4: With that, I'll now turn a call over to Jim to review the details of our financial results.
Speaker 5: Thank you Chris and good morning everyone.
Speaker 5: Please prefer to slide seven to review our financial results for 2022.
Speaker 5: Broadband revenue grew 20.9 million or 9.2% to 249 million.
Speaker 5: driven by an increase of 9.3% in residential and SMB revenue.
Speaker 5: You primarily to a 119% increase in Glow Fiber Revenue and a 3.5% increase in incumbent cable data revenue.
Speaker 5: Commercial fiber revenue grew 11.2% to 38.8 million due primarily to growth in circuits.
Speaker 5: Broadband adjusted EBITDA grew 7.5% to 90 million in 2022 due to strong revenue growth.
Speaker 5: partially offset by higher expenses of 7.9 million to support the Glow Fiber expansion, 4.3 million and salary wages at incentive compensation, and 1.9 million and higher saltware related costs from system upgrades.
Speaker 5: As previously announced last quarter, we ceased being services and operations in the fourth quarter and a dance of the expected closing of the previously announced sale of the 2.5 gig heart spectrum in the first half of 2023.
Speaker 5: that discontinuation of V-moperations will eliminate 1.3 million in revenue.
Speaker 5: 600,000 and it adjusted EVA.lossus.
Speaker 5: and 13.9 million in operating losses in 2023.
Speaker 5: on Friday.
Speaker 5: Cower segment revenue grew 1.2 million or 6.9% to 18.9 million in 2022 due primarily to a 4.1% increase in the average revenue per tenant.
Speaker 5: Adjust an epithop, which is 7.7% due to the increase in revenue.
Speaker 5: Moving this slide 9, consolidated revenue grew 9% to 267.4 million in 2022 due to broadband and tower revenue increases of 9.2% and 6.9% respectively.
Speaker 5: Consolidated adjusted EBITDA grew 15.6% to 76 million due to growth in broadband, it towered just EBITDA of 7.5% and 7.7% respectively.
Speaker 5: and 10% decline in corporate expenses.
Speaker 5: We have gained strong momentum and our fiber first growth plan is outlined in slide 10.
Speaker 5: Since our first full calendar year of Glow Fiber Sales activity in 2020, we have posted a double double with 10% and 16% compounded annual growth rates for revenue and adjusted EBITDA, respectively. We were able to accomplish these strong growth rates while we were selling our wireless business.
Speaker 5: resizing the company to a broadband-centric business and ceasing our bean-thick's wireless product.
Speaker 5: The last non-recurring material event to flow through our financials will be term related to team mobile decommissioning the former Sprint Network in our markets.
Speaker 5: We are now estimating approximately 9 million, the high end of our range provided last year.
Speaker 5: An annual backhaul and tower lease revenue turn when we enter 2024 as T-Mobile rationalizes the former Sprit Network during 2023
Speaker 5: Although T-Mobile term will temporarily slow growth in the short term, we are confident that our long term growth rate driven by our Glow Fiber expansion will return to the two similar Kager rates from the past two years.
Speaker 5: Moving the slide 11.
Speaker 5: We had 369 million of liquidity as of December 31st.
Speaker 5: Negative free cashflow for 2022 was $115 million, up $18 million as we accelerated our low fiber construction.
Speaker 5: As reflected on slide 12, we have no material debt maturities until 2026.
Speaker 5: In addition to our credit facility availability, we expect to supplement our liquidity with 30 million tax refunds and 17 million cash proceeds from the sale of the 2.5 gigahertz spectrum in the first half of 2023.
Speaker 5: We are in a strong liquidity position to accelerate our Glogue Fiber Network expansion plans without having to raise additional capital.
Speaker 5: And now I'll turn the call over to Ed. Thanks Jim and good morning. I'll start on slide 14 where we depict our Integrated Broadband Network, including over 8,300 route miles of fiber.
Speaker 6: With the launch of our new markets of Williamsburg and South of Virginia, we now offer glow-fibre symmetrical multi-gig service in 17 markets.
Speaker 6: We continue to execute on our Glow Fiber Build Plan adding almost 17,000 additional passes in the quarter and we are on track to launch six new Glow Markets in 2023.
Speaker 6: Construction is also progressing in the rural markets where we have one government grant funding for unserved areas and we expect to launch gigabit fiber services in four counties in the first half of 2023.
