Shenandoah Telecommunications Co (SHEN) 2014 Q2 法說會逐字稿

Good morning, everyone, and welcome to the Shenandoah Telecommunications second quarter 2014 earnings conference call. Today's conference is being recorded.

At this time, I would like to turn the conference over to 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 June 30, 2014. Our results were announced in a press release distributed this morning, 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 for accessing the replay 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 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 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 will turn the call over to Chris now.

Thank you, Adele. We appreciate everyone joining us this morning. I am delighted to share news of our Company's continued growth and our good results for the quarter.

On slide 5, you will see the second quarter 2014 net income was $8.6 million, an increase of 9.9% compared to the prior year. Continued growth in our wireless and cable segments drove the improved net income performance. Adjusted operating income before depreciation and amortization or OIBDA for the quarter was $33 million, an increase of 5.7%.

Revenues grew by almost $4 million, reaching $81.4 million in the second quarter, which was a 5.1% increase from the prior year period. Our subscriber growth, increased data fees, and enhanced product mix drove the revenue increase in our wireless segment. In our cable segment, the revenue improvement was the 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. We had solid increases in both postpaid and prepaid this quarter. Compared to the end of second quarter 2013, our postpaid customers grew by 4.3%, and prepaid customers by 5.2%. Operating revenue grew 4%, an improvement of $2 million.

Turning to slide 7, you will see our cable segment highlights. We experienced substantial improvements in cable segment's operating performance, led by an operating revenue increase of 11.2%, to $20.8 million. Cable adjusted OIBDA reached $3.9 million, an increase of 20%. These increases were driven by RGU growth which was up 6.1% over the prior year.

As listed on slide 8, our solid results are being driven by the improved performance and capability of our networks as the result of the upgrades completed in 2013. On the wireless side, new and existing customers are embracing our better coverage, stronger indoor signals, faster download speeds, and enhanced, crystal-clear voice quality. The $115 million upgrade to 4G LTE, the biggest capital investment in our Company's history, puts us on par, and in most cases ahead of, our competitors.

The upgrades to our cable infrastructure have strengthened our cable offering and enabled us to meet customers' continually growing demand for high-speed broadband services and premium digital TV packages. We have a lot of work ahead of us, but I am proud of the progress the team here is making to improving our service reputation and customer trust. Our net promoter score, which measures how likely a customer would recommend Shentel, has improved considerably over the past three years as a result of these efforts.

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 10.

Our key financial metrics, including operating income, net income, and earnings per share all rose substantially in Q2 2014 over Q2 2013. Net income was up nearly 10%, and operating income and earnings per share were up nearly 9%.

On slide 11, I have shown the calculation of adjusted OIBDA. Here you can see that adjusted OIBDA grew by nearly $1.8 million or 5.7%. Depreciation grew by $524,000 in Q2 2014 over Q2 2013, as a result primarily of the incremental depreciation on the 4G wireless equipment installed over the course of the last year. Share-based compensation expense was essentially flat, and the loss on disposable assets was down just $29,000.

Slide 12 shows our growth in adjusted OIBDA by segment. This quarter once again, the cable segment led the way with a 20% improvement, followed by the wireless segment with an 8% improvement. The wireline segment's adjusted OIBDA decreased by $500,000 or 7%.

On slide 13, I have analyzed the changes in adjusted wireless OIBDA results between Q2 2013 and Q2 2014. Postpaid revenues are up by $2.1 million between Q2 2013 and Q2 2014. A combination of factors drove this increase.

Postpaid billing rates are up over 3% during this period, while average customers have grown by 4.2%. Partially offsetting the growth in gross revenues was a $900,000 increase in the postpaid net service fee we pay to Sprint. Effective August 1, 2013, this fee rose from 12% to 14% of net revenues, which is the maximum rate allowed under the current contract.

In addition, prepaid revenues grew by $300,000, related primarily to growth in average prepaid customers of 3.4%. A 16.5% decrease in the number of gross additions to our prepaid customer base, combined with a decrease in the cost per addition charged by Sprint, drove a decrease of $1.1 million in the cost of prepaid acquisition costs.

