Q1 2024 Shenandoah Telecommunications Co Earnings Call

Participants

Kirk Andrews; Director, Financial Planning and Analysis; Shenandoah Telecommunications Co

Christopher French; President & CEO; Shenandoah Telecommunications Co

James Volk; Chief Financial Officer, Senior Vice President - Finance; Shenandoah Telecommunications Co

Edward McKay; Chief Operating Officer, Executive Vice President; Shenandoah Telecommunications Co

Hamed Khorsand; Analyst; BWS Financial

Presentation

Operator

Good morning, everyone, and welcome to Shenandoah Telecommunications first-quarter 2024 earnings conference call. Today's conference is being recorded.
At this time, I would like to turn the conference over to Mr. Kirk Andrews, Director of Financial Planning and Analysis for Shentel.

Kirk Andrews

Good morning, and thank you for joining us. The purpose of today's call is to review Shentel's results for the first-quarter 2024. Our results were announced in a press release distributed this morning, and the presentation we'll be reviewing is included on the Investor page at our website, www.shentel.com. Please note that an audio replay of this 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; Ed McKay, Executive Vice President and Chief Operating Officer; and Jim Volk, Senior Vice President of Finance and CFO. After our prepared remarks, we will conduct a question-and-answer session.
As always, let me refer you to slide 2 of the presentation, which contains our Safe Harbor disclaimer to 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 the statements.
Therefore, we have provided a detailed discussion of various risk factors in our SEC filings, which you are 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.
And with that, I will now turn the call over to Chris. Go ahead, Chris.

Christopher French

Thanks, Kirk. We appreciate everyone joining this morning, and I hope everyone is well, I will start the call with an update on the recent transactions and our strategy executio. As listed on slide 4, we announced and closed on the sale of our towers during the first quarter. The $310 million sales price represents a multiple of approximately 31 times 2023 tower segment adjusted EBITDA when considering the expected T-Mobil revenue churn we had previously disclosed. We're very pleased with the sale price especially when considering the publicly traded tower companies are trading at multiples in the high teens. This transaction is a good example of the market value of our assets and businesses exceeding the implied value within our stock price.
We also closed on $356 million in new financings on April first, including $275 million in incremental credit facility capacity and $81 million in preferred equity. We had strong interest from both lenders and financial sponsors during the financing processes, which reflects well on our track record, management team, and fiber-first strategy. These financings will provide growth capital to continue to invest into new Glo Fiber expansion markets.
On April 1, we closed on the acquisition of Horizon Telecom for $385 million which included issuing $4.1 million common shares to a selling shareholder of Horizon. Horizon's fiber-rich network will open up new Glo Fiber expansion markets in Ohio, while doubling the size of our commercial fiber business. We recently announced our plans to expand the Glo Fiber network to Greenfield, Hillsboro, Jackson, Johnstown, and Zanesville, Ohio.
We're excited to welcome our new Ohio colleagues to Shentel, and I'm pleased to report that Glenn Lytle has joined the senior management team to lead commercial sales for the combined company. Glenn brings over 25 years of commercial fiber sales experience, including the last five years, successfully growing the Horizon commercial fiber business.
I'll now turn to slide 5 to give an update on our strategy execution and our Horizon integration efforts. Although we've only owned horizon for about five weeks, we are off to a fast start with our integration efforts. We announced a brand change from Horizon to Glo Fiber in mid April and implemented a new Glo Fiber rate card in Ohio. Similar to the plans we used in the mid-Atlantic states, we focus on easy, straightforward pricing with no long-term contracts. We expect the new rate card will enhance customer additions and reduce churn.
We also identified another $1 million in annual run rate expense synergy savings, increasing our target to $10.6 million. We began to implement plans to achieve these synergies in April, realizing about $4.8 million annualized or about 45% of our target as we enter May. We expect to complete the integration and realize the full energy savings target by the end of the first half of 2025.
In parallel with our sale, acquisition, and financing activities. We reported a strong quarter of operating results in our mid-Atlantic markets. We added 5,000 Glo Fiber customers, setting a new quarterly record. We also constructed and released the sales almost 26,000 new Glo Fiber passings. With a 260,000 passings constructed in the mid-Atlantic markets and 15,000 passings acquired as part of the Horizon merger, we now have 275,000 Glo Fiber expansion market passings or 46% of our year-end 2026 target of 600,000.
Moving to slide 6. We now have over 15,000 route miles in our super regional fiber network, spanning seven adjacent states. The combination with Horizon has been well received by our commercial customers. We now have 25 Glo Fiber markets as reflected on slide 7. We have started engineering, permitting, and/or construction in another eight markets including the five new markets in Ohio.
With the Horizon acquisition closed and most of the underwriting of new markets complete, we have good visibility into the future state of our Glo Fiber network and markets. The next 32 months will be focused on execution of our build and sales plan.
With that, I'll now turn the call over to Jim to review the details of our financial results.

