Shenandoah Telecommunications Co (SHEN) 2014 Q1 法說會逐字稿

Good morning everyone, and welcome to the Shenandoah Telecommunications first quarter 2014 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over Ms. Adele Skolits, CFO. Please go ahead, ma'am.

Good morning, and thank you for joining us. The purpose of today's call is to review Shentel's results for the quarter ended March 31, 2014. Our results were announced in a press release distributed this morning, and the presentation we'll 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 Earle MacKenzie, our Executive Vice President and Chief Operating Officer. After our prepared remarks, we'll 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'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. 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 good quarter, and I'm delighted to share news of the Company's continued growth.

On slide 5, you'll see that first-quarter 2014 net income increased 3.2% to $8.6 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 7% to $31.7 million. Revenues were $80.5 million in the first quarter, a 6% increase from the prior-year period. Revenues increased chiefly as a result of wireless subscriber growth, increased data 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 wireless highlights start on slide 6. Post-paid customers grew by 4.2% over last year, and pre-paid customers by 3.1%. Operating revenue grew 6.1%, improving by $2.9 million.

Turning to slide 7, we also experienced substantial improvements in cable segment's operating performance. Operating revenues increased 10.6% to $20.5 million, while cable-adjusted OIBDA grew by 27% to $3.8 million. Strong growth of 6.1% in RGUs drove this increase.

As discussed on slide 8, our solid performance is being driven by many things, including two huge network upgrades that were completed in 2013. First, on the wireless side, we completed a $115-million upgrade to 4G LTE, the biggest capital investment in our Company's history. New and existing customers are embracing our enhanced service, and we've seen better coverage, stronger indoor signals, faster download speeds, and enhanced, crystal-clear voice quality.

Second, with the 2013 completion of upgrades to our cable infrastructure, we have strengthened our cable offering. Customer demand continues to grow for high-speed broadband services and premium digital TV packages, and we are positioned to meet those demands.

Our reputation and customer trust has grown dramatically over the past three years. Our Net Promoter Score, which measures how likely a customer will recommend Shentel, was poor three years ago. Since then, we have achieved gains that the research firm deemed remarkable. We have a lot of work ahead of us, but I am proud of the progress the team here is making.

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

Thank you, Chris. Before I review the financial results, I'd like to review two changes we made to our segment reporting during the quarter. First, in late 2013 the Company restructured its Management team, primarily to align our organization with our operating segments -- wireless, cable, and wireline, rather than on a functional basis, such as sales and marketing, operations, and engineering.

As part of this restructuring, the Company determined that the operations associated with the video product offered in Shenandoah County, Virginia, would be included in the wireline segment. The video services offered in Shenandoah County share much of the network which the regulated telephone company uses to serve its customers. These services had previously been included in the cable segment.

Second, primarily as a result of the restructuring, the Company's allocations of certain shared general and administrative expenses were updated to reflect how our Senior Management Team makes financial decisions and manages resources. Since the Vice Presidents managing the operating segments do not directly control these expenses, the Company has chosen to record these expenses at the holding Company.

As a result, certain costs including finance and accounting, executive management, legal, IT, and human resources are now recorded in the other segment as corporate cost. In this way, segment performance presents a clearer picture of the trends in an individual segment's profitability.

In our press release, we included a table showing a pro forma set of segment financial statements for the past two years by quarter, and for the full years, which reflects these changes on a comparable basis with the current reporting.

Moving on to the Q1 2014 results, I'll begin with slide 10. Our key financial metrics, including operating income, net income, and earnings per share, all rose approximately 3% in Q1 2014 over Q1 2013. We had a couple of unusual items impacting our first-quarter results. I'll touch on these factors when I review the segment performance.

On slide 11, I've shown the calculation of adjusted OIBDA. Here you can see that the adjusted OIBDA grew by nearly $2.1 million, or 7.1%. Depreciation grew by $1.4 million in Q1 2014 over Q1 2013, as a result primarily of the incremental depreciation on the 4G wireless equipment installed over the course of the last year.

The total value of the stock awarded in Q1 2014 increased over Q1 2013, but $656,000 of the incremental share-based compensation expense was due to a change in the terms of the stock grants in 2014. These terms implied that $700,000 of the expense was recognized immediately, instead of being recorded over the course of the four-year vesting period, as we have in prior years.