Speaker 6: Turning to slide 15, we now have approximately 445,000 approved glow fiber passings with franchise agreements in place.
Speaker 6: These are all greenfield builds outside of our current incumbent cable footprint. With the combination of glow fiber and our 20,000 approved fiber passings for government grant projects, our construction backlog is approximately 318,000 fiber passings in addition to over 147,000 glow fiber passings already constructed.
Speaker 6: Turning to slide 16 for our Glow Fiber operating results for 2022, we more than doubled our data customers and total RGUs ending the year at over 24,000 customers and 31,000 total RGUs.
Speaker 6: Our broadband data penetration rate climbed from 15.1% to 16.5% and our churn remains extremely low at less than 1.1% as our local customer service team and technicians continue to take great care of our customers.
Speaker 6: In the fourth quarter of 2022, approximately 44% of our new residential subscribers adopted speed tiers of one gig or higher, including over 7% that took our 2 gig service.
Speaker 6: Broadband data average revenue per user declined slightly year over year to $73.48 as we rolled out in lower speeds here targeting more price sensitive customers.
Speaker 6: Less than 6% of our new residential subscribers adopted this 100-mect here during the fourth quarter.
Speaker 6: Attachment rates for our streaming TV and voice services were both 11% to the fourth quarter.
Speaker 6: At the end of 2022, approximately 15% of Glow Fiber customers subscribe to streaming TV service and approximately 13% subscribe to voice service.
Speaker 6: Slide 17 demonstrates our data penetration as our market stage.
Speaker 6: 18 months after launching a neighborhood, we typically reach data penetration rates of 20%.
Speaker 6: We continue to see a steady climb in penetration rates as our markets mature and brand awareness increases. And after three years, our initial neighborhoods launched in the fourth quarter of 2019 have reached a penetration rate of about 36 percent.
Speaker 6: Let's move on to our incumbent cable operating results for 2022 on slide 18.
Speaker 6: Our broadband data RGUs grew approximately 3.1% year over year and we ended the year at almost 110,000.
Speaker 6: Our data penetration increased from 50.4% at year end 2021 to 51.7% at year end 2022, and we added approximately 500 broadband data RGUs in the fourth quarter.
Speaker 6: Total RGUs grew 1.6% year over year to approximately 190,000 at the end of 2022.
Speaker 6: We continue to see the clients in our video service due to court cutting.
Speaker 6: and growth in commercial voice RGUs, more than offset declines in residential voice services for the year.
Speaker 6: Broadband data average revenue per user remains strong and increased approximately 2.9% year over year to over $81 as customers continue to migrate to higher speed tiers.
Speaker 6: And finally, churn remained fairly steady year over year at 1.58% in 2022.
Speaker 6: Turning to slide 19, we highlight our broadband enterprise and wholesale commercial fiber business.
Speaker 6: During 2022, we booked new sales with monthly revenue, totaling approximately 367,000.
Speaker 6: Our enterprise and mid-market new sales bookings were down in 2022, primarily due to sales position vacancies, but we have filled those positions and 2023 is all to a good start.
Speaker 6: We installed new services totally over 403,000 in incremental monthly revenue in 2022, and excluding the impact of the T-Mobile Network rationalization that Jim mentioned. We are well positioned to continue annual revenue growth rates in the high-signal to low double digits.
Speaker 6: T-Mobile did reduce the number of backhaul connections in 2022, and we expect the majority of their network rationalization project to be completed in 2023.
Speaker 6: In addition to the 7-year contract with T-Mobile for 175 back-haul connections that we previously disclosed,
Speaker 6: We're also seeing additional wholesale back-all orders supporting team-level self-lights.
Speaker 6: Excluding T-Mobile, churn in revenue compression for our commercial fiber business improves significantly year over year with a combined total of just 0.33% for 2022.
Speaker 6: The high compression in 2021 was due to a combination of a major wholesale customer replacing higher-cost optical circuits with lower-cost e-thin-net circuits and a five-year contract extension at a reduced rate for a major wireless carrier.
Speaker 6: Turning to slide 20 at our tower segment, we decommissioned one non-revenue tower in 2022 due to a highway relocation project bringing our total number of towers down to 222.
Speaker 6: Our third party leases remain fairly steady year over year at 436. However, our intercompany leases decreased from 47 to 10 as we turn down beam-pitched While it's at, all of the parts disappear and get to go, the
Speaker 6: We ended the year with 446 total tower tenants and approximately two tenants per tower.
