Shenandoah Telecommunications Co (SHEN) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Shenandoah Telecommunications second-quarter earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions) As a reminder, this call may be recorded.

I would now like to introduce your host for today's conference, Adele Skolits, CFO. Please go ahead.

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, 2013. Our results were announced in a press release distributed this morning, and the presentation we will be reviewing is included on our Investor page at our website, www.Shentel.com. For those of you participating via the Web, the slides will be advanced automatically.

Please note that an audio 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.

As always, let me refer you to slide 2 of the presentation, which contains our Safe Harbor disclaimer, and remind you that this conference call may include forward-looking statements subject to certain 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 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. These reconciliations are also provided in an appendix to today's slide presentation.

I will turn the call over to Chris now.

Thank you, Adele. We appreciate everyone joining us this morning. The second quarter demonstrated strong financial performance, particularly in our postpaid Wireless and Cable segments, and continued progress towards the completion of our 4G wireless network by the end of this year. On slide 5, you will see the net income increased 41%, reaching $7.8 million, compared to just under $5.6 million in the prior year. Revenues were $77.5 million in the second quarter, growing by 8.5%.

Revenues increased as a result of Wireless subscriber growth and the increased fees for data usage on smartphones. Additionally, Cable segment revenues increased, related to an increase in RGU counts and higher monthly revenue per customer.

Turning to slide 6, we again had positive net Wireless additions in our postpaid services, with the number of total postpaid customers up nearly 1.3% over the year-end 2012 number and 4.4% higher than the second-quarter 2012. We added 2,340 net postpaid customers during the quarter, reaching a total of 266,297.

While year-over-year we saw a 12.12% increase in prepaid customers, for the quarter we experienced a net decline of 3,032 due to more stringent requirements for eligibility for the government-subsidized Assurance program.

Nonetheless, strong year-over-year customer and revenue growth led to a 20.6% increase in operating income for the Wireless segment. At the end of the second quarter, 85% of our covered POPs had access to our 4G LTE service, and we remain on track to complete the remainder of our network by year-end.

Cable segment highlights are shown on slide 7. All upgrades of the cable systems acquired in 2010 have been completed, though fiber drops will continue to be installed throughout the rest of the year. Cable segment operating revenues increased 6% from second-quarter 2012.

Consistent with cable industry trends and our college market seasonality, we experienced a slight decrease in basic video RGUs, but we did have good increases in digital video, high-speed Internet, and voice services. We ended the quarter with a total of 116,115 RGUs.

Turning to slide 8, I just wanted to take a moment and pull the discussion back a bit for everyone. Shentel is at an exciting point in its strategic initiatives for Cable and Wireless. As most of you know, in the 2008 to 2010 time frame, we made a series of strategic acquisitions primarily to expand the scope of our Cable segment and diversify our business.

These were good markets that we acquired, but many of the assets were quite neglected by former owners. During the 2010 to 2013 period we have been investing a tremendous amount of resources in upgrading both our Wireless and Cable businesses.

The 4G LTE upgrade we are currently doing on the Wireless side is the biggest investment project in Shentel's history. That said, we are at the tail end of these significant investments, and we expect the capital expenditures will come down significantly in 2014.

On slide 9 you will find some of the current key initiatives for our Company. On the Wireless side of the business, a top priority is to complete the 4G upgrade by the end of the year. We are on track to accomplish this, and our team is doing a great job. This upgrade provides existing and new customers with an extraordinary network, and as an organization we are focused on leveraging the upgrade to expand both our number of users and the average revenue per user.

On the Cable side of the business, we have largely completed a significant upgrade and we're focused on leveraging this investment and growing overall RGUs. Alongside technology upgrades, we embarked on a unified brand initiative, launched in 2012, which we are driving through TV, radio, print, direct mail, and social media. We are pleased with the progress we have made thus far and will continue to drive brand awareness in these markets.

Finally, we continue to focus on growing fiber lease revenues in both the Cable and Wireline segments, leveraging the investments in our networks. We are very pleased with the second-quarter results and the positive trends we are seeing in our business. We believe our strong financial performance and the pending completion of our network upgrades leave us well positioned for growth.

I will now turn the call back to Adele to review the details of our financial results.

Thank you, Chris. I will begin on slide 11. On this slide you see that both operating income and net income for 2Q '13 had strong increases compared to the same quarter of 2012.

Operating income increased over 30%, reaching $14.5 million. Net income for the quarter was $7.8 million, an increase of 41% over 2Q '12. Earnings per basic and diluted share for Q2 '13 was $0.33, up from $0.23 in the prior year.

