Q2 2023 Consolidated Communications Holdings Inc Earnings Call
Question. During this time, please press star followed by the number one on your telephone keypad. If you would like to withdraw your question simply press Star one again. Thank you.
I will now turn the call over to Philip Kranz Senior director of Investor Relations. Philipp you May begin your conference.
Good morning, and thank you for joining the consolidated Communications' second quarter 2023 earnings call. Our earnings release financial statements and presentation are posted on the Investor Relations section of our website at IR Dot consolidated Dot com.
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.
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 <unk>, President and Chief Executive Officer, and Fred Graffam, Our Chief Financial Officer.
Following their prepared remarks, we will open the call for questions I will now turn the call over to Bob.
Philip and good morning, everyone I will dive right into some of the key highlights from our second quarter.
First we achieved yet another record quarter in our consumer channel with over 18600 fiber net adds demonstrating strong growth of our <unk> fiber. This represents a 51% sequential increase for fiber net adds.
We achieved nearly 7000 positive total consumer broadband net add as fiber net adds have offset DSL declines. This increase in consumer broadband net adds is roughly seven times greater than the prior year and reflects a 190% sequential growth from the first quarter.
Third our consumer fiber Internet revenue grew 58%, which contributed to overall consumer broadband revenue growth of over 8%.
Fourth consumer broadband fiber our group is up five 1% and finally, our fiber churn continues to be low at one 3% we.
We continue to see favorable trends for <unk> fiber with record breaking monthly results in June we closed the quarter with 6600 fiber net adds and in July we set a new record of nearly 7300 fiber net adds in the month this ramp positions us to again exceed our record Q2 fiber net adds results.
In the third quarter.
In addition, we reached an agreement to sell our Washington State asset, resulting from the ongoing review of our market portfolio and supporting our commitment to focused fiber expansion in our core markets.
Moving to slide four I'll remind everyone of our journey, including the actions we are taking to solidify a return to growth in 2024, we are executing on a multi year transformation from a copper based telecom to a leading fiber broadband provider and there are plenty of proof points that demonstrate we are well on this pad.
I am more confident than ever that will leverage our operating expense structure as revenue grows and as our cost rationalization actions take hold.
We are targeting a mid teens EBITDA compounded annual growth rate of over the next few years. We also believe that our EBIT margins have long term upside to the mid to high 40% level as we drive highly profitable fiber penetration across the consumer commercial and carrier channels.
We've recently initiated a significant business simplification and cost savings initiatives to further align and focus our organization as a fiber provider generate.
<unk> drive improve margins and ultimately provide better customer service.
This effort includes resource optimization rationalization of our real estate footprint and a review of our product portfolios.
These actions are estimated to result in annualized cost savings of more than $30 million, resulting in improved EBITDA and margins beginning in the second half of 2023.
Our fiber investment thesis remains intact overall broadband usage continues to rise and consumers' desire for faster speeds and more reliable connections continues to increase.
These industry trends align well with our fiber product offering, which we believe is superior to cable and fixed wireless.
Currently offer symmetrical two gig speed and our technology is upgradable, even beyond our current 10 gig capability.
Put simply fibers future proved characteristics provide us with undeniable long term growth opportunities and we certainly are excited with what lies ahead.
As we've discussed in the past we benefit from several distinct structural advantages, including our incumbent position, we have a fiber rich carrier class network that we can cost effectively extend including existing conduit capacity for berry facilities and pole access where we have aerial plant. These network advantages provide us with favorable unit cost include.
Adding an industry leading cost of past operating a strong return on investment opportunities.
Now I'll update you on our fiber builds in the second quarter, we build fiber to over 57000 locations and remain on track to upgrade roughly 225000 locations during 2023.
We are approaching our build with a prudent measured pace for context in 2021 and 'twenty. Two we demonstrated that we can build efficiently and with speed. This allowed us to expeditiously reached 40% fiber coverage an important inflection point that supports consistent consumer broadband net adds and revenue growth.
As evidenced by our results. This is exactly what we are doing.
Our build strategy and pace is fueled by fiber penetration and government broadband partnerships all viewed through the lens of prudent liquidity management.