Network-related costs increased by $300,000, as higher tower rents and network maintenance related to installation of 4G technology were partially offset by lower backhaul expenses. Line costs improved by $300,000 through efficiencies gained by replacing T-1 circuits with fiber backhaul.

Finally, postpaid acquisition costs rose by $1.1 million, primarily as a result of increases in handset subsidies and advertising expenses. The equipment subsidy cost increases relate to increases in the subsidy per gross add, upgrades to replace Clearwire WiMAX 4G phones with those capable of supporting 4G LTE technology, and a growing number of tablets.

On slide 14, I have shown the components of the changes to adjusted cable segment OIBDA. The positive changes include a significant growth in high-speed data revenues of $1.3 million, as a result of a 13.1% increase in HSD customers. Equipment revenues are up by $600,000, as the result of charging for some set-top boxes separately, which had previously been included in the service fee.

Voice revenues are up $300,000, driven by a 21% increase in average voice customers. Video revenues are up by $200,000, as the result of the price increases which we implemented in January, primarily offset by the increases in the video content provider's rates. This rate increase was partially offset by a 3.2% decrease in the number of video customers. As a result of changes in the bundling of our packages and promotional discounts to drive sales growth, discounts and promotional costs are up $700,000.

Despite the loss of video customers, programming costs are up $700,000 as the result of large rate increases from content providers. Finally, network and maintenance costs are up by $400,000 as a result of network growth.

Moving on to the wireless OIBDA on slide 15, revenues grew by $300,000 as a result of growth in facility leases to third-parties and affiliates. The affiliate access expenses also increased, in order to provide the third-party services. Other costs rose by $400,000 including sales and marketing expenses.

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. My comments begin on slide 18.

We ended the quarter with 277,673 postpaid wireless customers, up 3,952 since the beginning of the year, compared to 3,405 for the first six months of 2013. Our postpaid smartphone penetration was 77%, with 75% of smartphones being either LTE or tri-mode capable. We launched Framily in April, and at June 30, 6% of our postpaid base was on the Framily plan, with 76% of them migrating from existing price plans.

On slide 19, we show gross and net postpaid adds for the second quarter this year compared to last. We had 15,898 gross adds in Q2 2014, an increase of 5% over Q2 2013. The 2013 gross adds included approximately 1,800 iDEN conversions. So without the iDEN conversions, the gross adds were up 19%.

23% of the second quarter 2014 gross adds were new Framily lines, with 85% of Framily adds in Shentel-controlled channels, and 15% through national and other non-controlled channels. Included in 2014 gross adds are approximately 33 -- 3,300 tablets, with 50% from Shentel-controlled channels, and 50% from nationals and other non-controlled channels. As you are probably aware, Sprint had a promotion that continues into July for a free tablet that we honored in our service area.

We processed approximately 3,800 Easy Pay transactions through Shentel-controlled channels, with 55% for gross -- new gross adds and 45% for upgrades. As we have disclosed, Easy Pay transactions are not recorded on our financials. We just process the paperwork for Sprint, and Sprint records the revenue and corresponding cost of goods sold. We don't have any data for the number of Easy Pay transactions processed by non-Shentel-controlled distribution in our service area.

Net adds for Q2 2014 were 2,648, an increase of 13% over 2013. Churn for Q2 continues to trend nicely, down from last year, and down from the 1.73% we had in the first quarter of 2014. We believe the major contributor is the stability and quality of our network, now that Network Vision is complete. We did 45 -- 47% of the gross adds in our Shentel-controlled channels in Q2 2014, compared to 44% in 2013. We are at a nominal port-out position for Q2, an improvement over Q1.

Postpaid upgrades in the second quarter were higher than normal, at 7.5% of the base. 32% of upgrades were processed through Shentel-controlled channels, and 68% through non-controlled channels. Part of the reason for the elevated upgrade is our continued effort to remove WiMAX phones from our network. At June 30, we still had approximately 12,000 WiMAX phones.

Slide 20 shows the growth in gross billed revenue per postpaid user in Q2 2014, compared to Q2 2013. We saw an increase of $2.03, with over $3 increase in the data component. The gross billed revenue per postpaid user was down $0.14 from the $64.93 in Q1 2014. The nominal decrease is due to the introduction of Framily plans and the lower average billing for tablets.

