Q1 2023 Consolidated Communications Holdings Inc Earnings Call
Okay.
Ladies and gentlemen, good morning, My name is Abby and I will be your conference operator today.
At this time I would like to welcome everyone to the consolidated Communications first quarter earnings Conference call.
Please be advised that today's conference is being recorded.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
If you would like to ask a question. During this time simply press the star key followed by the number one on your telephone keypad.
If you would like to withdraw your question Press Star one once again.
Thank you and I will now turn the call over to Philip Cramps Senior director of Investor Relations.
You may begin your conference.
Good morning, and thank you for joining the consolidated communications first quarter 2023 earnings call.
Our earnings release financial statements and presentation are posted on the Investor Relations section of our website at IR got consolidated dotcom.
Please review the Safe Harbor provisions on slide two of the presentation.
Today's discussion includes forward looking statements about expected future events and financial results that involve risks and uncertainties that may cause actual results to differ materially from those expressed today.
A discussion of factors that may affect future results is contained in consolidated's filings with the SEC.
In addition, during this call we will refer to certain non-GAAP financial measures, which are defined and reconciled in our earnings presentation and press release.
With me today are Bob you del President and Chief Executive Officer, and Fred Graffam, Our Chief Financial Officer.
Following their prepared remarks, we will open the call for questions.
Before I turn the call over to Bob I'll note on April 13th we announced the receipt of a take private proposal from searchlight capital and British Columbia investment management.
Since the announcement the board has established a special committee consisting of independent directors of the board to review and consider the proposal as well as any other alternative proposals or other strategic alternatives that may be available to the company.
Given that the process is ongoing we will not be able to take any questions related to this matter during our Q&A session.
I will now turn the call over to Bob.
You Philip and good morning, everyone first let me say there is a lot of enthusiasm and excitement across our organization a key initiative for US was starting the year with a leadership team realignment, we added key leaders to our consumer business and commercial and carrier businesses and brought on a new CFO . In addition to making other strategic changes.
The depth of go to market experience with these new leaders is incredible and I am quite pleased with the immediate contributions of our collective team.
Importantly, we are seeing strong early momentum and are building the foundation for growth in the future.
Q1 highlights include a new quarterly record of consumer fiber broadband net adds of over 12300 on the growing strength of iridium fiber.
Second is the positive total consumer broadband net adds of over 2400.
This means that just in the first quarter were well above our full year 2022 consumer broadband net adds.
Offsetting DSL losses.
Third consumer fiber broadband revenue grew 56%, which contributed to consumer broadband revenue growth of over 6%.
Consumer broadband fiber ARPA is up five 7% and fiber churn improved to an industry leading 1%.
We're seeing favorable trends for video and fiber, notably we experienced the highest months of consumer Fibernet adds in our history at approximately 5200 in March and approaching 6000 in April these levels are well beyond our historical net ads in an average month and position us for even higher fiber net add activity and our second in <unk>.
Third quarters.
Lastly, we are well positioned to meet growing demand for installations and to efficiently conduct future fiber build given our inventory position.
Let's turn to slide four which highlights our journey from a copper based telecom to a leading fiber broadband provider.
We continue to make great progress on our multiyear plan to bring fiber to more than 70% of our footprint and through our actions. During 2023, we're solidifying the foundation for a return to growth in 2024 are.
Our fiber network is projected to reach roughly half of our addressable locations by the end of this year and we are targeting a compound annual EBITDA growth rate in the mid teens for 2024 through 2026.
We're also looking for EBIT margins to approach mid to high 40% levels over the long term as we drive highly profitable fiber penetration across our three revenue groups consumer commercial and carrier, while leveraging our existing cost structure.
On slide five.
Summarized the key aspects of our fiber investment thesis, we couldnt be more excited with the long term growth opportunity that fiber provides us with symmetrical speeds that are upgradable to beyond our current 10 gig capability, it's a superior product to cable and fixed wireless <unk>.
Fiber is future proof technology is essential, particularly as data demand continues to grow to this and a recent Mckinsey report projects data traffic to expand by 20% annually in the next five years and then further site that fiber is arguably the only fixed broadband technology currently capable of delivering the speed.
And capacity expected by governments businesses and consumers.
We also enjoyed several distinct structural advantages, including our incumbent position we.
Have been serving many of our communities for decades, and we know our fiber expansion markets very well.