Looking at slide 12, adjusted operating income before depreciation and amortization, or OIBDA, for Q2 '13 was $31.3 million, up $2.8 million or almost 10% from Q2 '12. In order to better understand the forces driving this growth, I have provided the OIBDA results by segment on slide 13.

What you see from this table is that adjusted Wireless OIBDA has grown by 9.5% and Cable results have improved by more than 4%. The Wireline segment's result is up 8.6% over Q2 '12, since the growth in fiber sales and retail rates is offsetting the loss of long-distance carrier access billings and the modest loss of Wireline retail customers.

I will next go into the Wireless and Cable OIBDA changes in depth. On slide 14 I have analyzed the changes in the Wireless OIBDA results between Q2 '12 and Q2 '13.

Postpaid revenues continued to grow, increasing by $3.4 million as a result of the growth in our customer base and growth in data billing rates. The $10 smartphone fee was billed to 65% of our postpaid customer base in June 2013, up from 48% during June of 2012. In addition, the average number of postpaid customers in Q2 '13 was 4.6% greater than Q2 '12.

Prepaid revenues grew by $2.8 million, primarily due to growth in the average number of prepaid customers of more than 15% and a shift in the customer mix to higher-priced plans. The cost to support prepaid customers has grown by $900,000, both as a result of the 15% growth in average customers and an increase in the rates Sprint charges Shentel to support those customers.

Also, the implementation of 4G technology requires either fiber or microwave-based backhaul technology. This technology replaces the copper-based T-1s we had been relying on for most of our 3G cell sites.

In addition, we are paying more rent at the cell sites where we have upgraded to 4G. These two factors, along with the increasing volume of data traffic and customer growth, drove growth in our network costs of $1.3 million in Q2 '13.

Finally, acquiring prepaid customers involves additional expenses related to handset subsidies, commissions, marketing, and other sales-related costs; and these costs grew by $1.7 million. Gross prepaid additions are up 21.7% over Q2 '12, driving the majority of this increase.

On slide 15, I have shown the components of the changes to adjusted Cable OIBDA. High-speed data revenues have grown by $800,000 and voice revenues by $300,000 in Q2 '13 over Q2 '12, primarily as a result of a 9.8% and 21.4% increase in average customers, respectively.

Programming costs have increased by $300,000, as increases in the rates charged by content providers have more than offset the loss of video customers. Network costs have increased to support additional voice and Internet traffic.

Finally, turning to slide 16, as we discussed on last quarter's call, effective April 1. 2012, we completed the conversion of certain of our subsidiaries from C-Corps to LLCs. This change resulted in reducing our tax rate to 39.3% in Q2 '13 from 42.8% in Q2 '12. This saved us an estimated $450,000 in Q2 '13.

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 morning, everyone. I am pleased to share with you additional positive details on the progress of our Network Vision project. I am extremely proud of our team.

As shown on slide 19, we currently have completed leasing and zoning on 501 of the 525 sites we are targeting for year-end. Construction is completed on 458 sites. We have launched 4G LTE on 394 sites and 800-megahertz voice on 404 sites.

With this progress, 88% of our covered POPs now have LTE or 800-megahertz voice service available. We remain on track to the budget and will complete the project well before year-end, except for a handful of sites that will be delayed into next year by zoning or the need to move to a different tower. These last few sites will have minimal impact on our customers.

Although the customers have been enjoying the benefits of LTE and 800 voice as we have turned on each site, we plan to launch our local campaign to tout our new service in August.

Slide 20 shows the continued growth of postpaid customers since the end of 2011. We ended the second quarter with 266,297 postpaid customers, an increase of approximately 4.4% in the past year. At June 30, we had 397,669 combined postpaid and prepaid customers, which is 19.3% of covered POPs.

I will not spend time this quarter detailing top service plans, top devices, and iPhone statistics, but we have made this information available in the appendix.

Slide 21 provides more details on postpaid customer activity in the second quarter compared to last year. We added 2,340 net adds on gross additions of 15,184. Churn was virtually flat at 1.62%.

We did see an increase in sales through non-Shentel-controlled channels, which includes the Web. 5.9% of our postpaid base upgraded their phones in the second quarter, with 25% of those upgrades being done in Shentel-controlled channels.

Gross billed revenue per user is shown on slide 22. The trend continues with good growth in billed revenue, up 3.4% or $2.08 from a year ago to $62.76.

The data component has grown 8.3% and voice has decreased $0.31. The increase is primarily the result of more customers having a smartphone and paying the $10 smartphone fee.

