Consolidated Communications Holdings, Inc. (CNSL) Q4 2020 Earnings Call Transcript

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Consolidated Communications Holdings, Inc. (CNSL -0.23%)
Q4 2020 Earnings Call
Feb 25, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, my name is Casey and I will be your conference operator today. At this time, I would like to walk everyone to the Consolidated Communications Fourth Quarter Earnings Conference Call. [Operator Instructions]. Thank you. I will now turn the call over to Jennifer Spaude, Senior Vice President of Investor Relations and Corporate Communications. Jennifer, you may begin your conference.

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

Thank you and good morning. I would like to welcome everyone to Consolidated Communications Fourth Quarter 2020 earnings call. On the call today are Bob Udell, President and Chief Executive Officer; and Steve Childers, our Chief Financial Officer. Bob's comments today will highlight our strategic initiatives, and our operational results, as well as our accelerated growth plans. Steve will provide some details on our fourth quarter and full-year financial performance and outlook for 2021. Following the prepared remarks today, we will open the call up for questions. Before we proceed, I will remind you our earnings release, financial statements and earnings 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 2 of the 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 and our 10-K will be filed tomorrow. Today's discussion will also includes certain non-GAAP financial measures. Our earnings release includes a reconciliation of these measures to the nearest GAAP equivalent.

I'll now turn the call over to Bob Udell.

Bob Udell -- President and Chief Executive Officer

Thanks, Jennifer, and good morning everyone. I'd like to welcome all of you to Consolidated Communications Fourth Quarter 2020 earnings call. And, I'm very excited to talk to you about how 2020-year was a pivotal year for Consolidated Communications. The pandemic brought unforeseen challenges yet our business performed very well. This past year highlighted the critical importance of the services and support we provide, consumer, commercial and carrier customers as well as our success and adapting to meet and exceed our customer expectations. We were part of the Keep Americans Connected Pledge and rapidly installed upgraded and maintain services to our customers. Our fiber network successfully handle the increased traffic levels and performed very well. Our teams ensure customer stay connected, it's stable and upgraded broadband connections, wherever they are and make safety, a priority at all times in their work. I am proud of what we accomplished in our business and for our customers. Well, at the same time, growing strategic revenue and increasing our adjusted EBITDA year-over-year. 2020 also brought a strategic partnership for us with Searchlight Capital Partners, who committed to make a 425 million total investment resulting in an immediate capital infusion of 350 million, which we announced in September of last year. In conjunction with this investment, we refinance our capital structure, which provides us the capital and financial flexibility to accelerate our fiber network expansion. We have over 600 million of liquidity and extended the debt maturities until 2027. With our strong balance sheet and strategic partner in Searchlight, we will upgrade 1.6 million fiber passing over the next five years. We're building on an excellent platform for the future. We are well on our way to becoming a fiber first broadband company. Our goal is to provide an excellent customer experience, grow our consumer and commercial broadband penetration rates, and increased data ARPUs and ultimately return the company to revenue growth. We couldn't be more excited about what lies ahead as we have a fully funded growth plan, a strong balance sheet, and increased liquidity. Our 4th quarter results were very positive and demonstrate the stability of our business, the strong execution and improving revenue trends and increased adjusted EBITDA. Coming into 2020, we committed to produce stable earnings and growth free cash flow. And that's just what we did in the fourth quarter and for the full year 2020 despite the challenges COV ID-19 presents. The pandemic has certainly changed how-we-do-business, but it has not had a material impact on our results. Revenue trends are improving and we were able to grow adjusted EBITDA for the recent quarter and the year. Turning to commercial and carrier, we grew data and transport 3.2% in the fourth quarter and 1.9% for the year. We've a very consistent track record of growing the strategic revenue stream, as you'll see on slide 5. Our carrier channel continues to support 5G backhaul upgrades at tower sites and core network upgrades to support fiber to the tower initiatives for our national carrier partners. As we build out carrier grade capacity, we increased our net buildings 11% year-over-year. Our sales team is doing an excellent job of maintaining strong relationships and collaborating closely with carriers to identify upgrade opportunities Our focus is on targeting on net sales, which make up roughly 90% of new sales activity this correlates to higher margins increased upsell opportunities and greater ability to ensure the best customer experience ultimately contributing to higher customer retention.