The reconciliation of gross billed postpaid revenue to net postpaid revenue is shown on slide 21. Gross billed revenue for Q2 2014 was $53.6 million, up 8% from the same period last year. The net postpaid service revenue was $36.9 million, up 3%. The difference in the percent growth is due to the increase in the net service fee retained by Sprint from 12% to 14% in August 2013, which represents approximately $1 million per quarter, and an uptick in discounts, credits, and bad debt.

Slide 22 shows prepaid results. Gross prepaid adds for the second quarter of 2014 were 15,286 with a net loss of 361, ending the quarter with 138,176 prepaid users. The quarterly net loss was driven primarily by lower gross adds and a decrease of Assurance customers due to the annual reauthorization process. Shown on slide 23, in spite of the reauthorization of Assurance customers, prepaid churn was 3.8%, very favorable to the 5.3% we had in Q2 2013, and better than most of the previous quarters shown.

As I have done in the past quarters, let me give you an update on our network. At June 30, we had 528 cell sites, and have added 2 more in July for a total of 530. 66% of our sites have a second LTE carrier. 86% of the second carriers are at 800, and 14% of the second carriers are at 1,900. We plan to start adding a third LTE carrier to sites starting in August, once the testing for the new Alcatel-Lucent software release that allows for additional carriers is complete.

Data usage has increased approximately 45% since the beginning of the year, with all of the growth occurring on LTE. 60% of all data usage is LTE, with 25% of our LTE usage on 800 megahertz. Our average LTE speeds are approximately 7.5 meg. Voice usage is flat. We have equipped 93% of our sites with 800 voice service, but only 17% of our voice traffic is on 800 megahertz.

We continue to work with Sprint and Alcatel-Lucent on the cross-band balancing feature that prevents us from shifting more traffic. So we have not gotten the full value of the 800 spectrum. Our blocked call rate is about 0.4%, and our dropped call rate is 0.6%. I would point out that many of our dropped calls are due to the customers leaving our service area into an area with no service.

Moving to cable on slide 25. Due to our annual loss of students in the second quarter, we had a net reduction in RGUs of 371, similar to the loss in the second quarter of 2013.

In the second quarter, we added 627 net voice RGUs. Voice services are not typically impacted by student migrations. Even with the student losses, we had 28 net high-speed internet adds and lost 1,026 video RGUs. We continue to make progress increasing our RGUs per customer at 1.66 compared to 1.6 a year ago.

Average monthly cable revenue per RGU and per customer are shown on slide 26. A video rate increase in January and efforts to upsell customers have resulted in a 3.3% increase in average revenue per RGU to $55.74. The higher average revenue per RGU and increasing the ratio of RGUs per customer has resulted in a 7.3% increase in average revenue per customer to $92.31.

Slide 27 shows the key indicators for Q2 2013 compared to Q2 2014. Extending the boundaries of our cable systems and adding a small adjacent system resulted in an increase of homes passed to over 171,000. RGUs are up over 6% to 116,221, and customers are up over 2% to 69,889, resulting in the higher ratio RGUs per customers mentioned earlier.

Video penetration has dropped to 30.2%, but digital penetration has risen to 63.6%, because we have now moved all of our 700 megahertz markets to all-digital. High-speed internet had healthy annual growth of over 13% to 48,096 for a 28.5% penetration. Voice has had an annual growth of almost 21% to 16,426 for 9.9% penetration. As you recall, we had very little voice or data penetration when we purchased these systems, so we are very pleased at the rate we have been able to grow both internet and voice services.

Regulated access line and DSL statistics are shown on slide 29. We continue to have modest access line loss, with 2.8% loss in the past 12 months. We continue to have modest DSL growth, up to 48.2% of access lines.

As you recall, beginning this year, we have moved the responsibility and the reporting of the video-only cables customers served in Shenandoah County, Virginia, where we are the regulated phone company, to the wireline segment. At June 30, we had 5,904 video-only cable subs.

