Shenandoah Telecommunications Co (SHEN) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Shenandoah Telecommunications second-quarter 2010 results conference call. (Operator Instructions). As a reminder, this conference call is being recorded.

I would now like to turn the conference over to our host, Ms. Adele Skolits. Ma'am, you may begin.

Thank you. Good afternoon, everyone. Thank you for joining us. The purpose of today's call is to review Shentel's results for the quarter ended June 30, 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.

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 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're 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 statements.

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 our SEC filings.

I will turn the call now over to Chris.

Thank you, Adele. We appreciate everyone joining us this afternoon. The second quarter of 2010 was a very busy one for our Company, and we've had many significant accomplishments since our last quarterly call. I've listed some of the highlights on slide 5.

Last Friday, we closed on the acquisition of JetBroadband. At close, the JetBroadband network passed approximately 115,000 homes and had approximately 66,000 revenue-generating units, or RGUs. This acquisition was funded with new credit facilities, which Adele will discuss later on this call.

In our existing cable business, we are pleased with the 7% increase in RGUs during the quarter. These results are driven by the substantial progress we've made in expanding voice services to 40% of the homes passed and high-speed Internet to nearly 60% of the homes passed.

In early July, we signed an amendment to the current contract with Sprint Nextel to allow Shentel to sell Virgin Mobile and Boost prepaid wireless services. With the signing, these prepaid products and services became available in the Shentel wireless service area through Sprint stores operated by Shentel, as well as hundreds of other locations. Shentel also acquired the rights to future revenues related to the approximately 50,000 existing Virgin Mobile customers in our service area.

Late in the second quarter, we also began offering 3G/4G data cards and, more recently, handsets. This happened in conjunction with 4G services becoming available in our York and Harrisburg, Pennsylvania, markets.

A third highlight was the final distribution of the assets from our defined benefit pension plan, which happened in early June. We recorded significant incremental nonrecurring expenses in the second quarter as a result of this final distribution and the curtailment of the Supplemental Executive Retirement Plan.

As you can see on slide 6, on a consolidated basis, we are reporting net income of $4.6 million for the quarter compared to $6.7 million from the second quarter of 2009. Net income from continuing operations was $4.5 million for the quarter as compared to $6.8 million in the second quarter of '09.

The 2010 results from continuing operations include $3.8 million before taxes, and $2.2 million after taxes, of expense related to the just-mentioned retirement plans.

On slide 7, we've listed the highlights from our progress in the wireless segment of our business. Postpaid wireless PCS customers are up 5% from a year ago. Continued growth was helped by churn of just 1.7%, relative to the 1.9% for the first quarter of 2010.

We still have not reached agreement for the sale of our converged services business, although we continue to work with potential buyers. This process remains challenging as potential buyers actively work to obtain funding. We continue to expect that a sale will ultimately be achieved.

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 9. For Q2 '10, earnings per share from continuing operations were $0.19 in comparison to $0.29 for Q2 '09. The impact of closing and curtailment of the retirement plans was over $0.09, which accounted for most of the change.

Moving on to slide 10, adjusted operating income before depreciation and amortization, or OIBDA, for Q2 '10 was $20.3 million, or up $400,000 from Q2 '09. In order to better understand the forces driving this change, I've provided the OIBDA results by segment on slide 11.

Adjusted wireless OIBDA was flat, while average customers were up 5.5% in Q2 '10 relative to Q2 '09. The Company absorbed an increase in the Sprint Nextel service fee. Since amending the Sprint Nextel management agreement effective January 1, 2007, the service fee we pay Sprint has been 8.8%. The amendment provided for adjustment of the fee as the net cost of the services provided in the contract change. This is the first time Sprint has exercised this option, and since the net cost exceeded the maximum, the fees were adjusted to the maximum of 12% effective June 1, 2010. The change in percentage results in an increase in the net service fee of approximately $300,000 for June.

