Shenandoah Telecommunications Co (SHEN) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Shenandoah Telecommunications' first-quarter 2012 earnings conference call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session, and instructions will be given at that time.

(Operator Instructions).

As a reminder, this conference call may be recorded. I would now like to hand the conference over to Ms. Adele Skolits. Ma'am, you may begin.

Good morning, and thank you for joining us. The purpose of today's call is to review Shentel's results for the quarter ended March 31, 2012. Our results were announced in a press release distributed this morning, 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'll 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're strongly encouraged to review.

You're 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 our SEC filings. I'll turn the call over to Chris now.

Thank you, Adele. We appreciate everyone joining us today. I'm pleased to report that we started the year with a great first quarter. We had significant improvement in our financial results, led by customer and revenue growth in our Wireless and Cable segments. Installation and construction is now under way with our wireless network upgrade as we prepare to transition to 4G LTE as part of Sprint Nextel Network Vision project.

Financial highlights are shown on slide 5. Net income was $4.5 million for the quarter, up 50% from the first quarter of 2011. Net income from continuing operations was up 42% to $4.4 million for the quarter. The earnings improvement was driven by an $8.4 million increase in revenues and was achieved in spite of recording $2 million of accelerated depreciation associated with the wireless network upgrades. Adjusted OIBDA was up $3.6 million over the first quarter of 2011, an increase of 17%.

Moving to slide 6, revenues reached $68.8 million, an increase of almost 14% over the first quarter of 2011. Wireless customer growth and RGU growth in our Cable segment drove the revenue increase. We continued our streak of quarterly positive net adds in Wireless, ending the quarter with just over 365,000 post-paid and pre-paid subscribers.

Our Cable segment continued to add RGUs reaching almost 139,600 at quarter-end. Growth in average billings per customer, particularly in the Wireless segment, also contributed significantly to the revenue growth.

Specific Wireless segment highlights are shown on slide 7. We again had positive net Wireless additions in both our post-paid and pre-paid services, with the number of total customers up nearly 2.6% over the year-end 2011 number and 14.8% higher than first quarter 2011. We added 2,064 net post-paid customers during the quarter, reaching a total of 250,684, which is a year-over-year increase of 5.4%.

Pre-paid customers grew by 7,285 in the first quarter to a total of 114,384. Continued pre-paid growth was helped by churn of just 3.65% this quarter, relative to 4.5% for the first quarter of 2011. Customer and revenue growth contributed to an increase of operating income in the Wireless segment of $0.5 million over the first quarter of 2011.

Cable segment highlights are shown on slide 8. The upgrades of the cable systems acquired in 2010 are now 90% complete, and we expect the remaining markets to be completed this year. Our Cable segment total RGUs increased by 2,361 in the first quarter, an increase of 1.7% over the year-end 2011 total. We experienced a slight decrease in basic video RGUs but had good increases in digital video, high-speed Internet, and voice services. I'll now turn the call back to Adele to review the details of our financial results.

Thank you, Chris. I'll begin on slide 10. Adjusted operating income before depreciation and amortization or OIBDA for Q1 '12 was $25 million or up $3.6 million from Q1 '11. In order to better understand the forces driving this change, I've provided the OIBDA results by segment on slide 11.

Here, you get a picture of how the segments' results are contributing to the consolidated financial results. In a moment, I'll go into the Wireless and Cable OIBDA changes in depth. What you see from this table is that adjusted Wireless OIBDA has grown by 12%. Cable results have improved as a result of the growth in penetration of homes passed, which Earle will review with you in a moment. And the improvement in Wireline financial results was driven primarily by sales of fiber facilities.

On slide 12, I've analyzed the changes in the Wireless OIBDA results between Q1 '11 and Q1 '12. Post-paid revenues continue to grow as a result of the growth in its customer base and growth in data billing rates. The pre-paid revenues grew by $2.6 million, related primarily to growth in pre-paid customers.

As a result of our success in acquiring pre-paid customers, there is $700,000 of new pre-paid costs in Q1 '12. Acquiring pre-paid customers involves additional expenses related to handset subsidies, commissions, marketing, and other sales related-costs, and these costs grew by $800,000.

