ATN International Inc (ATNI) 2022 Q3 法說會逐字稿

Good day, and thank you for standing by. Welcome to the ATN International Third Quarter 2022 Earnings Conference Call and Webcast. (Operator Instructions) I would now like to hand the conference over to your speaker today, Mr. Justin Benincasa, Chief Financial Officer of the company. Please go ahead, sir.

Great. Thank you, operator, and good morning, everyone. Today, we'll be reviewing our third quarter 2022 results -- earnings results. With me here is Michael Prior, ATN's Chief Executive Officer. Michael will be providing an update on our business and strategy as well as high-level overview of our quarterly results. I'll cover the relevant financial information and provide additional color where necessary. As a reminder, we released our third quarter earnings press release last night after market close. Investors can find the release and summary slides with the call on our Investor Relations website. Before I turn the call over to Michael, I'd like to point out that this call, our press release and slides contain forward-looking statements concerning our current expectations, objectives, and underlying assumptions regarding our future operating results.

These statements are subject to risks and uncertainties that could cause actual results to differ materially from those described. In an effort to provide useful information from investors, our comments today include non-GAAP financial measures. For details on these measures and reconciliations to comparable GAAP measures and for further information regarding these factors that may affect our future operating results, please refer to our earnings release on our website at atni.com or to the 8-K filing provided to the SEC. And I'll now turn the call over to Michael for his remarks.

All right. Thank you, Justin, and welcome, everyone. The third quarter of 2022 was another good quarter for ATN, one where we serve our customers well and advance our strategic broadband buildout, and made excellent progress toward our 3-year growth objectives. For example, we grew the homes passed by our broadband networks to about $614,000 at the end of the quarter, which was 9% higher than a year ago. Of this amount, we added about 29,000 new homes passed by fiber or other higher-speed solutions. Our ongoing network investments are also reflected in our subscriber levels.

As of September 30, 2022, 54% of our 205,000 broadband subscribers were connected to our higher-speed networks. That represents an increase of nearly 13% year-over-year. Other metrics we track as part of our 3-year plan are also showing good progress. For example, we ended the quarter with 356,000 mobile subscribers in our International segment, up about 9.5% from a year ago as a result of our sales and marketing efforts and investments. Both in the Caribbean and in the U.S., most of our expansion work is in markets that we believe will continue to benefit from growing demand and positive secular tailwinds, putting us in an excellent position to benefit from this growth and to help enable it as we provide these communities with the connectivity capabilities that will help them thrive. Towards that end, our efforts in the U.S. to reach many traditionally underserved communities were bolstered by some great wins in securing critical federal funding.

Since July, we have been named recipients or sub-recipients for roughly $144 million in awarded grants. As part of our Alaska fiber optic project, we were jointly awarded 2 grants, each with an Alaskan Native Corporation for a total of about $103 million. Working with our partners, we plan to utilize this funding to connect household, healthcare facilities and schools and 25 communities across Alaska's rural Yukon Delta region through affordable high-speed Internet for the first time. Beyond the clear economic benefits to our business, these collaborations billed the potential to deliver transformative change for better living conditions and outcomes in these previously unconnected communities. In the Lower 48, we have been awarded $41 million in federal funding since July of this year, inclusive of the grand we announced last quarter for $10 million to connect homes and communities in the Southwestern U.S. This will be spent to connect thousands of homes in many schools, businesses and healthcare facilities to advance high-speed services, and we anticipate applying for and winning additional grants and other funding support in the coming quarters. And we view this as a nice complement to our core efforts to execute our U.S. strategy.

Now before turning to our quarterly results, I would like to first take a moment to discuss the current economic and financial climate. While we are closely monitoring developments, we remain confident in our market-leading positions as well as our overall business prospects. Along our way to becoming a leading connectivity provider to smaller markets and traditionally underserved segments, we have acquired highly valuable experience investing in as well as building and operating network-based businesses. As part of this progression, we've managed our operations through multiple business cycles and events as well that had significant economic impacts on the markets we serve. So while we take the recent economic developments and prospects seriously, and we will adjust as we need to, it's worth noting why we believe we are well-positioned to continue moving forward and generating value for our stakeholders.

