Shenandoah Telecommunications Co (SHEN) 2015 Q3 法說會逐字稿

Good morning, everyone. Welcome to the Shenandoah Telecommunications' third-quarter 2015 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 September 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 for which 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 replace undue reliance on these forward-looking statements. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statements.

Also, in an effort to provide useful information to investors, we note on slide 3 that 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 third quarter, and I'm pleased to have this opportunity to provide details about the Company's continued growth. On slide 5, you'll see the third-quarter 2015 net income of $8 million was in line with the prior year. However, if you remove the expenses related to the nTelos acquisition and a non-routine depreciation adjustment, net income was up 35% for the September quarter. Adjusted operating income before depreciation and amortization, or OIBDA, for the quarter increased 10.7% to $36.8 million. Revenues were $85.2 million in the third quarter, an increase of 3.6% from the prior-year period.

Increased revenues in the wireless segment were a result of wireless subscriber growth. Cable segment revenues also improved as a result of an increase in the number of Revenue Generating Units, or RGU, 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, as more consumers are recognizing the reliability and versatility of our enhanced network and customer service capabilities. Quarter-end postpaid customers grew by 7.3% compared to the prior year, and prepaid customers by 3.6%. Operating income for the quarter grew 6.7% when compared to the third quarter of 2014.

Turning to slide 7, our Cable segment also delivered strong growth in the quarter. We gained subscribers for our high-speed Internet and voice services, and had growth in subscriptions to higher-priced digital TV packages. Video revenues also benefited from rate increases, as we passed through increases in our programming cost.

Operating revenues increased 16.2% to $24.4 million, while cable-adjusted OIBDA grew 62% to $5.5 million. Quarter-end RGU growth of 3.9% helped to drive this increase. Other Company highlights can be found on slide 8. Our fiber lease revenues increased almost 14% to $9.3 million, and our 154 towers generated $1.7 million in OIBDA from lease revenue.

I provided on slide 9 a status update of our acquisition of nTelos. Since the deal was announced on August 10, we have made good progress in moving towards closing. Our financing has been secured, with the retail syndication being oversubscribed without going into the flex terms. We received early termination of the Hart-Scott-Rodino review, and all state regulatory approvals have been received. Our FCC transfer application is expected to go on public notice soon. We've extended offers to nTelos employees, primarily in the retail stores and field operations. All activities are proceeding well, and we've had great cooperation with the nTelos management team. Closing is still expected early 2016.

This was a busy quarter for us, and we're pleased to have achieved solid organic revenue growth and to have expanded our customer base, while at the same time reaching agreement on a transformative acquisition. Without the non-routine cost of the acquisition and the depreciation adjustment, we substantially improved the ongoing profitability of the Company. We continue to attract new customers with our upgraded wireless and cable networks, as our enhanced coverage and high-quality service meet the growing demands of the marketplace.

Finally, following the close of the quarter, we announced a cash dividend of $0.48 per share, an increase of 2% over the 2014 dividend. The dividend is payable on December 1 to shareholders of record as of the close of business November 5. Shentel has paid an annual dividend every year since 1960.

We also announced a two-for-one stock split, effective for shareholders of record as of the close of business on December 31, 2015. We are at a very exciting point in our Company's development, and I'm appreciative of the efforts of our employees and support of our many longstanding shareholders. 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 with slide 11, which summarizes our Q3 2015 results. While operating income is up 6.7%, net income and basic earnings per share, or EPS, are flat in Q3 2015 over Q3 2014. All of these metrics were affected by two non-routine unfavorable items recorded in the third quarter, which totaled $4.7 million before taxes and $2.8 million after taxes. So roughly an impact of $0.12 per share on EPS.

The first was a $2.1 million cost adjustment related to the nTelos acquisition. The second was a $2.6 million adjustment to accumulated depreciation to reflect the more accurate calculation of depreciation on certain assets placed in service in one year and capitalized in the next year. As a result of transitioning to a new fixed asset system, we discovered that depreciation on these assets had not been handled properly in our legacy system.

On slide 12, I've shown the calculation of adjusted OIBDA, which adjusts for the impact of acquisition costs. Here you can see that adjusted OIBDA grew in the neighborhood of what you are accustomed to seeing, or by nearly $3.6 million and 11%. Depreciation grew by nearly $2.4 million in Q3 2015 over Q3 2014 as a result primarily of the adjustment I just described.