While gross pre-paid additions were lower, the growth in pre-paid acquisition costs was driven by an increase in the amount of handset subsidy per gross add. Increases in post-paid handset subsidies of $1 million, primarily related to iPhone subsidies, was the primary reason for post-paid acquisition costs rising by $1.7 million.

Also, advertising and commissions expenses, both included in this line item, increased by $300,000 apiece. We continue to enhance our network to handle the increasing volume of data traffic and customer growth, and these costs increased by $700,000 in Q1 '12.

On slide 13, I've shown the components of the changes to adjusted Cable OIBDA. You can see in the first three bars, service revenues have grown by $1.9 million. This growth was led by growth in the popularity of our high-speed data products, which outpaced the growth in video. Customer growth also drove growth of $300,000 in equipment revenues. As with Wireless, the growth in customers comes with an immediate cost related to acquiring customers. These incremental costs were $800,000 in Q1 '12 over Q1 '11.

Finally, effective April 1, 2012, we completed the conversion of certain of our subsidiaries from C corporations to LLCs. The conversion to LLCs was the first phase in a restructuring undertaken to reduce the administrative and compliance burden of our organizational structure. One of the benefits of the LLC conversions is that for tax purposes the income and losses of the converted entities will pass through to the parent. This is significant in states where there is no opportunity to file consolidated returns.

We expect that this step will decrease our tax burden in those states, and our effective tax rate will be approximately 40% instead of the 43% we've previously reported. In early third quarter, we expect to complete the restructuring by merging certain of our subsidiaries out of existence by combining them with existing subsidiaries in the same segment, allowing for increased efficiency in our operations. 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.

Thank you, Adele. Good afternoon, everyone. I'll be starting on slide 15. We continued our positive trend on post-paid net adds with a good quarter and an increase of approximately 5.5% for the past 12 months, bringing us to 250,684 post-paid customers at March 31.

Slide 16 provides the details of post-paid gross and net adds for the quarter compared to last year. We had 15,966 gross adds for the first quarter of 2012, an increase of 480 from 2011. We had net adds of 2,064, a decrease of 952 from 2011. We saw slower traffic in our stores during the first quarter, with 50% of gross adds coming through Shentel-controlled channels, compared to 55% in the first quarter of 2011. Churn for the first quarter at 1.86% was similar to the fourth quarter and up from 1.76% in the first quarter of 2011.

As shown on slide 17, we continue to have a significant increase in post-paid gross billed revenue per user at $60.57 per month, an increase of $1.13 from the fourth quarter of 2011 and of $4.52 from the first quarter of 2011. This increase was driven by a $5.02 increase in the data component during the past 12 months as a result of continuing to focus on selling higher-end price plans and the $10 per month charge that Sprint initiated at the end of January 2011 on all new smartphone users.

The 5.4% increase in customers and the higher average billed revenue resulted in a 14% increase in first-quarter post-paid gross billed revenue to $45.3 million, shown on slide 18. Bad debt increased by 400,000 and service discounts and credits by 500,000.

As a percent of gross revenue, the credits remain constant at 10%, and bad debt inched up from 2.8% to 3.3%. Over the past few years, we've seen our bad debt remain constant or decrease as a percentage of revenue. Net service revenue grew by a healthy 13% on the 5.4 increase in customers.

On slide 19, you see the price plans that were the most popular in the first quarter. On the right side of the slide are the top selling phones for new gross activations. The first quarter was the second quarter we had the iPhone, and you can see that it was the top selling phone at 20%. At the end of the first quarter, 57% of our post-paid customers had a smartphone. That's a 4% increase in penetration from the end of 2011 and an 18% penetration increase in the past 12 months.

On slide 20, I've provided some details on our iPhone sales and penetration. As I stated earlier, 20% of all new activations in the first quarter purchased an iPhone. 51% of all new iPhones in our service area were sold in Shentel-controlled channels. Including upgrades, at March 31, 6.8% of the post-paid base had an iPhone, up from 3.6% at year-end, with 40% owning an iPhone 4 and 60% having an iPhone 4s as of March 31, 2012.