First is our differentiated model and strategy. We provide essential communication services to rural and remote markets than most other operators have historically avoided serving. By building out the necessary capabilities to support this market entry strategy, we have secured high recurring revenues, durable cash flows, sticky customer relationships, and a strong competitive footing as well as other favorable business attributes. And we believe demand for our services will remain high across all our markets. Second is our sound financial and capital allocation strategy. While we invest in those areas that we believe are attractive from a risk-adjusted perspective, we also maintain a strong balance sheet underpinned by high recurring operating cash flows and limited non-discretionary capital expenditures.

This provides us with significant flexibility in our capital spending and allocation decisions. Based on market conditions and opportunities that arise, we are able to speed up slow down or change, the network build-out in our 3-year plan. Similarly, we have the ability to be opportunistic in accessing capital and capitalizing on new growth opportunities or alternatively, to add to shareholder value in other ways. While this flexibility is compelling, we believe, in all market cycles, it is a particular relevance today given the current business plan. Third, but not least is our high-quality leadership team, both at the parent and subsidiary levels, we have a leadership team. Teams that are operational experience across multiple market cycles, and of course, the added benefit of seasoned managers and staff working with them. We are proud of the culture we've built here at ATN over the past 30-plus years and consider it to be a critical strategic asset.

So now for a brief overview of our quarterly results before Justin provides a deeper dive into our financial performance. In the third quarter, we grew total revenues by 9% and adjusted EBITDA by 14% year-over-year. This was driven by positive results across both of our operating segments, including a strong performance in Alaska, fiber and broadband customer additions and mobile subscriber growth. Consistent with the past, we continue to leverage cash flow durability from our more mature businesses and to reinvest those proceeds in other markets that are earlier in their growth cycles as well as in the existing network infrastructure upgrades. The healthy growth in our international mobile subscribers and revenue I noted earlier is a nice success story, and we expect to see that positive momentum carry forward as our improved sales and marketing capabilities and completed network upgrades bear fruit.

We are steadily expanding our broadband subscriber base and state-of-the-art communications infrastructure, both domestically and internationally. In the U.S., as I mentioned at the top of the call, our multiyear network expansion strategy is benefiting from new sources of federal funding, which took both economic value and social benefits for all involved stakeholders. We are proud to be working with our partners, both in Alaska in the Southwestern U.S. to help bridge the digital divide. Of note, our last in operations performed well in the quarter, with a substantial top-line contribution and strong operating cash flows. While we continue to see resilient demand in Alaska for our Enterprise and Wholesale solution, we also have made initial inroads to provide fiber-to-prem services to select markets in the state. This initiative is still in its early stages, and we look forward to updating everyone on its progress in future quarters.

So in summary, we delivered good results in both the U.S. and international markets during the third quarter. We remain committed to being first to fiber in those markets that are aligned with our established criteria and where we believe we can propose to sell strong first-mover advantage. In addition, we continue to prioritize building and owning modern core digital communications infrastructure, consistent with our glass and steel strategy. Most importantly, as we execute towards these 2 strategic objectives underpinning our 3-year plan, we are also steadily expanding our overall broadband network and subscriber count. And while that gives us confidence in our long-term growth targets as well as our core financial objectives for the full fiscal year. Our financial position allows us to be flexible in the execution of our strategies as we look to maximize value for shareholders. And that's it for now.

I'll hand it over to you, Justin, for financial results.