Going forward, based on current revenues, the net service fees will increase approximately $4 million per year. Since the net service fee percentage is at the maximum allowed in the contract, we anticipate the percentage will remain at this level through the end of the contract unless renegotiated in a future amendment.

Including this change, Sprint Nextel fees increased by $600,000 for the second quarter of 2010. In addition, the cost of the expanded network coverage and rollout of EV-DO coverage resulted in an $800,000 increase in network costs.

Adjusted wireline OIBDA increased by $1.5 million in Q2 '10 over Q2 '09. Access fees increased by nearly $900,000 as a result of the retrospective adjustment to US reimbursements received from NECA.

Facilities leasing increased over $300,000 as a result of ongoing sales efforts. Service revenues increased by $300,000, primarily as a result of a rate increase implemented in March 2010.

Adjusted cable OIBDA decreased by $1.2 million in Q2 '10 over Q2 '09. Approximately $900,000 of this decrease relates to growth in the cost of acquiring customers, including installation, commissions, advertising and marketing. While net RGUs grew significantly in Q2 '10, this growth was offset by the sale of systems, with nearly 1800 RGUs in December 2009.

Simultaneous with closing on the JetBroadband acquisition, we entered into a series of syndicated debt facilities. The terms of the facilities are outlined on slide 12. The facilities include a $189.8 million term loan which matures in five years. The term loan bears interest at LIBOR plus 3.5% at the outset. This rate is expected to drop to LIBOR plus 3% over time as our leverage drops.

While we have other floating-rate options, we have chosen to tie the rate initially to one-month LIBOR. There is no LIBOR floor, and at the time the deal closed, one-month LIBOR was approximately 30 basis points. The amortization will be 5% in year one and 10% each year thereafter.

The credit agreement requires that one-third of the outstanding balance on this loan be hedged and that the Company meet certain maintenance covenants outlined on this slide. In addition, the facilities include a $50 million revolver and $8 million in a fixed-rate term loan.

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.

Thank you, Adele. Good afternoon, everyone. Slide 14 shows the postpaid wireless PCS customer growth since December 31, 2008. As Chris mentioned earlier, we did purchase approximately 50,000 prepaid customers in July, but they are not reflected on this slide.

At June 30, 2010, we had 227,437 postpaid PCS customers, an increase of over 5% from a year ago. We began selling the Virgin Mobile and Boost brands on our CDMA network in July. The third-quarter results will reflect the prepaid customers.

On slide 15, you can see that second-quarter gross adds are down from 14,936 to 14,177. Churn has decreased from 2.1% in the second quarter of 2009 to 1.7% in the most recent quarter. This downward trend is consistent with Sprint's results.

Slide 16 shows that our gross billed data ARPU continues to grow, resulting in an average of $20.61 per customer per month during the second quarter. This represents over a 12% increase from the $18.35 we had in the second quarter of 2009.

The decrease in total gross billed revenue per user has continued primarily due to greater percentage of customers on rate plans with larger usage allotments, the shift of usage patterns from voice to data, and add-a-phones. The Sprint value proposition continues to be well received in our markets.

Slide 17 provides you the reconciliation between our gross billed revenue and the net service revenues reflected in our financial statements. The improvement in bad debt, offset by an increase in service credits from a year ago, results in the combination remaining at the same percentage of gross billed revenue, net revenues growing at slower pace, and gross billed revenue as a result of the change in the net service fee percentage that Adele explained earlier.

We continue the trend of a significant number of our customers selecting higher revenue plans, as shown on slide 18. Rate plans that contain the Any Mobile, Anytime feature continue to provide a powerful value message. In the second quarter, 40% of our gross additions took the Everything Data Family 1500 plan.

We continue to sell a good cross-section of phones. As we've pointed out before, we have one of the highest data revenue per users, with a lower percentage of smartphones than other carriers. In the second quarter, 38% of the phones sold were smartphones, raising the mix of smartphones to 24% of our base. Our distribution channels continue to do an excellent job of selling the right phone to match our customers' needs.