First and foremost we're focused on driving penetration across our existing base of over one 1 million fiber passing which provides support to fund additional fiber build.
With the leadership team previously announced and our refined go to market strategy, we've never been better positioned to drive increased penetration.
<unk> is the continued pursuit of grant or infrastructure funding opportunities that align with our plan and can be synchronized with fiber build activity and our communities.
These government funding opportunities helped to offset rural high cost passing allowing us to maximize the economies of our builds for a complete communities.
At this time, we are tracking approximately $110 million of additional broadband government partnership opportunities. This does not include any potential opportunities that come as a part of that $42 billion B program, which is still too early to project. However, we are working with the state broadband offices on their respective plans and believe.
The <unk> partnership opportunities across our footprint are quite significant.
As a reminder, we have been awarded roughly $160 million of broadband partnership and grant funding since 2019 across our markets. The positive reputation that we've earned from our previous success with public private partnership.
<unk> positions us well to pursue additional funding.
Given the uncertainty with the timing of awards under the <unk> process and the cost efficiencies, which come with building complete markets. We are currently evaluating the pesos for the next few years and are no longer projected to be complete in 2026.
We will continue to be diligent and nimble in our order to pursue government partnership opportunities with a focus on balancing the number of passing and cost efficiencies of our built.
Let's move to slide nine during our previous call, we outlined a comprehensive strategy to increase our fiber penetration.
We executed well on this strategy as evidenced by our record fiber net add activity in the quarter.
Our upward trajectory is fueled by the enhancements we've made to our go to market strategy and our re rally efforts with video fiber highlighting its superior value proposition. Additionally, we've continued to add consumer sales partners and door to door reps, which are now up six times since year end.
We continue to see more upside with sales channels optimization, as we scale, our door to door and agent resources.
Additionally, we have increased our weekend installed capacity and call center sales ability to meet demand and better serve our customers.
With these changes we are well positioned to continue to grow our video and fiber services.
Turning to our fiber cohort penetrations, we are seeing particularly strong performance across our newer cohorts in 2023, our Q1 'twenty three cohort had a penetration of 12, 2% in its first full quarter in our Q2 2023 card we have already achieved a penetration of nearly 9% are new rally plan.
By the team now in place is working.
Our cumulative Q2 'twenty one cohort is at 21, 5% at the two year Mark while our Q2 'twenty two cohort at the one year Mark is at 13, 4%. Although these older cohorts are slightly below our targets are re rally efforts are yielding positive results for example, where we've conducted.
Rally activities, we've generated double digit sequential increases in fiber net adds in the second half of the year, we will strategically accelerate our rebranding efforts across additional older older cohorts.
Turning to our commercial and carrier channels with nearly 59000 fiber route miles and over 14700 on net buildings. We believe we are the leading fiber based provider in the markets we serve.
Our deep breath of services, including fiber broadband connectivity and cloud based services allows us to deliver differentiated solutions to a wide range of customers.
During the first half of the year, we've been executing on our strategy to simplify product offerings enhance our go to market coverage and improve our speed to market to capture more businesses. Both on net and near net I am pleased with our progress within commercial data services, we're focused on driving growth for our core fiber product offerings.
A dedicated internet access and Ethernet connectivity.
With success in the fiber connectivity business, we expect to expand and grow our cloud voice security and SD Wan offerings in our enterprise markets.
We are also ramping sales of our fiber internet connectivity products, leveraging our symmetrical fiber network for small and medium businesses. These products include fit them at work, which we introduced last quarter for small businesses and fiber connect which serves larger smbs within SMB installs of our fiber internet connectivity.
<unk> are up nearly two times year over year.
We continue to make investments to increase our core network capacity, which benefits all three customer revenue channels, we will continue to leverage new fiber passing within our consumer outs, which provide us with opportunities to use that same fiber to grow both carrier and commercial data and transport services and we are focused on enhancing.
The visibility of our network and commonly used industry tools and databases, which allow nationwide carriers channel partners and customers to more easily identify the robust services consolidated can provide as well as the span of our lit buildings and fiber footprint.