Great. Thanks, Michael. We delivered a solid financial performance in the third quarter of 2022. During the period, total consolidated revenues were $182.2 million, up 9% year-over-year. Operating income was $1.4 million, improving from an operating loss of $1 million last year. And adjusted EBITDA was $41.9 million, up 13.8% year-over-year. These improvements were mainly driven by the addition of a full quarter of Alaska Communications results compared to a partial quarter last year and the improved operational performance in Alaska on a pro forma full quarter basis. Notably, we also continue to see strong subscriber growth in other markets as we make significant network and operational investments and continue to execute on our 3-year strategic growth plan. Now turning to our segment breakdown. In the International segment, revenues were $90 million in the quarter, increasing 6% year-over-year.

This growth was the product of higher mobile and broadband subscribers and the associated revenue, partially offset by a scheduled step down in federal high-cost support subsidies for the U.S. Virgin Islands. For this segment was $27.9 million in the quarter, up 3.7% year-over-year, driven by subscriber growth as well as operational investments in customer acquisition, additional backhaul capacity and increased resiliency to support our higher mobile and broadband revenue in the segment. In our U.S. segment, revenues were $92.2 million in the quarter, up 13% year-over-year. During the period, business and carrier services accounted for approximately 70% of the segment services revenue. In line with our consolidated performance drivers, the increase in segment revenues was mainly due to the addition of a full quarter of Alaska's results compared to a partial quarter in the same period a year ago, along with solid organic revenue growth year-over-year. Consistent with our expectations, year-over-year revenue growth in the segment was partially offset by a reduction in legacy wholesale wireless revenues.

FirstNet construction contributed $3.3 million to the segment revenues in the quarter. We've completed approximately 70% of the site and now expect to complete 75% of the build by the end of 2022 versus our prior forecast of 85%. This is mainly due to the timing of permitting and approvals as mentioned in prior quarters. Adjusted EBITDA for our U.S. segment was $21.9 million in the quarter, up 33.6% year-over-year. This increase was mainly due to the same factors which led to the higher segment revenues in the period. Net loss in the third quarter was $2.8 million or a loss of $0.25 per share compared with a net loss of $2.6 million or a loss of $0.22 per share in the same period a year ago. We reported $38.9 million in CapEx spending for the quarter. That includes $19.3 million in our U.S. segment and $19.4 million in our International segment.

Now turning to our balance sheet and cash flows. We ended the quarter with total cash and cash equivalents of $77.8 million. In addition, for the first 9 months of the year, net cash provided by operating activities was $79 million compared with $47.7 million a year ago. Year-to-date, we utilized approximately $36 million of cash to fund various working capital items, including prepaid circuits and inventory as well as to reduce payable and accrued balances. At the end of the third quarter, our total debt outstanding was $355.6 million. This amount includes $220.6 million on last communications balance sheet and excludes $43.5 million related to the FirstNet customer receivable financing facilities. With a consolidated net debt-to-EBITDA ratio of under 2x, including both nonrecourse and parent-level debt, we maintain strength on our balance sheet as well as flexibility in our financial strategy, as Michael spoke to earlier in his remarks.

In summary, we delivered solid financial results in the third quarter and our outlook for the full fiscal year remains unchanged. We're benefiting from our established leadership across our markets as well as from our ongoing network expansion, network upgrades and subscriber base increases. As we consistently invest in line with our 3-year strategic growth plan, we're also building out our foundation in setting up ATN well for the long term. We look forward to continuing to deliver value to all stakeholders across our operations and updating everyone on our progress going forward. Thank you, everyone. That concludes my prepared remarks for today.

I'll turn the call back to Michael for his closing comments.

Thank you, Justin, and thank you, everyone, for joining us. We're excited about the future, given the essential nature of our offering, the quality and growing reach of our network and the early-mover advantages we're enjoying an underserved community. And lastly, the financial flexibility we have within our control. Now I'll turn it back to the operator for questions.

(Operator Instructions). First question go ahead is coming from Ric with Raymond.

A couple of questions. First, obviously, you guys are trying to help out rural, remote areas. You've gotten a couple of grants now federal grants in Alaska. Help us understand social benefits clear. Help us understand the economic value to you all. What do these grants imply? Is it -- and you spend CapEx and you get reimbursed CapEx, you get it through service revenues and the timing. Help us understand how we should think about you're announcing these grants and how we should be modeling it and thinking the economic value add?

