Shenandoah Telecommunications Co (SHEN) 2015 Q2 法說會逐字稿

Good morning, everyone, and welcome to the Shenandoah Telecommunications second-quarter 2015 earnings conference call. Today's conference is being recorded. At this time I would now like to turn the call 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, 2015. 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 this 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 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 solid second quarter and I am pleased to be able to share details about the Company's continued growth.

On slide 5 you'll see the second-quarter 2015 net income increased over 21% to $10.5 million compared to the prior year, attributable primarily to continued growth in the wireless and cable segment. Adjusted operating income before depreciation and amortization, or OIBDA, for the quarter increased almost 13% to $37.2 million. Revenues were $85.7 million in the second quarter, an increase of over 5% from the prior-year period.

Increased revenues in the wireless segment were the result of wireless subscriber growth, which more than offset the decline in billed revenue per customer. Our cable segment revenues also improved as a result of an increase in the number of revenue generating units or RGUs, video rate increases and customers selecting premium digital TV and high speed data packages.

Our wireless highlights start on slide 6. We saw growth in the wireless segment with increased customers for our post and prepaid offerings. This growth was a result of combining our regional advertising efforts with Sprint's national marketing campaigns and aggressively marketing the benefits of our enhanced network and local customer service capabilities. Postpaid customers grew by 6.8% compared to the prior year and prepaid customers by 5.3%. Operating income for the quarter grew almost 10% when compared to the second quarter of 2014.

Turning to slide 7, you see that our cable segment continued its improving trend and delivered strong growth in the quarter as demand for our high speed Internet and voice services out-paced the anticipated decrease in video subscribers. Operating revenues increased about 16% to $24.2 million, while cable-adjusted OIBDA grew 46% to $5.7 million. RGU growth of more than 6% drove this increase.

Other Company highlights can be found on slide 8. Our fiber lease revenues increased 6% to $8.5 million and our 154 towers generated $1.6 million in OIBDA from lease revenue.

We're pleased with our organic revenue growth and enhanced profitability in the second quarter. Our upgraded wireless and cable networks continued to appeal to new customers, while current customers are increasing the offerings they subscribe to. Customers expect enhanced coverage and high-quality service and the marketplace recognizes that our state-of-the-art networks meet those demands.

We have higher free cash flow as a result of the decrease in capital expenditures with the completion of the recent system upgrades. Our strong balance sheet provides a solid platform for long-term growth. We continue to evaluate strategic acquisition opportunities in both the wireless and cable markets. Absent the right opportunities, dividends will remain an important priority and an effective method for us to return capital to shareholders.

We view our debt load as relatively modest with attractive terms but we began making required principal payments at the end of last year, after two years of interest-only payments. Our Board will be making a decision on this year's dividend declaration in the October timeframe. I will now turn the call back to Adele to review the details of our financial results.

Thank you, Chris. I'll begin my remarks on slide 10 which summarizes our Q2 2015 results. As you can see, all of our key financial metrics rose substantially in Q2 2015 over Q2 2014, with operating income up 19%, net income up 22%, basic earnings per share up 19% and diluted EPS up 23%.

On slide 11 I've shown the calculation of adjusted OIBDA for Q2 2015 and Q2 2014. Here, you can see that adjusted OIBDA grew by nearly $4.2 million, or 13%. Depreciation grew by nearly $1.1 million as a result primarily of the incremental depreciation on network enhancements required to meet the growing data needs of our customers. Incremental share-based compensation was up in Q2 2015 over Q2 2014 by just $76,000. Finally, the loss on the disposal of assets was up $95,000 in Q2 2015.

Slide 12 shows our growth in adjusted OIBDA by segment for the same periods. Cable led the way again with a 46% improvement, followed by wireline with a 12% increase. The wireless segment posted a healthy 9% growth in OIBDA. The cable improvements are consistent with longer-term trends, as Chris mentioned earlier. OIBDA margins also grew significantly in all three segments.

On slide 13, I've analyzed the changes in the adjusted wireless OIBDA results between Q2 2015 and Q2 2014. Postpaid handset and customer acquisition costs are down by $2.4 million. As Earle will discuss in greater detail in a moment, the shift to leasing and equipment installment billing to finance handsets drove this decrease. In a related shift in postpaid service pricing, the postpaid billing rates were down 8.9% during this period. So while average customers grew by 6.4%, net postpaid service revenues dropped by $300,000.

