Shenandoah Telecommunications Co (SHEN) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Shenandoah Telecommunications First Quarter Earnings Call. (Operator Instructions)

As a reminder, this conference is being recorded. I would like to introduce your host for today's conference, Adele Skolits, CFO. You may begin.

Good morning, and thank you for joining us. The purpose of today's call is to review Shentel's results for the quarter ended March 31, 2017. 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, uncertainties and other factors. These may cause our actual results to differ materially from any future results expressed or implied by such forward-looking 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 statements.

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 solid start to 2017 and look forward to building on the results we achieved in the first quarter.

Our expanded customer base contributed to significant revenue growth in the quarter, and we continue to make progress integrating the customers and assets we acquired from nTelos. We remain ahead of our schedule, both to enhance the acquired network, and to migrate customers to Sprint's back office.

On Slide 5, you'll see the first quarter 2017 net income decrease to $2.3 million compared to $13.9 million in the prior year. This was due primarily to depreciation and amortization expense and the acquisition, integration and migration cost associated with the nTelos acquisition. For the quarter, adjusted operating income before depreciation and amortization, or OIBDA, increased 82% to $73.5 million. Revenues were $153.9 million in the first quarter, a 66% increase from the prior-year period.

Revenues increased chiefly as a result of nTelos acquisition. 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, which was due to the pass-through of video programming cost and customers increasingly selecting high-speed data packages.

Our Wireless highlights start on Slide 6. Postpaid customers are up more than 127% over the last 12 months, while prepaid customers are up almost 71%. For the first quarter '17, Wireless adjusted OIBDA grew to $61.4 million, an increase of 114%. Just after the close of the quarter, we announced another expansion of our affiliate relationship with Sprint. The new agreement not only gives us the opportunity to grow our customer base in the new area. It will also enhance the experience for existing customers in adjacent markets, which should expand our customer base and help reduce churn.

Turning to Slide 7. Our Cable segment also delivered strong growth in the quarter as demand for our high-speed Internet and voice services outpaced the anticipated decrease in video subscribers.

Operating revenues increased almost 10% to $29 million, while Cable adjusted OIBDA grew over 31% to $9.3 million. Customer demand for higher bandwidth data services and growth in average RGUs of 2.2% contributed to the revenue and OIBDA increases. OIBDA as a percent of revenues was 32%, continuing its upward trend.

As many of you know, we have diversified revenue streams and Slide 8 profiles 2 additional assets. Our fiber lease revenues increased 12% to $11.2 million and our 196 towers generated $1.9 million in OIBDA from lease revenue, up slightly compared to last year's first quarter. With the investments we've made, we've improved the reach and reliability of our network and believe that services we are able to offer, including our Triple Play in the Cable markets and LTE coverage in our Wireless markets, are among the most comprehensive and competitive in our service areas. We developed a deep knowledge of the region and look forward to increasing our Mid-Atlantic footprint through the expansion of our relationship with Sprint. As customers continue to expect more from the telecommunication providers, we will continue to deliver the robust network, superior service capabilities and enhanced product offerings needed to meet consumer demand and to position ourselves as the carrier of choice in our markets. I'll now turn the call back to Adele to review the details of our financial results.

Thank you, Chris. I'll begin with Slide 10, which shows our changes in profitability. In the top line, you can see that we had a decrease of $10.6 million or 50% in operating income for Q1 '17 over Q1 '16. Over the same period, net income is down $11.6 million and basic earnings per share is down $0.24. Fully diluted earnings per share is down $0.23. We've taken a step back in these profitability measures, as Chris said, as a result of incremental cost of acquiring and integrating the nTelos operations as well as the certain noncash costs such as depreciation and amortization related to the tangible and intangible assets acquired, to which we allocated the purchase price of nTelos. We've provided, in the next slide, to assess how the underlying business is performing without these costs. Slide 11 begins with the $10.6 million drop in operating income and then adjust for certain noncash or nonroutine items. As you can see, for Q1 '17, adjusted OIBDA is up $33.1 million or 82% over Q1 '16.

We also provide continuing OIBDA to reflect the amount of adjusted OIBDA the company would generate without the benefit of Sprint's waiver of the management fees, and this measure is up $24.2 million or 60% for Q1 '17 over Q1 '16.