Incremental share-based compensation was up in Q3 2015 by just $144,000. Finally, the loss on the disposal of assets of certain head and equipment recorded in Q3 2014 and the Q3 2015 cost related to the acquisition of nTelos have been added back to derive adjusted OIBDA.

Slide 13 shows our growth in adjusted OIBDA by segment. Cable continues to lead the way again this quarter, with a 62% improvement, followed by the Wireless segment with a healthy 7% growth in OIBDA. The Wireline segment took a modest step back of $400,000 related to incremental cable programming costs and costs related to new fiber contracts. The Cable improvements are consistent with longer-term trends, as Chris mentioned earlier. OIBDA margins also grew significantly in the Cable and Wireless segments.

On slide 14, I've analyzed the changes in the adjusted Wireless OIBDA results between Q3 2015 and Q3 2014. Postpaid handset and customer acquisition costs are down by $3.6 million. As we've discussed on previous calls, 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 are down 10.3% during this period. So while average customers grew by 7.2%, net postpaid service revenues dropped by $1.5 million. Prepaid revenues grew by $1.3 million, related primarily to growth in average prepaid customers of 4.7%, and a 6.7% increase in the average monthly billing rate to each customer.

Increases in the rates Sprint charges us, in addition to the increase in the customer base, drove a $300,000 increase in prepaid acquisition and support costs. Network costs have increased by $1.3 million as a result of increases in sale-side rent and backhaul, as well as reductions in the amount of labor capitalized.

On slide 15, 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 $9.1 million increase in average HSD customers, and customers choosing higher levels of service.

In addition, video revenues grew by $900,000, primarily as a result of the price increases which we implemented in January to offset the increases in video content providers rates. These increases were offset by the overall loss of video customers. The average number of video customers dropped by 2.2% during this time, consistent with industry trends.

Voice revenues are up by $300,000 as a result of a 15.3% increase in customers. The increases in content providers rates and an unfavorable adjustment for programming fee audits drove a $1.2 million increase in programming costs.

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

Thanks, Adele. Good morning. I'll start my remarks on slide 17. We ended the third quarter with 303,527 postpaid customers, an increase of 5.4% in the past year. We have 448,631 total users. 81% of our postpaid customers have a smartphone, 92% of our smartphones are LTE-capable, and 66% also have smart capabilities.

Slide 18 shows that we had a very strong third quarter. We added 7,035 net adds, an increase of 33% over the same quarter last year. As a result of churn remaining low at 1.4%, we added more net customers on 457 fewer gross adds.

Continuing the favorable trend from earlier this year, our pour-in versus pour-out ratios for the third quarter was 2.1 to 1. Due to the shift toward non-subsidized phones, our local dealers are now processing their non-subsidized sales and upgrades through Sprint. So the percentage of Shentel-controlled sales is lower. I draw your attention to the graph on the lower-right column. We are on track for our record-low year for churn.

Let me provide a few more postpaid stats. Phones represented 74% of the net adds, with the remaining being tablets and connected devices. 28% of gross adds took a subsidized plan; 30%, installment sales; and 42%, a lease. 9.1% of our base upgraded during the quarter, with the breakdown 18% installment sales, 48% lease, 34% subsidized plans.

As of September 30, 64% of the postpaid base remains on the subsidized plan. To date, the pace of sales of the iPhone 6s has been similar to the iPhone 5 two years ago. As the industry decouples the phone from the service revenues, we are seeing a continued decline in postpaid gross billed service revenue.

On slide 19, you see the third quarter was $57.39, down $6.56 from last year. Gross billed revenue is down $1.62 from the third quarter. Just a reminder that both the revenue and the cost of goods sold related to the sale of non-subsidized phones are reported on Sprint's books.

The reconciliation of gross billed postpaid revenues to net postpaid service revenue is on slide 20. The total billed and the net service revenues for the third quarter are both down 4%. Again in the third quarter, the decrease in the cost of goods sold from fewer phone subsidies is greater than the revenue loss, resulting in an improved gross margin.

