Shenandoah Telecommunications Co (SHEN) 2009 Q1 法說會逐字稿

Good day, and welcome to the Shenandoah Telecommunications first quarter 2009 results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Adele Skolits. Please go ahead, ma'am.

Good afternoon, and thank you for joining us. The purpose of today's call is to review Shentel's results for the quarter ended March 31, 2009. Our results were announced in a press release distributed this morning and the presentation we'll be reviewing is included on our website at www.Shentel.com.

Please note that a replay of the call will be made available later today. The details were set forth in the press release announcing this call.

With us on the call today are Christopher French, our President and Chief Executive Officer, and Earle MacKenzie, our Executive Vice President and Chief Operating Officer.

After our prepared remarks, we will conduct a question-and-answer session.

I'll begin with Slide 2 of the presentation. While we don't provide guidance with respect to specific future financial results, we caution that this call may contain forward-looking statements, which involve a number of known and unknown risks and uncertainties. These may cause our actual results to differ materially from these statements.

Shentel provides a detailed discussion of various risk factors in our SEC filings, which you are strongly 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 statement.

Also, in an effort to provide useful information to investors, we note on Slide 3 that our comments today include non-GAAP financial measures. Details on these measures, including why we use them, and reconciliations to the most comparable GAAP measures, are included in this presentation.

I will now turn the call over to Chris.

Good afternoon. I want to thank everyone for joining us. Despite having to record a large impairment charge related to our Converged Services business, the first quarter of 2009 was another good quarter for Shentel. Our operating results were very strong, despite the continued deterioration in the economy. We're making good progress on our upgrades to the recently acquired cable systems, and with the expansion and enhancement of our PCS network.

We also announced plans to acquire the assets of a small telephone cooperative, which is nearby to our existing local exchange in fiber networks.

As you can see on Slide 5, on a consolidated basis, we are reporting a net loss of 4.1 million for the quarter, compared to net income of 4.8 million for the first quarter of 2008. Total earnings were impacted by 10.7 million after-tax impairment charge from our reassessment of the value of our discontinued Converged Services business.

Net income from continuing operations was $6.2 million for the quarter as compared to 5.5 million in the first quarter of 2008, an increase of 14.2%.

We are still in the sales process with Converged Services and presently have [entries] from multiple potential buyers. While current conditions are unfavorable for a sale, it is more desirable for us to exit this business, so that we can focus our time and capital on our other growth opportunities. We expect to be able to execute a sale by this summer, but do not now believe we will realize proceeds close to the carrying value on our books, leading to our decision to record the non-cash impairment charge.

On Slide 6, we've listed the significant initiatives we currently have underway. Progress continues on our upgrades to the cable systems we acquired from Rapid Communications, with work nearing completion on the largest system in Covington, Virginia.

On the PCS side, we added eight additional cell sites in the first quarter, as well as adding EVDO capabilities to 26 additional sites. EVDO is now available off of 237 of our 419 total sites, covering 87% of our covered POPs.

In March, we announced an agreement to purchase the telephone assets of North River Telephone Cooperative, a 1,000-access line cooperative in Northern Augusta County, Virginia. This system is less than an hour's drive from our headquarters here in Edinburg. This acquisition is subject to regulatory approvals and a vote of the co-op's membership, which is currently scheduled for June 1. Since we already have a significant investment in the infrastructure needed to provide advanced telecommunications services, we believe we can [profitably] offer these same services to North River customers more efficiently and cost-effectively than the co-op can do on its own.

We're still concerned about the impact economic conditions can have on our growth rates, but it's still unclear as to how long or deep this recession may be. As Earle will address shortly, we continue to see a decrease in traffic into our PCS stores and a resulting slowdown in the rate of gross additions.

We also experienced a slight uptick in our churn rate, but on a positive note, we experienced further increases in build revenue per user due to increases in data usage.

Slide 7 lists a few of our operational issues being driven by current economic conditions. As mentioned on our previous conference call, we are monitoring the local economy, as well as customer behavior, to be able to react in the event conditions warrant a delay or cancellation of any capital projects.

We continue to track the activity regarding the economic stimulus programs for broadband deployment in rural areas, although specific details are still very hard to come by.

And finally, we remain on the outlook for opportunities that may arise for us to make use of our conservative balance sheet in the event there are any attractive buying opportunities for strategic assets, again, only if they're a good fit and are available at reasonable prices.

