Shenandoah Telecommunications Co (SHEN) 2009 Q2 法說會逐字稿

Good day and welcome to the Shenandoah Telecommunications second-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 morning and thank you for joining us. The purpose of today's call is to review Shentel's results for the quarter ended June 30, 2009. Our results were announced in a press release distributed last night and the presentation we will 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 are 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 will begin with slide 2 of the presentation. While we don't provide guidance with respect to specific 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 morning, everyone, and thank you for joining us. The second quarter of 2009 was another good quarter for Shentel. While economic conditions remain weak, our wireless business continues to grow and we are positioning the Company to offer expanded services in the cable markets we have acquired.

The member owners of the small telephone cooperative we offered to purchase have approved the acquisition. This telephone system is near our existing local telephone operations and our fiber networks and we are excited about the prospect of bringing high-speed broadband service to this community.

As you can see on slide 5, on a consolidated basis, we are reporting net income of $6.7 million for the quarter compared to net income of $7.2 million from the second quarter of 2008, a decrease of 7%. Net income from continuing operations was $6.8 million for the quarter as compared to $8 million in the second quarter of 2008.

The results for the second quarter of '08 included $0.6 million after tax of nonrecurring wireless income related to prior period USF fees received from Sprint and Nextel. The second quarter of 2009 included after-tax losses of $0.7 million for the newly acquired cable TV operations. We expected to incur these cable TV losses while we rebuild the networks and launch new services, which in turn should create long-term value.

We are now in the final stage of the sale of our converged services operations. While not the best market conditions for a sale, we've been pleased with the interest in these assets and expect to be able to execute a sale in the third quarter.

On slide 6, we have listed the significant initiatives we currently have underway. Progress continues on our upgrades to the cable systems we acquired from Rapid Communications with work completed on the largest system in Covington, Virginia. On the PCS side, we added 13 additional cell sites in the second quarter as well as adding EV-DO capabilities to 41 additional sites. EV-DO is now available to 94% of our covered POPs.

In March, we announced an agreement to purchase the telephone assets of North River Telephone Cooperative, a 1000 access line cooperative in Northern Augusta County, Virginia. The Co-op members voted in June to approve the sale. As we discussed last quarter, we already have a significant investment in infrastructure needed to provide them 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 have already formulated our plans for upgrading this network and will work quickly once regulatory approvals are received and the purchase is final, which we expect this fall.

Economic conditions continue to impact our growth rates and it's still unclear as to how long or deep this recession may be. Our gross additions are on par with the second quarter of 2008. While our churn rate is up over the same quarter last year, we experienced a slight reduction in our churn rate over the first quarter of 2009.

Shentel's conservative financial position enables us to remain long-term in our decision-making. While quarters like this one are not taken lightly, we remain committed to building long-term value and continue to invest in capital projects which we believe will help achieve that goal.

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

Thank you, Chris. I will begin on slide 8. As Chris mentioned, we are pleased with our second-quarter results including the results of discontinued operations, earnings per share was $0.29 for Q2 '09 in comparison to $0.31 for Q2 '08. For Q2 '09, earnings per share from continuing operations was $0.29 in comparison to $0.34 for Q2 '08. The Company continues to deliver solid returns for its shareholders.

On slide 9, operating income for Q2 '09 was $11.6 million or down $2 million from Q2 '08. Wireless operating income was flat but we have had solid gains in revenues. Average PCS customers are up 9% and gross revenues before credits, Sprint fees, and write offs are up by 14%. However in Q2 '08, we recorded nonrecurring revenue of $1.1 million related to USF fees received from Sprint related to prior periods. The operating costs associated with enhancing our PCS network added $0.5 million to PCS operating costs in Q2 '09 over Q2 '08.

As we have discussed in previous earnings calls, we incur additional operating costs related to the additional 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 that the margins will grow as a result of the additional data revenues and the additional customers in the new coverage areas.