We had a modest loss of 327 prepaid customers in the third quarter to the end-quarter, 145,104 prepaid users shown on slide 21. Moving to slide 22, we continue to see a sizable shift of our prepaid customer mix to Boost from Virgin Mobile and Assurance, that has resulted in keeping our prepaid gross billed revenue over $29. This is consistent with the wireless operation results that Adele shared earlier.

Network staff is summarized on slide 23. 93% of our 548 cell sites have a second LTE carrier at 800 megahertz. 187 of the sites have three LTE carriers, including a second 1900 carrier using 10 megahertz we've harvested from our original 30 megahertz and 1900 spectrum.

We've been able to harvest spectrum for 4G due to the dramatic shift of data usage from 3G to 4G. 89% of our data traffic is on LTE, with 33% on 800 megahertz. Data usage grew 11% in the quarter. Due to not having yet launched the 2.5 spectrum, our average speed is 4 megabits.

With a launch of up to 32.5 sites in some of the busiest parts of our network before year-end, we expect that the average speed to significantly increase. 40% of the voice traffic is on 800 megahertz. We continue to have actual excellent dropped and blocked percentages. We have fiber built out to 213 cell sites -- 170 to Shentel sites and 43 to others. 17 sites are in planning or under construction.

I will move to cable results on slide 24. We added 1,792 additional revenue generated units in the quarter. Continue to have strong growth in voice and high-speed Internet users, with a very modest 53 video losses. Slide 25 shows continued improvement in the average revenue per RGU and per customer. Average revenue per customers is up almost 14% year over year.

As I mentioned last quarter, after a year of educating our high-speed Internet customers, in June, we started billing for overages. We have a liberal data allowances, ranging from 200 gigabytes at 5 meg to 1 terabyte at 101 meg. We set our allowances to target the 5% of our users that consume a disproportionate amount of usage. We notify the customer as they approach their allowance, and without throttling, we charge $10 for each block of 50 gigabytes over the allowance. Our average cable user continues to consume about 90 gigabytes per month. So you see our allowances are very generous. We implemented allowances to target those users that will trigger additional capital expenditures. The results were that approximately 5% of our customers pay allowances, with the average amount of allowance in the high-20s.

The stats shown on slide 26 show the continuation of improved penetration of digital video, high-speed Internet, and voice. The Wireline results on slide 27 show the continued low access line loss, and the modest increase in DSL customers in our regulated telephone operations.

All of that has changed in the fourth quarter, as we've made some dramatic changes. We have launched cable modem service to the approximately 16,000 homes in our LEC area that also pass by coax. We are offering higher DSL speeds in our less-dense populated non-cable areas by using bonded pairs.

The biggest change is that we will no longer require residential customers in our LEC area to have voice service in order to obtain broadband. We have increased our DSL rates by $10 per month, which we will credit if the customer keeps his voice service. We will report on our initial results during our next earnings call.

Moving to slide 28, you see that fiber sales are significantly ahead of last year, and we have healthy sales funnel. We have updated our estimate for 2015 CapEx on slide 29. We estimate that 2015 CapEx will be approximately $70.4 million. The primary reason for the lower spend are $1.4 million of less network maintenance, $1.3 million less success-based, and $1.1 million less on IT system enhancements. I will now turn the call back to Adele.

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

(Operator Instructions)

Barry Sine, Drexel Hamilton.

Good morning, folks.

Good morning.

A couple of questions on competitive dynamics. First, if we could start with the wireless business, especially I'm interested in the prepaid market. AT&T seems to be making some noise with their Cricket brand in prepaid, and we've seen that with some of the carriers' results in the quarter.

What are you seeing in your market? I don't know to what extent you have Cricket brand in your market. What are you seeing with prepaid?

Barry, this is Earle. AT&T is selling Cricket in our market, and we are seeing more activity than we have in the past. Our basically flat results for the third quarter was primarily because Sprint has de-emphasized the Virgin Mobile brand. So we had very aggressive growth in the Boost product, which they continue to support strongly.

But we had almost exactly the same number of losses in the Virgin Mobile, and actually even lost some Assurance customers in the third quarter. So we think that the prepaid business is very -- it's still a very good business. And I understand that Sprint will be re-energizing the Virgin Mobile brand later this year and early next year. So we expect to see a recovery of prepaid growth starting in the fourth quarter.