Yes. Okay. Thank you, Ric. So the grant. So first thing, as we've said previously, I want to note is that the grant size, and I think you're getting this with the question does not translate directly and immediately in the economic value for the [grant]. For example, building in remotes of Alaska for serve small populations might have less of an economic impact on our business or take longer to mature than some of our -- the smaller grants we've won. And then the way we think about this, and I'll get back to the CapEx in a second or Justin will, but we view these brands more as a complementary effort to our core strategy. So that's -- we look at being a primary provider of connectivity to multiple customer segments across our geographies. And the grant allow us to serve more people, serve more communities to add economic underpinning to our other efforts. So when we build in fiber into a community in the Southwest, for example, we are to serve, let's say, the schools or homes under a grant.

We are also working that with our broader plans to extend to fiber to the towers to build businesses and to build other communities that may not be grant supported. So it's really just a piece of the pie. And then there's no direct CapEx with the grants we've talked about. So it really is -- these are really, by and large, fully funded with the exception of a small amount that you talked about in July where I think we've got $10 million and we had about $1 million match. It may be under the [bed] program going forward that there are going to be a lot of matching plans, and we will look at whether our piece of CapEx has an adequate risk-adjusted return when we apply for it. But -- and then so then lastly, when will that impact us. You won't see much impact in our core numbers and deliverables next year. It will be minimal. As you go further out, 24, 25, some of these brands will, yes, have a nice bolstering, we believe, to EBITDA and revenue. But there's still just a piece of the pie. This is not a grant-only strategy we have. Does that answer your question, Ric?

Yes. Yes, it does. Second question, you guys had mentioned the Sacred Wind acquisition. Any update on that acquisition? I think you had mentioned a rough EBITDA number. Any thoughts on the timing, any update to the revenue and EBITDA impact? And we noticed that in third quarter, there was, I think, a $3.4 million transaction integration charge. What was that related to?

Okay. So first, I'll take the last one. The transaction charges in the third quarter. That's just M&A-related charges. Some of it, yes, with sicker wins. Some of it were other activities. And as you know from the past, we don't comment on those activities unless until there's something to announce. As the Sacred Winds economic impact, I think we did not -- as we said last quarter, we expect the business will generate EBITDA of about $10 million in 2022. We didn't disclose the revenues for that. So we expect the business to do at that level or better in the next year, and it will be combined with our Cabinet broadband operation and within our overall U.S. segment.

And the timing of the closing, did it close?

It is not closed, but we expect it to close in the fourth quarter.

Yes. And the final one for me is, obviously, a couple of times you've highlighted your balance sheet, the financial flexibility. Help us understand, is that the comfort, the market that other companies are seeing trouble raising money in a high-interest rate environment to deploy capital programs? Is that also meant to say you're looking at some potential M&A?

Well, it's meant to say multiple things. So the question is, why do I [keep talking] about financial flexibility? And the first to assure shareholders that we know the whole reason for being here is to reward our investors. That's our primary objective. And in the economic environment we're in, in the prospective environment, I think there are more questions from shareholders about, what's your spending? Is that level of spending appropriate? How do we ensure that we see adequate returns as investors? And so I think what we're saying is we have the flexibility to -- in our capital allocation to do things for shareholders. And we will weigh that against the other point which you raised, which is because of our flexibility, a lot of our competitors don't have the same flexibility. So we do see an opportunity to seize first mover advantage, generate nice returns, perhaps including M&A, in fact, including bolt-on, in particular, M&A that can accelerate or enhance our existing strategy. But what we're really saying is we're going to be very conscious of the environment. We're not going to get too far ahead of our skis, and we're going to adjust as we to ensure shareholders [benefit].

Our next question will be coming from Gregory Burns of Sidoti.

In the International segment, what was the -- how much FCC support revenue were you still getting? And what's the timing of the wind-down of the remainder of that?

