Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Consolidated Communications Holdings, Inc. (NASDAQ:CNSL)
Q3 2020 Earnings Call
Oct 29, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Consolidated Communications Holdings, Inc. Third Quarter 2020 Results Conference Call. [Operator Instructions] [Operator Instructions]

I would now like to hand the conference over to your speaker today, Jennifer Spaude. Please go ahead, ma'am.

Jennifer Spaude -- Senior Vice President of Corporate Communications and Investor Relations

Thank you, and good morning. I would like to welcome everyone to Consolidated Communications' Third Quarter 2020 Earnings Call. On the call today are Bob Udell, our President and Chief Executive Officer; and Steve Childers, our Chief Financial Officer. Following our prepared remarks, we will open the call up for questions. Before we proceed, I will remind you our earnings release, financial statements and presentation are all posted on the Investor Relations section of our website, which can be found at consolidated.com. Please review the safe harbor provisions on slide two of our presentation.

Today's discussion includes statements about expected future events and financial results that are forward-looking and subject to certain risks and uncertainties. A discussion of factors that may affect future results is contained in consolidated filings with the SEC. Today's discussion will also include certain non-GAAP financial measures. Our earnings release includes reconciliations of these measures to the nearest GAAP equivalent.

I will now turn the call over to Bob Udell.

Bob Udell -- President and Chief Executive Officer

Thank you, Jennifer, and good morning, everyone. I hope you're all doing well and staying safe. Wow, we've got great things to talk about today. I'm going to kick it off with an overview of our strong Q3 results and our new strategic partnership with Searchlight. Steve will provide an update on the financial results and an overview on the new capital structure. I'll close with a discussion on our strategic imperatives and fiber build plans that will enable us to return to growth and future-proof our business.

I'm very pleased that our third quarter results demonstrate both the resiliency of our business and the very strong execution in improving revenue trends, growing adjusted EBITDA and strengthening the balance sheet. In addition to our very strong third quarter results, we recently completed a recapitalization, which included both a strategic investment and a global refinancing in which we raised $2.25 billion in new secured debt. This new capital structure and capital infusion will significantly bolster our growth plans, which I'll discuss later.

First, let me remind you that we set out on a path 1.5 years ago to transform the business when we announced a deliberate capital allocation, and that's exactly what we've done. I fully expect Consolidated Communications' transformation to continue and will look very different in another 18 months from today. We now have the foundation to do this with a strong balance sheet, increased capital and liquidity. Before jumping into quarterly results, let me provide an update on how the pandemic is impacting our business.

In this new normal, our communication services remain critical and play a fundamental role in keeping consumer, commercial and carrier customers connected. We turn technology into solutions, connecting people wherever they work and live. People are depending on connectivity now more than ever. And as -- and we are working harder than ever to ensure reliable and continuous high-quality services for them. As we look back on the past six months, COVID has certainly changed how we operate, but we're determined to ensure resilience in our business, and we are fortunate to have a team that has adjusted quickly and continues to adapt as needed.

Our network architecture continues to successfully handle the increased traffic and usage. The proactive measures we immediately implemented have kept our employees and customers safe. At this time, we have not experienced any material impacts to our business as a result of the pandemic. Now turning to third quarter results. I'm very pleased with the solid and stable results we delivered in the recent quarter and year-to-date. Revenue growth trends in both broadband and data transport services combined with lower operating expenses contributed to our overall results.

Starting with commercial and carrier, we grew data and transport 1.6%, which further demonstrates our consistent track record of growing this strategic revenue stream. Our carrier channel is active with 5G fiber and new wireless backhaul prospects. Our sales team is doing an excellent job of maintaining strong relationships and collaborating closely with carriers to identify upgrade opportunities. Our tower connections under contract increased roughly 2% year-over-year, totaling approximately 3,900 connections.

As we build out carrier-grade capacity, our fiber network investments allowed us to increase on net buildings 12.5% from a year ago, totaling approximately 13,200. The vast majority of our new sales across all customer groups are on net, which correlates to higher margins, increased opportunity to upsell and a greater ability to ensure the best customer experience, ultimately contributing to customer retention. Within our commercial channel, we continue to see demand for bandwidth upgrades and our ProConnect VOIP revenue is up 12% year-over-year.

We recently launched Enterprise at Home, which is a direct response to business customer needs right now. This new service provides business class internet and full-featured unified communications to remote employees, removing obstacles to productivity and providing priority of service and support for our commercial clients when working from residential locations. In addition, we launched Webex Contact Center and expanded our Microsoft Productivity Suite to all markets.