We have continued to upgrade our wireline networks, as Earle will review in a moment. The increased depreciation associated with these enhancements is the primary reason wireline margins are down by $0.7 million over Q2 '08.

In December 2008, we acquired cable operations from Rapid Communications. We are in the process of upgrading these operations. While in the long run these enhancements will give us the opportunity to significantly increase penetration and revenues per customer through expanded services, they will continue to incur operating losses in the near-term accounting for $1.1 million of the $1.2 million increase in the operating loss of our cable TV operations.

On slide 10, we have shown our calculation of OIBDA. After adjusting for the nonrecurring USF fee income, OIBDA was up $0.7 million for Q2 '09 over Q2 '08.

Cash flows on a consolidated basis appear on slide 11. Net cash from operations increased by $11.2 million in Q2 '09 over Q2 '08. Capital spending and other investments increased by $5.4 million in Q2 '09 primarily as a result of network improvement projects. We expect the significant PCS network enhancements and the upgrade of the acquired cable TV assets to continue through this year. Our existing credit facilities and cash flow from operations are expected to be adequate to support these projects and our other capital expenditures.

As a result of making voluntary payments, the amount drawn against the $52 million debt facility with CoBank is down to $14.7 million at June 30, 2009. The terms allow us to access the undrawn portion of the facility through December 31, 2009. While we do have the option of moving from a variable to a fixed interest rate, we have not chosen to do so. This is something we continue to monitor. The debt carried a variable rate of 2.86% at June 30, 2009.

Once again, please keep in mind that Shentel is still in the process of closing our defined benefit pension plan and we will be distributing its assets. We have requested a technical advice letter from the IRS with respect to the forfeited benefits of unvested former employees. We cannot predict due to delays created by the further IRS review when this plan will be terminated. When the final IRS approval is received and the assets are distributed, we expect to record an incremental $3.6 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 June 30, 2009. We expect these amounts to increase approximately $100,000 per quarter this year.

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

Thanks, Adele. Good morning. As shown on slide 13, in spite of the current economic conditions, we continue to have net growth in our wireless operations and are reporting total wireless customers at June 30 of 216,067.

On slide 14, the number of gross additions in the second quarter of 2009 was in line with the same period last year but the increase in churn from 1.74% in 2008 to 2.07% in 2009 resulted in fewer net adds at 3,013.

In light of the condition of the economy, we are encouraged that churn improved slightly from the first quarter of 2009 and that our bad debt expense in the second quarter of 2009 is 11% lower than the same quarter in 2008.

Slide 15 reflects the impact of our continued EV-DO buildout. Gross billed revenue per subscriber was $55.84 with $18.35 of the total from data. At $18.35, data ARPU has increased by $4.83 from a year ago and $0.36 from the first quarter of this year. With fewer sites left to upgrade to EV-DO during the rest of this year, we expect the rate of data revenue growth will slow.

Slide 16 shows the components of our PCS revenue to reconcile from gross billed revenue to the net revenue recorded by the Company. Both bad debt and service credits are down not only as a percent of billed revenue but as absolute amounts. The increase in management and service fees are consistent with a 14% increase in net billed revenue.

On slide 17, we list the top selling price plans and equipment during the second quarter. Again this quarter, almost half of our gross additions took one of our three highest revenue rate plans. This focus on selling premium plans is the reason we have been able to retain an ARPU in the mid-50s and have continued to see an increase in data ARPU.

Again this quarter, the LG Rumor, Samsung Rant, and the LG Lotus are among the top selling phones. They were joined by the Samsung Highnote. Approximately 9% of all devices sold in the quarter were mobile data cards. We saw a drop in the number of Instincts sold and although we sold all of the Palm Pre phones in our inventory, we had a limited number to sell.