Prepaid revenues grew by $1.2 million, related primarily to growth in average prepaid customers of 6.3%, and a 4.6% increase in the average monthly billing rate to each customer. Increases in the rate Sprint charges us to acquire and support prepaid customers, in addition to the increase in the customer base, drove a $900,000 increase in prepaid support costs.

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 which grew by $2.1 million as a result of a 10.4% increase in average high-speed data customers. In addition, video revenues grew by $1 million, primarily as a result of the price increases which we implemented in January to offset the increases in the video content providers' rates. The average number of video customers actually dropped by 1.9% during this time, consistent with industry trends.

Voice revenues are up by $400,000 as a result of a 19.5% increase in customers. Bundling of services to promote customer growth resulted in a $500,000 increase in discounts and promotions. The increases in content providers' rates drove a $1 million increase in 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.

Thanks, Adele, good morning, everyone. Starting on slide 16, we ended the quarter with 296,492 postpaid users, up almost 7% in the past year, and 441,923 total users for a penetration rate of 20%. 81% of our postpaid users have a smartphone. 90% of our smartphones have LTE capabilities, with 58% also having SPARK capabilities.

Slide 17 shows we more than doubled net postpaid additions in Q2 at 5,414. The Increase in the net adds was a result of higher gross adds at 17,734 and lower churn at 1.4%. Q2 churn at 1.4% is the lowest quarterly churn in SHENTEL's history, with both may and June at approximately 1.3%. You see that SHENTEL-controlled channels only produced 36% of gross adds in Q2. With the advent of EasyPay and leasing our local agents use Sprint inventory rather than SHENTEL inventory, and are therefore counted as non-SHENTEL-controlled distribution. In reality, there has not been any fundamental shift in where customers are buying their phones, just how we classify them.

Let me provide you some additional postpaid stats. Our port-in ratio increased in the second quarter to 1.84 to 1. Phones represented 63% of the net adds, while tablets and connected devices were 37%. As of June 30, tablets were 5.3% of the postpaid base. 32% of our gross adds took traditional subsidized phone plans, down from 42% in the first quarter. 31% selected installment sales and 37% leased their phones. As of June 30, 72% of our base remains on subsidized phone plans.

Postpaid upgrades for the quarter were 8.7% of the base. 29% of the upgrades came through SHENTEL stores. The breakdown of second-quarter upgrades were 37% staying on subsidized plans, 19% on installment plans and 44% leasing their phones. We believe that the Cut Your Bill in Half promotion continues to get prospects in our stores, although only 7% took the offer in the second quarter.

The shifts to customers buying or leasing their phones continues to have an impact on gross billed revenue per postpaid user, as shown on slide 18. Second-quarter gross billed revenue was $59.01, down 9% from a year ago and 3% from the first quarter. As a reminder, when a customer leases or buys his phone on an installment plan, both the revenue and cost of goods sold related to the phone are recorded on Sprint's books. Not having to subsidize those phones is reflected in the lower cost of goods sold.

The reconciliation of gross billed postpaid revenues to net postpaid revenues is shown on slide 19. Gross billings were down only 3% due to strong customer growth, and net revenue down only 1% due to improved bad debt write-off and lower service credit.

Prepaid stats start on slide 20. We had a net loss of 2,352 prepaid customers the second quarter on approximately 20,000 gross adds, to end the quarter at 145,431 prepaid customers. The major driver of the net loss was the annual renewal of the government subsidized assurance plan.

Slide 21 shows prepaid churn was 5.1% in the second quarter, but average prepaid gross billed revenue was up, at $29.41 per month. We continue to see very high demand for a higher revenue Boost product and a continued gradual decline of Virgin Mobile customers. As of June 30, 75% of our prepaid customers have a smartphone, with 66% of the prepaid smartphones having LTE capabilities and 43% also having SPARK capabilities.

I would like to share some network stats shown on slide 22. We have 546 sites, 94% of the sites have LTE -- have 800 megahertz LTE service. 166 of the sites have three LTE carriers using 10 megahertz of capacity harvested from our original 30 megahertz of 1900 spectrum. 86% of our data traffic is on LTE, with 34% of the LTE traffic on 800 megahertz. Average LTE speeds are approximately 5 megabits.

