Shenandoah Telecommunications Co (SHEN) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Shenandoah Telecommunications fourth-quarter and yearend 2013 earnings conference call. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session and instructions will be given 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. 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 December 31, 2013. Our results were announced in a press release distributed after the market closed yesterday and the presentation we will be reviewing is included on the investor page of our website at www.shentel.com.

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 Earl 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 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.

These reconciliations are also provided in an appendix to today's slide presentation. I'll turn the call over to Chris now.

Thank you, Adele. We appreciate everyone joining us this morning. We had a great year capped by a great fourth quarter.

During the fourth quarter our financial performance showed strong growth driven by increased numbers of wireless subscribers and improved product mix as well as increases in average revenue per user in the wireless and cable segment. We were very pleased to announce that during the quarter we finished the 4G LTE upgrades to our wireless network. With this significant capital investment now completed we expect 2014's capital expenditures to be approximately $74 million, a 27% decrease from 2013.

On slide 5 you will see the fourth-quarter 2013 net income increased 36% to $6.7 million compared to the prior year, attributable primarily to continued growth in the wireless and cable segments. Adjusted operating income before depreciation and amortization, or OIBDA, for the quarter increased 12% to $29 million.

Revenues were $78 million in the fourth quarter, a 4% increase from the prior-year period. Revenues increased chiefly as a result of wireless subscriber growth, increased smart phone fees and enhanced product mix. Our cable segment revenues also improved as a result of an increase in the number of revenue-generating units, or RGUs, and higher average revenue per customer.

Our 2013 financial highlights start on slide 6. Total revenues for the year increased to approximately $309 million, up 7% as compared to 2012. Growth was driven by wireless subscriber growth, increased data fees on smart phones and improved product mix.

In addition, RGU growth, video price increases and customers opting for higher-speed data packages in the cable segment contributed to revenue improvement. Adjusted OIBDA grew 11% to $118.6 million.

Turning to slide 7, we experienced substantial improvements in operating performance in 2013. Operating income increased 60% to $55.4 million while net income grew 81% to $29.6 million driven by strong growth in the wireless and cable segments.

Slide 8 highlights the outstanding results in our wireless segment in 2013. We again had positive net wireless additions in our postpaid services with the number of total postpaid customers up 4% over the yearend 2012 number reaching a total of 273,721.

During the fourth quarter we experienced strong growth in net postpaid customers, up 50% from the prior-year period. The wireless network upgrades have significantly extended and enhanced the quality of our service offering. These improvements, along with an aggressive promotional campaign, drove our postpaid fourth-quarter results.

Year over year we saw an increase of nearly 7% in prepaid customers and during the quarter net additions to prepaid subscribers was 4,378 compared to 5,723 in the fourth quarter of 2012. Accounting for Sprint's correction of allocated prepaid cost in the fourth quarter of 2012, adjusted OIBDA in the wireless segment increased 16% to $22 million and operating income increased 7% in 2013.

Cable segment highlights are shown on slide 9. All upgrades to the cable systems acquired in 2010 have been completed and we are now capable of offering 50 megabits per second to over 87% of our homes passed.

Operating revenues grew $1.1 million in the fourth quarter as a result of average RGU growth, video price increases which were driven by rising programming costs, and customers opting for higher-speed data packages. Cable segment total RGUs increased by 5,384 in 2013, an increase of 4.7% over the yearend 2012 total. Net additions during the fourth quarter totaled 1,470, up considerably from 129 in the fourth quarter of 2012.

Consistent with cable industry trends we experienced a slight decrease in basic video RGUs but this was offset by solid increases in digital video, high-speed Internet and voice services. We ended the quarter with a total of approximately 120,300 RGUs. Adjusted OIBDA in the cable segment for the fourth quarter of 2013 was $2.8 million, up 58% (sic - see Press Release, "59%") from $1.8 million in the fourth quarter of 2012.