Speaker 6: Finally, slide 21 provides our 2022 capital spending and our guidance for 2023.
Speaker 6: We finish 2022 at the low end of our previous garden at approximately 190 million in capital investments.
Speaker 6: The increase over 2021 was primarily driven by the ramp up of construction in our low fiber markets and the start of construction in the unserved markets where we have one government grants.
Speaker 6: For 2023, we are projecting capital spending in the $260 to $300 million range as we continue to invest aggressively to accelerate construction of our Greenfield Fiber to the home networks. In our Glow Fiber markets, we plan to invest approximately $180 million.
Speaker 6: including approximately 110 million to complete construction of 100,000 taxis in 2023.
Speaker 6: Approximately 50 million for engineering, permitting, and preliminary construction work toward remaining 198,000 passings in the construction backlog, and approximately 20 million to connect new customers.
Speaker 6: We also plan to invest approximately 40 million to deliver gigabit broadband to un-served areas as part of government grant projects.
Speaker 6: Roughly 15 million will be used to complete approximately 4,000 passings in 2023, and 25 million will be invested in engineering, permitting, and preliminary construction work toward the remaining 19,000 passings in our construction backlog.
Speaker 6: We will eventually be reimbursed for approximately 50% of our total construction costs. However, we expect the vast majority of these reimbursements to occur in 2024 and 2025.
Speaker 6: Thank you very much and operator we're now ready for questions.
Speaker 2: Certainly, at this time if you'd like to ask a question, please press star 1 on your telephone keypad.
Speaker 2: If you take your trigger question, again press star 1.
Speaker 2: Frank Luton with Raymond James, your line is open.
Speaker 5: Great, thank you. I got a few questions that I think are pretty important in looking in the outlook for the business. Last year we got a pretty good look at sort of the stability of the business. I know some of this is a little forward looking, but I think it will help folks a lot with modeling and so forth. Thank you.
Speaker 5: If you can give us a better split between the 9 million of how much of that is going to come out of the actual tower lease line, how much of it is going to come out of the fiber backhaul and kind of the revenue the EBITDA effect as well. And give us an idea of the jumping off point for the fiber and the backhaul from 23 going into
Speaker 5: into 24, that would be my first question, that would be very helpful.
Speaker 5: Yeah, Frank, I can answer that one. So a 5 million, about 2.8 million is going to be on the tower side, the tower lease side, and 6.2 million on the back wall side. We're just going to give you a little bit more context here. We're expecting about 20 million.
Speaker 5: And as we go to 24, we expect it to be around the 11 million mark. The full 9 million should be reflected by the end of 24.
Speaker 7: Okay.
Speaker 5: All right, and so thank you. And so my next question, as you look out over the next few years, walk us through where you are with the balance sheet, and where do you think you have to get before you raise new capital and what's sort of the maximum leverage you would get to before you would make a financing decision, not asking kind of when that hump happens, but we're so we can kind
Speaker 5: would probably do a refinancing of current facility, which is going to mature in 2026. So again, no plans to raise capital in the short term.
Speaker 5: And just to give you a little bit of guidance in the next 12 months, we expect to end the year with about $200 million of liquidity at the end of 23. It's our projections as we speak today.
Speaker 5: And how much that liquidity will be cash and how much that will be bar and capacity.
Speaker 5: Yeah, about 100 million in cash and then about 100 million in revolver availability. Our current agreement requires us to draw a dam on the remaining delayed draw term loans by 230. We need that money and we plan to do that in the first half of this year. Yeah.
Speaker 5: Okay, great. And then very quick. So you say you reach peak leverage at 3.9 times. If you do nothing else, if you kind of hit the wall and the expansion ends, where is fast, how much do you deliver on an annual basis after that with the penetration and so the report that you have?
Speaker 5: Yeah, Frank, it comes down quite a bit after that. So, you know, by as we saw, as we slow our capital spending and we have this fairly sizable opportunity to continue to monetize by adding customers.
Speaker 5: The incremental margin on a new customer once you've built out the network and you've launched the network The incremental margins are quite high here in the 60 you know 70% range
Speaker 5: So to answer your question, you know, we expect net leverage to go below three times by 27 and maybe even the end of 26.