Our commercial sales team's CCI Ignite sales approach fits the market and environment using a hybrid of virtual tools to meet customers where it makes sense for them. Now turning to the consumer channel. We grew broadband revenue 2.6%, representing the sixth consecutive quarter of broadband revenue growth. Our broadband services are competitive, and we are even more excited about our fiber expansion, which will accelerate this growth in 2021. CCiTV, our streaming video service, is fully launched in Northern New England, Texas and most recently in California and Illinois.

We continue to see the majority of subscribers bringing their own device and higher broadband speed adoption with CCiTV. This easy self-installed product reduces the cash we're totaling approximately 10,000 homes passed when complete. Our fiber density positions us well to partner with communities through public-private agreements and Federal CARE's funding. This gives us additional opportunities in rural areas that would otherwise be difficult to justify financially.

These nine public-private community builds are all slated for completion in late 2020 or early 2021. Our consumer channel has been stable and we're eager to accelerate our fiber growth plans to build a best-in-class consumer service experience. We executed well across all of our three customer channels, and our teams are laser-focused on the right priorities.

I will now turn the call over to Steve, who will provide more details on our financial results for third quarter. Steve?

Steve Childers -- Chief Financial Officer

Good morning, everyone. As Bob said, it was an exciting and a simple quarter, and I'm happy to share with you the details of our strong third quarter results as well as to provide an overview of our new capital structure. Our financial summary for the third quarter begins on slide four of our presentation. Operating revenue for the third quarter totaled $327.1 million, a decline of 1.9%, which is more than a two times improvement compared to the 4.2% decline a year ago. This is the result of the continued strong performance realized across all of our customer channels.

As a result of improved revenue trends and continued cost structure improvement, third quarter adjusted EBITDA was up 1% or $1.3 million from a year ago, totaling $132.2 million for the quarter. Now let's review revenue starting with commercial and carrier, where revenue totaled $146.4 million in the third quarter. Before moving into each component of commercial and carrier revenue, I want to note that, as discussed on prior earnings calls, due to the potential impact of COVID, our SMB or small business, revenues are approximately 8% of total revenue. As of today, we have not seen a material change in our SMB revenue trends.

Data and transport revenue grew 1.6% and totaled $90.2 million. This growth continues to be fueled by our investment in our fiber network and the addition of new business products enhancements. Commercial voice revenue declined $1.3 million or 2.7%, which was reduced by more than 1/2 from a year ago. Other revenue declined approximately $900,000 in the recent quarter and is down $7.4 million in the nine month period, primarily due to lower equipment sales.

Equipment sales is the one area we are seeing a slowdown due to the COVID-19 economy, and we expect decisions on equipment purchases to continue to be deferred as customers stay cautious to current economic conditions. The impact on earnings and cash flow with this low-margin product will be nominal. Now turning to our consumer channel, where revenue totaled $128.4 million. Total consumer revenue was down 2.3% or $3 million in the third quarter. However, the recent quarter decline rate improved 140 basis points from a year ago, and the channel showed overall growth sequentially for the second quarter in a row.

Consumer broadband revenue grew for the sixth consecutive quarter and was up 2.6% or $1.7 million for the third quarter. Consumer ARPU increased 4.6% year-over-year, now totaling $76. Our strategy of leading with broadband, specifically in our newly upgraded areas, is working and driving retention as well as higher ARPU. Consumer voice revenue was down approximately 6% or $2.7 million year-over-year. The decline in consumer voice was reduced almost in half from a year ago. We attribute this to a more robust and competitive broadband offering, which contributes to higher voice retention. Video revenue declined 9.8%.

The $2 million decline was offset by reductions in video programming expense and lower capex. In part, this decline reflects our change in strategy to streaming over-the-top services bundled with broadband services. Network access revenues declined $2.2 million, largely due to special access declines and subsidy revenue was flat and it is expected to remain at an $18 million per quarter run rate. With respect to the Rural Digital Opportunity Fund, we will be participating in the RDOF auction, which starts today.

We will continue to evaluate our options throughout the bidding process but due to strict FCC anti-collusion rules, we cannot comment further at this time. Now turning to operating expenses, excluding depreciation and amortization, other operating expenses totaled $209.5 million, an improvement of $7.2 million or 3.3% from the prior year. Free cash flow increased $39.6 million year-over-year and is up $128.9 million year-to-date. Cost of services and products declined $2.2 million, driven by lower video programming expense and lower salaries and benefits associated with ongoing cost savings initiatives.

