Shenandoah Telecommunications Co (SHEN) 2010 Q1 法說會逐字稿

Good morning, everyone, and welcome to the Shenandoah Telecommunications first quarter of 2010 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Adele Skolits, CFO. 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 first quarter ended March 31, 2010. Our results were announced in a press release distributed yesterday evening 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 were set forth in the press release announcing this call.

Today's call will not address any future impacts of the Jet Broadband acquisition we expect to close late this year. As I am sure most of you recall, we held a conference call to discuss those on April 19, shortly after we announced the agreement. The slides and audio from that presentation are available on our website.

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 two 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 three 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 turn the call over to Chris now.

Good morning. We appreciate you being able to join us today.

We are very pleased with our operating results during the first quarter of 2010. While economic conditions remained weak, we were able to generate customer and revenue growth in each of our operating segments. We have completed system upgrades in many of our acquired cable markets and started to roll out voice services in a limited number of these markets.

As a result, we once again had significant gains in customer additions for the quarter. These efforts are positioning our Company to generate future growth in earnings.

As you can see on slide five, on a consolidated basis we reported net income of $6.8 million for the quarter compared to a net loss of $4.2 million from the first quarter 2009. Net income from continuing operations was $6.6 million for the quarter as compared to $6.2 million in the first quarter of 2009, an increase of 7%.

Included in this year's first quarter was a $1.3 million after tax loss from the cable TV segment which compares to a loss of $600,000 for the first quarter of 2009. We expected to incur these losses while we are rebuilding the CATV networks, launching new services, and incurring costs to expand the customer base. This in turn should create long-term value as we begin to grow revenues and profits.

On slide six, we have listed our progress in the wireless segment of the business. Wireless PCS customers are up 5% from year ago and net adds are up 7% in the first quarter of 2010 over the first quarter of 2009. Continued growth was helped by churn of 1.91%, relative to 1.99% for the fourth quarter of 2009. Our wireless CapEx spending has tapered off since we completed the significant initiatives we had underway to expand high-speed data capability and to enhance coverage, mainly in our Central Pennsylvania markets.

Slide seven shows progress in other areas of our business. Upgrades to the acquired cable systems continued at a good pace with 68% of those markets now upgraded to two-way capability and now offering high-speed data and other premium video services. We now have voice services available to nearly 6,400 of the homes passed outside Shenandoah County with additional systems scheduled to receive these services in the coming months.

Our wireline segment now offers DSL service to all the customers served by the North River Network we acquired last November. This service has been well-received in that market and continues to be in demand in our [Legacy Lake] area. In total, our DSL customers grew by 5% in the first quarter of 2010.

Although frustrated with the slow progress, we are continuing to work towards the sale of our converged services business. This process continues to be delayed due to challenges faced by buyers seeking funding in difficult economic times. However, we still have potential buyers actively working to obtain funding, and we remain hopeful that a sale can be executed in the next quarter.

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 nine.

As Chris mentioned, we are pleased with our first quarter results. For Q1 '10, earnings per share from continuing operations were $0.28 in comparison to $0.26 for Q1 '09. Results of the discontinued operations included earnings per share were $0.29 for Q1 '10 in comparison to a loss of $0.18 per share for Q1 '09.

Moving onto slide 10. Operating income before depreciation and amortization or OIBDA for Q1 '10 was $19.8 million or down $100,000 from Q1 '09. The change in OIBDA results by segment is given on slide 11. An increase of 5% in average wireless customers over Q1 '09 drove a $651,000 increase in wireless OIBDA.

Three factors resulted in the decrease in OIBDA of $752,000 in the cable segment for the first quarter of 2010, relative to the first quarter of 2009. Improvements to the network to begin to offer a triple play of voice, video and high-speed data drove costs up. In addition, there were also significant customer acquisition costs associated with acquisition of new customers in the form of commissions, promotional discounts and installation costs.

Finally, some small non-core systems representing approximately 10% of the customer base were sold in December of 2009.