Within our commercial channel, Unified Communications, demand remained strong. Our ProConnect voice revenue grew 10% in the quarter and 12% for the year. We're pleased to have recently received the UC Excellence Award. UC for unified communications, recognizing our ProConnect solution for the outstanding valued offers businesses. We also expanded our Microsoft productivity suite to all markets and announced a partnership with Ciena and it's adaptive IP solution, which offers essential IP capabilities to support new applications using like scale and intelligent automation. The result simplifies administration, troubleshooting, and reduces cost for our customers. Our CCI ignite sales approach remains key to our success. The recent win with the educational network in the east includes more than 300 circuits across 80 locations. Our dense fiber network enabled us to win this deal upgrade bandwidth with a 1 gig and add additional locations.

Now turning to the consumer channel, we grew broadband revenue 2.8% in the fourth quarter as shown on slide 7 of our presentation. This represents the 7th consecutive quarter of year-over-year broadband revenue growth. In 2020, we completed five fiber over builds across four communities passing just 2000 locations with Federal CARES Support. in first quarter, we will complete fiber overbuilt across five additional communities, adding more than 8,000 fiber passings. We continue to see significant demand for rural broadband networks and partnership opportunities. It doesn't, representing 20,000 additional passings have accepted our build proposals with work starting later this year and additional towns are currently evaluating bids. Because of our dense fiber network proximity, we are well positioned to partner with rural communities to build fiber, were typically would be difficult to justify financially. Customers are clearly seeing the benefits of these fiber-based services. In the new areas, we just released in fourth quarter, we are seeing penetration rates, consistent with other leasing fiber build at this same stage and a bid we completed last year in Chesterfield, New Hampshire where we have limited competition. We were at 60% penetration after one full year. In rural New York, where our fiber build passives over 10,000 locations with significant cable overlap. We realized 32% penetration in two years. These take rates are consistent with our plan. About 1/3 of sales are new connections on the network with the majority of all subscriptions at one 1 gig symmetrical. These are an optimal test of our process, product and pricing for our larger fiber build plans and we're off to a fast start. Closer built nearly 400 miles of fiber since early January, we will upgrade 300,000 passings in total for 2021, enabling fiber Multi-Gig speeds. The majority of these upgrades will be in northern New England and in addition, we will also target areas in California, Texas, Illinois and Minnesota. This is the first step to extending fiber to more than 70% of our total passings and to be clear, our plan is about more than just building fiber, our go-to-market strategy has been meticulously planned out. We will offer Multi-Gig symmetrical broadband speeds, simple plans, highly competitive pricing and a stellar customer experience, all to create a truly differentiated service offering. We are placing a concentrated focus on delivering the best-in-home experience possible using the latest Wi-Fi 6 technology and advanced troubleshooting tools. We will update you regularly on the new fiber product offerings, and go-to-market plans throughout the year. I'm very pleased with how resilient our team was in 2020 and how well they executed across our three customer channels. An incredible amount of work has been done to position us for the future and we are executing our fiber expansion plans.

I will now turn the call over, Steve, who will provide more details on our fourth quarter and full year 2020 financial results.

Steve Childers -- Chief Financial Officer

Good morning, everyone. As Bob said, 2020 was a pivotal year and I would like to echo his comment, I could not be more proud of what our team accomplished. I'm very excited about how well positioned we are to execute on the fully funded 5-year build and growth plan. So for today, I'm happy to share with you the details of our strong fourth quarter results as well as provide outlook for 2021. Our financial summary for the fourth quarter begins on slide 4 of our presentation. Operating revenue for the fourth quarter totaled $326.1 million, a decline of 1.5% or 250 basis point improvement compared to a year ago. This is a result of the continued improved performance realized across all of our customer channels. As a result of the improved revenue trends and ongoing disciplined cost management, fourth quarter adjusted EBITDA totaled $132.3 million and was upto 1.1% or $1.4 million from a year ago. EBITDA margins remained strong at approximately 41%. Now let's review our revenue results. Commercial and carrier revenue totaled 149.8 million in the fourth quarter of 0.6% year-over-year. Data and transport revenue performed particularly well and totaled $92.8 million, an increase of 3.2% year-over-year. This growth continues to be fueled by our investment in fiber network and success within the carrier and commercial channels. Voice revenue declined $1.6 million or 3.5%, but represents a notable improvement from the decline of 5.7% in the fourth quarter of 2019. We continue to be closely monitoring our SMB channel in our increasing the customer touch point to cultivate stronger relationships and provide value for this group of customers. Looking forward to 2021, we would expect data and transport to grow at least at a rate of 2% for 2021 and we also expect voice to perform consistent with 2020 trends.