SG&A costs were reduced by $5 million in the recent quarter, primarily due to lower labor and benefits expense combined with operational efficiencies. Net interest expense in the quarter was $31.7 million, down $2.6 million from the same period last year. The decrease was primarily due to declines in variable interest rates on the term loan and repurchases in the company's 6.5% senior notes in prior periods. Cash distributions from company's wireless partnerships totaled $12.4 million in the third quarter compared to $10.9 million a year ago.

Year-to-date, we have received $32 million in wireless cash distributions. And at the beginning of the year, we expect it to be in the range of $37 million to $39 million for the full year of 2020. At this time, we have limited visibility to Q4 distributions from Verizon wireless. Adjusted net income per share was $0.23 compared to $0.06 per share a year ago. The improvement reflects the consistency of our operating results and a decline in depreciation expense. capex was approximately $56 million in the third quarter and $152 million year-to-date.

Our capex spend supported success-based fiber projects and broadband network infrastructure expansion. As we pivot to execute on our growth plans in the fourth quarter, we expect full year capex to be at least $210 million as we prepare for a fast start in 2021 on our fiber expansion and build plans. Total liquidity, including cash on hand and availability under our revolver was approximately $191.6 million. Our business is strong and stable, and we have demonstrated our ability to improve revenue trends and manage costs, and we have made notable progress on our capital allocation plan. Our leverage ratio improved from 4.33 times at the beginning of the year and we actually achieved our year-end target of four times at the end of the third quarter.

Pro forma for the October two recapitalization, which allowed us to reduce debt by approximately $200 million, our net debt leverage would have been 3.5 times. We closed the recapitalization on October 2, and we now have an even stronger balance sheet, enhanced flexibility, increased liquidity and extended maturities. We are very pleased with the strong support from lenders and bond investors on our refinancing.

The debt structure consists of the following: a five year $250 million revolving credit facility, which has been upsized to respond to the letter of credit requirements for RDOF; a seven year $1.2 billion secured term loan priced at LIBOR or plus a coupon of 4.75% with a 1% floor; and senior secured notes of $750 million at a coupon rate of 6.5% due in 2028.

This successful refinancing, combined with the strategic investment, provides us with much greater financial flexibility to support our fiber expansion growth plans. We will not be reinstating guidance for the fourth quarter or full year 2020. However, in the fourth quarter, we will offer the following color. Uncertainty around the threat from COVID-19 persist, we continue to navigate the pandemic-led economic crisis with nominal effect on our overall results.

However, we are closely monitoring all aspects of our business, and we are very focused on the safety of our employees and customers. We expect to see normal levels of seasonality within our Northern New England residential markets as snow birds migrate for warmer weather. Last year, we estimated the fourth quarter impact to revenue, primarily in data and voice, net of a price increase in the fourth quarter to be about $2.5 million.

Since we announced the September 14 announcement of the partnership with Searchlight, we have been accelerating our fiber and growth expansion plans, and we will use the fourth quarter to get off to a fast start and build plans for 2021. We could have some start-up operating expense for the new fiber builds in addition to the capex being at least $210 million for the full year, as I mentioned earlier. We have outlined our new capital structure. And with respect to the Searchlight investment, we will be electing to pick interest for the fourth quarter of 2020 and throughout 2021.

With that, I'll now turn the call back over to Bob to discuss strategic priorities. Bob?

Bob Udell -- President and Chief Executive Officer

Thanks, Steve. The consistency of our results, the strength and depth of our team and the quality of our assets helped us attract the strategic partnership with Searchlight. We are gaining an experienced partner who brings valuable research and development capabilities and knowledge of the industry in addition to their investment. We are pleased to have recently welcomed Dave Fuller to our Board as one of their designated board members. Searchlight's capital infusion enabled our global refinancing and allows us to pivot to accelerate our growth and ramp our fiber expansion plans beginning next year.

We are embarking on a multiyear investment initiative where we will upgrade more than one million passings, addressable homes with fiber, enabling us to provide superior service across all three customer channels and deliver revenue growth. While we've been successful in growing broadband, we are now positioned to immediately bolster our fiber expansion plans and become an even more competitive provider. We are focused on finishing the year strong, and we are already deep into the planning and execution on our accelerated fiber builds.