We increased our on net buildings by 4% in the second quarter after normalizing for Kansas, which correlates to higher margins increased opportunity to up sell a greater ability to ensure the best customer experience and more opportunities for additional connections.
In summary, I am pleased with our continued momentum during the quarter. Our team is working with an unrelenting focus on driving fiber growth across the business, while simultaneously taking aggressive actions to improve our margins.
Now I'd like to address the industry wide matter regarding lead sheet cable first of all we take the health and safety of our workers the communities in which we live and operate very seriously based on the most current information we have we estimate less than 1% of the company's 100000 mile Copper network contains cable with <unk>.
Led cheating in fact, we have not installed led sheet cables for more than 50 years, we operate in rural and smaller communities, where infrastructure deployment. Historically happened at later dates thus many of our areas never handle that cable utilized we.
We have a history of and we'll continue following all applicable local state and federal environmental laws and safety regulations. We will continue to follow the science and work collaboratively with regulators the industry and our trade association to engage in constructive conversations on this topic.
I will now turn the call over to Fred who will provide more insights on our second quarter financial results Greg.
Thanks, Bob and good morning, I am pleased with the continued momentum we are seeing in the consumer fiber business as Bob mentioned, we have taken aggressive steps to simplify our business achieve efficiencies and lower our cost structure, which will support higher margins in the future.
Further our agreement to sell our Washington State assets for gross proceeds of $73 million reflects the company's continued focus on its fiber expansion plans and its core regions.
For further context, and Washington assets include Consolidated's incumbent networks in Ellensburg, and yellow and had revenue of approximately $21 million in 2022.
We expect the transaction to close in the second half of 2024 and attempt to use the proceeds to bolster our liquidity and fund additional fiber expansion.
Now I'll move to our operating results.
Total operating revenue for the second quarter was $275 2 million and adjusted EBITDA was $76 9 million.
Revenue in Q2 declined $8 5 million or 3% versus the prior year as normalized for last year's Kansas divestiture.
Approximately 75% of the decline of $6 $4 million was driven by lower overall voice revenue across the business. The remaining decline was driven by lower video network access and other products and services revenue, which was down mainly due to reduced recognition a public private partnership construction projects a year ago.
We continued to see strong growth in the consumer broadband business, driven by our <unk> fiber product, which offset some of the declines previously mentioned continued progress in our consumer fiber business is a key driver to achieve overall revenue growth in 2024 as discussed on prior calls we expect the decline in full year 2023, EBITDA principally due to sales of search.
Non strategic assets and lower legacy revenue.
The decline in reported adjusted EBITDA of $31 million for the quarter included $16 million for non strategic asset divestitures $10 million related to declines in the areas of voice video and access revenue $5 million.
Including higher marketing and advertising costs.
Now I'll review revenue by customer channel all of these revenue comparisons will be against normalized Q2 2022 results.
In our consumer channel total revenue was $112 1 million down one 3% compared to a year ago.
Consumer broadband revenue was $71 3 million up eight 4% with strong fiber revenue growth of 58% consumer fiber net adds were up 93% from a year ago as the adoption of <unk> fiber accelerates.
For the quarter, we delivered record broadband fiber net adds of 18651 with our fiber coverage now at 43%. We are clearly executing on our fiber expansion plan.
Consumer fiber <unk> was $68 29 in the second quarter up five 1% year over year, and one 2% sequentially due to speed mix as customers continue to take higher speeds of our fiber services or.
Our gig plus speed mix is up 15 percentage points on a year over year basis.
Included in that mix is a growing interest in our two gig product.
Consumer voice revenue was $31 4 million down $4 8 million or 13, 2% largely due to continued erosion of access lines.
Video revenue was $9 4 million a decline of $2 3 million or 19, 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.
Commercial revenue was $95 8 million down $2 6 million or two 6% Dave.
Data services revenue was $53 2 million up eight 5% year over year.
Growth areas in this channel continued to be dedicated internet access up 16% and SD Wan, which is up 36%.
Voice services revenue was $32 2 million down $2 2 million or six 4% 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 $10 4 million down $600000 largely due to a decline in sales of business systems equipment.