Finally, when the dust settled on the 4G upgrade, the removal of the 3G equipment cost us $366,000 less than we had accrued for asset retirement obligations, and we recorded a gain as a result. In Q1 2013, we had losses on the disposal of assets totaling $82,000, so this line item improved by $448,000.

Slide 12 shows our growth in adjusted OIBDA by segment. All three operating segments contributed to our consolidated growth. Cable led the way with a 27% improvement, followed by the wireline segment with a 9% increase, and wireless with a 4% improvement. While the cable improvements are consistent with our longer-term trends, the wireless improvements are not, as they are impacted by some of the non-routine items I mentioned.

On slide 13, I have analyzed the changes in the adjusted wireless OIBDA results between Q1 2013 and Q1 2014. Post-paid revenues are up by $2.1 million between Q1 2013 and Q1 2014. A combination of factors drove this increase. Post-paid billing rates are up over 3% this period, while customers have grown by 4.2%. Partially offsetting the growth in the gross revenues was a $900,000 increase in post-paid net service fees we pay to Sprint. Effective August 1, 2013, this fee rose from 12% to 14% of net revenues.

In addition, pre-paid revenues grew by $2 million, related primarily to growth in average pre-paid customers of 5.3%, and a 13.4% increase in the average monthly billing rate to each customer. A 10.5% decrease in the number of gross additions to our pre-paid customer base, combined with a decrease in the cost per gross addition charged by Sprint, drove a decrease of $900,000 in the cost of pre-paid acquisition costs.

Network related costs increased by $500,000, related to increases in tower rents related to the installation of 4G technology and network maintenance. The upgrade to 4G network efficient technology required us to replace copper-based T1s we used to transport traffic from our cell sites to our switch, with fiber-based back-haul. As a consequence, we fell below the number of T1s one of our vendors required to qualify for our previous level of volume discounts, and we recorded an additional $500,000 in Q1 2014 while we negotiate a final settlement with the vendor related to the service cancelled in previous quarters.

Finally, post-paid acquisition costs rose by $2.4 million, primarily as a result of increases in handset subsidies and advertising expenses. The handset subsidy cost increases relate to increases in the subsidy per gross add, as well as upgrades to existing customer phones to replace the Clearwire WiMAX 4G phones with those capable of supporting 4G LTE technology, as Earle will discuss in greater detail.

On slide 14, I've shown the components of the changes to adjusted cable segment OIBDA. The positive changes include significant growth in high-speed data revenues of $900,000, as a result of a 12.5% increase in average HSV customers. Equipment revenues are up by $500,000, as a result of an increase in customer premise equipment rents due to fewer discounts on digital access devices, and increased rates on DVR boxes.

Video revenues were up by $300,000, as a result of the price increases which we implemented in January, primarily to offset the increases in the video content provider's rates. This rate increase was partially offset by a 3.5% decrease in the average number of video customers.

Video voice revenues are up $200,000, driven by a -- rather, voice revenues are up $200,000, driven by a 23% increase in average voice customers. The cable segment was allocated a large portion of the share-based compensation expense increase I mentioned earlier, and also incremental health care costs due to high levels of self-insurance claims.

Despite the loss of video customers, programming costs are up $500,000 as a result of rate increases from content providers. Finally, network and maintenance costs are up by $700,000 as a result of network growth. At this time, I'll turn the call over to Earle now to go into greater depth on some of the operating factors driving our results.

Thank you, Adele. Good morning, everyone. My presentation starts on slide 17.

We ended the first quarter with 275,025 post-paid customers, an increase of 1,304 since year end. Our smartphone penetration continues to grow, reaching 77% of the post-paid base.

Slide 18 provides the detail of the net adds for the quarter. We had similar gross adds for the first quarter of last year, with lower churn of 1.73%. The result being 1,304 net adds, a 22% increase.

During the first quarter of last year, we were still getting IDN conversions, which numbered 1,745, with net adds of 1,065. Of course, there were no IDN conversions this year. We saw a significant increase in sales in the Shentel channels at 55% of gross adds, compared to 45% last year. Post-paid upgrades in the first quarter were 4.6% of the base, a significant decrease from the fourth quarter, and a little lower than our historical percentages.

As we stated in our year-end earnings call, we do not have the ability to offer Easy Pay or Framily until April. We did launch both products on April 11. We believe not having Framily and Easy Pay did have an impact on our results, particularly in the second half of the quarter.

