Shenandoah Telecommunications Co (SHEN) 2018 Q2 法說會逐字稿

Good morning, everyone, and welcome to Shenandoah Telecommunications Second Quarter 2018 Earnings Conference Call. Today's conference will be recorded.

At this time, I would like to turn the call over to John Nesbett of IMS and Investor Relations for Shentel.

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, 2018. Our results were announced in a press release distributed this morning, and the presentation we'll be reviewing is included on our Investor page on the website www.shentel.com. Please note that an audio replay of the call will be made available later today. The details are set forth in the press release announcing this call. With us on the call today are Chris French, President and Chief Executive Officer; Dave Heimbach, Executive Vice President and Chief Operating Officer; and Jim Woodward, Senior Vice President, Finance and CFO. 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 actual results to differ materially from the statements. Shentel provides a detailed discussion of various risk factors in our SEC filings, which you're strongly encouraged to review. You're cautioned not to place undue reliance on these forward-looking statements. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statement. Also, in an effort to provide useful information to investors, we note on Slide 3 that our comments today include non-GAAP financial measures. Details on these measures, including why we use them, and reconciliations to the most comparable GAAP measures are included in our SEC filings. These reconciliations are also provided in an appendix to today's slide presentation.

Okay. I'll now turn the call over to Chris. Go ahead, Chris.

Thank you, John. Good morning. Thank you for joining us. Before I begin, I'd like to take a moment to introduce Dave Heimbach, who's joined us as Executive Vice President and Chief Executive Officer. Dave previously served as Chief Operating Officer of Rise Broadband and Cincinnati Bell, and has already proven to be a strong addition to our team. Dave has been with us for a few months now, but I wanted to welcome him to his first Shentel Earnings Call.

Second quarter 2018 was a solid quarter for us, as reflected in our revenue growth, significantly improved operating income, enhanced net profitability and considerably reduced operating expenses. As you know, during the past year, we've expanded our Wireless service territory in the mid-Atlantic area to now serve a population of more than 7 million. With the growth of our geographic footprint, our focus is on promoting our enhanced network and extensive service offerings to increase distribution and activation levels in our extended coverage area. The capacity and reliability of our network speaks for itself and is a competitive advantage for us in the markets we serve.

Regarding the proposed Sprint-T-Mobile merger, we're watching and waiting with all of you. We believe a merger makes excellent sense from a competitive standpoint, providing a stronger competitor against the much larger AT&T and Verizon. We've had a very successful and mutually beneficial affiliate relationship with Sprint during the last 20 years. Shentel has provided tremendous benefit to Sprint over the duration of our relationship, particularly in our buildout of rural markets. And we would welcome the opportunity to continue to provide value to the new combined company.

While we wait for more clarity on the future, our primary focus remains on continuing to grow our Wireless business while providing excellent coverage and service to our Sprint customers.

Moving to our results. On Slide 5, you'll see that revenues increased to $154 million. Excluding the impact of adopting ASC 606 regarding revenue recognition, revenues would have increased by $4.8 million. We saw strong growth in operating income to $18.7 million in the second quarter, primarily related to the absence of acquisition, integration and migration costs that were included in the second quarter of 2017.

Second quarter net income significantly improved to $7.8 million compared to a net loss of $80,000 in the second quarter of '17. Adjusted operating income before depreciation and amortization, or adjusted OIBDA, increased slightly to $69.8 million.

In our Wireless highlights on Slide 6, you'll see that postpaid customers are up 6.6% and prepaid customers increased 13.5% compared to Second Quarter 2017. Despite subscriber growth, revenues of $112.3 million were a slight decrease compared to second quarter '17, largely due to ARPU declines and the adoption of ASC 606. Excluding the impacts of 606, Wireless revenues increased by $2.2 million, driven by the growth in postpaid and prepaid customers. Wireless adjusted OIBDA for the quarter increased 3% to $60 million.