Carrier revenue totaled $35 8 million down $1 2 million or three 2% versus the prior year.
Carrier data and transport services revenue was $31 2 million down $1 7 million or five 1% from last year in the second quarter, our carrier transport revenue declines reflect the impact of churn and pricing step downs in the fiber to the tower business as discussed on prior calls.
For the full year 2023, including the timing of churn and pricing step Downs, we now expect a revenue reduction of between five and $10 million for the gear once.
Once we are beyond the large fiber to the tower renewals. We believe we have an opportunity to grow our carrier business through capacity upgrades for our wireless and wholesale customers, adding new tower connections and expanding sales focus to include a broader set of wholesale customer targets.
Wireless tower connections under contract totaled 3864 down 4% versus last year reflective of the aforementioned churn network access revenues totaled $22 7 million.
Down $1 7 million or six 8%, primarily due to declines in special access circuit revenue as carriers move from Tdm to Ethernet based transport solutions the.
The decline was partially offset by an increase in end user access revenue due to an increase in the state and federal USF factors.
As a reminder, the USF revenues are a pass through.
Cost of services and products expense declined $8 9 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 access costs related to prior year PPP.
These costs were partly offset by an increase in required contributions to the federal and state Universal service funds.
Utility and fuel costs also increased in the current year.
Selling general and administrative expenses increased $8 $1 million versus GAAP results last year and included higher marketing and advertising expenses to drive growth and additional costs related to professional fees for customer service and process improvement initiatives for our fiber broadband products and.
In addition employee labor cost increased from the prior year due to additional sales resources. These increases were partially offset by a decline in property and real estate taxes in the quarter.
Net interest expense was $36 9 million, an increase of $6 7 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 $164 million for the second quarter, including in our Capex spend was $50 million of build capex for passing is constructed and released $9 million of build capex for construction and process.
$7 million of core Capex, which supports all of our business lines and is not included in our cost per passing.
$17 million related to an increase in our construction and CPE inventory.
$50 million of success based capital for our consumer and commercial businesses. The split between success based capital is approximately 60% consumer slash SMB and 40% business and carrier.
Please note that consumer success based capital relates to both fiber and copper installs includes capital related to other consumer offerings and includes a modest approximately 10% allocation for indirect costs.
Finally, the second quarter capital included $31 million for obligatory and digital transformation for the quarter, our obligatory capital was elevated in part due to seasonal infrastructure projects, which drive incremental plant costs such as road moves.
We continue to maintain considerable build in CPE inventory on hand, due to previously committed inventory purchases such purchases were highly weighted towards the first half of the year and are expected to benefit us in future quarters.
As of June 30, we maintain sufficient inventory to execute on a significant portion of our customer growth and build plans for 2023 and 2024.
For our build our average cost to pass in Q2 was approximately $865 driven by the timing of building certain rural areas for the quarter.
For the full year of 2023, we estimate our average cost per passing to be approximately $780 and our life to date cost per passing to be $660.
We continue to target an average direct cost to connect into $750 to $800 range.
We experienced higher than anticipated over time due to the significant acceleration of <unk> installs in the recent quarter, which is pushing up our cost per installation.
To mitigate this increase we are implementing efficiency measures to reduce the cost per install including rigorous review of installation metrics monitoring the use of wireless extenders and improving our process for drops.
Moving to our capital structure. The company recently entered into a new three year interest rate swap agreement for $500 million of its term loan debt commencing upon the termination of its previous swap agreement.
Including the new swap agreement the company has 77% of its total debt at a fixed rate through September of 2026.
Further our $1 1 billion of senior notes have fixed coupons. Our overall average cost of debt is $6, 72% up from $6 six 1% in the first quarter.
We maintain cash and short term investments of approximately $203 million with $215 million of available borrowing capacity on our revolving credit facility subject to certain covenant ratios.
Our net debt leverage was 555 turns at June 30.
Now I'll comment on our 2023 outlook, we have no changes to our previous ranges for adjusted EBITDA cash interest expense and cash taxes.
With regard to adjusted EBITDA, our outlook reflects an improved second half of the year as consumer fiber revenue growth combined with the impact of previously mentioned cost savings measures taking effect.
