Q3 2023 Shenandoah Telecommunications Co Earnings Call
Good morning, everyone welcome to Shenandoah Telecommunications third quarter 2023 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 financial.
Planning and analysis for Centel.
Good morning, and thank you for joining us.
The purpose of today's call is to review <unk> results for the third quarter 2023.
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 <unk>.
Ww Dot Centel dot com.
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.
Mkay Executive Vice President and Chief operating Officer, Jim Volk, Senior Vice President of Finance and CFO.
After our prepared remarks, we will conduct a question and answer session.
I 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 these statements.
Four 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.
Except as 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, Kurt we appreciate everyone joining us this morning, and I hope everyone is well.
Today, we're planning to discuss our third quarter financial and operating results, excluding the results and impact of the Horizon Telecom transaction, we announced last week unless expressly noted.
Our respective teams are very excited about this transformative combination and have already started work on obtaining the necessary approvals and doing early stage planning for the upcoming integration.
We will have more to share in future earnings calls.
I'll now turn to the highlights of our third quarter results.
We continue to make solid progress in executing our glo fiber growth plan.
As noted on slide four we added almost 20000, new glo fiber passes in the third quarter.
We increased passing 55% year over year and crossed the 200000 milestone during the quarter.
Our glo fiber past things are now almost the size of our cable market passengers as.
As we approach our fourth quarter of launching our first glo fiber market in November we will have doubled the size of our broadband business in terms of passing.
With Horizon Telecom acquisition expected to close in 2020 for an accelerated construction anticipated across all of our markets. We expect to double the broadband passenger again by the end of 2026.
Moving to slide five our sales team added over 4500, Glo fiber data subscribers in the third quarter and as Brian the <unk> fabric customer base by 77% over the past year.
Similar to the high growth in broadband passing we've grown total broadband data subscribers by 78% since the third quarter 2019.
Track record over the past four years provides confidence for us to grow our broadband data subscriber base at similar growth rates in the next three to four years.
Expand our glo fiber network.
As reflected on slide six the growth in broadband data subscribers has driven steady expansion our consolidated adjusted EBITDA margin year over year since 2019, when we launched glo fiber.
The key catalyst for the margin improvement are the combination of extremely scalable fiber networks, which are driving incremental high speed data gross margins of more than 80% and our ability to gain scale in our selling general and administrative expenses.
We expect margins to continue to expand as we execute our glo fiber growth plan and closed our acquisition of RASM.
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 I will start with our board and financial results for the third quarter 2023 on slide eight.
Broadband revenue grew $5 1 billion or eight 1% to 67 4 million.
<unk> fiber revenue was the primary catalyst growing four 4 million were 90% from the prior year period with strong customer growth and a five.
One 8% decrease in data subscribers.
Cable market revenues, excluding the impact of our discontinued <unk> service.
300000, or 7% due primarily to a 1% growth in data subscribers.
Commercial fiber revenue grew 900000 or nine 4% to $10 4 million Q2, 500000 in recurring revenue from certain growth.
And 400 down the nonrecurring early termination fees related to backhaul disconnects in the quarter.
As previously announced T mobile is planning to shut down portions of the former sprint network and disconnected 71 backhaul circuits during the third quarter.
We expect we expect approximately 80 additional backhaul disconnects as part of this network rationalization.
Broadband adjusted EBITDA grew 19, 4% to $26 6 million in the third quarter when compared to the same period of 2022 due to revenue growth by $2 1 million, partially offset by 700000 and higher advertising expenses to support the glo fiber expansion.
As Chris mentioned earlier, we continue to see the benefits of operating leverage of our global fiber business.
<unk> brought the cost of service increased only $100000, despite adding 15000 customers over the past 12 months.
On slide nine tower segment revenue was in line with the same period 2022.
We have not recognized any churn from T mobile year to date.
We have received notices that they plan to terminate.
53 leases as part of the previously announced decommissioning of the former Sprint network.
They walk agreement with T mobile that allow T mobile to terminate leases with only a $10000 termination fee ended on September one.
These 53 leases will continue to generate rental revenue until all required equipment is removed from the lease property and inspection notices issue.
We expect our rental revenues could continue for up to two more years for a portion of these leases.