We're still getting about $1.4 million a quarter right now -- a month, I should say. -- quarter. Sorry, quarter. It's a $5 million a year. And the wind-down, Michael, do you want to comment on that, the schedule in balance.?

Yes. I mean we're still talking to the SEC about that and trying to understand it with respect to how that market served and whether will be adequately served. So that's about all I would have to say on that.

Okay. And then on the mobile side, churn is still going up, but you're spending more to acquire the customers. So they're staying around for a shorter period of time. Can you just talk about maybe that dynamic and the return you're expecting to get there? Are you -- do you have plans to try and bring churn down?

Yes, Greg. So churn on mobile. So the first thing I'd note, it is up a little, but you recognize that we have a very high prepaid things. So the percentage of our base that is prepaid is quite significant. So I don't think those churn levels as a blended churn number are bad. That said, of course, lower churn is always better. And there is some -- probably some of the slight uptick is because of promotional activity. So if you grow gross adds, you're going to see some of those will some of those loans, particularly on a prepaid basis or when promotions roll off. But net-net, we like the economics around it, and we'll continue watching carefully, but we like the economics.

Okay. Great. And then lastly, are you still funding your private networks business? What is the status of that?

It's really a much smaller business. It is subsumed within our U.S. segment within Commnet. And it has de minimis funding requirements in this last quarter and probably positive contribution going forward. But small.

In terms of your refocused strategy around first to fiber and glass and steel, does that still fit in with the strategy? Or is that something that maybe is no longer a focus of the business?

Are you -- Greg, you're asking... We still -- the private network fits within our first 5 or less strategy?

Right. Is it like a non-core asset now that maybe does not fit anymore?

Yes. So I think -- and just maybe for everybody listening because some people might not know what we mean by private networks, but private networks is essentially campus or in-building or customer premise, advanced wireless connectivity just to keep it simple. And so we still are offering that service. We're offering that service in multiple markets, but we really view it as the service add-on to our existing business. It's not a core part of our strategy to expand that service.

And we have -- our next question is coming from Hamed Khorsand with BWS Financial.

This is Hamed Khorsand. Just wanted to ask you about the subscriber growth commentary. How sustainable is this growth? And what are you doing in terms of trying to upsell that customer? Do you get into the more fiber and the higher end of the broadband spectrum that you're providing?

So Hamed, just to be clear, you were asking about -- really about the broadband subscriber side?

Yes.

Okay. So I think it's very sustainable. In fact, we're -- with our plan, we expect to continue to grow both the percentage of our customers are on higher speeds and the overall number. I think -- and in terms of upselling, we have seen as many operators have seen the continued interest in existing customers to take -- to upgrade to higher speeds and higher capabilities or add mesh solutions and things like that. So we continue to have success there. And we've also seen in a lot of our newer fiber builds, if we look at our plans and demographics, we are typically seeing a take-up at higher plan levels than we had built into our business plan which is great. So I think as we see this growth, I think you'll see some positive impact on ARPUs from that, from people buying more speeds and then, of course, the growth in subscribers. So I think we're quite bullish on it.

Okay. And then my other question was as far as the mobile side is concerned, what is the competitive risk here as you add more and more subscribers seeing more of a degradation in pricing? I don't -- you always worry about that. We always keep an eye. You already paranoid about competition, paranoid about pricing and you keep a careful eye on it. It's not really something that's front of mind or at this point, either on the convention the pricing. I think if anything, we expect to be growing ARPUs over time in mobile. And I spoke to [churn] before as well. We're not concerned about that expanding within the 2 segments of prepaid and postpaid. But it's something we'll always keep an eye on and react too quickly if we see a change. And does the growth in these 2 segments, the broadband and mobile, will that help you at all get to a free cash flow positive state in '23? Or is that still further out?