Have a fiber rich carrier class network that we can cost effectively extend including existing conduit capacity for berry facilities and pull access where we have very old plant. These network advantages provide us with favorable unit cost, including an industry, leading cost of past offering a strong return on investment opportunities as we execute.
On our plan.
Looking now at slide eight.
Get you on our fiber build and.
In the first quarter, we upgraded nearly 54000 locations with our supply chain and labor in good shape. We are on track to upgrade at least 225000 fiber locations during 2023.
Our total fiber passing now extend to just over 1 million locations or 40% of our overall service area up from 10% in 2020.
As we discussed in the last quarter, we've reached an important inflection point with our fiber coverage such that we are able to generate increasingly positive overall consumer net broadband adds.
As a result, we are now consistently growing our overall consumer broadband revenue.
This is a key catalyst for us as we move closer to overall revenue growth.
Looking out to 2026, we expect that more than 70% of our passengers will be fiber by the middle of the year, representing an increase of more than seven times, our fiber coverage in 2020.
We fuel our bills with increased penetrations public private partnerships and have continued flexibility with our capital structure and our portfolio of assets.
First and foremost we're focused on driving penetration across our existing base of over 1 million fiber, passing which of course will boost our revenue and cash flow providing support to fund additional fiber builds.
Second is the continued pursuit of grant or infrastructure funding opportunities that align with our plan when synchronized appropriately with our fiber builds these governmental funding opportunities helped to offset rural high cost pass things, allowing us to maximize the economies of our builds for complete areas. This is a key.
<unk> component as we continue our expansion.
And we've been awarded over $150 million of broadband partnership and grant funding opportunities since 2019 across our markets. We've earned a very positive reputation with our previous public private partnership wins, which in turn leads to new opportunities in neighboring communities.
At the end of first quarter, we were tracking nearly $140 million of additional broadband government partnership opportunities, which is up by $40 million from the prior quarter.
This does not include any potential opportunities as part of the $42 billion B program. As many of you are aware beat opportunities are expected to come to market over the next 12 months in summary, we are doing well on the continued execution of our fiber build we will continue to be nimble in order to flexibility as opportunities and plans evolve.
Let me now highlight our fiber cohort penetrations, which are improving.
Our Q1 2021 cohort is nearly 30% at the two year, Mark which is above our target of 24%.
We are very pleased with the performance of this cohort, which includes particularly strong results from some areas, where we had public private partnerships.
Moving to our Q1 'twenty two cohort penetration was 14, 7% at the one year, Mark which is above our target of 14%.
During our Q4 call, we outlined a comprehensive strategy to increase penetration across all of our cohorts and I am a static with the results that we're seeing from these initiatives put quite simply we're doing exactly what we said we would do.
Our record Q1, 'twenty three consumer broadband fiber net adds for March were 5200, and this momentum continues in April where we're approaching 6000 fiber net adds.
Put this into perspective, our prior monthly record was 43 hundreds.
Key factors for this upward trajectory include our re rally efforts with video and fiber and its superior value proposition.
So continued growth in our consumer sales partners and our door to door head counts, which are now up for ex since year end.
We continue to see more upside with sales channel optimization, along with improvements being made on our E Commerce and call Center tactics importantly, our install capabilities are keeping pace with our growing sales activity and as I mentioned, we have CPE and stock ready to deploy for our current installs looking ahead, we'll continue.
Executing on all of these key initiatives to keep momentum going in to further build upon our first quarter 2023 results.
Now, let's turn to slide 11, where I'll provide additional perspective on the progress we're making in the consumer fiber business, which is contributing to overall consumer broadband revenue growth.
Growing this area of our business is a key factor for us as we lay the foundation for overall revenue growth in 2024.
In Q1, we added 12300, <unk> fiber subscribers, an increase of 60% versus the prior year.
Fiber broadband revenue was $26 1 million up 56% year over year, and a 10% increase from the fourth quarter. These positive results in our fiber business contributed to overall consumer broadband revenue growth of 6% in first quarter.
Fiber subscriber trends remain consistent with over 70% choosing our one gig or higher service, while the vast majority are new subscribers.
Our transformation to fiber from copper continues to grow with fiber now, making up 37% of our consumer broadband connections, which is up from 25% just a year ago.