As a reminder, when we acquired nTelos, Sprint committed to waiving the 8% postpaid and 6% prepaid management fees up to $4.2 million a month until the total waived reaches $251.8 million.

We provide continuing OIBDA measure to ensure investors are aware that we will eventually reach this threshold and the waiver will end. In addition, for the first 6 months after May 6 closing date of the nTelos acquisition, we didn't incur any management fees relative to the nTelos customer billings prior to the customer being migrated to Sprint's back office.

To better understand the factors driving the consolidated results, I've provided the fourth quarter OIBDA results by segment on Slide 12. Adjusted Wireless OIBDA has increased $32.7 million or 114% while Cable results have improved $2.3 million or 33%. Wireline results have increased by $100,000 or 1%.

On Slide 13, I've analyzed the changes in the adjusted Wireless OIBDA results between Q1 '16 and Q1 '17. Postpaid revenues have grown by $40.4 million due to a 129% increase in the average number of those customers quarter-over-quarter. Prepaid revenues have grown by $12.1 million as a result of a 68% increase in those average customers. The waived management fees I described earlier contributed $8.9 million to the growth in adjusted OIBDA. The amendment to the affiliate contract with Sprint, effective January 1, 2016, specified that we separately receive or pay certain revenues and expenses that were previously included in the postpaid net service fee. As a result, we began receiving travel revenues, which grew by $3.7 million in the first quarter of 2017.

Postpaid acquisition costs, including the $2.1 million to reimburse Sprint for handset subsidies and commissions related to sales through national channels, grew by $5.2 million. Prepaid acquisition costs grew by $4.7 million and the costs to support these customers grew by $1.2 million.

Network costs increased by $21.3 million as a result of a 166% increase in the number of cell sites, from 556 at the end of the first quarter of 2016 to 1476 at the end of the first quarter of 2017.

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 $1.8 million as a result of a 7.9% increase in the average high-speed data or HSD customers. Also, the HSD customers are choosing higher speeds that carry higher service charges. Voice equipment and other revenues grew by $600,000 as a result of the growth in customers, primarily as a result of the 5% increase in average voice customers.

Video revenues were down by $200,000 as the 2.6% decrease in video subscribers was partially offset by increases in video rates driven by higher programming costs.

Another favorable improvement to revenues was the decline of $400,000 in promotional credits and discounts. Selling, general and administrative costs have decreased by $200,000 primarily as a result of reductions in spending for advertising. Finally, network and other costs of goods and services sold have increased by $600,000. 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. Great progress continues in the transformation of nTelos. We are on track to the have the customer migration and the upgrade of the network to 4G LTE completed by the end of the third quarter.

Slide 16 shows the end -- that we ended the quarter at 717,150 postpaid customers, down 5,412 from year-end as we continue to see the pattern of above-average churn on the non-migrated nTelos base. Customers on subsidized phone service plans are 37% of the base, down 2% since the end of 2016. We continue to focus on phones rather than tablets with tablets only 5.2% of the base, down 670 from the end of 2016. Other data devices were 2.7%, down from 2.9% of the base at year-end.

Slide 17 provides some details on the gross and net activity for the quarter. 28% of gross adds selected the leased option and 54% chose installment purchase. You see that gross adds are only down slightly in the legacy area from a year ago. We had more gross adds in the new area than we had in our legacy area, an exciting indicator of what we expect in the future with an upgraded network. We had almost 22,000 gross adds in the new area running limited local advertising. Our plan is to start heavy local, promotional and coverage advertising in the new areas starting right after Labor Day as we are finishing up the network upgrade.

Device upgrades in the first quarter were at 5.7% with 45% of the upgrades choosing lease and 44% installment purchase. We have a net loss of 5,412 postpaid customers in Q1 with the legacy area adding 1,487 net with phone additions at 143% of the net adds. The new area is down 6,899 with 16% of the net losses being tablets and other data devices. We continue to have a net port-in ratio of 1.7:1 in the legacy area. And although still negative, we pull closer to 1:1 in the new area.