Moving to Slide 7. Revenue in our Cable segment increased 8.6% to $32.1 million. The growth was primarily due to growth in high-speed data and voice RGUs, video rate increases to pass through higher programming cost and new and existing customers selecting higher speed data packages. In addition, adjusted OIBDA for the second quarter grew 23.7% to $12.3 million compared to $9.9 million in 2017, primarily driven by broadband ARPU.

On Slide 8, we detail our Wireless (sic) [Wireline] business, where revenue decreased to $19.1 million compared to $19.6 million in the second quarter of '17. External revenues grew 5.3% to $12 million. However, affiliate or intercompany revenue decreased by 12.9% to $7.1 million. This decrease was primarily due to repricing backhaul circuits for our Wireless segment.

Slide 9 profiles our fiber lease and mobile tower revenue streams. Our fiber lease revenues grew by approximately 2% to $11.9 million and our 193 towers generated $2.8 million in lease revenue, up 3.7% compared to second quarter 2017. Our second quarter demonstrated solid progress in all of our operating segments, and we're energized by the opportunities we've identified to drive growth across the business. Our upgraded network and growing reputation as a provider of reliable coverage, excellent service and robust capacity are competitive advantages that position us to attract new customers and increase the service packages of our existing customer. Shentel has a proven track record of meeting the communication needs of the markets we serve, particularly in our more rural geographies. Our focus on high-quality, reliable service is the foundation for our continued growth as we move through the balance of 2018.

Now I'll turn the call over to Jim Woodward, our CFO, to review the details of our financial results.

Thank you, Chris. And good morning, everyone. Let's take a look at our quarterly results. On Slide 11, we showed the changes in our operating revenues and net income. Revenues for the second quarter 2018 were $154 million compared to $153 million in 2017. Excluding the impact of the adoption of ASC 606, revenues increased $5 million, driven by the Wireless and Cable operations. Second quarter consolidated operating expenses decreased by $10 million. Excluding the impact of the adoption of ASC 606, operating expenses decreased by $3 million, driven by the absence of the nTelos acquisition costs and the decrease in depreciation and amortization as we retired assets acquired in the acquisition.

Our operating income increased $10 million over the prior year's quarter. We recorded net income of $7.8 million or $0.16 per share compared to a net loss of $80,000 in the second quarter of 2017. Excluding the impact of the adoption of ASC 606, Q2 earnings per share was $0.12.

Moving to Slide 12, you'll see our second quarter adjusted OIBDA results by segment, which illustrates the components driving the quarter-over-quarter change. Adjusted OIBDA for Q2 was $69.7 million compared to $69.4 million in 2017, representing an adjusted OIBDA margin of 45%. Continuing OIBDA is also shown on this slide to illustrate the impact of the waived Sprint management fee. As a reminder, when we acquired nTelos, Sprint committed to waive to 8% postpaid and 6% prepaid management fees up to $4.2 million a month until the waived management fee reaches $256 million. We expect to receive the benefit of the waived management fee through 2022.

Consolidated OIBDA was also impacted by expenses incurred for projects related to the implementation of the new lease accounting guidance as well as there are material weakness remediation efforts.

On Slide 13, we provide a bridge between second quarter 2017 and '18, Wireless adjusted OIBDA, which increased $1.9 million in the period. The revenue-related impact on adjusted OIBDA was an increase of $2.7 million, driven by increase in the post and prepaid revenue, partially offset by a decrease in national device sales from Sprint.

On Slide 14, we provide a bridge of the drivers and changes in Cable adjusted OIBDA. Cable adjusted OIBDA grew by $2.4 million quarter-over-quarter, primarily the result of high -- of increases in high-speed data revenues. The lift in high-speed data revenues reflects the changing habits of our customers, where they consume Internet-based video, which requires higher speeds and greater data consumption.