Looking at <unk> fiber ARPA exceed copper by over $14 or 27%. This is a meaningful difference and provides us with ample upside to continue driving significant revenue and EBITDA as our mix shifts increasingly to fiber.
In the first quarter consumer fiber broadband ARPA was up five 7% year over year, driven by the increase in speed mix as subscribers are favoring our one gig product offering. Additionally, we are also seeing an uptick in interest for our two gig product.
Let's turn to our commercial and carrier channels.
With nearly 58000 fiber route miles and over 14500 on net buildings. We believe we are the leading fiber based provider in the markets. We serve we offer fiber broadband connectivity and cloud based services to deliver differentiated solutions targeting customers ranging from small businesses to large enterprises and carriers.
Our go to market strategy includes direct and inside sales as well as the agent our partner channel under New leadership, we are focused on simplifying our offerings enhancing our coverage and improving our speed to market to capture more businesses, both on net and near net.
Within commercial data services, we saw year over year growth in dedicated Internet access SD Wan and cloud voice.
We are making investments to increase our core network capacity, which benefits all three customer revenue channels, we have enabled 400 gig and.
In transport services in our core networks and enabled 100 gig into our metro networks capable of delivering 10 gigabit connectivity to any customers address served by our fiber network. The Bottomline is new fiber passing is within our consumer routes provide opportunities for us to leverage the same fiber to grow both carrier and commercial.
Data and transport services.
We increased our on net buildings by three 5% in the first quarter after normalizing for Kansas, which correlates to higher margins increased opportunity to upsell, a greater ability to ensure the best customer experience and more opportunities for additional connections.
I will now turn the call over to Fred who will provide more insights on our first quarter financial results Bret.
Thanks, Bob and good morning, I am pleased with the progress we made in the first quarter and especially with the momentum in our consumer fiber business.
Total operating revenue for the first quarter was $276 $1 million and adjusted EBITDA was $75 4 million.
Revenue in Q1 saw a decline of $11 8 million or four 1% versus the prior year on a normalized basis for last year's Kansas in Ohio divestitures.
Approximately half of the decline or $6 $2 million was driven by lower overall voice revenues across the business.
Other products and services revenue accounted for 38% or $4 5 million of the decline mainly due to reduced recognition of public private partnership construction projects.
The remaining decline reflects lower video and network access revenue.
As Bob mentioned, we continue to see growth in the consumer broadband business through continued strength with our <unk> fiber product.
The momentum in this area is a key driver for overall revenue growth in 2024.
As discussed in our fourth quarter call and as reflected in our guidance. We expected a decline in 2023, EBITDA principally due to sales of certain non strategic assets and pressure in our legacy business.
The decline in reported adjusted EBITDA of $31 8 million for the quarter included $12 million for non strategic asset divestitures.
$11 million related to declines in the areas of voice video and access revenue.
$6 million of compensation expense related to employee recruitment increased head count and commissions due to the ramp of <unk> fiber sales and installations in the quarter as well as overtime related to maintenance activities due to storms in new England.
Now I'll review revenue by customer channel all of these revenue comparisons will be against normalized Q1 2022 results.
Turning to our consumer channel total revenue was $109 8 million.
Down two 2% compared to a year ago.
Consumer broadband revenue was $68 million up six 4% as we continued to see strong fiber revenue growth of 56%.
Consumer fiber net adds were up 60% from a year ago as the adoption of video and fiber accelerates further.
For the quarter, we delivered record broadband fiber net adds of $12 337.
With our fiber coverage now at 40% and our strategy demonstrating increased momentum we are prime to see continued improvement in the second quarter.
Consumer fiber <unk>, who was $67 51 in the first quarter of five 7% year over year, and 6% sequentially driven by speed mix as customers continue to take higher speeds of our fiber services.
The fiber mix of gig plus is up 14 percentage points on a year over year basis.
Consumer voice revenue was $32 3 million down $4 5 million or 12, 2%, primarily due to continued erosion of access lines and associated services and long distance revenue.
Video revenue was $9 6 million a decline of $2 1 million or 17, 7% year over year as we continued to deemphasize our linear video.
The transition from video is also driving a reduction in video programming costs, thus improving margins and free cash flow.
Commercial revenue was $95 5 million down $4 3 million or four 3%.
Data services revenue was $53 $1 million down 1% year over year. Despite the decline we are seeing growth for dedicated Internet access, which is up 16% SD Wan was up 41% and cloud voice was up 3%.