We have an experienced fiber construction -- we have experienced fiber construction teams and have firmed up our plans, which include upgrading 250,000 homes to gig speeds in 2021. We will significantly improve our infrastructure, and our digital transformation project will create a best-in-class customer experience as we become a dominant fiber-based broadband provider. The accelerated build plans leverage our near net fiber network to significantly boost customer speeds and expand gigabit fiber services to more than 50% of our addressable market.

As we enter the next phase of our growth and transformation, we've sharpened our focus on strategic imperatives, which are outlined on slide 11 in our investor deck. First, we're significantly accelerating our growth plan with the strategic investment and partnership with Searchlight. Our fiber expansion will allow us toline growth, and this return to growth is very exciting for this team. Next, we'll leverage our fiber assets and expansion across the three customer channels as we have in our past and as we work to deliver best-in-class customer experience and the most competitive services.

Third, our new capitalization has extended maturities and increased liquidity to position consolidated for accelerated growth, providing enough runway to complete our fiber build plan. We'll target substantially all free cash flow to focus on highest return fiber expansion projects. And we'll continue to evaluate the assets in our portfolio as a normal course of business to ensure all assets have a long-term strategic fit. In closing, I want to reiterate what an important time this is for our company and how excited we are to be executing on our fiber expansion plans. We have a strong, stable business, an experienced management team and a significantly improved financial position. I couldn't be more excited for what the future holds.

With that, operator, we'll be guided to take questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Greg Williams with Cowen. You may proceed with your question.

Greg Williams -- Cowen -- Analyst

Hey Guys, nice quarter. Hi. A couple of questions. One on the Verizon cash distribution, I know you just said you don't have the visibility, but it was $12 million, and it looks like it's trending ahead. But could I take your comments to maybe suggest that the $37 million to $39 million that you typically guide, is it still the right way of looking at it, that is anticipating heavy iPhone promotions in the fourth quarter as we've seen in the past?

The second question is, just on the EBITDA full year, you said you did not reinstate EBITDA guidance, but it seems like you're trending in a place where you should be getting at least at the high end, if not north of that, but you did mention some heavy start-up costs for the acceleration of your fiber deployment. So can you maybe unpack or provide some more color to such start-up costs in the fourth quarter and how we should think about the margin trajectory?

And the last one is just on the fiber acceleration. Can you just help us with a fiber build cadence? Where are you now in engineering or in planning? When do you plan on ramping up? How many homes passed in 2021 will be more front-end loaded or will the build be more linear? And maybe would you be providing some milestones or measures of success with the fiber build? Thanks.

Bob Udell -- President and Chief Executive Officer

Hey. Greg, that's a load of question, so let me unpack that. And I'll start with the last one first, on the fiber build cadence. And Steve will pick up on probably the Verizon cash distros and he'll have comments on EBITDA, I'm sure. But let me start with -- as I said in the prepared remarks, we're looking at 250,000 passings added in 2021, and I would expect the cadence to be similar to that. And I really think that, that's a minimum.

What we always find, and we found this in past builds like the state of New York we did, we find more passings just by nature of our conservative approach to engineering to each location, each address that we're targeting. We find that there's economies when we're in the market, and we usually get a little bit of overachievement. So I think 250,000 is a minimum, upgraded to one gig or fiber passings that we'll see in 2021.

What we're doing right now to get a jump on that is taking the CARES Act teams -- I mean, just to give you an example, we'll build 500 miles of fiber in roughly 120 days, and we're about 2/3 of the wait on with it for those public-private partnerships that we mentioned earlier because they're in very rural places. So we've already got the infrastructure rolling, but what we're doing is bolstering those teams, making sure that we can have a pretty strong cadence of construction coming out of the harshest winter time in Northern New England, in particular, and we have no risk of not having that market available, that 250,000 passings, by the end of 2021.

I think the net adds will be somewhat back-end loaded in 2021, just by nature of getting the digital transformation, some upgrades we're doing on the user interface for customers to order service electronically through a digital experience. We're significantly simplifying that in this effort and really changing the customer experience from top to bottom so that we can benefit from all the reliability and flexibility of fiber product can give us all the way to the end user.

So that kind of covers the cadence and the build planning. And yes, we'll have metrics that we -- Steve and I are still working through with the team, the will metrics that we share, the track the addressable homes available and then how we're doing in that adds across those upgraded areas. So more to come on that. Steve, do you want to pick up on Verizon?