Slide 15 shows the bridge between 2017 and 2018 Q2 Wireline adjusted OIBDA. Wireline adjusted OIBDA decreased $600,000 from Q2 '17 to Q2 '18, driven primarily by the repricing of affiliate or intercompany backhaul circuits provided to our Wireless segment. While repricing impacted the Wireline segment, a corresponding benefit was realized in our Wireless segment through a reduction in cost of services.

Turning to our capital metrics on Slide 16. As of June 30, 2018, we had $800 million of debt outstanding, and our leverage ratio was 2.89x, well inside of our debt covenant of 3.75. Barring any significant acquisitions, we expect our debt levels and leverage to decline. As a result of the 2017 tax act, the lower tax rate and accelerated depreciation on our capital investments, we do not expect to pay any significant cash income taxes, either federal or state, in 2018.

Now I'll turn the presentation over to Dave.

Thanks, Jim, and thank you, Chris, for the kind words at the start of the call, and good morning, everyone. First, I'd like to say that in the short time that I've been here, I've seen firsthand what a great team Shentel has in place and what a tremendous company this is. I'm excited about this new opportunity and energized to help drive the company's future success. I've had the opportunity to meet or speak with several of you already, and I'm looking forward to meeting more investors in the coming months.

I'd also like to congratulate Earle MacKenzie on his retirement and thank him for his input and guidance in our transition. Now I'll continue on with our presentation.

On Slide 18. Including the customers picked up from Sprint in the February expansion, at June 30, 2018, we had 781,000 postpaid and 252,000 prepaid customers for a total of 1,033,000 customers. This growth represents an increase of 6.6% and 13.5%, respectively, as compared to the second quarter of 2017, and also sequential growth as compared to first quarter of 2018. At the end of the quarter, 22% of our customers were still on subsidized plans, down from 24% at the end of the first quarter. 6.3% of our base upgraded their phone in the quarter, and of these upgrades, 98% were phones and 2% non-phones. Overall, 14% of our postpaid net adds for the quarter were non-phone devices, resulting in 8% of the total postpaid base.

Slide 19 shows the components of change of our Wireless customer base year-over-year. You see the 54,000 customers acquired as a result of the Richmond Expansion and 24,000 added from organic growth.

On Slide 20, we show the gross and net activity for Second Quarter 2017 and 2018. We had solid growth adds in the quarter, with good conversion rates when we got prospects into the store. Of special note, June 2018 was the best June ever in the history of the company. We continue to have a positive port-in versus port-out ratio at 1.54:1 for the second quarter of 2018.

On Slide 21, you see postpaid churn for the quarter of 1.67%, which is a nice improvement versus the second quarter of 2017, with churn in our core legacy area at 1.55%. Phone churn was 1.54% and non-phone churn was 3.03%. Our improvement in churn was somewhat offset by ARPU pressure as a result of Sprint promotional activity.

Moving to Slide 22, prepaid growth adds declined to 34,000 and net adds came down to 1,900. Similar to the postpaid results, the second quarter of 2017 net adds included our Parkersburg expansion. Also, as of September 2017, we no longer include Sprint lifeline customers as part of our prepaid count. Our entire prepaid net gain this quarter was Boost customers. The primary reason for the improvement was the expansion of Boost stores throughout our service area, an investment we made in local Boost advertising. Our recent success in prepaid is primarily the result of Sprint's wholesale relationship with nTelos, where the wholesale rate didn't make it prudent for Sprint to push prepaid. So we're seeing a lot of prepaid potential in the former nTelos footprint.

Looking at Slide 23, you'll see an improvement in prepaid churn. However, we saw a reduction in prepaid ARPU primarily related to promotions and discounts. Before I move to Cable, I'd like to update you on our store expansion. By year-end 2018, we are on track to have 170 branded Sprint stores and 152 Boost stores, representing about 21% and 30% increases, respectively, since the end of 2017.