Voice services revenue was $32 6 million down $2 3 million or six 5% in the recent quarter, primarily due to a decline in access lines as commercial customers are increasingly choosing alternative technologies.
Other revenue within commercial was $9 8 million down $1 $5 million largely due to a decline in sales of business systems equipment and special project revenue.
Carrier revenue was $37 $6 million flat versus the prior year.
Data and transport services revenue was $32 $9 million consistent with last year.
In the first quarter, our carrier transport revenue benefited from capacity upgrades in the fiber to the tower business and the continued delay in certain tower negotiations, which have largely offset expected market rate adjustments.
As previously discussed for the full year 2023, including the effective churn and pricing step Downs, we expect a revenue reduction of approximately $10 million.
Beyond these renewals, we believe we have the opportunity to grow our carrier business through capacity upgrades for our wireless and wholesale customers.
As well as adding new tower connections.
Wireless tower connections under contract totaled 4137 up 5% versus last year.
Network access revenues totaled $24 4 million down $1 3 million or four 9% primarily due to declines in special access circuit revenue as carriers move from Tdm to Ethernet based transport solutions.
Cost of services and products expense declined $4 million against prior year GAAP results due to savings from lower video programming costs, including the impact of the sale of our Kansas operations and a decline in excess costs related to prior year PPP. These.
These costs were partially offset by an increase in required contributions to the federal and state Universal service funds as a result of an increase in the annual funding rates in 2023.
Utility and fuel cost also increased in the current year.
Selling general and administrative expenses increased $8 million versus GAAP results last year, primarily due to severance costs and labor costs for additional sales head count in 2023.
We also saw an increase in advertising expense due to greater promotional activities for our fiber broadband products and higher professional fees for various systems enhancements and customer service improvement initiatives. These increases were partially offset by a decline in property and real estate taxes in the quarter.
Net interest expense was $33 9 million, an increase of $4 3 million compared to a year ago. The increase was a result of higher interest on the term loan.
Now turning to capital expenditures committed capital expenditures totaled $145 million for the quarter included in our Capex spend was $34 million of build capex for passing constructed and released $7 million for build capex for construction and progress.
$5 million of core Capex, which supports all of our business lines and is not included in our cost per passing.
$29 million related to an increase in our construction and CPE inventory.
$40 million of success based capital for our consumer and commercial businesses. The split of success based capital is approximately 60% consumers SMB and 40% business and carrier.
Please note that consumer success based capital relates to both fiber and copper installs includes capital related to our other consumer offerings and includes a modest approximately 10% allocation for indirect costs.
Finally, first quarter capital included $30 million for obligatory and digital transformation for the quarter, our obligatory capital was elevated due to plant replacement costs related to major storms in northern New England in both January and March.
As Bob mentioned, we have considerable build in CPE inventory on hand due to previously committed inventory purchases such purchases are highly weighted towards the first half of the year and are expected to benefit us in future quarters simply stated we are in a strong position to execute on our fiber build and consumer installation goals for the year.
For our build we continue to estimate our average cost per passing to be approximately $650 in 2023.
And we continue to manage our average direct cost to connect up to $750 to $800 range in the first quarter, we were approximately 10% higher due to overtime from higher connect activity as well as some spillover from January and March storms in northern New England.
Moving to our capital structure, approximately 77% of our total debt is fixed and recall that we have a $500 million interest rate hedge against our $1 billion term loan through July 2023, further our $1 1 billion of senior notes have fixed coupons, notwithstanding the heightened interest rate environment. Our overall average cost of debt is six.
Six 1% up from 648% in Q4.
We continue to evaluate our interest rate hedging strategy and we'll report any meaningful changes in the second quarter our.
Our net debt leverage was 476 turns at March 31.
As of March 31, the company maintained healthy liquidity with cash and short term investments of approximately $336 million and $213 million of available borrowing capacity on our revolving credit facility subject to certain covenant ratios.
With regard to our 2023 outlook it remains unchanged and as outlined on slide 15. Please note that while the overall capex outlook has not changed we modestly adjusted the percentage break out between fiber build success based and obligatory and digital transformation capital.
Now I'll turn it back to Bob.
Thank you Fred before opening for questions I encourage you to review our recently issued 2022, ESG report, which highlights our commitment to sustainability and our ESG journey. This of course includes our transition to fiber as it is more environmentally sustainable and uses less energy than cable or DSL.