Slide 18 reflects our wireline customers. Once again this quarter we had modest access line losses. We ended the quarter with 24,046 access lines. As mentioned earlier, the members of the North River Telephone Cooperative approved the sale of their telephone assets to Shentel at a membership meeting at the end of June. We have filed for approval from the Virginia State Corporation Commission and expect that we will get approval and will be able to close the transaction in the third quarter, adding approximately 1000 access lines.

We continue to see growth of DSL connections in our LEC area. At June 30, we had 10,526 DSL customers, which represents an over 43% penetration of access lines. The majority of our DSL customers have 1.5 meg at $34.95 a month or higher speeds. We will continue to offer high speeds with current construction in a way that will provide the availability of up to 10 megs of speed to over 95% of our telephone customers.

We continue to see a loss of dial-up customers to high-speed alternatives. Those inside our telephone service area migrate to our DSL product, but we have no high-speed alternative to offer customers outside of our telephone footprint. We plan to continue to support the dial-up product for the segment of the population not ready to make the jump to high speed.

We've been very active working on cable properties we acquired in December. We have performed some much-needed maintenance and have stabilized the customer losses in advance of upgrading the networks.

During the second quarter, we successfully completed the transition to our billing and back-office systems. In June, we completed the upgrade of the systems in Allegheny County and Covington, Virginia. This is our largest market and had the least amount of work to upgrade. In the past few weeks, we have launched our marketing and sales campaign, offering an expanded video lineup, high-definition, DVR service, and multiple Internet speed options. We are encouraged by our initial success.

Work continues to rebuild the properties in West Virginia, where the extent of the efforts will be more extensive. We will launch Petersburg, West Virginia in August and numerous other markets in the fourth quarter. We are benefiting from the synergies of our current cable assets, the head end that serves our customers in Shenandoah County will also serve via a new fiber build the Petersburg and Franklin, West Virginia markets, therefore eliminating the need to build a new head end.

On slide 19, you see that cable subscribers have remained flat from the beginning of the year. This reflects our success at slowing the loss of customers and markets within inferior networks and the initial success of our sales efforts. Not reflected are the hundreds of existing customers in the Covington market that have upgraded their video package and added Internet. Once we have a meaningful number of Internet customers, we will provide the details of the RGUs.

Before I turn it back over to Adele, I would direct you to slide 20, which summarizes the capital expenditures we have made last year, year-to-date, and expect to make for 2009. You see that to date we have committed and spent $30 million and expect to spend a total of $64.6 million by year-end. This is in line with 2008, which was a record year for Shentel.

Chris discussed earlier our decision that in spite of the recession we believe that it is the right long-term decision to continue to expand our networks. To date in 2009, we put 21 new cell sites into service for a total of 432. We anticipate that we will add an additional 54 sites before the end of the year for a total of 496. The new sites provide us additional capacity to retain our superior operating metrics and continue to move us towards coverage parity in Central Pennsylvania.

As of June 30, we have added EV-DO to 278 sites and expect to add an additional 60 before year-end. The capital spend in wireline is for additional fiber capacity on existing routes, extending our fiber network, the anticipated cost of offering DSL in North River telephone area, increasing the broadband speeds available to our telephone customers, and preparing to move all of our voice traffic to a soft switch by year-end 2010.

The 19.3 million for cable, as I discussed earlier, is for the two-way upgrade and the ability to launch triple play to our cable customers. This is a very aggressive plan but to date, we have not encountered anything but few delays and a few unexpected conditions.

I will now turn it back over to Adele.

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

(Operator Instructions) Will Lauber, Sterling Capital Management.

Yes, on the wireless side, I'm just trying to reconcile -- I see the billed revenue per susbscribers growing up a little bit and the data portion is going up a lot, but the voice is going down a bit being driven mainly by the simply everything plans that's there's a greater proportion that is I guess allocated to the data side?

That's true. When we have a combination plan that offers unlimited voice and data or very large buckets of voice and data, we allocate 30% of the revenue to data and 70% of the revenue to voice.