Now moving to Cable on Slide 24. You'll see that our total RGUs have been relatively stable over the past year. We added 3,500 high-speed Internet customers, 800 voice subscribers and lost 3,400 video subs. Average revenue per RGU and per customer shows continued improvement, driven by over 2,500 of our broadband users upgrading their speed this quarter and the video price increase we had in January to offset higher programming costs. Like many of our peers, we have deployed speed rolls to provide more value to our customers. During the second quarter, we tripled the broadband speed for our commercial customers, which was preceded by the first quarter speed roll that we've provided to about 1/3 of our residential customers, which migrated all customers above 15 Mbps, 1 tier up.

Slide 25 is another view of the data shown on the prior slide and includes the penetration of homes passed by each service. As expected, we show increases in high-speed Internet with a decrease in video. Although, I'd like to note that our churn or loss percentage on video subscribers is stable and actually lower than the previous year. We remain focused on driving higher broadband penetration in our underpenetrated markets where recent upgrades have yielded incremental network speed and capacity.

Turning to Wireline stats on Slide 26. We're seeing annualized access line loss of 5.9%, offset by a stable broadband base with growing ARPU. As previously disclosed, we have recently begun migrating our broadband DSL customers in our legacy Wireline footprint to Cable modem service for roughly 60% of households in that market over the next couple of years.

The growth in fiber lease revenue is shown on Slide 27. We saw growth in nonaffiliated lease revenue, partially offset by a decline in affiliated wireless lease revenue. Overall, external fiber-based revenue growth has crossed into double-digits, with recent wins in the Roanoke market. We will continue to leverage our strong fiber network to target growth in the commercial and wholesale markets, going forward.

Slide 28 provides our CapEx budget for 2018, which is consistent with what we've shown on previous calls. At the end of the second quarter, the company had spent $62 million of the estimated $163 million capital budget for 2018. As previously disclosed, more than half of the 2018 CapEx is allocated for sell-side upgrades and expansion of our coverage in recently acquired territories.

I'll now turn the call back to Jim for closing comments. Jim?

Thanks, Dave. Before I conclude, let me shed some light on how this potential Sprint-T-Mobile merger can possibly impact us. At this point, there are numerous unknowns, and we're not going to spend time speculating, but I will walk you through a few different scenarios that can materialize in accordance with our affiliation agreement with Sprint.

Assuming the new merger is approved, T-Mobile has 180 days after closing to negotiate a mutually acceptable addendum to the affiliate agreement. Based on a specific criteria we laid out in the agreement, the new T-Mobile would have 60 days after this period to decide if they wanted to buy our Wireless business, which does not include our towers or fiber networks. If they pursue the purchase of the Wireless business, there are predetermined criteria that will guide the valuation of our business, all of which were developed with the shareholders' best interest in mind. If they choose not to buy our Wireless business, Shentel will remain an affiliate of the new T-Mobile, and for the next 60 days, we have the option to acquire the T-Mobile customers and network at a purchase price based on specific criteria and assumptions. If we're unable to finance the purchase, the new T-Mobile will finance the purchase at their cost of capital for up to 5 years. If Shentel decides not to buy the T-Mobile network and customers, the new T-Mobile must turn off their network that overlaps Shentel within 2 years.

I know the implications of this merger -- of a potential merger raise questions, but we're too early in the process to prognosticate potential outcomes. So we'll continue to remain focused on growing our business thru investments in technology and providing high-quality local service. Thank you.

Operator, and we're now ready for questions.

(Operator Instructions) We have a question from Ric Prentiss from Raymond James.

One operational question and then one strategic question. Operationally, on the Wireless side, churn, postpaid churn improved nicely. Can you talk us through a little bit of what you saw help that? And then, there also is maybe some pressure from Sprint as they remove the promotions. So just wondering what you're thinking on the trend line for postpaid churn?