Yes. So the growth in overall revenue, of course, slows down and benefits free cash flow, free cash flow again is somewhat discretionary. So we have high operating cash flow today. We have a relatively low what we would call maintenance CapEx. So we -- if we wanted to start stop expanding or slow down expanding our free cash flow would grow. We would start taking that high operating cash flow and have excess relatively easily. So I think that's the main feature. I don't know, Justin, do you want to add anything?

I think we have strong free cash flow today and a lot of our CapEx as Michael mentioned, is forward-looking. So we have the ability to control that as much as we want to control the CapEx spend.

And the other point, Hamed, on that, though, is it is true if you look at our market and a core part of our strategy, there is a layering effect in any market as we add up and as we add customers, whether it's mobile or fixed, whether it's consumer or business or government, there is an economy of scale benefit. So as we grow those revenues within that market, you see higher margins, contribution margins and free cash flow expansion.

And our next question is coming from Rick Prices of Raymond James.

I want to come in with a follow-up, if I could. A lot of discussion on satellite [say]. We've had T-Mobile and SpaceX Starlink, we've had Apple in Globalstar as far as putting satellite capabilities, communication capabilities in the iPhone 14. I get the question a lot from investors. First, how do you guys view the potential competitive threat from satellites into your different markets? And then associated with that, you guys have had a relationship established with OneWeb. Where is that at? And if they complete the merger, which we think they will Utilsat, what does that bode for you guys?

I think we think satellite is largely complementary to our businesses. As I noted before, we're always paranoid. But we think it's largely complementary where -- because of the inherent capacity differences, along with some performance characteristics and costs, we view it mostly as an attractive billing. And so that's where we partner. We partner actually to deliver the people in our broader operating area where satellites a good solution, and it's a more economical solution than something we could provide by building network ourselves. And we'll continue to do that. In fact, we're continuing to look at that. And we're looking at wholesale relationships, too, providing backhaul and transport for the satellite company. So I think there's clear value to what they bring. And I view it -- I think we view it as largely complementary to what we have.

And from a standpoint of any competition on the mobile side?

Yes. On the mobile side, I just -- I think that is largely hypercompetitive markets trying to meet to for now. I don't see it as a major factor, certainly for us. I can't speak to those players. But in our markets, I really don't see it as a major factor. And should it become important to our subscribers to provide some capabilities like that. I think there's going to be multiple satellite operators to choose from to partner with to provide that solution when it's really ready. So I don't think there's more impact that I can see.

Okay. And you touched on a little bit the macroeconomic environment. Help us understand a little bit about how inflation is affecting your companies and operations directly. Are you feeling anything from a recessionary impact potentially out there? And with a high-interest rate environment, any changing thoughts of all those items inflation turns to maybe recession and then higher interest rates as far as what this all might mean for your guidance?

Yes. So like everyone else, we're seeing inflationary pressures in certain areas such as labor, materials, equipment. We're also keeping an eye on potential economic churn around the low end of our subscriber base, but we haven't seen any meaningful there. And so what we're doing about it is, at the moment, it's not really had a material impact on our business, but we are actively monitoring local, national, global economic factors, and we're working hard to make the business more efficient, reduce costs. And we've also raised prices on our services in select markets where it makes sense, and we do this rig typically by delivering additional value, such as higher speeds and return for higher monthly service fees. So we're continuing to evaluate it, but that's so far. That's what we're seeing, and that's what we're doing.

And on the interest rate side, any change in thoughts on what you want to with your guidance?

No. I mean we've given the EBITDA guidance. But right now, we're pretty confident where we are in terms of our ability to -- on our loan facilities and whatnot. So we feel confident where we are.

There are no further questions at this time. I will now turn the call back to Michael for closing remarks. Go ahead, sir.

All right. Thank you, operator. ATN continues to execute at a high level this quarter with steady momentum across our markets. We are serving our customers well, advancing our strategic broadband build-outs, and making excellent progress toward our 3-year growth objectives. In addition, we are proud to be working with our partners in last and the Lower 48 to help bridge the digital device. So thank you all.

Good care, everyone.

This concludes today's conference. You may disconnect. Have a great day.