We saw an increase in port-outs to most carriers including T-Mobile, who historically has been a port -- a net port-in carrier. This shift causes us to have higher churn and lower net adds than the trends we were experiencing earlier in the quarter. Since it's only been a few weeks, we don't have enough data to say what will be the impact of having Framily and Easy Pay.

I would like to take a moment to clarify the impact of easy pay on Shentel. We will realize the benefit of no subsidy on a phone sold on Easy Pay through Shentel-controlled channels, but we will not record any revenues or cost of goods sold. Sprint is holding the paper, and will record all of the revenues and cost of goods sold.

Moving to slide 19, since we were only offering Sprint pre-Framily plans during the first quarter, our average gross billed revenue per customer continued the growth trend we've seen in the past years. The average of Q1 was $64.93, an increase of $2.06 from the first quarter of 2013, and a $0.46 increase from the fourth quarter. The introduction of Framily will likely impact the average gross billed revenue, but it's too early to have any meaningful data.

Slide 20 shows our reconciliation between our total gross billed revenue and the net post-paid service revenue reported on the financials. Gross billed revenue is up 8%. Net is up over 3%. The major contributor to the lower net percentage is the increased management and service fees, up almost $1 million due to the increase in the net service fee from 12% to 14% in August 2013. We also saw an up-tick in bad debt, and we offered a promotion in the first quarter that was recorded as a credit on the customer's bill.

Moving to pre-paid on slide 21, we had lower pre-paid gross adds, at 19,200, and net adds at 1,490, compared to 6,200 net adds in the first quarter 2013. We ended the first quarter at 138,537 pre-paid customers, an increase of 3% in the past year.

At the end of Q1, 67% of our pre-paid customers had a smartphone, with 15% of the pre-paid base having an LTE-capable phone. The lower gross adds appears to indicate that the initial benefit that we had of pent-up demand for our pre-paid services in our area has ceased.

The lower net adds was impacted by the loss of several thousand Assurance customers, as Sprint started the annual reauthorization of the customer base in March. We understand that the reauthorization process will continue into the second quarter.

The reauthorization of the Assurance base also had an impact on our churn rate, as shown on slide 22. Without the impact of the loss of the Assurance customers, our churn rate would be in line with what we experienced in 2013. The average gross billed revenue of $27.39 continues at higher levels than we've seen in the recent quarters, due to the lower percentage of Assurance customers in the mix.

Our new wireless network continues to operate well. We continue to see blocked and dropped calls below 0.5%. We have voice at 800 deployed on 86% of our sites, and coverage already exceeds our 1,900 coverage. Over 15% of the voice traffic is on 800, because we're still having some issues on the cross-band load balancing that prevents us from shifting more traffic. We're working with Sprint and Alcatel-Lucent to address the issue.

The amount of data usage on LTE is at 51% of total usage, up from 47% in the fourth quarter. 49% of the post-paid customer base and 15% of the pre-paid customer base, or a total of 38% of all users, have LTE-capable smartphones. We continue to decrease the number of WiMAX phones in the network to approximately 16,000, down from 21,000 at year end.

As I reported last quarter, we have harvested 10 megahertz of our original 30-megahertz 1900 spectrum, and now have over 80 sites with a second LTE carrier at 1900. We just launched LTE at 800 on 15 test sites, and will expand deployment during the second quarter.

We're very pleased with our first-quarter cable results shown on slide 24. We added 2,752 net revenue generating units, RGUs, in the first quarter, compared to 1,771 in the first quarter of 2013, and 1,533 in the fourth quarter. As a reminder, this slide has been re-stated to exclude the video-only Shenandoah County, Virginia, cable customers that we moved to the wireline segment.

This is our best first quarter since expanding into cable in 2008. We added 2,292 data users, 811 voice users, and had 351 video losses. We added 1,132 net new customers, and now have 1.65 RGUs per customer.

The results on slide 25 show the average monthly revenue per RGU and customer. The results on this slide reflect the impact of moving 6,000 video-only customers to the wireline segment.

In the past year, we've seen a $2.43 increase in revenue per RGU to $56.20 in the first quarter of 2014. With the number of voice and data RGUs increasing, and the number of video RGUs decreasing, we are seeing smaller growth in revenue, but we are replacing higher-revenue but lower-margin video RGUs with lower-revenue but higher-margin data and voice RGUs. The $7.33 increase in average revenue per customer reflects our efforts to sell more RGUs per customer, making each customer more profitable.