Wireless construction has slowed from our record spend in 2008 and 2009. Slide 19 shows the large number of cell sites added in 2009, along with EV-DO sites to provide 3G coverage to 95% of our covered POPs. We added only seven new sites in the first half of 2010. The high construction expenditures in 2009 are now reflected in the increased operating costs in 2010. The ongoing capital expenditures will be primarily success based, focused on adding additional capacity and improved in-building coverage.

In the second quarter, 4G coverage became available in portions of our York and Harrisburg, Pennsylvania, markets as part of Clearwire's launch of the greater Philadelphia market. We are now selling 3G/4G data cards and phones throughout our service area.

Moving to our wireline segment on slide 20, we continue to have modest access line losses. The unusual pattern in the access line count reflects the addition of approximately 950 access lines from the acquisition of North River Telephone Cooperative in November 2009. Our broadband penetration using DSL in our telephone footprint is now at 49%, including the North River area, which, like the rest of our telephone footprint, has a 100% DSL availability.

We are continuing to enhance our network to offer higher speeds, with many of our customers now able to get 10MB or more.

Significant efforts continue in our cable operations. We have owned the Rapid Cable properties for 19 months and have now upgraded 85% of the homes passed. We plan to have all of the homes passed acquired from Rapid upgraded by year-end. We continue to accelerate growth in RGUs, with 1873 net new RGUs in the second quarter, as shown on slide 21.

As a reminder, the broadband customers using DSL where we are the telephone company are reflected in our wireline segment, although the 7800 video customers located in Shenandoah County are included in the cable segment RGUs.

Slide 22 shows the evolution of our cable markets over the past 18 months. In December 2009, we sold several small systems covering approximately 8000 homes passed and approximately 1800 RGUs, mostly video customers. This chart shows the numbers of homes passed and the numbers of homes where Internet and phone is available, along with penetration rates for those services. Our penetration rates are below the industry average, so we are confident there is significant upside potential.

During the second quarter, we sold 1873 net new RGUs, with 1040 broadband RGUs and 783 voice RGUs, which appears to show the demand for these services in the markets we serve.

My final slide, slide 23, breaks down historical capital expenditures by reporting segment, along with our current view of the capital expenditures for the current year. Our 2010 spending, including the expected $11.1 million to begin the upgrade of the JetBroadband network, will essentially be equivalent to the total capital expenditures for 2009. The 2010 number -- total also includes the dollars to complete the upgrade to the cable networks acquired from Rapid in December 2008.

I will now turn it back over to Adele.

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

(Operator Instructions). Ric Prentiss, Raymond James.

Thanks for providing the segment information on the presentation, also, Adele.

You're quite welcome.

First, first question I've got for you guys is, Earle, I missed one of the numbers; it's been a long day for us. You said smartphones sold in the quarter were how much?

38% of the phones sold in the quarter were smartphones.

Okay. And 24% of the base, I caught.

Yes.

Is that smartphones only, and air cards would be up and above that?

Air cards are above that.

And do you have what the total would be with smartphones and air cards, just to kind of compare it to other people out there?

About 10% to -- almost 11% of our base are cards.

Okay. We've heard a lot from Sprint, talking about looking at their next RFP for their network, looking at LTE, WiMAX been rolled into base stations. What are your thoughts as far as upgrading the wireless network as far as timing? Or do you piggyback on Sprint's RFP, or just what's involved with the whole thoughts on going to 4G?

We've had some preliminary discussions with Sprint on their plans. Our contract allows us to piggyback on their contracts. So whatever contracts they sign, we will have the option to get the same pricing as we always have.

As far as timing, we are still looking at their schedule. I expect that we won't see any significant capital expenditures on our side until late 2011 at the earliest, but probably not until 2012.

And you mentioned you've been now getting the handsets also for 4G. Were you able to get enough EVOs, or is it still kind of capacity-constrained for you guys, too?

It is capacity-constrained. We sold about 2000 of them in the period of time that they were available in the second quarter. We could have sold more, but just couldn't get enough.