Cash flows on a consolidated basis appear in slide 12. Net cash from operations decreased by $5.2 million in Q1 '10 over Q1 '09 as a result of timing of the quarter end 2010 Sprint payment, and changes in the timing of vendor and tax payments. Capital spending of approximately $9.6 million was up $500,000 from the first quarter of 2009. Future capital spending will be lower than 2009 until we close on the acquisition of JetBroadband.

No incremental borrowings were required in the first quarter of 2010 and the delayed draw term loan and the existing revolver are more than adequate to support our operations until they are refinanced when we put in place our facility for the JetBroadband acquisition.

As we have mentioned before, the IRS has approved the distribution of our defined benefit pension plan and distribution of its assets began in May and should be completed in the second quarter. When completed, we expect to record an incremental $3.4 million of expense related to terminating the plan and make a payment of $600,000 to fund the remaining liability.

These numbers are as of the quarter ended March 31, 2010 and could change slightly when the final calculation of the plan accounting is complete.

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, everyone.

Slide 14 shows the wireless PCS customer growth since December 31, 2008. During the first quarter of 2010, we added 1,708 net customers, a 7% increase over the first quarter of 2009. At March 31, 2010, we had 224,526 PCS customers, an increase of over 5% from a year ago.

The growth curve is slower than the past years, but we continue to build a high-quality customer base. I will remind you that all of these customers are postpaid since we do not currently have a prepaid option. We anticipate being able to sell the Virgin Mobile and Boost brands on our CDMA network before the end of the second quarter.

On slide 15, you can see that while gross adds are down from 15,248 to 14,516, we actually had more net additions in the first quarter of 2010 than we did in the same quarter last year. We are very pleased that our churn decreased from 2.15% in the first quarter of 2009 to [1.91%] this year. We continue to hold the line on credit standards and focus on local customer service.

Slide 16 shows that our gross build data ARPU continues to grow, resulting in an average of $20.54 per customer per month during the first quarter. This represents almost a 14% increase from the very healthy $17.99 we had in the first quarter of 2009. The decrease in total ARPU results primarily from a greater percent of our customers on rate plans with larger usage allotments and add a phones.

The Sprint Nextel value proposition is clearly well-received in our markets.

Slide 17 provide you the reconciliation between our gross build revenues and the net service revenues reflected in our financial statements. The improvement in bad debt and service credits from a year ago resulted in a 4% increase in net revenue from a 3% increase in gross build revenue.

We continue the trend of a significant number of our customers selecting the higher revenue plans as shown on slide 18. The any mobile, any time plans that allow customers to call any mobile customer on any network continues to differentiate Sprint with the value message compared to Verizon or AT&T.

We continue to sell a good cross-section of phones. What is noteworthy is our industry-leading level of data revenue when we sell a low percentage of smartphones and other carriers. Our distribution channels continue to do an excellent job of selling the right phone to match our customers' needs.

Our aggressive wireless upgrade program started in 2007 is complete. Slide 19 shows the large number of cell sites we have added over the past two years, along with EVDO sites to provide 3G coverage to 95% of our covered POPs. We added only five new sites in the first quarter of 2010.

We have accomplished our goals of keeping ahead of capacity requirements in the busiest parts of our network, significantly improving our coverage, particularly in Pennsylvania, and improving and providing the most robust 3G coverage in our service area.

The ongoing needs will be primarily success-based, focused on adding additional capacity.

Moving to our wireline segment on slide 20, you see that we continue to have modest access line losses. Our broadband penetration using DSL and our telephone footprint is now at 46% with a monthly broadband ARPU of $37.54.

We continue to enhance our network to offer higher speeds with many of our customers now able to get 10 megs or more. The customers from our recent acquisition of North River Telephone are included in these numbers. And we have completed the construction of the North River DSL network. So we are able to offer DSL to all of these customers.

As a result, DSL customers grew by 492 in the first quarter of 2010 or 5% -- two thirds of the new DSL customers from our legacy telephone area and one third from our new North River market area.