Slide 26 shows the change in the key indicators during the past year. Our edge-out strategy has increased the number of homes passed by almost 1,000. We've added over 6,700 net RGUs, and over 1,400 additional customers. That's broken down into over 5,600 additional data RGUs, 3,000 new voice RGUs, and a loss of 1,900 video RGUs, with 65% of the video losses during the second quarter of last year.

The increase in digital penetration is due primarily to the all-digital conversions we've completed in several of our 750 systems. Before the end of the second quarter, we'll have converted all of our 750 systems to all-digital.

In January, we did a video price increase to pass on the increases in programming costs. Our video cancels due to the price increase were nominal, although we did get a lot of customer calls and comments on social media. We continue to attempt to educate our customers for the reason for the annual price increases.

Slide 28 shows some key wireline results. Access line losses continued to be very small, at only 1.5% for the past year. With 58% penetration, we continue to add DSL customers at a slowing pace. As mentioned earlier, we've moved 6,000 video customers to the wireline segment as part of the management realignment we did last fall. We now have a single vice president responsible for this customer base that purchases regulated telephone, DSL, and video from Shentel.

Slide 29 shows the impact of our focus on fiber sales. You see the $600,000 increase in non-affiliate fiber revenues between the first quarter this year versus last. There's a drop in signed contracts between the first quarter of this year and last, but that is impacted by the timing of a large contract. We still expect to exceed the $18.9 million of new fiber contracts we sold last year.

My final slide is slide 30 on capital expenditures. At this point, there are no changes to our $74-million projection for 2014. To date, we've spent or committed approximately 25% of the 2014 budget. I'll now turn it back to Adele.

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

Absolutely.

(Operator Instructions)

Our first question comes from Alan Salinas of Raymond James. Your line is open.

Hey guys, this is Alan here in for Rick Prentiss. A big topic on the Sprint call was their tablet sales. I was wondering, are you guys selling any tablets now in 1Q? If not, do you guys expect to ramp that up as the year progresses?

Alan, this is Earl. We did sell a nominal number of tablets. To date, we have about 3,200 total tablets in our base, so we have not focused on tablets. They are a lower revenue generating. Our concern is that people buy them and use them primarily on Wi-Fi. It's not been a product that we have focused on. But we'll continue to monitor it. If we see the market changing, then we will be selling more tablets.

Great. Thank you, guys.

Thank you.

(Operator Instructions)

Our next question comes from the line of Barry Sine of Drexel Hamilton. Your line is open.

Obviously, I'm still kind of digesting the results but obviously a very good quarter again. A lot of different moving pieces, and thank you, Adele, for calling all those out. As of I think you said April 11, you now have Easy Pay and Framily. Looking forward, are you -- is everything done with -- are you done with the charges for the LTE upgrade? Do you have the network? Do you have the plans in place? What is the outlook for the rest of the year on the wireless side?

Barry, this is Earle. As of the 11th of April we have all the systems in place to be able to sell Framily and Easy Pay. We did have some work to do with Sprint, because of the fact that the decision was made that Sprint would carry the paper. We had to have the procedures in place where we actually are taking the equipment out of our inventory to satisfy the customer's need, but then Sprint reimburses us for that inventory, and then basically is recording the entire transaction on their books. We have all of that in place, and we have started offering the Framily plan, similar to what Sprint's been doing in its stores.

As far as the network, yes, the network is complete. As I mentioned, we are very happy that we've been able to now launch LTE at 800. Only have 15 sites up, so I don't have a lot of stats yet, but it is working. We are -- we have 80 sites now up where we have the second carrier at 1900, and that is also going well for us.

The reason we've been able to do that is because as I mentioned, 51% of our usage is now on LTE, data usage is now on LTE. We've been able to true-up or free up some of the capacity we had for 3G, and allowed us to harvest that second carrier, which we think puts us in very good position, as we continue to move our customers, especially the WiMAX customers, off those WiMAX phones to the LTE phones.

As far as the expense levels of operating the network, the first quarters will become a pretty normalized level going forward. We are adding some sites this year. I think we have 22 in the budget for capacity, and so there will be some additional operating expenses related to those sites, but that's pretty nominal compared to the base that we have of 525.

To kind of address the question a little differently, if I look at first quarter and then how that may look vis-a-vis the rest of the year, first quarter you didn't have the Framily plan, the Easy Pay, now you have those. You talked about the losses -- port-outs to T-Mobile. I'm assuming, the sense I get is that the following three quarters on a wireless post-paid add basis should look a little bit better than what we saw in 1Q, as those impacts won't be present the rest of the year?