Fiber results are shown on slide 30. We had over a 12% increase in fiber lease revenue in the past year, with over 60% of the increase in non-affiliated revenue. We wrote 4.9 million of new fiber contracts in the second quarter of 2014, and still expect to exceed the 18.9 million of new fiber contracts we sold last year.

My final slide is slide 31. There are no changes in our expected CapEx spending from our first quarter call. To date, we have spent or committed approximately 50% of the $74 million 2014 capital budget.

That completes my remarks, and I will turn the call back over to Adele.

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

(Operator Instructions)

Rick Prentiss, Raymond James.

Can you hear me all right? Hey, can you hear me?

Yes.

Okay. Hello guys, a couple questions, if I could. On the Framily plan, I think, Earle, you said it's now 6% of your base. And you launched that, was that launched in May?

That was launched in the middle of April.

Mid-April, okay. So it was almost a full quarter effect in there. As far as percent of sales, it looks like the appendix says it was like 23% of sales?

Yes.

As you look -- with July now in your pocket, has that increased, or is it still staying in that percent of sales range?

It's remained relatively constant.

Okay. And the -- I think I missed the Easy Pay number. What did you say Easy Pay was?

We had 3,800 Easy Pay transactions.

Those are just through your channels?

Just through our channels, yes.

Okay, and -- .

And 55% of those were for new gross adds, and 45% were for upgrades.

Okay. And then, tablets -- what did you say about tablets, as far as it's becoming an increasing part?

Well, we now have -- we added 3,300 tablets in the second quarter. We now have -- about 2% of our base are tablets.

So the postpaid base?

Yes.

And as you think about the way you calculate ARPU, tablets obviously come in at lower or free rate. How is -- how are tablets being reflected in ARPU? And is there a thought from you -- and I guess Sprint, since they provide a lot the numbers, on separating those out, or thinking of how we report ARPU or --?

ARPU on a tablet is -- it averages about $15. So it is worked into the average that we provide for all. But -- so it certainly has an impact on the overall average, but it averages about $15 per customer per tablet.

Great. And then, you mentioned the upgrade percent was high, 7.5%. You are down to 12,000 WiMAX left. What are your thoughts as far as the trend on -- first, non-WiMAX upgrades, and then kind of total upgrades?

Both were up for the quarter. We really have a push to try to get all the WiMAX out by the end of the year. We probably won't get to 100%, but we virtually want to have all of those out, so the customer gets the full advantage of our LTE network. But we also saw an uptick in non-WiMAX upgrades this quarter also.

Are we thinking it will stay elevated then through the rest of 2014, and then maybe come back down in 2015?

I would think so, with the combination of just the WiMAX, and also with the new iPhone. I suspect that we'll have upgrades in this range for the rest of the year.

Sure. Okay. And then, more importantly, Sprint on their call mentioned that they're trialing a lot of different rate plans, as they try and think through what's happening in the competitive environment. Are they offering any of those trials in your neck of the woods, and can you share with us what is being looked at?

No. We are not involved in any of those trials. We are selling just the list prices that are on the website, and we really don't have any significant visibility on that. We basically are just waiting for the results, and as we have always done, we will mirror what Sprint does nationally.

And from your competitive dynamics, though, it doesn't seem like T-Mobile is that prevalent in your markets. Is that still the case?

They really only have any significant presence in the Eastern part of Pennsylvania. So that's really the place that we are seeing their impact. So although they certainly are impacting the dialogue nationally with their advertising, there is not that many distribution points in our footprint.

Sorry for all these rapid-fire ones, but I've got some easy quick ones, I think. And then, nTelos, on their call the other day mentioned how they had seen an increased presence from Cricket with AT&T now owning them, and from Metro expanding outside their area. Have you noticed an increased presence of those prepaid offerings in your market?

We have not. They have the Norfolk, Richmond area, which are much bigger metropolitan areas than what we serve. So we really haven't seen the impact of that yet.

Great. I appreciate the quick answers to all those questions. Thanks.

David Dixon, FBR Capital Markets.

Thank you, and good morning, Earle.

Yes.