Significant efforts continue in our cable operations. We have owned the Rapid Cable Properties for 16 months and have upgraded 68% of these markets in the past nine months. We began rolling out voice services to several markets in late first quarter of 2010. We have had our best quarter in cable RGUs as shown on slide 21.

As a reminder, we include the broadband DSL customers located in Shenandoah County where we are the telephone company and our wireline segment although the 8,000 plus video customers located in Shenandoah County are included in the cable segment of RGUs.

As we have upgraded the acquired networks, we have relaunched with additional video services and high-speed Internet. Additionally, we plan to start focusing on business customers during the second half of 2010.

Slide 22 shows the evolution of our cable markets over the past 15 months. In December 2009, we sold several small systems covering approximately 8,000 homes passed and approximately [1,800] RGUs and mostly video customers.

As mentioned, we have upgraded 68% of the homes passed in the acquired markets, 77% including the homes passed in Shenandoah County. Available [homes] for voice services will increase rapidly and we expect to have all systems upgraded for all services by the third quarter of this year.

My final slide, slide 23, breaks down the year-to-date and our current view of capital expenditures we have for the balance of the year. Our spending, including an expected $11.1 million to upgrade JetBroadband networks, will essentially be equivalent to 2009.

I will now turn it back over to Adele.

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

(Operator Instructions). Ric Prentiss with Raymond James.

Good morning. Busy day, appreciate you guys doing the call and having such a nice crisp deck. Big news this morning with Sprint introducing their new rate plans. I appreciate Earle's comment that you guys will get start selling Virgin and Boost CDMA before the end of the second quarter.

I wanted to probe deeper on that. One, how will you start distributing that? Are you going to put it into your stores or are you looking at other stores? Start with that.

Yes. We will be selling it in our own stores. We will be selling it through our exclusive agents. There are already some agents in the area that were previously selling directly with Sprint. Those will roll under our distribution plan and we are going to actively add new agents that will focus just on prepaid.

And how important do you think prepaid will be? Haven't had the opportunity in the past. In your markets, how successful have other prepaid operators been? And have you been waiting with bated breath to get it or is it just a nice to have or a need to have?

I think we are very excited about getting it. We have always had a fairly high credit standard and so we do have customers who walk out the door because they don't meet our credit.

This is going to be great to have an alternative to offer those customers. So I think that it will have an impact right away and I think once the word on the new Sprint packages get into the marketplace, I think that is also going to enhance the traffic into our stores.

And I assume you've had a chance to look through the plans a little bit. How do you think it will be positioned to Virgin, the 25 versus the 41 versus the 60? Where do you see the usage and demand in your markets being interested in it?

I think probably the middle of that is going to be a very important price point for us. There will be -- I think could be a little bit of erosion from existing postpaid at the high end of that range. But I think the middle of that range is a very good price point compared to the current postpaid and I think offers great value to the customers.

Thanks.

Barry Sine with CapStone Investments.

I wanted to ask a couple questions on the Rapid Cable Properties. Before I do, could I just ask one follow-up on the prepaid plans? Could you compare the -- your expected margins on selling prepaid with the existing postpaid business?

I expect that the margins will be slightly less than they are in the postpaid. Primarily because churn being so high, you don't have the [length] of customer, but what offsets that is the fact that we're not going to have the equipment subsidies that we have in the postpaid.

So the margins will be good. They will just probably be marginally lower than the ones we experienced in the postpaid.

Thank you. And then, on -- some questions on the table. First of all you mentioned at the end of the year you sold off a small number of properties. Could you give us the rationale what were you doing there, why did you sell those properties?

These were properties that were not adjacent. The majority of them were not adjacent to any other systems that we were upgrading. They also -- the plant was in particularly poor condition. And so the amount of money it would have taken us to upgrade those networks to be able to provide a triple play really was not cost-effective.