I'll now turn the call back to Adele to review our financial results in more detail.

Thank you, Chris. I'll begin on Slide 9. As Chris mentioned, we are pleased with our first quarter results. The Company continues to deliver increased returns for its shareholders. For Q1 '09, earnings per share from continuing operations was $0.26 in comparison to $0.23 for Q1 '08. This represents growth of 13%.

Our net loss per share, including the result of discontinued operations, was $0.18 for the first quarter of 2009, as a result of the $0.45 per share impairment loss recorded in the first quarter that Chris just described.

We reviewed the fair value of the Converged Services operation in connection with the preparation of the quarterly financial statements. Based upon changes in the marketplace and the progress of the auction for the sale of this business, management has concluded that the fair value of the Converged Services operation has declined from earlier estimates. As a result, we recorded the impairment of $10.7 million after taxes, which was allocated to goodwill, intangibles and fixed assets.

On Slide 10, you can see that operating income grew by $2.5 million and operating income before depreciation and amortization by $4 million for Q1 '09 from Q1 '08.

Operating revenues grew by $6.5 million, primarily driven by increases in the wireless revenues of 4.4 million and the impact of newly acquired cable operations for the quarter.

Operating expenses grew by $4 million in Q1 '09 over Q1 '08. Increased cost of the cable operations, as a result of the new acquisition, accounted for $3.2 million and increased depreciation associated with network improvements drove most of the increase.

As Earle will address in a moment, in 2009, we will continue to enhance and expand the coverage of our PCS network. We will incur additional operating costs related to additional and enhanced cell sites in advance of the incremental revenues they produce. In the short run, these increased expenses will reduce the margins in the wireless segment. In the longer term, we expect the margins will grow as a result of the additional data revenues and the additional customers in new coverage areas.

Cash flows on a consolidated basis appear in Slide 11. Net cash from operations increased by $6.9 million in Q1 '09 over Q1 '08.

Capital spending and other investments increased by $1.3 million in Q1 '09, primarily as a result of the network improvement projects Earle will review in greater detail. We expect the significant PCS network enhancements and the upgrade of the acquired cable TV assets to continue in 2009.

We expect the existing credit facilities and cash flow from operations to be adequate to support these projects and our other capital expenditures. As of March 31, 2009, we had drawn $25.7 million against the $52 million credit facility with CoBank. The terms allow us to draw upon the facility through December 31, 2009. While we do have the option of fixing this interest rate, we have not currently chosen to do so. This is something we continue to monitor. The debt carried a variable rate of 2.91% at March 31, 2009.

We have restructured our business segment reporting to be consistent with changes in our internal management of the Company's businesses. In today's earnings release, and all future financial reporting, we will reflect three reportable segments -- wireless, wire line and cable TV.

The wireless segment provides PCS services as an affiliate of Sprint Nextel and on cell towers which it rents to affiliated and non-affiliated entities. The wire line segments provides voice services, internet access, long distance access services and leases fiber optic facilities. Finally, the cable TV segment provides cable television services.

Please keep in mind that Shentel is still in the process of closing our defined benefit pension plan and distributing its assets. We have requested a technical advice letter from the IRS with respect to forfeited benefits of unvested former employees. We expect, despite delays created by further IRS review, that this plan will be terminated by year end 2009.

When the final ITS approval is received and the assets are distributed, we expect to report an incremental $3.5 million of expense related to terminating the plan, and make a payment of $2.4 million to fund the full liability to employees. These numbers are as of the quarter ended March 31, 2009. We expect these amounts to increase by approximately $100,000 per quarter.

At this time, I'll turn the call over to Earle to go into greater depth on some of the operating factors driving our results.

Thanks, Adele. As reflected on Slide 13, gross and net PCS additions in the first quarter were down from the same period last year. We ended the first quarter of 2009 with 213,000 PCS subscribers, an increase of 19,000 or 10% from the first quarter of 2008.

Moving to Slide 14, first quarter gross additions were just over 15,000, a decrease of approximately 3,000 from the first quarter of 2008. We've seen a significant drop in store traffic at our Company-owned locations and our exclusive agents. We've also seen a slowing of additional lines to current customer accounts, with some business accounts dropping lines as they resize their workforce.

Churn was up slightly to 2.15% this quarter compared to 1.98 in the same quarter last year. The result was net additions of 1,592 compared to 6,802 in first quarter 2008. The lower net adds is primarily a function of fewer sales opportunities.