We are very pleased with the fourth-quarter and yearend results and the positive trends with many able to capitalize on. Our balance sheet is strong with $38 million in cash and $58 million of working capital at December 31, 2013. Our successful 4G network upgrade represented the most significant capital investment in the Company's 112-year history.

As a result of completing the upgrade in the fourth quarter of 2013, we expect capital expenditures to decrease by about 27% in 2014. This will enable us to generate significant improvements in free cash flow in 2014.

Our first priority is always to use these funds to continue to invest in growing the Company. However, if an appropriate opportunity does not materialize over the course of the year we will consider returning cash to shareholders in the form of increased dividends, or accelerating the repayment of debt. Buying back stock doesn't appear to make sense with a stock as thinly traded as ours.

Over the past few years we have completed two major network upgrades while seeing significant improvement in our financial performance. We start the new year with great momentum poised for continued growth by providing a superior, localized customer experience and by capitalizing on positive industry trends. 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 11, which shows our earnings per share, or EPS, with and without the 2012 adjustments related to the prepaid settlement, cable goodwill impairment and other non-routine items outlined further in the appendix to this presentation.

Diluted EPS before adjustments rose from $0.69 to $1.23, or 78%. After adjustment EPS rose from $0.84 to $1.25 and this equates to a 49% increase.

Slide 12 shows our growth and profitability in OIBDA. In the top line you can see that we had over $3.1 million, or 33% increase in operating income for 4Q 2013 over 4Q 2012.

For the year ended December 31, 2013, operating income was up $20.7 million, or 60% over 2012. In the rest of this table I have adjusted for the significant non-cash, or non-routine items.

As you can see, for 4Q 2013, adjusted OIBDA is up nearly $3 million over Q4 2012, or 11.6%. For the end December 31, 2013, adjusted OIBDA was up $11.8 million, or 11.1%. These improvements are consistent with the longer-term trends.

On slide 13 I've provided the long-term view of adjusted OIBDA. Over the last five years adjusted OIBDA has grown by $46 million. This represents a compound annual growth rate of 10.3%.

The rate of growth has been higher in recent years. The chart on the right shows that the wireless segment has contributed consistently and significantly to this growth. And the cable segment has shown substantial improvements in recent years.

The wireline business has generally held steady as a result of fiber sales offsetting the loss of telephone access lines and access revenues. To better understand the forces driving the results in our three segments I have provided the fourth quarter OIBDA results by segment on slide 14.

Adjusted wireless OIBDA has increased by $3 million, or 16% while cable results have improved by $1 million, or 58%. Wireline results have decreased by $1.1 million, or 18% primarily as a result of recording an $800,000 adjustment in 4Q 2013 related to settling an access charge billing dispute.

On slide 15 I have analyzed the changes in adjusted wireless OIBDA results between 4Q 2012 and 4Q 2013. Postpaid revenues are up by $2 million between 4Q 2012 and 4Q 2013. A combination of factors drove this increase.

Postpaid billing rates were up over 4.3% during this period while average customers have grown by 3.7%. Partially offsetting the growth in gross revenues was an increase in the postpaid net service fee we paid to Sprint.

Effective August 1, 2013, this fee rose from 12% to 14% of net revenue. The impact of this fee increase on the fourth quarter of 2013 was $925,000. In addition, prepaid revenues grew by $1.8 million related primarily to growth in average prepaid customers of 7.6% and an 11.8% increase in the average monthly billing rate to each customer.

A 2.5% increase in the number of gross additions to our prepaid customer base combined with a decrease in the cost per gross add charged by Sprint drove a decrease of $600,000 in the cost of prepaid acquisition costs. Network costs have decreased by $500,000. You may recall on previous calls we described the additional cost related to the redundant backhaul required as we were replacing 3G base stations with 4G base stations.

With the completion of the upgrade these redundant costs have ended. This favorable change was partially offset by increases in tower rent as we renegotiated sell side leases to permit the addition of the 4G technology.

Postpaid acquisition costs rose by $1.6 million primarily as a result of the 6.3% increase in gross adds and increases in handset subsidies. On slide 16 I have shown the components of the changes to adjusted table segment OIBDA. The positive changes include significant growth in high-speed data revenues of $900,000 as a result of an 11% increase in average HSD customers.