Our port-in ratio in the legacy area approached 2:1 early in the quarter and declined to 1.6:1 after Verizon and AT&T launched their unlimited plans.

Churn in the legacy area has remained steady from last quarter and a year ago. In the new area we have 3 very different stories. The churn rate for the customers we got from Sprint as part of the nTelos deal is slightly elevated from our legacy churn. The churn for the nTelos customers that have come in and heard the upgrade story as part of getting migrated to the Sprint back office is lower than our legacy churn.

Conversely, those nTelos customers that still have not migrated have churn over 3%. We expect that pattern to continue and the churn rate for the non-migrated customers to even increase as we push towards finishing up the migration by the end of the third quarter.

Slide 18 shows the trend of gross billed revenue per postpaid user for the past 5 quarters. Q1 2016 was without any impact of nTelos. Q2 had a partial quarter impact, and Q3 2016 reflects the full impact of the nTelos base. Approximately $4 of the drop in the average bill is due to the impact of the nTelos lower revenue per user price plans. The reduction in Q1 2017 is a function of continued decline in the percent of the base on higher subsidy plans and the impact of the unlimited freedom plans.

We had a great prepaid quarter adding 7,419 net prepaid subs reflected on Slide 19. With the nTelos prepaid customer migration behind us, we had double the number of gross adds from a year ago and net adds of 5,899 in the legacy area and 1,520 in the new area.

We expect prepaid performance in the new area to continue to improve as we work with our third-party agents to open additional Boost stores. We ended the quarter with 243,557 prepaid users for a total of 960,707 users, up 2007 from year-end. Slide 20 shows the prepaid churn is down and average gross build revenue is up almost $6 from a year ago. The big jump in Q1 2017 is a result of the continued shift of the base to the Boost brand, but primarily the impact of purging the 24,000 nonrevenue-producing prepaid customers late in December 2016.

Slide 21 shows, graphically, the continued progress on the nTelos network upgrade. In the first quarter, we have completed 28% of the targeted 2017 decommissions. 78% of the sites for the 800 megahertz to be added, 39% of the 2017 4G LTE site upgrades and 8% of the new 2017 coverage sites.

As mentioned earlier, the plan is to complete the first 3 activities by the end of the third quarter. We expect the majority of the new coverage sites to be completed in the latter half of 2017.

Slide 22 shows the same network stats we have previously provided. I will note that we are now carrying 97% of the data on LTE in the legacy area and 90% in the former nTelos area. Data usage continues to grow with overall usage up over 10% since fourth quarter 2016.

Slide 26 provides our -- I apologize. I lost 1 of my pages. I will get back on track here in just a second.

Slide 24 reflects the continued pattern of increasing average revenue -- I am still missing.

Page 22.

Yes. As Adele has shared, the profitability of the Cable segment continues to accelerate based on the number of net RGU additions but primarily due to the mix of the revenue generating units or RGUs. On Slide 23, we had net RGU gain of about 400 in the quarter but the higher-margin, high-speed Internet users were up over 6% from a year ago and up 2% in the last quarter to 61,815.

Voice users are up over 4% from last year and up over 1% from the last quarter to 21,647. Conversely, video users are down almost 6% in the past year and down almost 2.5% in last quarter to 49,384. We increased our video pricing each January to offset the increase in programming cost. Although the 2017 price increases were not out of line with prior years, we did see more churn this year with cost being the reason for leaving.

Slide 24 reflects the continued pattern of increasing average revenue per RGU and the customers due to annual increases of video pricing to pass on higher programming costs and the customers moving to higher-speed data allowance high-speed Internet plans.

Our average revenue per Internet customer is now over $70. Slide 25 shows our homes passed, number of customers and penetration by type of service. I will highlight the footnote that states that this slide doesn't include cable stats, the Cable customers we have in our regulated telephone service, which is included in our Wireline segments.

The next slide, 26, provides our Wireline stats. There are no changes from the pattern we have shown previously. We have declining access lines and increasing high-speed Internet customers with all of the net adds in high-speed Internet being our cable modems since (inaudible) cable modem in late 2015.

Slide 27 shows that both the affiliated and nonaffiliated fiber revenues continue to grow. We continue to have strong fiber sales to external customers with 72 million of new -- 7.2 million of new contracts written in the first quarter 2017. A major win in the first quarter was Roanoke continuous City Schools.