And so, we looked at kind of a bundle of properties. Armstrong Utilities was the company that bought it from us. They had telephone operations in that area, so it made a lot more sense for them to own and operate those cable systems.

And if you could compare the progress that you have made to date in upgrading the [Rapid] properties, how is your plan progressing, vis-a-vis your initial capital expenditure, expectations, and also versus your timeline expectations, both to get them fully upgraded and then to get to market with a full triple play offering for customers?

As far as from a cost standpoint, we are basically right on budget. Actually a little bit below what we expected to spend. The good news is that the outside plant, in most cases, has been in better shape than we expected. So we have spent all the dollars we expected to -- we planned to spend on the electronics but the outside plant was marginally better and therefore we haven't had to spend those dollars.

As far as timing, we always expected that the winter months would be tough for us to do upgrades. As you can see, we did not add a lot of new homes passed upgraded in the first quarter. It only went from 64 to 68.

But we have already started an aggressive program to continue. And we have already upgraded several systems this month and continue -- in April and will continue it in May and June. So we are basically on target for where we thought we would be and maybe 30 to 60 days behind. We didn't quite get as many done before winter as we had hoped.

And I think you said by the end of the third quarter, you expected to complete the network upgrade work. When will you be in the market with a full triple play video data as well as voice offering in all of those markets?

We have already launched voice in several of the markets at this point. As we get closer to the end of the third quarter, we expect that all systems will offer all three services by the beginning of the fourth quarter.

And just turning to a comment that I think Adele made on one of the slides. You mentioned that with the additional debt you are going to take on, associated with the JetBroadband acquisition, that is going to bring down your cost of capital.

Do you have an estimate of what your new cost of capital is going to be, Adele?

No, we don't disclose that externally, but I don't have to educate you on the fact I'm sure, Barry, that the cost of equity is far greater than the cost of debt. We are running right now on a variable rate, 2.8%, on our delayed draw term loan. We have negotiated a facility, but not closed on a facility that would be LIBOR plus 3.5 starting out and it is leveraged to clients. Over time, that rate would drop.

So we feel very good about our ability to reduce the cost of capital by going with a capital structure that involves more debt.

Okay and then also if I could get your comment -- obviously, there's news out of the Federal Communications Commission today. They are looking at changing the rules for broadband, for data services and perhaps introducing net neutrality requirements.

How does that change your thinking, if at all, on what you've done in cable? The acquisitions and your planned capital spending?

Not knowing exactly what the FCC is going to plan, it's hard to have any definitive answer. But we are not concerned about net neutrality. We believe that that would -- whether that is ultimately the law of the land or not, it really doesn't change our opinion on the cable acquisitions.

And my last question. I just want to confirm a data point that you gave on slide 19. Total cell sites went from 419 to 481 during the course of the first quarter. Is that correct?

(multiple speakers)

From year-end 2009 to year --.

Okay, yes, end 2009 so first quarter?

If you look at the bottom, the first two columns are 12/31/2008 and then 3/31/2009. And that you have 12/31/2009 and then 3/31/2010. So it is actually over 15 months.

[Greg Burns] with Sidoti & Company.

Good morning. Could you give us the number of Virgin Mobile subscribers currently in your territory? And then I guess any potential magnitude of the payment, [I guess], the Sprint for these customers?

We are still in the process of negotiating that. So at this point, it would be premature for me to provide that to you. But we hope to have those negotiations completed very soon. And once we do, we will be disclosing it.

Okay. The number [subs], also?

I can tell you that there is approximately 50,000 Virgin Mobile customers in our footprint today.

Okay. And Adele, OpEx was down about $1.7 million quarter over quarter. Could you just give a little color on what was driving that delta and how we should think about OpEx for the balance of the year?

Well, OpEx is continuing to go up in PCS to the extent that we bring new cell sites on. And as we've talked about before, Greg, you know, you have the effect of cell sites that you added the previous year being in place for the full year 2010 versus a partial year 2009.