However, also requires less repair and maintenance and can be easily upgraded to provide exponentially faster speeds as technology and consumer needs grow let.
Let me also reiterate that our transformation to a fiber one broadband company is gaining strong momentum.
We have new go to market leaders onboard and the teams combined expertise is accelerating our go to market actions.
As an organization, we are focused and collectively executing on our strategic priorities for the year, which include increasing fiber penetration across our three CS delivering an improved customer experience as demonstrated by high NPS scores and driving operational efficiencies and finally with <unk>.
Operator, we will now take questions at this time.
Thank you.
And as a reminder, I would like.
Pardon me as a reminder, if you would like to ask a question Press Star then the number one on your telephone keypad.
And we will pause for just a moment to compile the Q&A roster.
We will take our first question from Greg Williams with TB Cowen Your line is open.
Great. Thanks for taking my questions I do know you said you can't talk about the searchlight PCI, but I am curious is there a deadline or a general timeframe on a decision around exploring any of these strategic alternatives.
And just the second question is on your game plan for capital.
Got no maturities until 'twenty, seven plenty of liquidity, but to fund the build you're going to need to you I think access capital by my model. It's late 'twenty for 2025.
I'm curious if I'm in the general ballpark and and how you envision that to occur I mean, you will see meaningful EBITDA uplift in 2025 sets give you probably more access to the debt markets.
Is that the way youre thinking about it or are there other sources to access capital such as further asset sales. Thanks.
Yeah, Let me take the latter part of that.
First Greg it's Bob <unk>, good to hear your voice.
The flexibility we have in capital has been demonstrated I think.
Almost on a recurring basis, where we're very focused on getting the best return.
We have.
Good ramp coming out of first quarter, we feel good about that and Thats. The best way to fund as you said producing more net adds that improve EBITDA run rate and we believe we are we're looking forward at that we also demonstrated asset monetization.
Puts us in a good position in the public private partnership momentum continues to build which helps us get our dollars to go further as well as.
Expand our passing so.
Along that.
Align.
I think we'll exceed the 70% not willing to speculate how much.
We will exceed that but we've got good momentum and I think you capture all the levers we have to pull.
Related to <unk>.
The offer.
Bye.
The company.
That's being handled by the independent Committee.
We're going to keep the management team focused on running the business and keeping the momentum we've established.
And then let the independent committee manage the process around searchlight interest in acquiring the company.
Fair enough got it thank you.
And as a reminder, it is star one if you would like to ask a question.
Thanks, and good morning first question is just looking at the EBITDA for the first quarter can you talk about.
What are the opportunities through the year.
Cruise EBITDA to get back to at least the low end of the guidance range.
Yes, I mean, the most powerful thing.
On the fiber side and so.
So no I think we're I think the only other thing I would point out is we did have a meaningful number of one time expense items in the first quarter related to storms in new England, we had a substantial step up in it.
And overtime expense, we had two major storms and so we don't expect that to recur for the rest of the year, but but frankly, the most powerful thing we can do in the business to drive fiber revenue high margin and we're going to continue to keep a strong focus on our expense base throughout the year.
Just following on the last question as you go through this process.
Yes.
Doug.
Full level of investment that the company is planning on in terms of dollars as well as.
The benefits that you are looking to extract from those investments over time.
That you're seeing us do that.
And so we're going to let the special committee as I mentioned earlier focus on.
Guiding that process.
But we're going to focus on.
Sharing more detailed information as we continue to get momentum across all of our markets and further along in the plan and we're coming out of first quarter with.
Some some more information on cohorts.
And.
Certainly.
You'll start to see more around small biz as fitting that work continues to get traction. So I think it's not necessarily related to.
The process, although the special Committee make guide us on that.
Really built around as our plan matures wanting to to keep guiding you all in the industry.
On.
What was the investment potential continues to produce in our eyes.
Thanks very much.
As a reminder is star one if you would like to ask a question.
Ladies and gentlemen that is all the time, we have for questions today I would like to turn the call back over to Mr. Bob <unk> for closing remarks.
Well I want to thank you all for joining the call today, we certainly appreciate your support for the company and for tuning in and I look forward to updating you on our next call and have a great day.
Ladies and gentlemen, this concludes today's conference call and we thank you for your participation you may now disconnect.
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