Speaker 5: Okay, great. All right. Thank you for indulging me that's very helpful.
Speaker 5: Thank you for indulging me that's very helpful. Okay, my pleasure.
Speaker 2: Dan Day with B. Riley Securities, your line is open. Everyone's a nice day we're gon Descent.
Speaker 6: Yes, more on you guys. Appreciate you taking the questions. Just for someone for me, you can just comment on labor availability, either for you or your contractors as you build up in the work whether that's getting better or worse into 2023. And any impact that might have on your cost per passing. Going forward. Thanks.
Speaker 6: Yeah, this is Ed. I'll come in on that. So our labor availability has been fairly steady. In fact, we've got more construction crews working right now that we have in the history of the glow project. So we feel like we're in pretty good shape there. We have seen impacts from inflation. Our costs for both materials and labor have gone up, you know, 5 to 10%.
Speaker 6: So we've previously disclosed we expect a range of a thousand fourteen hundred dollars per new glow path You know up to this point we've been in the lower half of that range We do think those inflationary factors will push us up higher into that range Another factor there is you know some of the markets were building in now are less dense
Speaker 6: and they have more underground construction, so that's driving the cause per pass up slightly as well. Great, that's helpful. I know video is an increasingly less important part of the business going forward, but you lost almost 2,000 videos, so I was just wondering if there's anything you did to kind of push people out of there.
Speaker 8: video product in the quarter just seems like an elevated number relative to the last few quarters or for a book which is kind of a maybe a one-time random book there.
Speaker 6: Yeah, nothing specific in the quarter there. We continue to see court cutting. We have been passing along.
Speaker 6: Our programming cost increases to our customer, so the rates have been going up, so I think that does tend to push customers away as well.
Speaker 8: Yes, got it. And then last one for me, when we think about the glow fiber R2, are you being somewhat promotional in terms of getting people to switch and then like after a year or two maybe there's promotional rates for a while and then our two could.
Speaker 8: There could be a tailwind there longer term or it's kind of the price to price and you're letting the product speak for itself to get people to switch over.
Speaker 6: So, yeah, the price is the price. We offer one month free of service to new customers, but that's really the only real promotion we're running right now. We've really been focused on, you know, having, you know, fair, you know, steady pricing and not having this massive price increase like some of our competitors do after, you know, 12 or 24 months.
Speaker 8: Okay, great guys. Thanks for taking the questions.
Speaker 2: All right, thanks Dan. I'm head Connor Sun with BWS Financial. Your line is open. Good morning. Can you just talk about the glow fiber ads in the quarter? I think my math was up about.
Speaker 9: 3,180 if I'm right and that was down from the prior quarter.
Speaker 9: from Q3 ads and also lower than the Q2 ads. So is there a seasonally involved? Is it just timing versus what your build-out schedule?
Speaker 6: Yeah, so Ahmed, that's a good question there. That is primarily seasonality. Fourth quarter is typically slow. We typically see more gross ads in the second quarter and the third quarter. Okay, and then the ad spending you're doing now in those markets, obviously didn't.
Speaker 9: generate the increase in subscribers. So what is your marketing strategy on that front given the seasonality?
Speaker 6: So we have shifted our strategy somewhat. We are putting more marketing dollars into advertising, particularly digital advertising. And the goal there is to shift more sales to our web channel. And we've seen a significant increase in web traffic with those new marketing initiatives. That's our lowest cost sales channel.
Speaker 6: over 30% of our gross ads are now coming through the web for glow fiber so we've made significant progress there.
Speaker 9: And on the markets that you've already started to build out and enter commercially, are there any one of them where you think that you could see quick ramp and number of subscribers this year?
Speaker 6: Well, I think the ramp we're expecting is fairly consistent with what we've seen over time. Slide 17 of the deck shows the ramp. I think the markets were innery now. The ramp should be fairly consistent to that. And that's what we're seeing so far.
Speaker 2: Okay, thank you. You're welcome. Thank you, thank you. Thank you, thank you. Please press star one on your telephone. Keep at it.
Speaker 2: There are no further questions at this time. I would now like to turn the call back over to our presenters for final remarks. Yes, I'd just like to thank everyone for joining us this morning. We look forward to updating you on our five-repersed growth plan in 2023.
Speaker 10: Take care.
Speaker 2: This concludes today's conference call. We thank you for your participation. You may now disconnect.