Data usage grew by 11% in the second quarter over the first quarter and 104% in the past year. We estimate that the average customer is using approximately 4 gigabits a month. 39% percent of the voice traffic is on 800 megahertz. Blocked and dropped calls continue to stay low, with blocked calls at 0.3%.

Engineering and site development is complete and equipment is on order for 35 SPARK sites. We expect to complete additional sites before year-end and 125 total sites by 2016. We have our fiber built to 199 cell sites, 157 to SHENTEL sites and 42 to others, with routes for an additional 31 sites under construction.

Turning to cable on slide 23, you see our annual second-quarter dip in RGUs due to our retail college students leaving us for the summer. We lost 625 RGUs in the quarter. We saw an increase of 289 voice users, a decrease of 809 video users and 98 internet users. We expect a strong rebound in internet users in August when the students return to college.

Slide 24 shows another strong increase in average monthly revenue per RGU and per customer. Revenue per RGU is up $5.23 over a year ago, at an increase of $12.65 per customer.

Compared to the first quarter, revenue per RGU is up $1.25 and up $2.76 per customer. The year-over-year increase is due to price increases on video in January, but primarily the driver has been a significant increase in the average revenue per internet RGU.

In 2014 we announced to our customers that we would implement data allowances in June 2015. We had over six months of education on allowances, sending customers email notices as they hit 85%, 90% and 95% of their allowance. The move to data allowance has driven thousands of customers to increase their speed and their allowances.

Our allowances are very generous, with ranges from 250 gigabytes at 5 megabits and 1 terabyte at 101 meg. In the first full month of allowance billings we billed just under 5% of our internet users approximately $72,000 in allowances. Our overage fee is $10 for each 50 gigabytes. We had a few customers blast us on social media, but have had seen very few customers cancel due to the new policy.

Slide 25 highlights the changes we've seen in our customer base in the past 12 months. We have added 1,580 additional customer relationships and 7,169 additional RGUs. We continue to lead with, and have gained, 5,001 high-margin internet users. In addition, we added 2,975 voice users and lost 807 video users. Our digital penetration has grown to 73.8%. We're in the middle converting our last system that is below 1 gig to all digital, providing us enough capacity to continue to grow our internet users.

Wireline stats, on slide 26, highlight the continuing trend of very low access line losses, losing only 1% in the past 12 months. We continue to add broadband customers, now at 59.5% of access lines, with 12,856 users.

On slide 27, you see the second-quarter and year-to-date fiber sales for 2014 and 2015, further broken down between cable and wireline. We signed $6 million of new contracts in the second quarter and $10.8 million year to date. We added a new director of fiber sales in the second quarter and are adding some additional fiber salespeople in the cable areas.

Slide 28 shows our CapEx spending. As of June 30, we have spent and committed $32 million or 43% of our capital budget. We still have plans to spend the $74 million in 2015 but will provide a more accurate estimate during the third quarter call. Thank you, and I'll turn the call back over to Adele.

This concludes our prepared remarks. Christie, please review the instructions for posing a question.

(Operator Instructions)

Ric Prentiss, Raymond James.

First question I would like to ask you guys is, there has been a lot of speculation in the markets about Sprint doing a massive network densification. Earlier you talked about your SPARK progress in getting your stuff ready and you are ahead of schedule as you have been in the past.

But when you think about Sprint's plans, what do you think the impact on SHEN will be? And also can this help the 5 megabits per second speed that you are getting on average out there?

What will significantly help 5 megabits is going to be SPARK. When we implement SPARK we'll be able to have a wider carrier and we will be able to provide higher speeds.

As far as densification, with almost 550 sites, we're pretty dense already. We are looking at using some small cells, but we see, particularly in our area, that we're going to focus them on specific hot spots rather than using them for coverage or for capacity on a broader level. We believe with the amount of spectrum and the number of sites we have and the addition of the 125 SPARK sites, we're going to have a very dense network.

The one thing we are looking at doing is we are reengineering some of our sites to go from three sectors to six sectors, which will help us with some capacity where we think we may need it in the future.