Moving on to our pre-paid results on slide 21, you see that we had a good first quarter, with 7,285 net adds on 19,400 gross adds. This is substantially less than the 13,287 net adds we had in the first quarter of last year when we were benefiting from pent-up demand. We ended the quarter with 114,384 pre-paid customers, a 43% increase over the first quarter of 2011. On slide 22, you see the pre-paid churn continue the downward trend in the first quarter, and average monthly pre-paid gross billed revenue increased to $23.16.

Moving on to our Cable results on slide 23, we added 2,361 net RGUs in the first quarter and 8,899 or 7% during the past 12 months, bringing the total to 139,599. We had a 211 decrease in video RGUs in the first quarter and are about the same level we were a year ago. In the first quarter, voice and high-speed Internet RGUs grew by 737 and 1,835, respectively. In the past 12 months, we had a 50% increase in voice RGUs and a 16% increase in high-speed Internet RGUs.

As with other cable operators, the primary new demand is for non-video services. At the end of the first quarter, approximately 18% of our 76,130 customers don't purchase a video service from us. This quarter, for the first time, we've provided the number of average RGUs per customer. We continue to work to sell more to our existing base, in addition to growing our customer base.

Additionally this quarter, we are providing on slide 24 the average monthly revenue per RGU and per customer. You see that we had good increases in both over the past year. The average monthly revenue per RGU has increased $1.26 to $37.74, and the average revenue per customers increased $7.27 or 10.6% to $76.08. The increases are due to price increases, upselling existing customers, and selling higher-revenue RGUs to new customers.

Slide 25 shows the changes in the number of homes passed and our penetration rates over the past year. You see that basic video has fallen, but digital video, high-speed Internet, and voice have increased. Although narrowing, we still have a significant gap between our current penetration levels and the industry average, so we expect continued quarterly growth, although we do anticipate a dip in net adds in the second quarter when our student customers will be departing for their summer break.

Our Wireline results are shown on slide 26. We continue to have low access line losses, with approximately 3% access line losses in the past 12 months. Our DSL penetration in our LEC area grew to 55%. As you recall, we are the cable operator in our LEC area, but we do not offer voice or Internet over the cable network. Netting our DSL gains against our access line losses, total connections were 35,310, a 124 decrease from year-end 2011.

On slide 27, we continue to target total capital expenditures in 2012 at $138.4 million, with $60 million for network vision. We finished the Virginia cable system upgrades in the first quarter. One of the two Suddenlink markets was completed in April and the other targeted for June. The final Jet Broadband market, which passes approximately 10,000 homes in southern West Virginia, is expected to be upgraded by the end of the year. That will complete our cable upgrade program.

Before I turn the presentation back over to Adele, I'd like to give you an update on our Network Vision project. Work has progressed nicely over the past few months. We still plan to complete 274 of our 510 sites this year. The upgrades of our wireless switch will be completed in the next few weeks.

We have plans to install our first Network Vision base station later this month. We have approximately 100 sites scheduled to be completed by the end of July or early August. We still expect to launch initial 4G LTE service in the third quarter, although we will be starting to sell LTE phones as soon as they are available. I'll now turn it back over to Adele.

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

Thank you. (Operator Instructions). Our first question comes from Ric Prentiss from Raymond James.

Thanks. Good afternoon. A couple questions for you, if I could. First, appreciate all of the detail on the iPhone information. It's pretty quick how it got up to a large percent of your base. How many of your iPhone sales were new to you guys, versus just already existing customers?

Ric, this is Earle. Approximately about 35%, 37% were for new activations, and 65% to 63% in that range were for upgrades.

Okay. And speaking of upgrades, what percent of your base upgraded phones in the quarter?

I don't have that number right here in front of me.

Okay, we'll circle back afterwards to get that from you. Appreciate the update on the Vision project. So you're still looking for 274 cell sites this year. What do you think is the most serious gating factor to doing that? It's a pretty major project, obviously, if you get that many done in basically a half-year period. What are the most important gating factors we should be aware of?