Voice revenues are up $300,000 driven by a 22% increase in average voice customers. Video revenues were flat as the slight loss of video customers was offset by increases in video rates driven by higher programming costs. 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 morning, everyone.

Slide 19 shows growth of postpaid wireless customers and the penetration of smart phones for the years 2011 to 2013. We ended 2013 with 273,721 postpaid customers and grew the penetration of smart phones by 10 percentage points in 2013 to 75%. Penetration was up 3% from 72% at the end of the third quarter.

Approximately 62% of the postpaid smart phones are LTE capable. That is 47% of the postpaid base.

During 2013 we were proactive in getting over 40,000 WiMax phones out of the network and replacing them with LTE phones. We still have approximately 21,000 WiMax phones and have set the goal of having them migrated to LTE by the end of 2014.

Moving to slide 20, we had a very strong fourth quarter with 6,054 net postpaid adds compared to 4,025 in the fourth quarter of 2012. The fourth quarter of 2012 included 1,700 IDN conversions compared with no IDN conversions in the fourth quarter of 2013.

This is the best postpaid fourth quarter in our wireless industry. We attribute the success to the aggressive sales incentives and low churn. Rather than waiting until Black Friday to kick off our holiday sales promotion we started early in November before our competitors.

We married the promotion activity with a message in our markets that we had great LTE coverage. We believe the reduction in churn to 1.69% was a result of the end of the disruptions due to the network vision construction and that our networks are running well resulting in historical lows of blocked and dropped calls.

Another indication of the positive impact of completing network vision and the aggressive promotion is that we saw a significant improvement in our port in versus port out activity. I mentioned during our last call that during our network vision construction we had seen a shift to being a net port out against Verizon and AT&T. In the last four months of 2013 we either had three or all four months where we were net port in versus our five primary competitors including AT&T and Verizon.

Upgrades were 7.2% of postpaid base in the fourth-quarter 2013. Historically our great percentage has been approximately 6%.

Before we move to the next slide, I want to note that 12,577 IDN conversions were included in the 69,000 gross adds we had in 2012, and only 3,575 are in the 2013 gross add. Unlike Sprint, these conversions were a net add to Shentel.

On slide 21, we continue to have good increases in gross build revenue per user. From the fourth quarter of 2012 to the fourth quarter of 2013, we had a $2.64 growth per user to $64.47. The amount of voice revenue per user was flat with the entire increase in data revenue.

The result of higher gross billed revenues is shown on slide 22. Our total gross billed revenue grew by 8% from the fourth quarter of 2012 to $202.8 million. The reduction and discounts in credit offset the increase in the net service fee percentage from 12% to 14% so that the net revenue as shown on our financial statements also grew by 8%.

Moving to prepaid on slide 23, the pent-up demand that we experienced in the first few years of selling prepaid in our area appears to have slowed. We added 4,378 net prepaid customers in the fourth quarter of 2013 versus 5,723 in the fourth quarter of 2012. We added 8,661 net prepaid customers in 2013 to end the year at 137,047 compared to 21,078 net prepaid adds in 2012.

You recall that we lost over 13,000 Assurance customers early in 2013 when all carriers had to revalidate their government-subsidized customers. At yearend 2013, approximately 63% of our prepaid customers had a smart phone but only about 12,000 users had a phone that was LTE capable.

Prepaid churn and average gross billed revenues are shown on slide 24. Our churn for the fourth-quarter 2013 was at the same level as fourth-quarter 2012.

The spike in churn during the second-quarter 2013 was a result of the reauthorization of the Assurance customers previously mentioned. Average gross billed revenue is up over 2012 once again impacted by the reduction of the $10 Assurance customers.

I'd like to highlight our tower assets on slide 25. At yearend we had 153 towers. As we have stated before our tower assets are in our wireless segment but in a separate subsidiary and we don't build towers on speculation.