Okay and I'm guessing that when you said that you expect I guess going forward that you expect the data portion, the growth to slow down, is that --?

Yes. This is Earle MacKenzie. We do expect it will primarily because we've reached the point where now 94% of our customers have access to 3G. We see a pent-up demand as we add new locations and data usage jumps, but now that we are reaching kind of full penetration, it will only really be ongoing as we add new customers and existing customers by new applications that they can use the 3G network. So we expect it will continue to grow but certainly not at $4.83, which was the increase over the same period last year.

Okay, so I guess what I'm still kind of unclear about is when you guys did the business case to spend this money for the upgrades, did you take into account that at the time that Sprint's Simply Everything plan was coming out? I guess I'm just trying to figure out does your billed revenue subscriber -- are you hoping to get that up to $60 or what's kind of like the amount where all these investments made sense?

Well, the plan to actually build out this network started long before Sprint announced the Everything Plans. The lead time is fairly significant in doing the planning. But we did anticipate that there were many more applications coming online that people would need and want more broadband services. And therefore, we saw the need just as we are in our wireline business of continuing to build the network to offer higher and higher broadband speeds.

As far as what average revenue will turn out to be in total, we don't anticipate it to be -- to grow significantly over the mid-50s, which is -- we're kind of at the top and in line with most of -- with all the other large players. We do see shifts between voice and data as people are texting rather than making a phone call. That is why we are seeing the voice part of our revenue continue to decrease, obviously making the EV-DO investment has proven to be a very good decision on our part because it has allowed us to continue to stay at the top of the average data ARPU in the industry.

Okay, so I guess it would be safe to say I guess the business case was -- would be built more on just being competitive with the industry and not losing market share as opposed to we're going to make this investment and we hope to get this much in additional revenue and EBITDA out of it?

Well, I think probably both is correct. We are -- need to stay competitive, but if you look at our data revenue compared to others who have not made the EV-DO investment, there's a significant delta between our data ARPU and theirs. So I think that in both cases, it has proved to be a good decision on our part.

When you are referring to other people, would it be the other companies that have an agreement with Sprint or what were you referring (multiple speakers)?

No, it's just really if you look at carriers across the board, some have been more aggressive than others at building out their 3G networks.

Okay, that's it for now. Thank you.

(Operator Instructions) [Charlie Castillo], Raymond James.

Hi. This is Charlie sitting in for Rick Prentiss. How are you guys? Let me ask, have you guys put any further thought into possibly launching your own prepaid offering?

Charlie, this is Earle MacKenzie. We have continued to look at that, but from a practical standpoint from the size of our footprint and the fact that we don't have the wireless infrastructure in-house, we basically as you well know as a Sprint affiliate, use the Sprint's billing platform and their customer service. The incremental cost of us building the back office and having the support on a limited footprint of 2 million POPs really we just can't come up with making the economics work. So rather than dividing our attention, we have made the decision at least up to this point to continue to focus on the postpaid and grow that business.

Okay, understood. Then I guess switching more towards the high end, you were mentioning during the quarter Palm Pre supply was obviously limited and Sprint was clearly the same -- something along the same lines. You know, what about currently? Are you guys getting them into the stores or is it still kind of spotty?

The supply has gotten better. We still are able to sell pretty much every one that we get. So the supply in July has been better than June, but still significantly below where we would like it to be. And we have been informed that it will continue to improve throughout the rest of this year. So it's very, very important for us obviously for the fourth quarter to have a good supply of the phones that folks want.

Right. And final question, in terms of the converged services, obviously you guys are saying that you are in the final stages there. Do you have any type of timeframe like before the end of the quarter or anything like that to close on the sale?

We certainly are hoping to close in the third quarter.

Okay, great. All right, thank you, guys.

With no other questions in queue, I would like to turn the conference back over to Ms. Skolits for any additional or closing comments.

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

That does conclude today's conference. Thank you for your participation.