Steve Childers -- Chief Financial Officer

Yes. So Greg, thanks for the question. So going back to the Verizon cash distributions. Yes, so we did receive over $12 million in Q3. And I think the point I was trying to make is we are not expecting to receive that same level for Q4. I think we will be above the $37 million to $39 million range unless we have a surprise from Verizon. Again, at this point in time, we have limited visibility to that number, but I would expect us to be past or above the $39 million for the full year. And then if you go to -- think about the EBITDA number, not giving the guidance.

I think our -- not giving guidance is more because of uncertainty relative to COVID and probably more on the capex side on how much we might spend just to get ready. Right now, I'm not -- we're not really seeing a material impact for operating expenses relative to getting ready for the fiber builds, but if we have the opportunity to accelerate that to position us to be -- to get off to a fast start in '21, we will do so.

So I think the biggest thing I would take away from the Q4 numbers are the impact of seasonality in the Northern New England markets, and there could be some start-up expense relative to the fiber builds. But again, I think that's why we didn't give guidance, but not necessarily looking for that to be a hugely material number at this time. But again, we are motivated to get off the next start of '21.

Operator

Thank you. Our next question comes from Eric Luebchow with Wells Fargo. You may proceed with your question.

Eric Luebchow -- Wells Fargo -- Analyst

Thanks for taking the question. I'm wondering the component of your broadband growth, as you look out, you've had some nice performance in that market. So with your ARPUs at 76, do you think you can continue to grow that as customers upgrade speed tiers or you take pricing actions or do you think more of the future growth is going to come from customer adds?

Bob Udell -- President and Chief Executive Officer

Yes. I think, Eric, that it's both. We have had a history using the legacy consolidated markets as an example of matching speed tier increases with people coming off of promotions. And as a result, always been able to increment up a couple dollar ARPU improvement. So that's been a natural trend for us. I think that there's going to be a boost that comes from the net adds as a result of the fiber addressable market being increased, especially Northern New England, where we have the lowest share.

And so I think it's really going to be both. And it's probably a little bit too early for me to give you what the split might be on that, but generally speaking, I would say, we're going to be aggressive in pricing the initial launch of the fiber product and to make sure we've got a very good competitive position. So I think overall, we should see ARPU stable, if not growing, because there's room for ARPU increase in the markets where we're going to launch the one gig product.

Eric Luebchow -- Wells Fargo -- Analyst

Great. That's helpful. And a follow-up on the Northern New England build. I guess, what type of penetration rates are you assuming from the total homes passed that what do you think is achievable? And maybe you could remind us what the competitive environment looks like in that region and kind of what gives you confidence you can take share from some of the incumbents?

Bob Udell -- President and Chief Executive Officer

Yes. I think the way to think about it is, we're starting there with roughly 9%, 10% share and a network architecture that's very near net the customers, but hasn't been exploited for the consumer base. And so we're maybe a bit behind in some of the downtown areas and have done a very good job in the more rural areas of Northern New England. So essentially, we're going to develop it into a duopoly environment, and we think that what you'd see in typical duopoly type situations across other markets is what's possible.

There's reports of 30%, 40%, and our business plan works at something in the lower range of that. So we feel really good about our potential, especially when you consider the product is going to be a symmetrical one gig or two gig even out of the gate. So with the technology we have available to us and dedicated bandwidth from the host or the node location, all the way out to the customer on a court basis, we think our architecture puts us in an excellent position to have duopoly penetrations within three or four years as these fiber build areas mature.

Eric Luebchow -- Wells Fargo -- Analyst

Great. Thanks for the color.

Operator

Thank you [Operator Instructions] And I'm not showing any further questions at this time. I would now like to turn the call back over to Bob Udell for any further remarks.

Bob Udell -- President and Chief Executive Officer

Thank you. Well, thank you all for joining the call today. We surely appreciate your support in Consolidated Communications and look forward to reporting next quarter on our year-end results and the progress on our growth plans. Thank you, and have a great day. [Operator Closing Remarks]

Duration: 31 minutes

Call participants:

Jennifer Spaude -- Senior Vice President of Corporate Communications and Investor Relations

Bob Udell -- President and Chief Executive Officer

Steve Childers -- Chief Financial Officer

Greg Williams -- Cowen -- Analyst

Eric Luebchow -- Wells Fargo -- Analyst

More CNSL analysis

All earnings call transcripts

AlphaStreet Logo