Turning to our consumer channel revenue totaled $125.2 million, which represents a year-over-year decline of 2.6% in the fourth quarter primarily due to the fourth quarter seasonality impacts in northern New England. Notably consumer broadband grew for the seventh consecutive quarter on a year-over-year basis, totaling $66.3 million, which represented a 2.8% increase versus a year ago. In our earnings presentation, we introduced a new metric consumer data ARPU, which emphasizes our strategy of leading with the highly competitive broadband services. Data ARPU for the fourth quarter was $54.41, up 6.6% over a year ago. We expect to continue to grow data ARPU as we increase speed and upsell customers. We also continue to see improvement in trajectory of consumer voice revenue for the quarter, revenue was down 6.3% of $2.8 million from the the prior year. This represents significant improvement as full year 2020 compared to 2019, the rate of voice erosion was cut in half. Competitive broadband offerings combined with measured rates increases are contributing to improved revenue performance in this area. Video revenue declined to 11.5%. The $2.3 million decline was offset by reductions in video programing expense with lower capex. This decline reflects our change in strategy to streaming over-the-top services bundled with broadband services. We are pursuing new OTT partnerships reflecting our focus on low to no capex video partnership agreements. Network access revenues declined $1.7 million, largely due to special access decline. Subsidy revenue was down approximately $700,000 due to the anticipated lower funding from the Texas high cost fund for November and December.

Now turning to operating expenses, excluding depreciation and amortization. Operating expenses totaled $224.3 million, an increase of $11.6 million or 5.4% including $7.6 million in acquisition and transaction costs related to the SearchLight transaction. Cost of services and products increased $2.7 million, primarily due to the higher product expenses supporting the growth in commercial and carrier data transport revenue and over time associated the storm cleanup in northern New England. SG&A costs were up $1.2 million in the recent quarter, mostly due to non-recurring items related to sell property in tax settlements received in 2019. Net interest expense for the quarter was $48.4 million, an increase of $15 million. The the change result of our October 2 refinancing and the receipt of the first $350 million SearchLight Strategic investment. Interest expense increased $3.5 million due to the higher mix of our 6.5% senior notes in our external debt, $7.9 million and took interest on the Searchlight note note and $2.2 million in non-cash amortization of the deferred financing cost and discount on the debt.

As part of the quarterly valuation of the Searchlight contingent payment right, we recognize a gain of $23.8 million in the fourth quarter related to decline in the fair value of our contingent payment obligations as of December 31. Upon receipt of all of all approvals and the completion of the second close the Searchlight transaction, which we expect to occur mid-year, the CPR will convert to common stock. Cash distributions from the Company's wireless partnerships totaled $9.5 million in the fourth quarter and $41.5 million in 2020. This is up $5.7 million from a $35.8 million with total distributions received in 2019. For 2021, we expect distributions to be in line with past run rates and in the range of $37 to $39 million. Adjusted net income per share including the 6.3 million new common shares issued the Searchlight was $0.12 compared to $0.01 per share a year ago. The improvement reflects the consistency of our operating results and a decline in depreciation expense. Capex was approximately $65.3 million in the fourth quarter, reflecting the start of a higher level of spending support supporting our fiber network expansion projects. For the full year, we invested 217.6 million supporting success based fiber projects and broadband network infrastructure expansion. Our five-year fiber expansion plans are fully funded. The strategic investment firm Searchlight Capital Partners enabled us to complete a global refi of our external debt in the fourth quarter. Our new debt structure is outlined on slide 9 and consist a five-year revolving credit facility of $250 million, which will provide additional liquidity to support our bill plans, a 7-year secured term loan of 1.4 billion currently priced at LIBOR plus coupon rate of 4.75% in a 1% floor and secured notes of $750 million at a coupon rate of 6.5% due in 2028. We ended the year with $156 million of cash in the balance sheet and in January, we raised net proceeds of $148 million with the add-on to our terminal be. So, we have approximately $554 million in liquidity pro forma cash of $304 million and with access to our untapped revolver of $250 million. And as I mentioned earlier, we expect to receive the $75 million from Searchlight on the second stage close. When we get the requisite regulatory approvals midyear. As we reflect on the past nine months, COVID has certainly changed how we operate that our business remained stable. Today, we have not experienced any material impacts to our business as a result of the pandemic. We continue to keep a close watch on several areas, but we are cautiously optimistic and I am pleased to provide guidance for the full year 2021, which is outlined on slide 10 of our deck. For 2021, we are providing outlook based on the company's current operating performance, our fiber build plan and our new capital structure. Our outlook for adjusted EBITDA reflects strong operating momentum entering 2021 investments in operating expenses associated with the start up and acceleration of our fiber build plans of approximately $15 to $20 million and the normalization of cash distributions from our wireless partnerships, which are expected to be down, but in the range of $3 to $5 million. As we pivot to growth, we expect the 2021 EBITDA range is 500 to 510 million. Cash interest expense based on the current capital structure, including $150 million term loan B grade as we did in January is expected to be in the range of $140 to $252 million. In light of the strength of the capital market, we are constantly monitoring markets to see if we can opportunistically reduced our cost of capital and we expect to took the Searchlight investment at least through 2022 and we have the election did do sell through 2025. Cash income taxes are expected to be in the range of $2 to $4 million. We do not expect to be a federal cash taxpayer until 2020. Capital expenditures are expected to be in the range of $400 million to $420 million reflecting a higher level of spending support the fiber to the prem build plan, which includes over 300,000 gig plus upgrades and related success-based capital. Again, I am very pleased with 2020 result and very excited to be operating from a position of financial strength and flexibility as we enter 2021 and start to future proof our business with a fully funded growth plan.