We are now updating our outlook for capital expenditures, which are now expected to approximate $495 million.
Largely due to higher expected year end inventory balanced and reflected in our prior guidance.
This inventory is expected to benefit our 2024 capital outlook and is utilized for customer acquisition and build activities for 2023, our capital allocations are approximately 37% supporting the fiber build 37% supporting success based opportunities and 26% of our obligatory digital transformation initiatives and <unk>.
Inventory growth.
For success based capital to split is estimated to be 60% for consumer SMB fiber and 40% for commercial and carrier.
Now I'll turn the call back to Bob.
Thank you Fred I'll briefly comment on the take private proposal from Searchlight capital in British Columbia investment management that we received on April 13.
Special Committee, consisting of independent directors of the board is discussing a proposal with the bidders we are unable to comment any further at this time as the process is ongoing and there can be no guarantee as to the outcome of such discussions.
Finally, I'd like to reiterate our transformation to a fiber one broadband company is as strong as ever and I'm pleased with the significant progress being made on many fronts. In addition to driving fiber sales across all three of our revenue channels, we're taking meaningful actions to focus the company on our core markets.
<unk> the business and remove costs.
Accordingly, we will continue to execute against our strategic priorities for the year, including increasing fiber penetration across our three customer groups delivering an improved customer experience as demonstrated by higher NPS scores and driving operational efficiencies.
With consumer broadband fiber net adds of nearly 7300 in July we're looking to continue our momentum in the third quarter.
Operator, we will now take questions at this time.
Thank you at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad will pause for a moment to comply compile the Q&A roster.
Your first question comes from the line of Michael Rollins of Citi. Your line is open.
Thanks, and good morning, just a few follow ups if I could.
First.
I appreciate that you mentioned youre not able to discuss.
The process of the.
The review that you're doing.
With the letter that you received from search site, but can you just provide maybe an update on.
Just timing or background about how.
That type of review may or may not be affecting other decisions that the company may need to make whether it's from an operating perspective, a strategic perspective.
Yes, Mike.
Good morning, and it's Bob.
I appreciate the curiosity, but I really I really can't.
It's a matter that the special committee and search site deal with unfortunate.
Recused from from that.
I'm focused on the long term sustainability of the business and.
So with having achieved over 43% addressable fiber base.
We've got a really great plan.
Platform to sell into.
And so I'm focused on.
Operating within the things I can control and and.
And have access to.
And maybe just following up on that as you look at the program that youre going to deploy in the back half of the year to improve cost can you talk about what youre doing with some of those initiatives.
As you look to grow revenue from these fiber investments over the next number of years, how should investors think about the operating leverage associated with that revenue growth in terms of how much of that revenue can fall to the EBITDA line.
Yeah, Yeah, so firstly talking about a little more context on the on the costs that we that we referred to that were taken out of the business keep in mind that we are divested of some noncore assets over the last few years. So this is a <unk>.
Big part of this was just <unk>.
Right sizing the cost base, whereas some of those divestitures in prior years. So we were.
Some cases, we have transition services agreements that we have to support the businesses.
We're largely beyond those things at this point so from the from the perspective of the cost takeout. So it was just time with respect to the ongoing leverage of the business I will say that fiber is a very high margin product on an incremental basis. So as we as we think about <unk>.
Driving revenue fiber revenue in the future a very large portion of that will drop to the bottom line and drive improved EBITDA margins.
Okay.
Thanks.
Okay.
Again, if you would like to ask a question Press Star then the number one on your telephone keypad.
One moment please.
There are no further questions at this time.
I would like to turn the call back over to Mr. Bob <unk>.
Thank you.
Sarah and I appreciate the opportunity to report out to you. It's a very exciting time for our business with the consumer revenue now.
Positive and inflection points that we expected this time of the year our way.
And this year on our way ahead of two four.
Revenue positive in 2024. These inflection points are consistent with our plan and have us very excited as we move into the second half of 2023. So thank you all for tuning in today and I look forward to updating you on our next call have a great day.
This concludes today's conference call. Thank you for joining you may now disconnect your lines.
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