OpEx and cable continue to go up as we have more maintenance costs and more depreciation associated with those new cable systems. And we continue to enhance the wireline networks and they are -- the incremental costs for the most part are also associated with depreciation and the network.

Okay. Thank you.

Will Lauber with Sterling Capital Management.

With the JetBroadband acquisition, there's a pretty big gap between the current penetration and the industry average. In your business case, are you assuming that you get up to industry average? Or what is the expectations on that?

The answer is yes. We don't see any reason why these properties can't perform at the industry average. Obviously, our desire and expectations is it will beat the average.

But there's nothing unusual about these markets. If anything, we probably have the advantage of a telephone competitor who is probably not nearly as focused as the telephone competitors are in the large markets.

And we have the advantage of not having any overbuilders, to speak of, in those markets.

Okay, and then, I would imagine kind of the timing of that, it would be heavily loaded, probably in the first couple of years or how should we think about that? Getting up to the industry average.

I think it would probably not be in the first 12 months in particular, because of the effort that we are going to take in rebranding.

And we still have some upgrading to do there as we've announced. We will be spending $30 plus million in upgrading those systems over the first two years. So I think you'll see parts of the network where we can narrow that gap in the early years. But it will take us upgrading those systems to be able to offer a robust triple play before we can really match the industry numbers.

The good news about that is upgrading the electronics. It doesn't take as long as upgrading the outside plant as we had to do with Rapid.

So I mean, I guess it would be a function of doing the upgrades and I guess after you have the upgrades, you have your product. And I don't know -- I mean, I'm trying to just kind of piece together like I would think about getting up to that speed -- you know.

I think it's going to take us two or three years. Well hopefully less, but I think if you are looking at it realistically, there is quite a gap between where they are and where we expect them to be. So I think two or three years is not an unreasonable runway.

My last question is -- don't take this the wrong way because we are in a profession where we are second-guessed all the time. But it seems to be kind of the sentiment in the market and laying of a stock is that I guess besides these two smaller acquisitions that you did recently that, one, going back is the converged services which has turned out to be quite a disappointment. And then now you are taking on a big acquisition.

Could you just Monday morning quarterback? You know, what went wrong with the NTC acquisition and why your investors should believe this, the bigger JetBroadband acquisition is a good move?

I guess there's -- trying to keep it brief. I mean, when you look at our converged services business, the problem we had there were kind of twofold. Number one, we were relying almost completely on a third party for our margins. And the Dish contracts that were in place when we bought the business changed dramatically when we went from primarily analog to additional lineup. Our margins were very, very robust in the analog world. In the digital world, it would be the margins are not as healthy.

The other thing is that we just didn't get the scale in localities that we expected to get. At the time when we bought the business, the cable companies in particular were not focused on MDUs. They became more focused on MDUs later in the period.

And then third, the FCC ruling that basically prevented any common carrier. And because we own a telephone company, we are a common carrier. You cannot have exclusive contracts on the retail side, which also prevented us from growing the retail side of our business as quickly as we might have been able to, previous to that.

As far as the differences, I think there is a significant number of differences. We are looking at franchised cable areas where we are an incumbent. We are competing against phone companies that do not focus on these service areas. I think we have shown in a very short period of time our ability to bring rapid properties up to par and also start growing customers on that very quickly.

And the other part that I think is going to really help us is our ability to leverage our fiber assets, which we were not able to do in the converge services business.

I actually think the more valid comparison as Earl points out is to the Rapid acquisition and the recent progress that we have made there, rather than the NTC acquisition.

I mean what some will have to do with it is and that these recent acquisitions you are pretty much in your own backyard as opposed to far-flung places, is that it?

That's part of it although part of NTC we're close by. We had -- if you look at the margins on the properties that were close by, that we could leverage our fiber assets, the margins were very good. Where we couldn't get the margins is where we were trying to plant new flags where we didn't have infrastructure.