Bad debt has not been an issue. The amount of bad debt recorded this quarter is less than what we recorded in the first quarter of 2008.

We are focused on customer growth, but expect lower net additions will continue into the latter part of 2009 and maybe beyond. Although we have put on fewer customers -- excuse me -- Slide 15 shows that we continue to see an average revenue per customer grow, as we continue to get greater response to our expanded EVDO coverage and higher revenue rate plans.

In the first quarter, we had gross billed revenue per subscriber of $56.62, an increase from $54.90 in the first quarter of 2008. We are very pleased that our data ARPU has increased $6.72 from the first quarter of 2008 to $17.99 in the first quarter of 2009.

Slide 16 details the components of our net PCS service revenue. Bad debt fell from 2.5 million in the first quarter of last year to 1.7 in the first quarter of 2009.

Service credits have slowed. In 2008, they were over 11% of gross billed revenue. In the first quarter of 2009, they were 10.6%. They are still too high, but we are encouraged by the trend.

Net revenue grew to 70.3% of gross billed revenue compared to 66.9% in the same quarter last year.

Slide 17 was our top-selling rate plans. Again this quarter, the top-selling plans were the Everything Messaging Family 1500, the Everything Data Family 1500 and the Simply Everything Plan. These three plans represented 48% of the gross activations.

The top-selling handsets were the LG Rumor, the LG Lotus, the Samsung Rant and the Samsung Instinct. Mobile data cards were the fourth highest selling piece of equipment.

Moving to the next slide, we are well into our 2009 construction plan. We've added eight new cell sites and 26 new EVDO sites. Our 2009 capital plan will provide EVDO coverage for over 90% of covered POPs, will increase capacity and continue our expansion of coverage in Pennsylvania towards parity with Verizon and AT&T. We still expect to add approximately 68 new cell sites and 106 new EVDO sites in 2009.

We continue to monitor the economic conditions and if warranted, we'll postpone some capital expenditures into 2010.

Slide 19 provides some information on our wire line segment, where we continued to experience modest telephone access line loss. We obtained approval from the Virginia State Corporation Commission to increase all of our regulated residential and business rate plans $1 per month, effective March 1, 2009.

Our monthly premium residential rate is now $8.70 and our single business line rate is 15. We expect the rate increase to generate approximately $300,000 per year of new revenue.

We continue to increase our DSL penetration. We're approaching 43% of our access lines. Our 2009 capital plan includes upgrades to our DSL network that will allow us to offer up to 10 megs to all customers.

Slide 20 shows our cable TV customer accounts. The integration of the Rapid Cable properties continues to go well. We've been successful in our goal to stabilize the customer base in the newly acquired markets, as we aggressively work to reduce the number of head-ends and upgrade the networks to two-way.

We plan to relaunch the first rebuilt market in late second quarter 2009. We will convert all of the acquired customers to our billing platform in the second quarter. We're confident that we'll be able to offer Triple Play to approximately 85% of the homes passed by year end and expect to see good RGU growth in the second half of 2009, as we relaunch the rebuilt markets.

I'll now turn it back over to Adele.

This concludes our prepared remarks. Brandy, would you now review the instructions for posing a question?

Thank you. (Operator Instructions). And we'll take our first question comes from Rick Prentiss with Raymond James.

Thanks. Good afternoon, everybody.

Good afternoon, Rick.

Good afternoon, Rick.

Good afternoon, Rick.

Hey, a couple of questions for you guys. On the wireless side, so it looks like data ARPU almost is spot on at $18 in the quarter versus 11.27 the previous year. Can you remind us fourth quarter '08, was that at $16 if I remember? I'm just trying to get the quarter-over-quarter growth also.

We were approximately at $16, high 15, like 15.90, 15.95, I believe.

Okay. And if you look at the rate plans that you mentioned were the most taken in the quarter as far as gross adds, Simply Everything is up there. Could you estimate how much of your base is on to the Simply Everything Plan right now?

I really don't have those numbers handy, but it's been in the top three of our plans ever since it's been launched, so it represents -- these three plans represent 50% of our gross adds. All of them are $100 or more a month plans.

Right. And they've been the top three sellers probably for the last -- maybe even the last several quarters or a year maybe?

It's really been the last four quarters, they've been our top-selling plans. We really have focused our sales organization on selling the high-end rate plans.