I think that's probably a pretty good position. The big thing -- another thing to point out was normally our distribution between ourselves and third parties or nationals is 50-50. Because the nationals were not offering Framily, we believe that when a customer, a prospect came into one of the nationals, they probably were more likely pushing them towards one of the other carriers.

If we -- one of the other things we're working on is getting that balance back where we had about the same number of gross adds, but 55% came through our stores. Our stores had a lot more activity this year than they had last year the first quarter, but we didn't get the same kind of contribution from the nationals. With Framily now available and launched in the nationals, we're hoping that that will help also to balance that.

Then Earle, a similar question on post-paid. If I think about some of the trends that impacted post-paid in the quarter, you mentioned Sprint reauthorizing some of the Assurance customers that will bleed into second quarter. You mentioned the fact that kind of the novelty of pre-paid has worn off now that it's been in the market for a year. It sounds like 2Q will look similar to 1Q, but then second half of the year, because the reauthorizations will be done with, may be a little bit stronger. Is that a fair way to think about pre-paid?

I think it is. You remember last year we took a tremendous hit in the second quarter on Assurance reauthorization. I don't believe that the reauthorization will be as big of an impact this year. But they really didn't get started on the reauthorization until it appears about the second week in March. We had some impact. As I mentioned, it was several thousand customers cancelled in the last three weeks or so of March, and then we've seen that trend continue into April.

Of course second quarter is just seasonally low for pre-paid, as well. That's always the lowest quarter for pre-paid.

Right.

My last question, you called out T-Mobile. Could you just kind of remind us, educate us, what is your network overlap with T-Mobile in the markets you're in, and then what is the marketing slash retail store overlap? Are they -- I don't recall seeing them being that visible in a lot of your markets.

No, their biggest presence -- I'm getting a little feedback here. Their biggest presence is in the eastern part of Pennsylvania, kind of the York, Harrisburg, over towards Carlisle area, which represents as far as population about almost 50% of our total pops covered. They do have a good network there. Their network for the western half of Pennsylvania and then down Interstate 81 to Virginia, West Virginia, Maryland is primarily interstate coverage, and really they have no company stores. They do sell through their national contracts. But their store concentration and their customer concentration is primarily in the eastern half of Pennsylvania.

Okay. Those are all my questions. Thank you very much.

You're welcome.

(Operator Instructions)

Nova, it looks like that's all the questions. I'm sorry. We have one more.

We have another question from the line of Rick Prentiss of Raymond James. Your line is open.

Yes, I'm sorry. Trying to be in a couple places at once today. I wanted to ask a question on the Easy Pay and the Framily plan. Can you update us as far as have you started the Framily plan and the Easy Pay, and what do you think the effect on EBITDA will be? It's a fairly complicated accounting, I guess.

Rick, this is Earle. We launched that on the 11th of April, so we've had a little over two weeks or so of Framily, and so we are seeing some take rate on that. It is growing. As you recall, Sprint has been advertising it nationally for longer than we've been able to offer it. It has taken some time for people to realize that we now are offering it in our stores. Really, I don't have a lot of data points to share with you.

As far as the impact on EBITDA, just to reiterate, we will not be recording any of the transaction related to Easy Pay on our books. We will get the benefit of not having -- to have the subsidy, but the revenue and the expense is going to be recorded on Sprint's books, because Sprint's going to carry that paper.

What will happen is a customer will come into our location. We will do the paperwork for Easy Pay. We will give them a phone out of our inventory. Subsequent to that, Sprint will reimburse us for that inventory that we've done. From our standpoint, it really is all a transaction on the balance sheet as far as inventory in and out, and then Sprint will actually be the one recording the revenue and will take the risk of any bad debt.

When Earl says the revenue, he means exclusively the equipment revenue. Obviously, the service, the ongoing service revenue would be ours.

From our standpoint, we would get a lower revenue from that customer for the service revenue, but we haven't had the subsidy. For us, the accounting is a little more straightforward.

Okay, great. Thanks.

You're quite welcome.

Thank you. I'm showing no further questions in the queue at this time. I'd like to turn the program back to Ms. Adele Skolits for closing remarks.

Thanks for participating everyone. I'd like to invite you to let me know if there are additional details you'd like to see in future calls. My contact information was provided on the press release. Thanks again.

Again, ladies and gentlemen, this does conclude today's conference. We thank you for your participation. You may now disconnect.