Of the remaining T mobile tower leases have an initial term ending in 2029 with optional lease extensions to 2014.
Power adjusted EBITDA declined 400000, due primarily to the accounting associated with the transfer of our cable literally tower to the broadband segment and termination of the related intercompany ground lease.
Moving to slide 10, consolidated revenue grew seven 3% to $71 8 million in the third quarter.
Sure.
Broadband.
Consolidated adjusted EBITDA grew 25% to $22 9 million also due to the growth in broadband.
We have $286 million of liquidity as of September 30, as displayed on slide 11.
This liquid liquidity position position does not include the incremental committed financings related to the Verizon transaction.
Negative free cash flow for the nine for the first nine months of 2023 was $23 million more than prior year due primarily to increased investments in expanding glo fiber and government subsidized construction uncertainties.
We offset by $29 billion in income tax and sales tax refunds received in 2023.
Please also note we received $17 million in proceeds from the closing of the two gigahertz spectrum sale in July that is reported separately from capital expenditures and the cash flow from investing activities.
As reflected on slide 12, our outstanding debt was $150 million as of September 30, we.
Have no significant debt maturities until 2026.
We expect to draw the remaining 150 million of delayed draw term loans in the fourth quarter for the terms of our credit agreement.
And now I'll turn the call over to Ed.
Okay.
Thank you Jim and good morning.
I'll start on slide 14, with an update on our rapidly expanding integrated broadband network. Now consists of over 9300 route miles of fiber.
In the third quarter, we launched two new Glo fiber markets, and Hanover County, Virginia, and Greencastle, Pennsylvania, and we now offer glo fiber multi gigabit service in 21 markets with engineering and construction underway in four additional markets.
We also added five new franchise agreements in the third quarter to bring glo fiber to over 40000, additional homes and businesses, including the city of Lancaster, and additional boroughs and townships adjacent to our existing markets in Pennsylvania.
Turning to slide 15, our total number of approved Glo fiber passing has grown to 519000 with 70 franchise agreements in 23 markets across five states.
In addition, we continue to have success with government Grant awards in the third quarter, we were awarded $2 $6 million in grants to bring broadband to approximately 1000 additional unserved homes adjacent to our cable systems in West Virginia.
We've now been awarded a total of approximately $90 million in grants that will enable us to extend broadband over 28000, unserved locations, primarily through fiber to the home technology.
Our engineering and construction teams continue to deliver in the third quarter with the addition of over 20000, new fiber passing bringing our total to over 203000, including approximately 1000 that are part of government subsidized projects.
In addition, our construction backlog remains very robust with 340000 incremental passengers approved for construction.
Our construction pace is dependent on other utilities to process pole attachment permits and locate existing underground facilities.
In some cases the industry wide high volume of broadband deployments is causing delays for both permitting and locates. This is a risk we're monitoring closely and actively working with our utility partners to mitigate and we expect to finish the year with approximately 235000 total fiber patterns.
As we wrap up glo fiber construction, we continued to see strong customer growth as shown on slide 16.
As Chris mentioned, we saw glo fiber data customers increased 77% year over year, ending the quarter with over 37000.
We've added over 16000 broadband data customers in the past year, and our penetration rate climbed to 18, 5% in the third quarter up from 16, 1% a year ago.
Our total number of data video and voice revenue generating units has reached 46000 up approximately 68% year over year.
Our broadband data average revenue per user increased by five 8% year over year and reached $77 for the quarter.
This was driven by a combination of additional equipment revenue and customer selecting higher speed tiers.
For the quarter, 47% of our new residential subscribers adopted speed tiers of one gig or higher including approximately 4% that took speed tiers of two gig or higher.
Hello, TV video service is now available to over 99% of the homes that we passed at the end of the third quarter approximately 11% of our total glo fiber customers subscribe to a video service and approximately 12% subscribed voiceovers.
And finally, our churn continues to remain very low at one 1% an improvement of 10 basis points over the third quarter of 2022.
We continue to focus on providing the fastest speeds in our markets outstanding local customer service and fair straightforward pricing.
We recently surveyed almost 3000 glo fiber customers and we were very pleased with our net promoter score of 61.
As comparison, many broadband providers are in the single digits or even in the negative range.