Okay. And a similar question on the video business. Again, across the industry, AT&T has made some noise with what they're doing with -- now that they own DirecTV.

I believe that satellite penetration is relatively high in your cable markets. What did you see in the quarter from the competitive standpoint there?

Well, don't compete. AT&T has no wired facilities in our footprint, so we are not seeing the impact of them trying to do more bundling. And there really has not been any more aggressive sales of stand-alone DirecTV in our service area. So as we reported, we had only 53 video losses, so the impact has been pretty nominal.

And turning to -- nTelos reported their results, and it seemed to me that their momentum held up pretty well in terms of the subscriber numbers. But I'm wondering if -- to what extent what they're doing in terms of pricing is a fit with your base? What are your thoughts on the momentum we're seeing there, and how well their subscriber momentum will integrate once you take ownership of nTelos?

Well, we been incredibly pleased with the way that the team at nTelos has continued to perform. It would have been very easy for them to kind of lay down once the announcement was made.

But from the senior management right down through the entire organization have remained very focused on doing their job. They had good numbers in the third quarter. Obviously their price plans are different than what we are selling.

But as we announced earlier, we are going to grandfather all of the nTelos customers at their current price plan. We will start selling Sprint plans once we take control, but we don't see any real problem at this point.

I think they are seeing the same kind of trends that the entire industry is seeing, where there's been a shift from subsidized to non-subsidized plans, and therefore lower service revenues. But they have a very healthy percentage of their customers are taking installment sales. And we will be able to offer lease as an option once we take control.

So I think things will go smoothly, and were not anticipating any significant shifts. The good news is that we have made offers to -- as Chris mentioned, to everyone at this point in operations and sales. And virtually everybody has taken the offer and is going to join us. That's going to allow for great continuity.

It will be a change on the sign on the top of the building. But the folks making the sales and who have the relationship with the customers are going to remain the same.

So you mention operations and sales. One of the other, I think, positive surprises in the nTelos results is, they had targeted 50% LTE POP coverage by year-end. Instead, they've announced they just hit 65%.

Obviously that would be a positive, in terms of your integration plans. Could you comment on that as it relates to your ability to integrate and seamlessly take over nTelos?

Yes. They have done a great job. We have been working with them.

Many folks that are in that organization are also going to be joining us. Some of those employees that were located in the East, in the Richmond-Norfolk area, they generally are not going to be joining us. But those that are in the Waynesboro and West area will be joining us.

We've made a number of offers to that organization and a number of them have accepted also. We are still in the process of interviewing many of the other positions. But they are doing it great job.

We have drawn the line of demarcation between the sites that they had under engineering and construction. They will continue to work on those through the closing, and any of those that are in process at closing will be continued using the approach that nTelos had of the dual base stations. But those that are beyond that -- and we have identified those -- we are actually working with them on those right now to do the engineering, to be able to construct those using the network vision architecture.

And then on the 150 to 200 additional sites that we talked about, the search rings are starting on those as we speak. So we are moving ahead to be able to have as seamless a transfer as possible, and to continue to push to 100% LTE coverage.

And just lastly, two relatively quick regulatory questions. On the FCC merger approval process, I think you've said that they are going out for comments. Could you refresh what is the timeline on that, what that's looking like? And then the other regulatory question, I didn't hear from Adele, but what's your timing on putting the Q out, please?

I will answer that first. We expect the Q to go out sometime later today, Barry.

Great.

And Barry, on the FCC, it has to go on public notice; it will be on public notice for 30 days. And really, the timing after that will depend on whether there are any comments filed during that 30 day period.

We don't think this is a very controversial transfer, so we're not expecting any. But we've got the combination of getting it on public notice -- which we think will happen soon, I've been told it will happen soon.

And then we've got the combination of that with the end of the year. And so with the holidays coming, things will get delayed where they might not have been delayed at other times of the year. But we are still very optimistic, since we've gotten all of the other approvals, that we'll be able to close early next year.

Thank you very much.

(Operator Instructions)

It looks as though that's all the questions we have. Thank you for joining us.

If you have additional questions that you would like to see answered on future calls, please let me know. My contact information was provided on the press release. Thank you for joining us.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may now disconnect. Have great day, everyone.