Yes, sure, Ric, I'll take that. So there's 3 primary contributors to the churn result in the quarter on postpaid. The first is, as the simple one, which happens every year, it's called seasonality. The second quarter is usually our best quarter, and you've probably seen that in prior years as well. The second one is, and the third, are things that, I would say, we can take credit for with respect to management decisions and initiatives. And no pun intended, but one has a tighter credit policy. So we made a change earlier in the year, and -- which was an initiative that gained momentum in Q4 last year, and it's starting to pay off now in the second quarter results. So it takes a while to manifest in the numbers, but we're pleased with what we're seeing there. The second is just the impact of the better network, a better performing network. So as coverage continues to improve, particularly in the nTelos areas and capacity augments continue to flow through, we're seeing that in terms of people's willingness to stick around.

Do you think, going forward, with Sprint, taking the half-off promotions off the table?

Chris French and I did just a little tour of our Southern Virginia markets, and I don't even remember, I lost count how many stores we visited, 70-some-odd stores. But what I would tell you is the prevailing feedback I've heard from our folks as well as customers while well in the stores. The new rate plan is being very well received. And we're not seeing any negative impact, really, whatsoever. And the new bring-your-own-device introduction of $20-a-month savings there on BYOD is also being well received. So we're not seeing any impact negatively there, Ric.

Great. And then on the bigger picture side, have you seen any evidence of T-Mobile overbuilding into your territories?

Any evidence. Well they're, as you know, have been public about their interest in leveraging their 600 megahertz spectrum. And I can't say for sure whether we are unique with respect to their buildout plans. But yes, generally, we understand that, that's something that they're undertaking, and it's also happening in our region as well.

Okay. Because the thought then is, obviously -- Jim, thanks for the thoughts on the Sprint-T-Mobile merger, and we get it, it's definitely early. One of the things I'm wondering about, though is you guys have done some turf expansions with Sprint, some of them are in earlier stages than others. Would it makes sense to try and accelerate CapEx and marketing plans to try and get more value into those markets as opposed to where they might be still very modest markets? So just trying to think on those turf expansions, how they might be considered and what you might consider doing, if a Sprint-T-Mobile merger would go through?

Yes, Ric, this is Dave again, and I'll kick it over to Jim for his thoughts. But when I think about the level of CapEx spend and I think about all the wheels we have in motion, we are -- we're busting it at a pretty good pace currently. I mean, we will have touched close to 200 cell sites this year in terms of capacity augments, new builds, et cetera, and where we're building fiber to the tower to decrease external expense. So we have -- that team is humping at a pretty good clip. And certainly, we always look for opportunities to accelerate. But duly noted, I guess, I would say, and we'll take the advice.

No, no, I think that's exactly right. I think that the build plans and the pace at which they just plan to do them, Sprint-T-Mobile, we're aggressive in that area to begin with because that's where we're going to get the shareholder return. So we realize that we need to get these areas built out quickly and effectively so we can start selling. So we'll take a look at it.

Okay. And there's some flexibility there because -- how is the existing -- that was probably not very contemplated in the original contract, thinking about turf expansions and how to value those in a merger change of control scenario?

Well, it was, Ric. This is Jim. So if -- in the event that this happens, there is a provision in the contract, it says that we'll get the better-of, either the economic value that is used to calculate the value of the Wireless business or whatever our CapEx spend has been in these new expansion areas. So I think it's not -- we'll get the better-of in that. And if you think about nTelos, we'll probably go about in that area pretty much, but in Parkersburg and what we call the Richmond sliver around here, which is a new territory, we just have to do that evaluation depending on when those conversations start. But I don't see that we will be hurt by having those new territories in that conversation at all.

Our next question is from Amy Yong from Macquarie.