James Volk

Thank you, Chris, and good morning, everyone. Before I provide commentary on our financial results, please note that we have altered our financial reporting triggered by the plan to sell our tower portfolio in the first quarter. The tower segment is now reported under discontinued operations in our statement of comprehensive income and statement of cash flow. The tower assets were recorded as held for sale on our balance sheet. These changes are reflected for the current and prior periods in our earnings release and Form 10-K. Under the new organizational and reporting structure, the company has one reportable segment in continuing operations from the quarter.
And now moving to slide 9 for our financial results for the first quarter. Revenue grew 3.1% to $69.3 million in the first quarter 2024, driven by continued strong residential and SMB revenue growth of $4.7 million or 9.1%, partially offset by the expected decline of $2.3 million or 19.8% in commercial revenue. The residential SMB revenue increase was driven by growth in Glo Fiber markets revenue of 73.1% due to a 62.3% increase in broadband data RGUs and a 9.7% increase in data market. Commercial revenue declined due to the expected decline in T-Mobile revenue as reported throughout 2023, T-Mobile disconnected backhaul circuits as part of the decommissioning of the former Sprint network. The revenue decline reflects a full period of these disconnects and a significant reduction in related early termination fees. We still expect about $7 million in lower T-Mobile revenue in 2024 and for the commercial revenue to return to mid to high single digit growth rate starting in 2025. As previously disclosed, adjusted EBITDA of $19.3 million was relatively flat flat in the first quarter as compared to the first quarter of 2023. Revenue growth was offset by higher expenses associated with expanding our Glo Fiber line of business higher programming fees for our video products and bad debt to the general macro economic conditions.
I'd now like to update you on our liquidity position following the horizon and related financing transactions, which we closed on April first, as reflected on slide 10, we raised $81 million of new preferred equity financing and used the proceeds along with cash on hand primarily from the tower sale to complete the acquisition of Horizon telcom.
In summary, we traded a slow growth infrastructure asset for a digital fiber asset with higher growth potential, which fits nicely with our fiber first strategy. Our pro forma liquidity position on April first is 484 million, including about 110 million in cash, 225 million in available delayed-draw term loans and $150 million in available revolver capacity. We are well positioned to fund our business plan to grow our book fiber expansion market getting to 600,000 by the end of 2026.
Moving to Slide 11. Our pro forma outstanding net debt as of April first is $190 million on a similar note, after adjusting fully diluted common shares of 51 million for the additional 4.1 million common shares issued to a rollover shareholder of Verizon as part of the acquisition and the ADS converted equivalent common shares of the perfect preferred equity pro forma April first, fully diluted common shares are now 58.4 million. As a reminder, the exchange price for converting the preferred equity into common shares is $24.50.
Before turning the call over to Ed, I will provide our expectations for 2020 for Horizon financial contributions and some key operating metrics on Slide 12, we expect Verizon to generate 50 to 54 million in revenue and 12 to $16 million in adjusted EBITDA for the nine months of April to December 2020 for capital expenditures for the nine months ownership period in 2024 are expected to range from 30 to 39 million. Most of the current commercial fiber CapEx is success-based relating to installing service for a portion of the 609,000 contracted monthly recurring revenue backlog. As Chris noted earlier, we announced five new Glo Fiber expansion markets in Ohio. The Glo Fiber CapEx in Ohio will be a combination of engine initial engineering and permitting for these new markets, constructing a few thousand more patents in existing Ohio markets in success based CapEx to connect customers. Horizon currently is 15,000 homes and businesses with fiber in three greenfield markets and 14,000 passings in the RLS market.
And now I'll turn the call over to Ed.