At June 30, 70% of our postpaid base had a smartphone. That is up from 65% and 59% having a smartphone at December 31, 2012, and June 30, 2012, respectively.

As a result of higher gross billed revenue per user and the growth of postpaid customers, slide 23 shows that the quarterly gross billed revenue has grown 8.2% in the past year to $49.8 million. Net revenue has increased 10.4% over the same quarter last year to $35.7 million.

Shown are the items that reconcile to net revenue reflected on our financials. You see that bad debt has remained flat at $1.6 million and discount and credits decreased by $400,000.

Management and net service fees totaled 20% of gross billed revenue, less bad debt, discounts, and credits. Sprint has notified us, as agreed in our last contract amendment, that effective August 1, 2013, the net service fee will increase from the current 12% to 14%, the maximum allowed in our contract.

Moving to prepaid Wireless on slide 24, we had an expected decrease in prepaid customers in the second quarter as Sprint and other prepaid carriers work to weed out fraud and duplication in the subsidized prepaid phone segment. In the second quarter, as a result of these reductions we had a net decrease of 3,032 prepaid customers.

Since the year-end 2012, we have lost over 12,000 Assurance customers, but still have a year-to-date prepaid net add of 3,195. At June 30, we had 131,372 prepaid customers, an increase of over 12% from the end of the second-quarter 2012. This shows the continued strong demand for prepaid in our service area.

Slide 25 shows the impact of decrease in the Assurance customers, with a spike in prepaid churn for the second quarter to 5.3%. With the decrease of Assurance customers, we have enhanced the customer mix, which results in an increase in average gross billed revenue to $28.16.

Shifting to our Cable segment, slide 27 shows the number of revenue generating unit, or RGUs, and the number of customers we had for the past five quarters. Once again this year, we had a net decrease in RGUs in the second quarter due to the moveout of college customers in our Radford and Farmville, Virginia, markets.

In the second-quarter 2012, including the loss of the college customers, we had a net decrease in RGUs of 1,513. This year, we had a net decrease of only 461.

In spite of the moveout, you see that we actually had an increase in both phone and high-speed Internet RGUs as we continue to take share from the local telephone company. We now have 16,731 non-video customers, customers that purchase high-speed Internet and/or phone but no video. That is an increase of almost 19% in the past 12 months.

The net loss in the quarter was entirely in video RGUs. The students will return in August, and the third quarter should reflect that positive bump.

We obviously focus on growing the number of RGUs, but we also focus on growing the average revenue per RGU end customer. Slide 28 shows both the increase in average monthly revenue per RGU and per customer in the past year.

The increase is a combination of the video price increase to cover increased programming costs in the first quarter of 2013, and the mix of new or existing customers taking higher-priced services. In the past 12 months, we have seen an average revenue per RGU increase 5.3% and average revenue per customer increase 9.1%.

Slide 29 has the number of homes passed with each service and the corresponding penetration rate for each service. We have grown high-speed Internet to 25.5% of homes passed and voice to 8.4%. We have seen a decrease in video penetration but an increase in digital penetration.

Going forward, the digital penetration should increase substantially as we migrate current and new customers to our digital offerings. As discussed previously, we have begun the process of distributing set-top boxes and migrating some of our systems to all-digital.

We have just finished up the small markets of Crewe and Blackstone, Virginia, that have about 1,000 homes passed and are starting in Rustburg, Virginia, one of our largest systems with 26,500 homes passed, located just south of Lynchburg, Virginia.

Slide 31 summarizes our key Wireline stats. We continue to see a decline in our regulated access lines, but at a rate much slower than the industry.

Our growth in DSL has slowed, with customers at the end of the second quarter just about where they were at the end of 2012. As the only terrestrial broadband option in our regulated telephone service area, we have likely penetrated virtually all of the current available markets.

My final slide, slide 32, is our historical and expected 2013 CapEx spend. At this point we continue to see expenditures for 2013 at $125 million. To date, we have spent or committed over $70 million.

As I stated earlier, we are still on budget for Network Vision at $115 million spent over 2012 and 2013. If there is a shortfall in our 2013 spend, it will be part of the $30 million of success-based spending forecasted in the budget.

With the completion of Network Vision and the cable upgrades expected in 2013, CapEx for 2014 should be significantly less than the 2013 plan. We will provide additional guidance once we have completed our budget cycle for 2014.

I will now turn it back over to Adele.

That concludes our prepared remarks. Danielle, would you review the instructions for posing a question at this point?