That makes sense. The last time Sprint did their vision project though, there was the pardon my dust for quite a period of time and it seems to have had little effect on you guys. Any thoughts on what Sprint's next generation will do on your edges or your cities surrounding your area?

We're always impacted by the quality of the Sprint network around us. They have been able to bring up some additional capacity, but they still are having some capacity issues in the outer suburbs of the big cities, and it is impacting us. We continue to monitor it closely and look forward to them adding some more capacity through the densification and think that things can only get better from here.

The fact that our churn was at 1.4% this quarter I think reflects the quality of our network and the improving quality of their network. We're looking forward for that continue to drop.

Makes sense. You keyed up my second question. Churn, obviously astounding, lowest ever, 1.4%. If you factor what you think is driving that, where can it go from here, and it does seem like industry as a whole really has seen churn come down. So is it somewhat related to the EIP plans also?

I am sure it is, but I think one of the things that we really are seeing is the payoff for our network capital spend. We have, although Sprint has not done anything nationally, we have been running for about a year a local branding campaign talking about the power of our towers. And all the marketing research we do has told us that it really has paid off.

I think that in combination with the great readings we're getting from route metrics in our Harrisburg market, which was one of our weakest spots early on as we tried to catch up with AT&T and Verizon in coverage. I think all of those things combined are starting to really pay dividend.

Price is important but all the research that we do, and this has been true for years and it continues to be true, the number one issue with customers is the quality of the network. Ultimately no matter what your price is, if you are not providing a quality network on a consistent basis, you are going to lose customers. I think our capital spend, and our continued capital spend, is going to keep us in a good position.

(Operator Instructions)

Kevin Smithen, Macquarie.

I wondered if we could talk a little bit about some of the ARPU pressure that you've been seeing from some of the new Sprint plans? Where are you in the migration of your base onto these new plans? When do you start to see the ARPU pressure abating?

You delivered very good sub growth and churn and EBITDA have been excellent. Curious when we might -- how much longer you think we have got in this ARPU service revenue pressure?

Kevin, you have asked a lot of questions in one. I will try to remember them all as I'm answering your question. Obviously, as we have said and always have been the case, we follow Sprint's pricing. They have continued to have some downward pressure as they've responded to the industry.

As I mentioned in my prepared remarks, we still have a significant percentage of our customers, new and existing customers, taking the subsidized plans. Just because they walk in the door we don't push them to an installment or a lease. We try to do the consultive sale as we always have and determine what is in their best interest.

For some customers that comfort of knowing that the phone is included is where they want to be. I think we're going to continue to see an increase in the percentage of leased and installment sales phones, but I think that we're going to continue to have 25%, plus or minus, of folks who are going to stay on that subsidized plan.

One thing that we're going to start seeing roll off towards the end of the year, as you recall, there were some fairly significant promotions that Sprint ran in the last part of last year that were for one year. We're going to see some of those credits rolling off at the end of the year, which I think is going to give us some relief as far as what the average revenues look like.

We're continuing to -- we are different because we don't report, as everyone else does, that $20 a month or whatever that they are getting for the installment or the lease on the phone. It doesn't show up on our financials. We are going to be always a little bit different than everyone else. When we look at our mix though, I think one of the things that encourages us that we're seeing more units per account as customers are adding more devices or more lines.

The other thing that we really do focus on is, our growth is not all tablets. We work very, very hard, once again, to be adding phone customers not just tablet customers, and have consistently been able to add more -- most of our gross adds, or the majority of our net adds have been phones.

I wish I had a crystal ball. I do believe that our average revenue is going to continue to drop some. But I think as reflected in the fact that our average customer is using 4 gigabytes a month of data and the industry is moving away from unlimited plans, we're going to start seeing that data allowance, those overages, start to add up just as we have in our cable business.

We implemented, as I mentioned, allowances for the first time and generated $72,000 worth of revenue in the first month. I really do believe with all of the increase in data usage, we're going to start seeing some sizable amount of revenue from people using over their allowances. That answer all of your questions? I'm not sure that I did.

It's very comprehensive. Thank you very much.

(Operator Instructions)

It doesn't look like we've got anymore questions, Christie. Thank you, everyone, for participating. Please let me know if there are additional details you would like to see in future calls. My contact information was on today's press release.

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