And then on the prepaid side, you guys have started selling that. Which rate plans do you find being the most interesting to people as you've now gotten into the prepaid world?

I still -- I think the Boost price plans, out of the gate, seem to be the most interesting. I don't know if that is because Boost has been advertising more heavily for a longer period of time, and that the new Virgin Mobile rate plans just really haven't gotten good exposure in the marketplace yet. But for the first couple of weeks that we've been selling, the biggest sellers have been the Boost plans

Those are like the unlimited 50 kind?

Right.

Great. Thanks, Earle.

Barry Sine, CapStone Investments.

My questions are also around the prepaid business. First of all, the 50,000 subscribers you've acquired the revenue rights to, what did you pay to acquire those?

We paid $138 per subscriber.

And can you give us any sense of what you're seeing in terms of ARPU at this point -- I know it's a little bit early -- in your markets for the prepaid subscribers?

Really don't have good information on that yet, Barry. We will have more detail at the third quarter.

I know that you obtained the right to begin offering prepaid as -- I think the date is July 11. What was the actual date? Did you immediately get it into all the stores at that point? Was there a delay? What was the rollout date?

And then, I know it's a little bit early, and you've already mentioned which plans are the most popular, but how is that doing versus the postpaid offering? Is it much more successful, about the same, less successful?

We actually started selling in all of our stores and our branded stores on the same day, on the 11th. Some of our other third parties which we control probably didn't get on for a week to 10 days. It was a period of time as we got them all set up.

There were already distribution channels in the marketplace selling Virgin Mobile. So that really didn't change.

As far as the pattern so far, looking at July, we did not see a significant change in our postpaid activity in July. But once again, with there not having been a lot of advertising to even know that the prepaid was in our stores yet, it's probably a little early to draw any conclusion about what that pattern may be going forward. But as far as the very, very preliminary information that I have available, there really doesn't appear to be any cannibalization of our postpaid business at this time.

Do you have any data points prior to your ability to offer prepaid, what percentage of customers walking in the door you were rejecting for credit reasons, so now you would have an ability to offer them something with prepaid?

Anecdotally, I would say probably one in four either didn't meet the credit requirements or was unwilling to pay a deposit. So we do believe that there will be a lift in our stores once customers realize that we have that option.

That sounds pretty significant. And then on the 4G, can you give us a little more of a sense of how the revenue and the cost split is working? If you sell a 3G/4G phone or data card, how does the revenue and expenses get split there?

Barry, it's basically exactly the same way that we are settling currently. Right now, there is an additional $10 charge for 4G data. We get our percentage of that, just like we do all the rest of the revenue. So there is really no significant difference in the settlement process.

Okay. And then turning to the cable business on the Rapid properties, could you describe your offer that you're going out to market with today? What are you including in the bundle, and what is the pricing? And what are you seeing in terms of competitive responses in the marketplace?

We are offering a variety of -- kind of almost a Chinese menu, because we realize that we are not a known entity at this point in time. So we are trying to use whatever service we can to get into the customer's home, with the idea that we can expand from that. But where we can offer a triple play, we are offering a triple play that is for -- you could add a lot of bells and whistles, but basically $100 a month.

We've actually had a lot of success selling broadband and phone to customers who are reluctant to give up their satellite, but are more than happy to change from the telephone company to us for the broadband and the phone. So as you saw in the net change of RGUs, the predominant amount of net change was in broadband and voice.

And we offer two flavors of voice. We offer voice with and without unlimited long distance. And if you don't buy the unlimited long distance, we are able to sell you LD calls at $0.04 a minute, which is pretty compelling, so that in every case, we are able to offer a much more attractive phone offering than the incumbent. And in most cases, we are able to offer more speed -- at or more speed than the incumbent in the broadband.

So once we get that base of customers and the word of mouth starts, we are very, very optimistic that there's some good growth there. And where we have upgraded the video from a couple of the franchise areas that we just recently upgraded in the late second quarter, only had 24 channels. So going from 24 channels to over 100, those folks are pretty excited, too. So we are getting a lift there also.