Slide 28 is the same slide we presented in our year-end 2016 earnings call. At this point, a $152.3 million for 2017 capital expenditures is still our best estimate of year-end spend. I'll now turn the call back over to Adele.

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

(Operator Instructions) And our first question comes from the line of Ric Prentiss from Raymond James.

A couple of questions, really surrounding the migration effort so I appreciate all that detail. I think I saw you've done 116,000 as of the end of 1Q. How many do you have -- how many did you have left at the end of 1Q to migrate? And can you update us kind of intra quarters how many are left so far, like right now?

Yes, Ric, this is Earle. I guess the best way to kind of approach this is that we believe that we're going to migrate in total about 70,000 to 73,000 postpaid customers during 2017. And we did 28,000 in the first quarter so you can kind of assume that it's kind of linear going from that point to the 70,000 to 73,000. What we really -- as I pointed out in my prepared remarks, I mean the real issue here is the very high churn from the customers who we haven't had a chance to talk to yet. We're being very aggressive in trying to get them in. We're sending them letters. We're sending them text messaging. We've done social media, we've used radio, we've have used print. It's just as we anticipated, that last group of customers are going to be the toughest to get into to make a change and they're the most likely to leave us because they haven't had the opportunity to coming in and have that one-on-one conversation and hear about everything we're doing with the network. So we expect that, that churn will stay at the 3-plus percent a month and actually as we saw in the prepaid, we'll have a much higher churn in that last month as we basically kind of give the customers an ultimatum come in or we're going be turning you off.

That's really helpful. Second question around migration also. If we look at your Wireless margins, they were 52% on total revenues, they were 52% in third quarter, 54% in the fourth quarter. Then 53% this quarter. How should we think about Wireless margins as we go through second and third quarter as you're getting ready to accelerate advertising, I heard post Labor Day. So what should we think about margins kind of as the migration comes to a close? And then as we exit '17 and '18, where do we think those margins would go? Just kind of help us given that there's so many moving pieces?

I think we can expect that as we invest in the network upgrades, that we will continue to have growing network costs. And we incur those costs in advance of growing the customer base. I don't expect, as Earle has pointed out, that we will reinvigorate the brand in the new area and begin growing that customer base until the fourth quarter and, of course, will be limited impact from that. But the fourth quarter is the first opportunity, I think, we have to take a step forward. We could lose as much as 1% or more. In the meantime as we incur these incremental network costs, recall Ric that it costs more to support a 4G base station than he does a 3G base station. And of course, as Earle pointed out in his section of our presentation today, that we're also growing the number of cell sites at a more rapid pace than we're decommissioning and eliminating cost as well. So we are all about getting that network to the point where we have a substantially better service for our salespeople to sell and it comes with a cost.

Yes, I would point out, Rick, that we are talking about adding net from where we are today over the next 12 to 15 months over 150 cell sites. So to be very realistic, there is going to be extra a cost of running that network. Yes, we'll get rid of the migration and integration cost, but we'll have those costs until we are able to get ahead of them by adding customers.

And of course, those same costs are added back in calculating adjusted OIBDA anyhow.

Right. So I think we're going to continue to see strong margins but there will be some deterioration and, we believe, I think we have been very upfront about that all along saying that we're making a huge investment, ultimately adding 220, 225 new cell sites, that's a lot of fixed cost that you're going to add in order to be able to be competitive.

Makes pretty good sense. I just want to make sure that people are clear on that trend line. And Adele, one other piece on that, the -- you get reimbursement from Sprint, I think, on nTelos customers until they move over. I know you mentioned it but I didn't write fast enough. How much did you receive in the quarter, and is that adjusted in OIBDA or is has just been a benefit to OIBDA?

Well, what I mentioned in my remarks was that for the first 6 months, we incur no management fee on the customers prior to migration. So it doesn't count towards that $252 million waiver at all, it wasn't charge at all. So it wasn't as though it was charged in waived, it wasn't charge at all for the first 6 months on the unmigrated customers. So the $252 million is actually somewhat larger than that.

And those first 6 months, that really then would have been reflected last year then?