Okay. And my last question. I had asked Adele in a conversation, I guess a few weeks ago, what --? Looking at the map that you -- from that acquisition, what are --? Is there any one particular cable company that would kind of fill in the various areas there like in Blacksburg and some of the other areas that would go in? Is that -- is it just one cable company in those kind of areas or is there a multitude of cable companies looking out [at] potential acquisition candidates for you?

It is a relatively fractured map at this point. There wouldn't be a single acquisition or a single company that we could talk to that would, usual words, 'fill in the gaps'. But we will continue to work and if there are individual properties or groups that come on the market, we will look at them and see how they fit into our footprint.

But obviously anything that we could buy that is adjacent would add tremendous value.

Who is the cable company in Blacksburg?

That's Comcast.

Comcast. Okay. Okay. Thank you very much.

Ric Prentiss with Raymond James.

Sorry. I want to circle back to wireless for a second there. Sprint is putting a pretty significant emphasis on 4G with Clearwire One and getting it built out, but also in selling converged 3G, 4G devices. They are getting the [EVO] this summer.

What are your thoughts as far as now that you are bringing pre-paid into the mix, bringing 4G into the mix and will you get the EVO?

On 4G, actually Harrisburg and York, Pennsylvania were launched this week and we are selling 4G in our stores there. So it's really too early for me to have an indication of how that is going to go.

We are selling 3G, 4G cards that Sprint is selling elsewhere. As far as the EVO, we anticipate that we will have access to that phone also, although that hasn't been finalized. But since it will be a 3G, 4G device we see no reason that we won't be selling it as Sprint is in their stores.

I think there is a lot of buzz around it. We are very excited about the potential. Even if all it does is drive traffic to the store, we think it could be a real plus for us.

Since we are at the edge of the greater Philadelphia 4G network, we are not sure we are going to see the same impact that we would if we were in the middle of a large 4G island.

Has Clear opened up any stores or are they just turned on the service?

To the best of my knowledge, they have opened up a single store and they've signed up several agents. But they haven't made the kind of splash that they've made in major metropolitan areas.

Okay. And then for Adele maybe, just an accounting reporting questions, how will you treat prepaid? How will you treat 4G [in] kind of looking at the financials?

It all falls under the same relationship with Sprint. The payments, the expenses that we pay to Sprint may differ and certainly will differ from the 8 plus 8.8% that we have now in terms of a management and a service fee. Dependent upon how they have structured that relationship with Clearwire and what have you and we'll have all of the final details nailed down.

But it will be accounted for in precisely the same manner that we do now net of Sprint fees in our service revenues.

And how will it affect ARPUs? Because some of these will have some differing ARPUs versus what you report on?

It will certainly drive ARPUs down because on average, as you know, I know you are very well-educated in that space, you know the ARPUs in this market, in this target market, run generally about $40 per month and you know our gross right now is more like $55.

And Virgin Mobile customers have been significantly lower than that. So the embedded base that we will be getting won't be at the $40 rate but I think when you look at incremental customers they will be at the $40 plus rate.

So you guys won't really be separating out the customers or the ARPUs? It will still be this kind of TCS or wireless revenue and wireless subs and then an ARPU that kind of comes out of that then? (multiple speakers).

No. I think we will provide detail showing the prepaid and postpaid so that you will be able to continue to track that. But as far as the accounting goes, I think what Adele is saying is, we will continue our netting the fees, but we will provide enough detail for you to know the direction of both of our lines of business.

Yes. That will be helpful. Thanks.

Thank you. I'm showing no further questions at this time.

Thank you for participating. Just one point of clarification on slide 19 the number of cell sites that we had at the end of 2009 was 476. So we have added just six cell sites or five since that time. So just so you know that.

I would like to invite you to let me know if there are additional details you'd like to see on future calls. Ric, in addition to just the separation between prepaid and postpaid, my contact information was provided on the press release.

Thank you for participating. That concludes our call.

Ladies and gentlemen, thank you for participating in today's program. This does conclude the call. You may all disconnect and everyone have a wonderful day.