But as far as the competitive environment, really there has been no response at all from the incumbent telephone company. And the satellite companies continue to market aggressively directly and through their third parties.

And just lastly as a follow-up, your marketing channels that you're using, you mentioned word of mouth. Do you have people knocking on doors or any television advertising? What are you doing in terms of advertising these services?

A little bit of everything, as reflected by our costs. I mean, we are spending pretty heavily both to talk about the product, but also create the brand awareness. But we have been quite successful with our own employees and third parties doing door-to-door.

We have a fairly good percentage of sales actually being done as add-ons by our customer service group. We have given them training and some incentives, as far as commissions, for them to upsell or add services to customers when they are calling in for any particular reason.

So I would say that probably about 35% to 40% of our gross adds are coming from door-knocking, and the remainder are coming from direct mail and telemarketing and the upselling on inbound calls.

Okay, those are my questions. Thank you.

Greg Burns, Sidoti & Company.

Just a follow-up on the last question in regards to the marketing on the cable business. Does that wind down at any point going forward, or is there any overlap with the marketing efforts you are putting in for the Rapid business and the Jet cable acquisition?

I would say that we will be advertising heavily through next year, continuing to build the brand, continuing to build awareness in the existing properties that we have. We have just kicked off this week -- since we closed on Friday -- we had advertising ready to go. We kicked off this week, primarily just, Jet is now Shentel, so not really an offer-based advertising at this point, but just name awareness, because it is not a part of the state where we've done business before. So we've had to -- we are in the process of creating some name awareness.

We will very quickly, in the next 30 days, be moving to an offer-based advertising on the TV. But these are smaller markets, so the amount or number of outlets that you have are limited. So it will be some print, pretty heavy on direct mail, radio and TV where it makes sense, mostly cross-channel, which is good for upselling and adding new services. But we will do some on the broadcast channels so that we will actually be reaching potential customers.

Okay. And then switching to a question on the wireless, gross adds were a little lighter than we were looking for. And I was just wondering if maybe you could give a little color on what's driving that and if you doing anything I guess proactively to bring those numbers up. And also, are you seeing any positive impact from the buzz surrounding 4G, getting people in the stores and anything along those lines?

Let me start with the 4G question first. 4G covers geographically a relatively small percentage of our area, probably about 25% of the POPs, but a much smaller percentage of the geographic area.

We have seen some interest. But the coverage, to be very honest, in York and Harrisburg -- we are at the edge of the network. So we are actually being very, very careful not to oversell the 4G when customers come into the store, because we don't want them to have an experience that is not up to their expectations. So we work very, very hard to understand where their travel patterns are. And if they do want a 4G -- 3G/4G card, we explain to them where 4G will be available and where they will be on 3G.

So I think it does create some buzz. I believe that if we had had more EVOs, we would have seen higher gross adds, because we took names, but really weren't able to fulfill the expectation. And once a name gets cold, you're not sure if you're going to be able to sell it, because customers or prospects are pretty fickle. The next new phone out, and they are ready to jump on that one, too.

As far as looking at how to drive more traffic into the stores, we have just launched a new campaign, a basically did-you-know campaign, really trying to -- we use kind of some humor. Did you know some funny fact, and did you know that you can get all of this great service from Sprint for $69.99? And we are starting to do that on billboards and mailers and various media, and it is starting to get some traction. We've only been running it in the market for about 45 days, so it's a little early to know exactly how successful it might be. But we do everything we can to drive traffic into the store. What we're finding is that traffic is down, but we are being pretty successful at closing the traffic that does come through the door.

Okay. Thank you.

(Operator Instructions). I am showing no further questions at this time.

Thank you for participating, and Ric, thank you for your feedback today. As always, please let me know if there are additional details you would like, either on further calls or in releases going forward. My contact information was provided on the press release. You may now disconnect.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day.