In addition over 82% of our customers indicated that they are already recommended glo fiber to a friend or family.
Moving to slide 17, we highlight our data penetration rates as our markets age.
All of our cohorts continue to see steady increases quarter over quarter.
Our third quarter 2022 cohort has already reached 18% penetration after one year and we're seeing penetration rates above 30% after three years.
Our oldest cohort launched in late 2019 is now quickly approaching our target average terminal penetration rate of 38%.
Let's move on to our operating results for our cable markets on slide 18.
Broadband data subscribers had a slight increase year over year remained flat quarter over quarter and ended the third quarter at about 109000.
Our total revenue generating units decreased by about 3% year over year as we continued to see declines in video service and residential voice service due to cord cutting.
Our data penetration decreased slightly year over year from 51, 5% to 51, 3% at the end of the third quarter.
Although we saw a slight increase the number of broadband data subscribers year over year. We have also added almost 500, new passengers over the past year.
Broadband data churn was 174% for the quarter and fairly consistent year over year, despite over builder activity in some markets that we previously disclosed.
We've increased broadband speeds and all of our markets, giving customers higher speeds and more value for the same price.
As we are proactively move customers to higher speeds, we've been able to maintain our <unk>, which is up 1% year over year to approximately $82 in the third quarter of 2023.
Okay.
Turning to slide 19, we highlight our broadband enterprise and wholesale commercial fiber business.
During the third quarter, we booked new sales with lumpy revenue totaling approximately $75000.
This is a decline versus third quarter of 2022, however, our year to date 2023, new sales bookings are in line with 2022.
We also installed new services totaling almost 98000 and incremental monthly revenue in the third quarter, which is about 10% higher than our average over the past four quarters.
Third quarter 2022 was elevated primarily due to the installation of a major E rate customer generating over $27000 in monthly revenue.
For cell site backhaul connections T mobile continues to reduce the number of circuits as part of their sprint network rationalization project.
Over the past year, they removed 289 connections and as Jim mentioned, we expect approximately 80 additional disconnects.
The remaining cell sites are under long term contract.
Our engineering and operations team continues to provide a quality network experience for our customers and excluding the T Mobile network rationalization.
Churn and revenue compression for the commercial fiber business decreased year over year to 0.3% in the third quarter.
Turning to slide 20 in our tower segment, we ended the third quarter with 446 total tower tenants and approximately two tenants per tower.
Our third party tower tenants remained constant at 436 however.
However, our intercompany tower leases decreased from 21 to 10, as we turned down beam fixed wireless sites in 2022.
As Jim mentioned, we do expect T mobile to eventually reduce the number of tower leases as they complete their sprint network rationalization project.
And finally, our total number of towers decreased to 220, as we decommission two non revenue towers.
Our capital spending guidance for the year as reflected on slide 21.
We've invested approximately $190 million in capital projects year to date the.
The significant increase year over year was driven by the ramp up of construction of our glo fiber markets and the Unserved markets, where we won government grants.
We've invested approximately $18 million in government subsidized projects year to date, and we expect to be reimbursed for approximately 50% of these costs as we complete construction.
For Glo fiber, we've invested almost $140 million year to date, including approximately $127 million for engineering, and construction and $13 million to connect new customers.
For the full year, we have lowered our capital spending guidance to a range of $243 million to $258 million, primarily due to fewer new fiber passing in government subsidized projects and glo fiber markets than originally planned for the year.
In addition, we were able to postpone some planned cable system capacity upgrades, while still increasing customer broadband speeds in our cable markets.
Thank you very much and operator, we're now ready for questions.
Thank you as a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby, while we compile the Q&A roster.
One moment for our first question.
Yes.
Okay.
And our first question comes from Frank Louthan of Raymond James.
Great. Thank you can you kind of sum up sort of the tower outlook.
It seems like you're getting a little bit more fees and the shutdowns and so forth and things, taking a little longer where does that get us kind of from a quarterly run rate going forward whats the expectation there.
Then on the.
Horizon deal I think you need about $250 million or so.
To finish the funding you are looking at from possibly a tower sale what are your options for financing that.
Yes, yes.
You don't get the tower sale or it comes up short would you look at the ABS market or anything anything like that thanks.
Okay.
Yes, Frank I can I can jump in on the dose.