(Operator Instructions) Ric Prentiss, Raymond James.

Hey, it is actually Charlie sitting in for Ric. Thanks for taking the call. Sprint on their call had said that the June 30 iDEN shutdown would actually have a negative impact on CDMA churn in second-half '13 due to enterprise customers who had mixed CDMA and iDEN accounts taking off their CDMA accounts as they migrate to other carriers. Do you think you will have much impact from that in your region?

Charlie, this is Earle. I don't believe so. We have don't have a lot of the mega iDEN customers that Sprint was referring to. In our case I think we feel pretty confident that the conversion has been pretty clean, and it shouldn't have much of an impact on us.

Okay. Also in regards to Sprint, they made it sound like they won't really push hard in terms of marketing on a national level until maybe 2014 when their 4G network is more fully deployed. Again, do you think that will be much of an impact on your own second-half '13 numbers?

Obviously, we would like to have the national support of the rollout of LTE. We are significantly ahead of Sprint in total, and that is the reason why we decided to go ahead and launch our own local campaign, which I think will be effective.

But I don't believe it will have a significant impact on our second-quarter numbers, the fact that they are not doing something nationally.

Okay, guys. Thanks for taking the questions.

Barry Sine, Drexel Hamilton.

Good morning, folks. A couple questions, if you don't mind. First of all on the prepaid -- the, I guess, Obamaphone roll-off.

Is that something that is still ongoing? Might we see an impact on that into the third or even the fourth quarter? Or is that process pretty much wrapped up now?

Barry, this is Earle. Our understanding is that it is substantially finished at this point, but I can't tell you that there won't be additional impact. But as I mentioned in my prepared remarks, we have lost over 12,000 phones in the first half of the year and still ended up with net positive numbers. So I think the impact on the third and fourth quarter should be fairly small.

So if I take that 12,000 impact out and look at the numbers that way, that is probably a better sense of what the underlying business is doing and a basis for modeling out 3Q and 4Q?

Yes, but remember the first quarter of the year is always the strongest quarter for prepaid. So I wouldn't want to just annualize that number, because I think that may overstate the expectations of the second half of the year.

Okay. Also on Wireless, in the appendix the slides where you talk about some of the iPhone metrics, I was a little surprised that the newest model, the iPhone 5, is such a small percentage of the iPhone adds. I think it was 20%, and that is the only iPhone model that is 4G LTE capable.

Why do you think that is? And what implications does that have for your LTE? And what changes might you make going forward to try and incent customers to put more phones onto your LTE network?

Well, you asked a lot of questions there in one question. I will try to answer them all. If I miss some, just repeat them.

As far as the iPhone 5 versus the 4, I think we are seeing is that our customer base is price conscious, and the fact that they are able to buy the iPhone 4 at a significant discount to an iPhone 5 is part of that.

The numbers that you are seeing there at the bottom, though, just to make sure that you are clear, that is the base. That is not what was sold in the quarter; that is the entire iPhone base that we have.

So obviously, we have been selling 4s and 4Ss for a lot longer than we have 5s. So the predominant number of iPhones that were sold in the second quarter were the iPhone 5, so we are continuing to move customers towards an LTE phone.

We also -- you didn't ask, but I will add, we had a significant base of 4G WiMAX phones in our customer base, and we have been working with those customers. And part of the upgrades that we have been doing is migrating those customers from the WiMAX to the LTE phones, because obviously if they bought a WiMAX phone they probably are higher data users than others.

So we are making that effort. At this point, Barry, I don't have the numbers right in front of me, but I believe we have about 55,000 to 60,000 of the phones that we have in our network on the postpaid side are LTE-capable phones.

Okay, that's helpful. Then, shifting gears over to the Cable segment and specifically on video, if I think about the strategy you had talked about when you got into acquiring these properties, they were in pretty significant need of upgrade. They are now all state-of-the-art digital video and video recorders and so on.

You started at pretty low penetration. It doesn't seem like the needle is moving that quickly.

You have already rebranded now. You have talked on the call about some new marketing efforts. Where are we in that upgrade cycle?

And then also on the discussion of factors impacting video subscribers, in the past the fall seems to be a difficult time, obviously with the NFL season and then satellite having the NFL Sunday ticket and you don't. So a lot of questions again.

Well, once again, you have asked a lot of questions. I will try to answer them.

As far as where we are in the process we are finished the physical upgrade. We have launched the new brand.

We continue to do market research and surveying our customers. The good news is that we now have over 80% name recognition within our service areas, and two years ago that was in the 40%s. So we have doubled the name recognition, which -- obviously they are not going to buy from you if they don't know your name.