Dave, one for you, one for you, Jim. First, Dave, I guess, what kind of operational opportunities do your see in the legacy and expansion territories. And I guess, if you could give us a sense of the penetration rates in nTelos versus legacy, I think that will be helpful. And then similar to the last question, with Sprint's promotional activity being a little bit refocused, what kind of trend should we expect on ARPU, going forward? And then, Jim, obviously, leverage is coming down and you have some interesting M&A opportunities lining up for you. How do we think about free cash flow priorities going forward?

Thanks, Amy. I'll take the first question first. In terms of operational opportunities, listen, I'm all ears, if you've got the advice like Ric. But in the meantime, I mean, my observation would be that coming into this fiscal year, the team -- Earle and the team put together a very well thought out plan, very well thought out budget. And really, my feeling, and I think as evidenced by the second quarter results, that the team is firing on all cylinders. In terms of additional opportunities that I see we can focus on, it's probably premature for me to signal anything significant. I mean, there's nips and tucks here and there in terms of things that the team and I are discussing just as general, a good management practice, but nothing substantially different, I would say, than what you would've seen or would've expected prior to my arrival, prior to Earle's retirement. In terms of the ARPU trends, look, what I would say is that we are encouraged by some of the recent Sprint activity as of the rhetoric regarding the discontinuation of promotional rates, the new rate plan, the BYOD introduction, and we're hopeful. We're optimistic that, that will start to abate some of the declines we've seen in postpaid ARPU and stabilize that and, hopefully, even increase it on a go-forward basis. But it's -- again, that one's a little bit premature for us to call at this stage, just given the results we've seen thus far. But we're optimistic and we're hopeful.

This is Jim. So look, on the capital allocation, I mean, it's -- you're exactly right. The debt levels are coming down. So we're kind of on hold with territory expansions as far as Sprint goes to see how that works out. But look, we're inquisitive. As new opportunities come up to expand our cable or fiber assets in an accretive way, then we'll take a look at those. So that may be one to deploy some of that capacity. But also, as Dave gets in and gets going and whatever new ideas he might have to deploy some capital for organic growth, we're in a good place. We're in a good place to be able to do both.

Our next question comes from Hamed Khorsand from BWS Financial.

Could you talk about, from a seasonality perspective, if there's any impact on the Wireless business and the ads that you had in the quarter?

Yes, Hamed, this is Dave. Seasonality, really, in terms -- the impact of seasonality really manifests in churn. But on the gross activation front, the primary driver there in the second quarter was the fact that we ran a very successful promotion, which this is the second year we have done this. We have noticed, the team has noticed, done a very good job on noticing a gap in competitor spend and offers during the early summer months. And we essentially, have capitalized on that fact for the second year in a row. We offered some -- we increased advertising spending, for one, and a did a lot of hyper local marketing and sales efforts to drive traffic into the stores. But in addition to that, we offered a prepared gift card incentive for $50 a line up to $100, and that serves as a phenomenal closing tool. And so we've just had a phenomenal June as a result. And what's great about that, too, is actually the sweetener was about half as rich as it was last year and got better results. So I think that demonstrates the fact that team is getting even better, over time, at this. So that was the primary driver of the second quarter results.

And switching to the broadband business. The growth slowed down a little bit quarter-over-quarter. Is that because of Q2 and customers just moving away from a seasonal standpoint? Or is that just, you're hitting a penetration ceiling right now?

I think the second quarter result is -- you're right, seasonally, it's a big move quarter, so you're going to see elevated churn as a result. But that is one of the -- to kind of pickup a little bit on Amy's point and respond a little bit to, maybe, to the comment lurking behind your question there. Focusing on broadband penetration rates, particularly where we are -- where we've done recent upgrades and are relatively underpenetrated relative to some of our more mature markets is something that the team and I are very focused on. So yes, duly noted, and something that will be a focus area for us on a go-forward.

(Operator Instructions) I'm showing no further questions at this time. I would like now to turn the call back over to Jim Woodward for closing remarks.

Thank you, everyone, for joining us today, and we look forward to continuing to update you on our progress.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may disconnect and have a wonderful day.