Well, I guess there probably are three. One is, we've got to be able to get fiber or microwave to every one of the sites. We're very optimistic they are going to be able to do that, but we are relying on third parties for some of those sites, so those could put us at risk.

Second is we've had some very good success in talking with the various tower owners and working through negotiations on those. Obviously, if those negotiations don't continue to go well, that could have an impact. And third is just the coordination with Alcatel-Lucent. Obviously, they are doing a huge project for Sprint at the same time. At this point, we do feel like we're getting the proper amount of attention, but that's something we continue to monitor.

Great. Thanks. I'll come back in if there's time.

Thank you. (Operator Instructions). Our next question comes from Greg Burns from Sidoti & Company.

Good afternoon. Thanks for taking the question. I just had a question around the Cable segment. Now that the upgrade is nearing completion, what your plans are in terms of sales and marketing. Are you planning on getting a little more aggressive in the second half of the year selling your services? Could you just give us an idea maybe about what your plans are there and what the impact will be on the margins?

We will be launching a branding campaign in the latter part of this quarter. We had made the decision to sell but really not to emphasize and spend a lot of money on brand advertising until we finished our upgrade, because to put a new name on the same service didn't seem to make a lot of sense to us. And so, although we have been doing sales, we haven't been pushing the Shentel brand. And so we have a branding campaign that is all but in the can at this point, and we'll be launching that in the next four to six weeks.

Right on top of that, we will be increasing the amount of our advertising, and coming up now with the summer, we have more opportunity, more daylight for door-to-door sales. So we will be ramping up the amount of door-to-door sales we'll be doing. It will have some impact, obviously, on our costs, but you have to remember, in most of our markets, there are a relatively limited number of outlets for advertising.

So even though I say that we're ramping up the advertising, we're not doing any kind of a national campaign or a huge broadcast television campaign. We have a few markets where broadcast television makes sense, but in most cases it does not. And an awful lot of our branding will be events-based and local media, which won't require huge amounts of dollars. It's probably more manpower than they are dollars in a lot of those programs that we'll be rolling out.

Okay, thank you. And a couple questions about the pre-paid business. Can you share with us what percent of the base is Virgin Mobile versus Boost? And in terms of the churn, are you doing anything specifically internally to show those improvements, or is it just the market trend in general with the same churn decline?

On the issue of breaking out between Virgin and Boost, we don't provide that detail. We take our lead from Sprint. Sprint does not provide the detail or break out between Virgin and Boost. And basically, by contract, we're not allowed to either.

As far as churn, our churn rates are basically mirroring that which Sprint is experiencing. And I think there's a combination of a number of issues there, but one has been continuing to offer a more enhanced lineup of phones, which I think tends to have customers happier longer with the phone that they have and, therefore, you don't see them jumping from one provider to the other. We've also seen a period of relative consistency in pre-paid pricing, so there hasn't been a lot of incentive for a customer to jump back and forth to get the best deal of the day.

Okay. And lastly, Adele, on the LLC restructuring, besides the tax benefit, is there any OpEx savings that go along with that?

I don't think it would be material to your projection. Certainly, we expect some back office efficiencies, but in terms of the numbers you'd be dealing with, it wouldn't be material.

Okay, thank you.

Thank you. Our next question comes from Ric Prentiss from Raymond James.

I tried to come in at the end of the queue. I guess I am again. Some extra follow-ups. The ARPU increase has continued to be impressive on the post-paid side. How much of your base is already on that extra $10 bolt-on? Just trying to think through how much more upside you have the rest of this year.

We have approximately 100,000 customers who -- of our 250,000 who are paying that $10 bolt-on, so over time, we expect still some upside there.

That happens as they come in and ask for an upgrade to their phone and have to sign up for an additional contract period, and as a result, they end up paying that incremental $10.

You have to remember that prior to January 2011, only customers who had a 4G phone were paying that $10. And so, we have a lot of customers who had a smartphone who were not paying that. So as they see the need to upgrade their smartphone over the next year or two, they will migrate to the -- adding the $10. And as I've said in previous calls, it just is not an issue. We've not had virtually any customers walked out and said no, I'm not going to buy a smartphone because of the $10 smartphone surcharge.