What we are finding, though, as we continue to do our market research is just the inertia of getting people to shift has been more difficult than we anticipated. We are continuing to aggressively market. We are continuing to point out very specifically the advantages of our broadband and voice compared to the telephone company.

And in that area, I think we are making very good strides towards the industry averages. You've got to remember, the industry has been offering voice and broadband for well over a decade, almost two decades. Our systems start out with zero, and so we have had to move that needle quite a bit.

On the video, we continue to struggle to take share from the satellite guys. They have an attractive offering. They do have the NFL ticket.

We do believe that our digital conversion is going to help us. When you are looking at our signal over a -- on a digital television but you have an analog service, it is not that appealing as it would be -- as you would get from the satellite. So as we are upgrading all of our customers or moving our customers towards that digital signal, I think they are going to get an improved experience.

The other thing that we will be launching here in the third quarter is we are launching a multiroom DVR, which will allow us to have -- once again, close the gap between ourselves and the satellite guys as far as the expanded services that we offer the customer. So we are very aggressive in trying to stem the loss of video customers and turn that around, but continue to see very promising results in our broadband and voice.

And, Barry, I would add to that, obviously in Q3 we would see the college customers moving back in.

Okay, thank you, Adele. My last question just relates to your capital structure. If I think back prior to your getting into the Cable business and then prior to the significant capital program for the 4G LTE upgrade, if anything I would say you were pretty well underleveraged.

You have addressed that. You have made some very attractive investments now. You have put some leverage on.

But as you talk about -- if I look at the outlook for capital spending going forward, with those programs winding down that probably declines pretty significantly. You probably become a very, very significant free cash flow generator again and get leverage worked down. If you get too underleveraged, that is not to the benefit of equity shareholders.

So again I know a lot of questions there, Earle. But how do you think about leverage, and the right way to leverage, and keeping that leverage ratio high enough so that it boosts equity returns?

Well, Barry, you may recall that in the third quarter of last year we restructured our existing debt deal. And part of that restructuring was two years of interest-only payments on that restructured debt.

So we won't be significantly paying down debt here in the next five quarters. So that is part of the answer to your question.

And even when we do begin to amortize over the five years beyond that, we are only amortizing about 50% of the debt. So we will still be carrying some significant amount of debt.

We are just under 2 times levered right now, which I think is a good place to be. As you know, the average for the industry is about 3 times.

So we will look at that relative to other opportunities we might have or returning funds to shareholders or what have you in the coming year.

Okay. Nice problem to have.

It is.

Thank you very much, folks. Good quarter.

(Operator Instructions) Donna Jaegers, DA Davidson.

Hi, thanks for taking the questions. On iDEN, I know you guys aren't exposed; but I was just curious if that accounted for any of the share, any of the net add gain, or any turbulence in the quarter?

Donna, this is Earle MacKenzie. The answer is -- very little.

We had been working with Sprint over the last six to eight quarters in anticipation of the turndown and had been moving customers over from iDEN to CDMA. We really didn't know what to expect in the second quarter, whether there would be a significant lift or not. But what we found was that there was really very minimal impact on our numbers in the second quarter from iDEN conversions.

Okay. Then can you just refresh us on what is going on with the competitive situation in Wireless in your service territory? I don't know if Leap is in any of your service territory; so is that going to be a factor? And just refresh us on where you are market share-wise versus the AT&T and Verizon?

Sure. We do not compete against Leap or Metro in our service area. Our markets are a little smaller than what they've focused on. But we do, obviously, compete against AT&T and Verizon, and in most of our service areas T-Mobile has a reasonable network. Probably their network is stronger in our Pennsylvania part of our market than it is in the Virginia, West Virginia, and Maryland part of our market.

We continue to have a strong position, compared to them. As I mentioned in my prepared remarks, our penetration is at 19% -- over 19%. That is about the same as Sprint nationally, not as high as Verizon and AT&T nationally.

But I think if you look at parts of our network, we actually probably even have market share on the areas in the southern part where we have been a competitor longer, and we are able to leverage our Shentel brand along with the Sprint brand.

Okay, great. Thanks a lot, Earle.

(Operator Instructions)

I think that's it, Danielle.

Thank you. I would now like to turn the call back to Adele Skolits for any further remarks.

Our Q will be released in the early afternoon hours today. And once again, thank you for joining us. Please let me know if there are any additional details you would like to see us include on future calls. My contact information was provided on the press release.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.