Okay. Because what I'm trying to look at is understanding with the weak economy, you mentioned you've seen foot traffic down. I'm trying to gauge what might be happening to ARPU as we look out over the next year or two, knowing how many people are on Simply Everything Plans, where data might go. I'm just trying to gauge -- maybe ask you directly, what do you think ARPU trends are looking like this year?

Really hard to know at this point, but we -- at this point, we don't see any real change in the buying patterns. The majority -- 50% of our customers are buying these three higher end plans.

And that's been the case for pretty much the last year?

It has.

Okay. Sprint, when they reported the other day, also showed data, ARPU on the CDMA side, had hit about $18 also, but it was not much growth sequentially. It was like 17.50 fourth quarter and then only $18 in the first quarter. So we're trying to gauge, is data kind of reaching a plateau in this tough economy, while we might still be seeing some pressure on the voice side?

Really hard to tell, Rick. I think one of the things to note is that we have now achieved over 85% of our covered POPs being covered by EVDO and so now, I think a lot of this growth has just been more EVDO available for people to use. And as we are now are getting closer and closer to finishing out our build-out, I don't think we'll see as big of incremental increases going forward.

Right, that makes sense.

As combined with a growing customer base.

Right. Remind me, the Boost Unlimited Plan, does Sprint allow you to offer that in your stores or how are they offered in your territory?

We do not sell the Boost product. We act as an agent for the iDEN. We have made the decision not to carry the Boost product in our stores. There are distributors who work directly with Sprint and Nextel that are selling the Boost product in our market, but we are not involved.

And you would -- would you receive -- well, you don't have the iDEN network anyway, so I guess the only thing that was there --

The only thing we would have gotten is a commission for selling it and we just didn't think it was a worthwhile way for us to use our efforts.

Okay. Sprint mentioned, I think, on their call also that they were looking into -- it didn't sound anytime soon -- but looking into offering a prepaid product on the CDMA network. Any thoughts about -- would that be something of interest to you guys as well in this kind of economic environment?

Absolutely. If Sprint offered it, we would certainly sell that. We have thought about doing something on our own, but the cost of trying to launch an independent prepaid, as not being able to call it Sprint, within our own distribution, just doesn't make it practical.

Great, okay. Thanks, guys.

Thanks, Rick.

(Operator Instructions).

If there are no further questions, then I think --

And we have Rick Prentiss from Raymond James with another question.

All right.

I didn't want to take up all the time, but if nobody else is out there, I'll ask you a couple more.

I feel confident they're out there. They're just being quiet.

Here we go; that's no worry with me. As you look at the new reporting scheme with the different segments, will we be able to get the historical quarterly information to kind of recast the models along the new lines?

Certainly, when we release the Q this evening, you will see the comparable information for the first quarter of 2008 --

What about like second and third?

-- and going forward.

Say it again.

And going forward.

So in tonight's Q, we'll get 1Q, 2Q, 3Q and 4Q?

No, you'll just see the first quarter of 2009 compared to the first quarter of 2008.

Is there any way to get -- obviously, as you're building models, it's a little awkward to constantly keep going back and restating actuals. Is there any thought about maybe getting exhibits out there to help recast the models in their entirety?

Well, we'll certainly take that into consideration. If it makes sense, then we will do that broadly.

Okay, yes. And then, final question. With the $10.7 million post-tax adjustment to the Converged Services value, where does that put the kind of estimated value on the carrying on the books right now?

Approximately $10 million.

Okay. And if I heard you right, still looking at this summer for resolution, even though it's a tough market out there, just to get it resolved and kind of move on?

Yes, we have a very active process at this point and several interested participants.

Great. Thanks very much.

Thanks, Rick.

And we'll take our next question from Barry Sine with Capstone Investments.

Good afternoon, folks.

Good afternoon, Barry.

Good afternoon, Barry.

Good afternoon, Barry.

A couple of areas I wanted to ask about. First of all, on the sales process on the Converged Network, could you give us a little color what you saw there that caused you to change the valuation there? I think from what you discussed at the shareholder meeting today, my sense is that it was more the inability of prospective buyers to get financing, and therefore, the market value may be a little bit lower?

Well, generally -- in general, market conditions are not as strong as they might have been even a year ago, as you know, Barry. That certainly affects what folks are willing to pay. We did a full evaluation of the fair value of this business in conjunction with our K at year end, and at the point that we decided to discontinue this operation.