I have a couple of questions, thanks, on network quality and service differentiation from here. Could you give us an update on your spectrum position as you look at the ramping LTE usage? I know you've called out the extra 10 megahertz of spectrum on the PCS band, and I think you touched on some of this in your prepared remarks. But just to get a sense of where you are now, and how you see yourself positioned from a spectrum standpoint?

Well, in total, we have 54 megahertz of spectrum with the original 30, the G-block 10, and then the 14 800s spectrum. We have farmed one 10 megahertz section out of the original 30. So we are using the original -- the 10 on the G-block, we are using one 10-block out of the original 30, and we are using 10 out of the 800. As I mentioned, right now we have a limitation that we can only use 20 megahertz of LTE on any one site.

We are testing the software now that is going to allow us to expand that, and we expect that that testing will be done by the end of August. And then, we'll actually be able to launch a third carrier on sites where we are having the demand. And so, we feel like we are in a very good position. We already have a significant number of sites with 20% -- 20 megahertz of spectrum. And then, by the -- certainly by the fourth quarter, we'll be able to have 30 megahertz of LTE spectrum on any site that needs it.

And as you think then about the 30 megahertz of spectrum that you will get to, as you get towards the end of the year hopefully, what's the importance of 2.5 for additional service differentiation to drive growth? Do you see that as an important tool in the toolbox, going forward?

We do. And actually, we are doing the preparation work this year. We've identified between 100 and 125 sites that we believe would make sense for us to deploy the 2.5. This is certainly a little bit of different decision than where Sprint is. Sprint is looking at the top 100 markets. We really only have one top 100 market, and that's Harrisburg.

But we're looking at some of our other markets, where we have very high penetration, like Hagerstown, Maryland; and Martinsburg, West Virginia; and Winchester, Virginia, and we will deploy 2.5 in those markets too, in the core area. And with -- we see that probably as a 2015 event. Don't know if we'll get all 100-plus sites done then, but we will certainly start that deployment in 2015, and we are selling the tri-mode phones now. So we are equipping our customers with the equipment that they can use, and we feel very comfortable that we will launch that sometime in 2015. And it really will be a differentiator for us.

Because some of the pushback that nTelos made on Sprint in the new agreement was to try to wind down the 2.5, whereas Sprint had seen it as much more of a service differentiation opportunity and were looking for a lot more about clustered based approach. So in the 100 to 125 sites that you identify, would that be deployed as a cluster, so there would be a real service differentiation in those core markets that you identified?

Absolutely. We are -- looking at our service area, we have a lot of geography where there is not a lot of density. Where we have the density of population is where we are going to do it, so there will be a cluster. Certainly, our definition of cluster will be different than Sprint's because of just the size of the markets. But the metropolitan area -- quote-unquote, inside the Beltway areas, we would deploy the 2.5.

And then the question, if I could, turns on the estimated costs to incorporate additional bands on the network. There is obviously some options in terms of how the industry is going to reshape itself. And in the scenario where Sprint and T-Mobile did come together, the plan there very clearly is to try to simplify onto the T-Mobile core network in many markets across the country. And so, in the event that that does play out, do you have a sense of what the costs would be to incorporate the additional bands on the network, that would be on the TMO network, so AWS for example, and 700 to layer that in? Or would that be another rip and replace?

No. It would not be a rip and replace, because the architecture of our network is the ability to add different spectrum carriers into the base station. So really what you'd have is you'd have the car in the base station, and you would have new antennas or additional antennas that you would have to be at that spectrum level put on the tower. So there would be some additional expense, obviously, tower expense to add more antennas to the tower. But the amount of both CapEx is certainly nothing close to a rip and replace. My estimate would probably be somewhere $150,000 plus or minus per tower for the car, the antennas and the construction costs.

Great. And last question, on the base of customers that you have with the software upgrade, what proportion of the customers would you estimate, if you can estimate this, would be able to receive an AWS-based LTE signal, if that was the scenario that we saw going forward?

I really don't have a guess at that, David.

Okay. We can circle back on that, then. Thank you so much, Earle.

All right. You're welcome.

(Operator Instructions)

So it sounds like that's it for us. Thank you for participating, everyone. I would like you to invite me to let you know if there are additional details you would like to see on future calls. My contact information was provided on the press release.

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