When possible we always build additional capacity to accommodate other tenants. We have an average of 2.5 tenants per tower with 1 being ourselves. You see in 2013 total tower revenue grew to almost $10 million with adjusted OIBDA of $6.3 million.

Before I move to cable I'd like to share with you a few facts about our LTE network. Overall we are very pleased with the performance of the network. As I mentioned earlier our dropped and blocked calls are at historic lows.

Approximately 47% of our data traffic is on LTE. That compares to 34% of our total pre- and postpaid customers having an LTE device.

15% of our voice traffic is now over 800 IDN spectrum. As expected, the in-building performance has been enhanced by this spectrum.

We recently harvested some of our spectrum from our original 30 megahertz of 1,900 spectrum and successfully installed a second LTE carrier in our 12 busiest sites. We plan to install 12 more in the coming weeks.

We still plan to launch LTE at 800 this year. There have been delays in getting the 800 spectrum cleared from Sprint.

Moving to our cable operations on slide 27, you see that we grew total cable RGUs to 120,275, an increase of 1,470 during the fourth quarter and 5,384 for 2013, which is a 79% increase over 2012. We saw modest decreases in video, down 373 users, but continue to see strong demand for our broadband, up 1,193 users and voice up 650 users.

We did substantially better in all categories than in the fourth-quarter 2012. We continue to work on getting more profitable customers growing the RGUs per customer to 1.59.

Supporting the goal of the more profitable customer you see on slide 28 that the average monthly revenue per RGU has increased about $1.00 since the fourth-quarter 2012 but the average monthly revenue per customer has increased over $4.00. Our penetration percentages by services for the past three years are shown on slide 29. In 2013 we increased the number of homes passed by approximately 2,000.

The video penetration has split by 1.6% but the digital penetration has increased to 49.2% primarily due to the previously announced digital conversions of several of our markets last quarter. We plan to convert three more markets to all digital later this year.

High-speed Internet is up 4,798 RGUs for the year and the penetration has grown to 27.2% of available homes passed. Voice RGUs are up 2,727 and the penetration is at 9.2%. I remind you that the primary difference between the homes passed for video and the other services is because 16,000 homes covered by our Shenandoah County cable system offer voice and high-speed Internet through our wireline segment.

Speaking of the wireline segment, please turn to slide 31. As we have historically experienced we had very modest access line loss with only 237 for 2013. We saw virtually no change in our number of DSL customers only growing by 18, to 12,585 at yearend 2013.

On slide 32 are the details of our fiber leasing activity in the wireline segment but there is a small and growing amount of activity in the cable segment. Fiber revenues were $21.8 million with $13.7 million billed to affiliates, primarily wireless segment for backhaul.

We continue to grow the amount of new fiber contracts with nearly $19 million of new contracts signed in 2013. These are long-term contracts that often require some construction, so the recognition of the revenues often start months after the contract is signed and will be recorded over 36 to 120 months.

My final slide is slide 33. We previously announced our $74 million estimated capital expenditures for 2014. You see how we project dollars will be spent by segment.

This is a significant decrease from the previous two years. I direct your attention to the notes on the right side of the slide where have broken down the $74 million in four categories.

Approximately 24%, or $18 million will be spent to maintain our current network. An additional 24% will be spent on capacity in wireless and cable primarily to keep up with the growing demand for broadband. 30%, or $22 million will be spent on network expansion.

These expenditures are to build new cell sites, additional fiber routes, fiber to the tower site and to build out adjacent areas to our current cable footprint. The 22%, or $16 million of success-based spending will only be spent if there are new revenues to support the expenditure.

This would include building a fiber extension to connect a new customer, or premise equipment for new cable customers. Approximately $17 million of the $74 million projected for 2014 are projects that were delayed from 2013. I'll now turn it back to a Adele.

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

Thank you. (Operator Instructions). Ric Prentiss, Raymond James.

Good morning. Couple of questions, apologize, joined it in progress. Another busy earnings day.