Edward McKay

Thank you, Jim, and good morning. I'll start on Slide 14 with an update on our fiber construction metrics. In the first quarter, we continued the growth of our predominantly fiber network, ending the quarter with 55% of our total broadband passings served by state-of-the-art 10 gig SGXGS. upon fiber to the home networks. We added over 26,000 new fiber passings in the first quarter and our construction pace was 47% faster than the first quarter of 2023. We are very pleased with the progress toward our goal of over 100,000 additional fiber passings in 2024, we now have approximately 260,000 Glo Fiber passings and our total number of approved Glo Fiber passings reached 565,000 at the end of the first quarter, combined with 15,000 existing greenfield fiber passings in former Horizon markets. And our recently announced expansion to 40,000 additional homes in Ohio we now have enough passive in our construction pipeline to reach our goal of 600,000 total Glo Fiber passings by 2026. In addition, we plan to construct approximately 23,000 fiber passings as part of government grant projects and 3,500 were complete at the end of the first quarter as we continue to ramp up Glo Fiber construction. We had a record quarter for customer growth, as shown on Slide 15. We added over 5,000 new Glo Fiber customers in the first quarter and reached a total of almost 47,000, up 62% year over year. A total number of data, video and voice revenue generating units has reached approximately 57,000, up 56% year over year. Our sales team continued to outpace our construction team, and we grew broadband data penetration from 17.4% a year ago to 18% at the end of the first quarter, while adding almost 95,000 new passings during the same period, our broadband data average revenue per user increased almost 10% year over year due to a combination of rate adjustments, additional equipment revenue and customers selecting higher-speed tiers. For the quarter, 50% of our new residential subscribers adopted speed tiers of one gig or higher including approximately 3% that took speeds of two gig or higher. We continue to focus on providing the fastest speeds most reliable network and outstanding local customer service and our churn remained extremely low at 0.86% for the quarter.
On slide 60, we highlight our data penetration rates as our markets mature and our continuing progress, increasing penetration rates across all our cohorts. 1st year after launch of the Glo Fiber market, we typically see penetration rates over 18%. And after three years, data penetration rates typically exceed 30% Ultimately, we expect to reach average terminal penetration rates of about 38%, five to six years after launching service in a new area. Our most mature neighborhoods lost in late 2019. I've already exceeded this goal.
Let's shift to our first quarter operating results for our cable markets on slide 17. Broadband data subscribers decreased slightly year over year to 109,000 and broadband data churn increased to 1.67%, driven primarily by competition from cable and fiber overbuilders in some markets. Our data penetration decreased to 50.3%, driven by the decrease in subscribers and the addition of over 4,000 passings in the past year, primarily in government subsidized areas by total revenue generating units decreased by about 4.5% year over year as we continued to see declines in video service and residential voice service due to cord-cutting. Competition has increased, but unlike some of our larger cable peers. Our markets are predominantly rural with a cable or fiber competitor offering service to less than 20% of our passings. Despite competitive pressure in portions of some markets. Broadband data RPU increased by 2.4% year over year to $85, offsetting most of the decrease in revenue from fewer RGUs.
I'll also add that we believe Shentel has limited exposure to the ACP. program relative to some of our larger cable peers, less than 4% of our total broadband data customers subscribed to a CP. supported plans, and over 75% of them were customers prior to enrolling in the ACP program.
Moving to slide 18, we highlight our broadband commercial fiber business in the first quarter, we booked new sales totaling 110,000 in monthly revenue, up almost 4% year over year. Our new installed monthly revenue for the first quarter was 66,000, and we finished the quarter with an installation backlog of approximately 165,000 in monthly revenue. We expect the majority of this backlog to be installed in the second quarter. Monthly churn in compression decreased significantly year over year to 1% for the first quarter of 2020. For T-Mobile has now completed the vast majority of backhaul disconnects associated with the Sprint network rationalization. As Jim mentioned, the Although these disconnects will temporarily slow revenue and earnings growth in 2024, we expect our commercial fiber business to return to historical growth rates in 2025 and beyond.
Our 2023 capital spending and guidance or for 2024 are reflected on Slide 19. Total capital investments for the first quarter totaled 70 million, roughly in line with our capital spending in the first quarter of 2023. Our Glo Fiber and government subsidized investments were on plan for the first quarter, and we are on pace to finish 2024 within our previous guidance range of 260 to 290 million.
Thank you very much. And operator, we're now ready for questions.

Question and Answer Session

Operator

(Operator Instructions) Hamed Khorsand, BWS Financial.

Hamed Khorsand

So first of all, I just want to ask you about the ads you had it with Glo Fiber. Is that a method of just being more markets or is that because you're gaining momentum with the markets you've already been established.

Edward McKay

So it's a combination of both there. Not only do we have additional new passes as we ramp up construction, but we're continuing to grow our penetration rates in those more mature motors. So it's definitely a combination of the two, and we accelerated our net adds year over year as well.

Hamed Khorsand

And do these customers that you're adding, do they have a prior broadband service provider or are they brand-new to the service?

Edward McKay

I would say the majority of our ads are switching from one of the big cable providers.

Hamed Khorsand

And lastly, with with Verizon, with the revenue that they're generating, is there any growth possibilities this year? Are you more looking at as to a 25 potential?

James Volk

Yes, I think I can jump in here and that the revenue is has grown. Yes, low single digit rents the last two years, they have a very sizable backlog as we noted on the slide, they have 600, $9,000 of monthly revenue under contracted sales contracts that are awaiting installation. We're trying to accelerate that, that that installation pace. It's going a little slower than what we had expected so far but up. But our new leadership team is involved there and we expect that we will we'll pick up as a couple of quarters past, and we should see some meaningful improvements by the time we get into 2025.

Edward McKay

Okay.

James Volk

Thank you, Maury. Thanks on that.

Operator

Thank you. And this concludes the Q&A session for today. I will pass it back to Jim Volk for final comments.

James Volk

Yes. Thanks, everyone, for joining us this morning. We look forward to updating you on our progress on our fiber first strategy and the Horizon integration in future periods. Have a great day. Thank you.

Operator

And this concludes our conference. You may now disconnect.