At the time, we were basing our estimates on historical transactions. This is a very unique asset and a fairly unique combination of properties that make that a tough thing to get your arms around, but at the time, based on the transactions we had in hand, based on the long-term prospects for this business, we believe that the carrying value was a good assessment of the fair value.

And the basis for the write-down now is your discussions with prospective buyers, is that correct?

That's correct, as well as market conditions.

My second question involves your in-region cable television properties and again, you had a slide at the shareholder meeting today where you talked about an upgrade program to upgrade that plan to a two-way capability, largely by the end of this year. If you could give us a little bit of color, what you expect to see there in terms of take rate, what the competitive situation is. I understand what the capital spending is, but if you can give us a little color on the expected subscriber growth from that and the expected revenue growth opportunities from that spending.

With only one-way [plant], we really -- we're limited as to what services we could offer and it put us at a growing disadvantage against the satellite providers. We were not -- we didn't even have a return path for a customer to be able to be able to order our Pay Per View movie. And so in order to be able to offer Video on Demand and some of the other services that we see coming in the future, in order to be able to offer those and remain competitive, we had to upgrade to two-way.

We're also actually going to be running several of the properties that we acquired from Rapid off of our same head-end, so part of the investment that we're making is actually an investment that can be leveraged over several other cable properties that are in the Eastern part of West Virginia. But as far as additional revenue stream, the most immediate one is, we have -- we plan to launch Video on Demand and expand our Pay Per View offerings before the end of the year.

Okay. And then my last question, you mentioned that foot traffic into your PCS stores is a little bit light and that led to a little bit slower gross adds during the quarter. If you could give us an update what you're seeing more recently, the second quarter to date -- I know in the national press, when they talk about the economy, we're seeing some signs of a potential uptick, some signs of a turnaround in the economy on a national basis. Are you seeing any of those signs locally in your markets? Is foot traffic starting to pick up over the last five or six weeks?

We really haven't seen a significant change in the pattern that we saw for the first quarter.

Okay. Those are my questions. Thank you very much.

Thank you, Barry.

And we'll take a question from Will Lauber with Sterling Capital Management.

Hi, yes, I wanted to -- obviously, 2009 is a big investment year from the wireless side of the business and then your cable acquisition and your current cable footprint. Does that kind of wrap up in 2009 or kind of what's the big picture maybe for 2010 as far as cap ex goes?

Will, this is Earle. As far as kind of looking at the different parts of our business, in our wireless business, when we complete the current two-year plan, which was really an '08-'09 plan, we will have achieved all of our major goals, EVDO, deployment and also getting the coverage footprint that we think we need to be competitive with AT&T and Verizon. So unless there is a new service or a significant need for an upgrade, we see that the capital expenditures we'll be making in the wireless in the foreseeable future will be basically just success-based capacity where we need additional service because of where we've grown our customer base.

In our cable acquisition, we have, once again, also a two-year plan, with most of the dollars being spent this year, which is upgrading the cable plan to two-way and giving it capability of providing voice, video and data. The majority of the markets will be upgraded this year, probably 3 or $4 million of upgrades in the 2010 period.

We also, in our wire line business, are upgrading our DSL network, as I mentioned, to offer 10 megs. Most of that project is going to be done this year, but some of that will actually be completed next year. So there should be a fairly significant decline in cap ex unless there's an acquisition that would require us to make some capital expenditures in 2010 and '11.

I guess that was my follow-on question -- what are the plans for the cash in 2010? Is it paying down the debt, increasing the dividend or still looking at kind of acquisitions?

That's something that we'll be taking a very hard look at. When we negotiated the last debt facility, the amortization was for six years beginning January 1 of next year. So we do expect to have free cash flow that we could either invest in another business or return to shareholders in some form, and that's something we'll have very active participation and conversation about here.

No kind of leaning one way or the other right now or is it kind of a wait and see basis?

Not at the moment, Will.

Okay. All right. Thank you.

You're quite welcome.

And it looks like at this time, there are no further questions. I'd like to turn the call back over to our speakers for any additional or closing comments.

Thank you for participating. I would like to extend an invitation to each of you to let me know if there are any additional details you would like to see in the future. My contact information was provided on the press release.

This concludes today's conference call. Thank you for your participation. You may now disconnect.