Yes.
We haven't seen any churn yet from T mobile on the tower leases.
They had given us proper notice under this pain block agreement that ended September one for 53 leases that they plan to terminate.
The timing is uncertain as to exactly when those leases will be terminated but based upon recent conversations that are keys at the den it sounds like this could be a more of a gradual.
Churn or disconnects.
Then what we're seeing on the backhaul side. So so my expectation is we'll probably see some of these leases continue for up to maybe two more years based upon some of these conversations.
And as you can see in our quarterly results.
Yes.
Sure.
Were doing about $3 million of adjusted EBITDA.
EBITDA quarter about $12 million annually.
<unk> three leases translate to about $2 2 million in revenue churn when they are all fully.
Turkey had terminated so I hope that answers your first.
First question.
Okay.
Okay great.
And then as far as for the additional capital.
Growth capital that we need to.
To fund our business plan post acquisition of Horizon.
Multiple sources that we can look at ours is one of the sources, we are going to explore.
But the ABS market as you mentioned is another source.
Would be would be appealing to us, especially as our growth Glo fiber markets. We are now getting several markets kind of go above that 2025% penetration level, which would make them attractive candidates for for.
For the for the ABS financing.
We have to be also mentioned our current credit facility. The first maturities occur in June of 2006, so by.
Early 'twenty five were likely be begin conversations to refinance that facility and that can also provide some additional capital.
So we have several sources of how we how we can achieve our growth capital funds.
<unk> alright.
Alright Thats great.
Last question. So the capex lowering this year or is that just kind of deferred into next year, how should we how should we think about that.
Yes, you are correct, we ran into some delays as Ed mentioned on especially on the on the.
Subsidized builds.
In getting access to some of the polls in just getting some of the locates dawn to locate facilities before we do underground construction.
And that has had a cumulative effect here that we're not likely to get as many passing storm in that area. This year, but we hope to catch up in 'twenty four.
And anything on those those items does that going to continue or was that a temporary slowdown or is there something about the.
The co ops or whatever that owned the polls of the locate guys that.
That's going to make that an ongoing problem or has that been addressed.
Yes. This is Ed.
A volume issue for these folks I think we will continue to see some short term challenges, but even with this we're projecting roughly a 25% increase in a number of fiber passes between 2022 and 2023. We think we can continue to scale, particularly as we ramp up construction and some additional market. So.
We're continuing to have some challenges there, but we think we can still grow grow the number of passengers even with those.
Can you mitigate that with some of your vendors by.
Given them some commitments or something ahead of time to devote some divert some resources or is it just.
In small town America.
So in our case here, we have the materials, we have our own construction crews ready to do the work that's not where the issue is it's with the actual the other utility companies, they're having trouble getting resources to do their.
Permitting work for the polls and then they're located for the underground facilities. So in some cases were able to mitigate that by paying overtime work for our overtime for the locators that are located in underground facilities. For example, we're also working.
Some cases to do.
Call self remedy, where we're able to adjust the.
Other telecommunications facilities on the Poles.
So we're working on ways to mitigate that but.
That's something that we're gonna be dealing with the next Youre plus.
Yeah, Okay. Good deal thanks, guys.
Thank you one moment for our next question.
And our next question comes from Hamzah <unk> of Dws financial.
Hey, good morning, just on the topic about.
This.
Capex shifts.
<unk> and so forth.
Would you be putting more investment into getting penetration rates up into the markets that you've already established a connected or you just really.
We are focused on the capex.
Moving forward maybe next year.
No.
So we're very focused on increasing the penetration in our existing markets.
That's the primary goal of our sales and marketing teams. So we are definitely focused on that area.
And how does horizon fit into this.
So youre planning scope for next year.
Given that Youre doing everything below the marketing involved is there any form of distractions, where I'm trying to get to.
So we'll be using a separate engineering and construction team in the horizon market. So we don't feel that that will be a distraction from the current.
Construction, we're doing in the low markets.
Okay very good thank you.
Okay.
Thank you I'm showing no further questions at this time I would like to turn it back to Jim Volk for closing remarks.
Thanks to everyone for joining us today and have a great day. Thank you.
This concludes today's conference call. Thank you for participating and you may now disconnect.
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