The EBITDA production on the Wireless side was also impressive. I think I'd go back maybe a long ways to find an $18 million EBITDA number on the Wireless side. What are your thoughts going forward on EBITDA? And I assume Vision costs will start pressuring on that at some point, but just trying to think of what the curve looks like, given the good results in 1Q.

The curve looks good, with the exception of the incremental operating costs for Network Vision. You'll recall on the February 6 call, we talked about not just the accelerated depreciation, but we have some significant costs, installation and fiber and microwave costs related to the back haul. And you can expect that we expect at this point that we will spend that money, but the timing is later in the year. So, those costs, you should expect us to incur in the latter half of this year.

I'm trying to remember if you'd quantified it back in February, as far as what that Vision OpEx impact might be.

We did. In fact, we had non-recurring installation fees in 2012 of $1 million. We had the redundancy, you may recall, that we described, that we assumed that we would have a couple of months of simultaneously having two sets of back haul to the same site. So, the old copper based T1 back haul simultaneous with the fiber and microwave back haul. That's another $1.6 million, and then we have to expand capacity as well, and that's another $900,000. And all of that, it had yet to hit as of March 31.

Okay, that helps. Its been a long earnings season, so I apologize for not remembering those.

I understand, and that should be available on our website, Ric, if you need it, or I could shoot it off to you.

Okay. And then Earle, in your comments, you were talking a little bit about bad debt. Also noticed service credit seems to have gone up year-over-year. Can you talk to us a little bit about what's happening on the bad debt line and the service credits?

On the service credits, it's gone up, but it's remained pretty much constant over a number of quarters at just about 10%. And you've got to remember that the service credits also are any kind of promotion credits that are given, so it's not all service. It's any kind of credit that the customer receives.

And we ran a short but very successful promotion right at the end of the year, where we provided the customer, rather than discounting the phone or discounting the connection fee, we gave them two months of free service, figuring that may be attractive when they started getting all of their Christmas bills. And it was a very successful promotion for us, but those -- basically, all those two months that we had, and you remember, we had a very good fourth quarter, those hit in the first quarter of this year.

On bad debt, at this point, we don't have enough of a trend line to see if this is any kind of a trend or if really just a blip. We have kept our credit pretty tight through the entire downturn in the economy. We have seen primarily either level or decreasing.

It has ticked up a little bit in this quarter but certainly not enough for us to say that's what we would expect for the rest of the year, so we're monitoring it closely. Because of the fact we can set our own credit policy, if we do believe that there's some kind of a shift, we can tighten up credit a little bit. But at this point, we don't see a need to do that.

How about within churn, involuntary versus voluntary. What are you seeing maybe on that line?

It's remaining pretty much constant, as far as the ratio. The little bit of an uptick in churn really was in both categories. It wasn't really one over the other.

Sprint had mentioned they are launching WiMAX offer on the Virgin and Boost coming up this quarter, second quarter. Do you have plans to match that? What's the update on getting that into your -- well, and is the clear wire network even in a lot of your areas?

It's not in a lot of our areas. The only place we'll really be able to offer that is in the York and Harrisburg, Pennsylvania, areas. And that is the outer outer suburbs of the Philadelphia system, so I wouldn't say that it is a particularly robust WiMAX network there. I think it really will depend on the user. If you have a user who is primarily in downtown Harrisburg, they could take advantage of it. And we will be basically mirroring what Sprint does at this point to be determined as far as whether it's going to have a significant impact on our gross adds and net adds.

Those are the two most significantly densely populated areas of our network.

So it could have some impact, just at this point, it's a little difficult to know.

Makes sense. Thanks for the extra information.

You're quite welcome.

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

Very good. Thank you for joining us, and if there are things that you would like to hear about on future calls, please let me know. My contact information was included on the press release announcing this call. Have a good weekend.

Thank you. Ladies and gentlemen, thank you for participating in today's conference. This concludes our program. You may all disconnect, and have a wonderful day.