I must admit I was very pleasantly surprised by the margins in the wireless business. Particularly given the strong amount of net adds and that you were doing your own advertising about the presence of your LTE network. Can you talk a little bit about how you were that successful and should we expect margins to go up from here even?

As far as from the operations side, we did see, which is normal for us, in the fourth quarter a larger percentage of our sales came through non-Shentel control channels. And as we have discussed before the cost of acquisition for a non-Shentel channel is covered by the net service fee.

So it is certainly advantageous to us from a margin standpoint when we have a surge coming from those channels. We did spend the advertising but the amount of advertising that we spent in the fourth quarter was not significantly different from our normal fourth quarter. But one of the changes we have made is that we are shifting dollars from traditional advertising to digital advertising, doing more through digital sites and we are finding that that can be pretty effective at targeting customers.

Obviously, Ric, the ARPU improving and particularly the shift from Assurance to Boost and Virgin Mobile customers is a positive outcome as well for the bottom line.

Great. And then you mentioned how you had gotten some positive net porting in at least three or four of the last months against all of your major competitors including T and Verizon.

As we look into now two months of 2014 under your belt, competitive dynamics have changed I think fairly dramatically here. How has your porting experience been in January and February and what are your thoughts about the current competitive situation?

The good news for us is that the porting has not changed dramatically from what we saw in the fourth quarter. I think that we haven't gotten into quite the same throws and arrows I think in some small markets that you seen in some of the major markets.

At this point we have not launched Framily. It's only available through Sprint stores and not through affiliates and third parties yet.

So we're still primarily selling the unlimited plan. And we do get some questions when customers come into our stores asking why they can't get Framily, but we've been able to sell through that. So we've continued to be able to pretty much stay to our game plan and have not seen a dramatic impact of some of the things that we are reading about in the press.

And are customers asking for the equipment installment, or device financing plans?

They are that we are not seeing a tremendous amount of demand for that. Once again, we can't offer that yet because we will not carry the paper on that.

That actually will be carried by Sprint and Sprint is still working out the processes of how to actually do that. So at this point we are not selling either the Framily plan or the lease to purchase plan on the phones.

Great. Thanks. See you guys next week.

(Operator Instructions). Neil Macker, FBR.

Too questions. The first one is on the Clearwire spectrum. We are seeing Sprint looking to deploy that in more rural areas.

Are you guys speaking to vendors about deploying 2.5 to enhance 4G in your area? Any update on your thinking there?

We are continuing to monitor what Sprint is doing. We believe at some point in time there are some areas within our footprint that it would make sense to deploy Spark, but we have made the decision that we were kind of used 2014 as an observation year. We will do maybe some work as far as from site acquisition work but really not looking to make any expenditures on that until at least 2015.

In terms of the area, are you looking at 25% of your footprint, 10% of your footprint, what's your thought right now on that?

We have over 500 sites and we have identified that it probably would make sense in approximately 100 of those.

Okay, so about 20% roughly. We're still seeing some problems with the Sprint network interference and some optimization. Are you feeling any spillover effects on that, and any sense of when you're adjacent areas, I know we've talked about this in the past, the areas between DC and your footprint Baltimore and Philly, when those areas will be fully built out by Sprint?

As far as our own network are optimization is going quite well. As I mentioned earlier our blocked and dropped calls are at a historic low, so I think that we have done a good job.

I give my engineers a tremendous amount of credit. We actually did our own optimization. We did not farm that out, which (technical difficulties) part of the difference there.

But our customers are still expressing some displeasure when they travel outside of our footprint as far as their LTE usage. We are encouraged that Sprint has seemed to pick up momentum as far as completing their 4G buildout. And we are optimistic that by the end of the year they will have built out the LTE to the borders and the customer experience will be dramatically improved.

Okay. That's all we have. Thanks a lot.

Thank you. I'm not showing any further questions in queue. I'd like to turn the call back over to management for any further remarks.

Thank you for participating. Our 10-K will be released on Monday.

If you need further information please feel free to give me a call. Have a good weekend.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program.

You may all disconnect. Everyone have a great day.