Yes. So that's already behind us. You asked how much was waived in the first quarter?

Yes.

I believe it was approximately $8.9 million.

Okay, okay. But the Sprint nTelos customer reimbursement is clean. There was none of that within 1Q '17 then?

Correct.

And our next question comes from the line of Hamed Khorsand from BWS Financial.

First off, could you just comment on the Sprint acquisition on the new territories in the quarter? Have you started the buildout process there? And the marketing, is there any update that you could provide us on the new territory?

Yes, this is Earle. I'm glad to. The answer is no, we really have done nothing and really hadn't planned to do a whole lot this year. The way you should think about this year is: one, we're basically doing the planning so that we can move quickly starting potentially late this year but most likely it will be 2018 before we have any substantial movement there. We're not actively selling. At this point, there isn't even a Sprint store other than some agents that we inherited from Sprint. So we don't have any of our own employees selling in that area and have said that we would delay opening stores until we had upgraded the network to make it competitive. So I think you're going to find that in the current period, the amount of revenue that's being generated by the 20,000-some customers that we got from Sprint, covers the cost of operating the network, so it has really variable impact on the bottom line. We'll starting incurring some CapEx cost and with that some OpEx probably early next year, but we'll continue to give you updates. And I think the first time you'll see any significant real movement would be in the fourth quarter of this year, first quarter next year.

Okay, and then on the prepaid adds you had this past quarter, is it because it's the Boost prepaid market is benefiting you? Is it because you're forging some of the new nTelos markets? What's driving that, especially in the new markets?

Well, I think, really, it's been a couple of things. Number 1, we've seen, over the last couple of years, a real shift from Virgin Mobile to Boost. The problem that we've had is we've been having extremely strong Boost sales but we've had very high churn in our Virgin Mobile base to the point where it kind of mitigated. We've had this increasing average revenue which kind of was the underlying support of that. We're now to the point where over 3/4 of our prepaid customers are on the Boost brand. So that's a very strong brand for us. We have been focusing on adding stores as of April 1, we took over 100% of the control of managing prepaid in our footprint in the new area. We have to remember that up until the year end, we were focused more on migrating customers than we were on growing customers. And we really didn't have that much Boost distribution because we were actually doing the migration of the nTelos FRAWG customers, their prepared brand, to Boost in our nTelos/Sprint stores. In our legacy area we don't really sell any prepaid out of our stores. Most -- all of the Boost is done through third party Boost stores. So I think what you're seeing here is really the opportunity to focus on prepaid, not having to focus on migrations, and as you saw in Sprint, Sprint has helped rejuvenate the Boost brand and they had good adds in the first quarter also.

Alright. And then last question here is on the ARPU on the postpaid. I mean it continues to decline and now you're facing competition from AT&T and Verizon. How much more impact do think will happen in Q2 because of that? And where do you think it'll stabilize, if at all?

Well, I think we've weathered the competition from Verizon and AT&T very well. We had launched the unlimited freedom plans well before they launched their unlimited plan. In early in the first quarter, we actually had increased our port-in ratio versus port-out to almost 2:1. Even after they came out with their heavy advertising and their promotion, our port-in ratio versus port-out was still at 1.6:1. So I don't know that we're being heavily impacted by that. I think really what you have to think about is the fact that we're continuing to have -- we're still in the high 30s but we still have customers who are on subsidized plans moving to either leased or installment purchase and in that they're going to get a lower average rate, but we're avoiding having to subsidize a phone. So if you look at it from a gross margin standpoint, they are offsetting. There is some impact, when you look at the unlimited freedom plans, because your first line is $50, your second line is $40 and so, on average, our customers are taking just over 2 lines each when they come in for that unlimited plan. So you're looking at an average revenue in the $45 range. So those 2 items are going to continue to have an impact on average revenue. It certainly has slowed but I think we'll continue to see a slight decrease in average revenue over the next couple of quarters.

(Operator Instructions)

Glenda, I see no further questions, so I think that concludes our call. Thank you, everyone, for participating. If you have additional questions you'd like to see us address on future calls, please let me know. My contact information was provided on the press release.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, and you may now disconnect. Everyone, have a great day.