With that, I'll now turn the call back over to Bob for closing remarks.

Bob Udell -- President and Chief Executive Officer

Thanks, Steve. So, as we enter the next phase of our growth and transformation, let's talk about strategic priorities, which you see in our earnings release deck on slide 11. Our number one priority is accelerating our fiber build to scale and grow broadband services. As we talked about we are embarking on a 5-year investment initiative, where we will upgrade 1.6 million passings with fiber enabling, multi-gigabit speeds across more than 70% of our footprint. Our second priority is leveraging our fiber assets to continue to grow commercial and carrier services. That's a solid revenue source for us and a source of growth. We are targeting 2% data transport revenue growth in 2021 and we'll continue to target 90% plus of those new sales being on that. And third, we are transforming the customer experience. We're going to make it easier for our customers to upgrade bandwidth and just do business with us in general. Our digital transformation project will be instrumental and improving order and support processes and we're striving for an industry-leading net promoter score. It is our intent to deliver a superior fiber product offering with a best-in-class customer experience. These priorities put us on a path to returning to top line growth by 2023 and this return to growth is very exciting. Our plan is fully funded and we are now positioned to execute on our fiber expansion plans as we build momentum and become a stronger fiber based broadband provider. Now I'd like to take this opportunity to announce, Eric will be joining our team next week as President of our Consumer Small Business Unit. Eric brings extensive industry experience having led the fiber market expansion plan for Google fiber in the Southeast and we're thrilled to have Eric bringing his experience and perspective to our team. 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. Our path forward is about building long-term sustainability and value for our investors, our customers and our employees. We have a strong stable business and experienced management team and a significantly improved financial position. I couldn't be more excited for what the future holds. So now, Casey, we will take questions at this time.

Questions and Answers:

Operator

Great, thank you. [Operator Instructions]. We do have a question that has come through from the line of Greg Williams from Cowen. Please go ahead. Your line is now open.

Greg Williams -- Cowen -- Sr. Equity Research Analyst

Great, thanks for taking my question. Just, Bob, can you just talk about the margin profile as you get to the fiber to the home deployments in a mature state and what are your penetration goals of your fiber builds over the next few years?. Thanks.

Bob Udell -- President and Chief Executive Officer

Greg. Let me start with the penetration goals. First, our plan is conservative. I can tell you what our experiences and our plan is built around mid '30s over a 3-year period. So, in the first two years, I'd expect us to be close to 30% and that's starting, If you look at a cohort or as we call them Fiber Distribution Hub from the point where it's ready for sale through 0 plus 2 years. So, our plan is conservative, but prior experience as I excited in some of the examples, few minutes ago, our experience has been, we can get to 20% in a year and we have some many areas where we've been able to get to 30% in two years. So, I think our expectations are to be in the duopoly parity state, not long after the third-year anniversary of opening a new neighborhood or fiber distribution. So that now to the margins on the product, I mean fiber is higher margin than our traditional telecom base, because of the maintenance benefits that comes with the last mile-fiber. So, I would say you can expect gross margins north of 70% in many cases, I think you get higher and I think EBITDA margins for this business as the transitions to fiber based approach 50%, if not higher. And so that's why we're so excited about accelerating this transition, it brings a lot of benefits that we haven't even factored into our plan because we're conservative as we've built our capital investment strategy.

Greg Williams -- Cowen -- Sr. Equity Research Analyst

Great, thanks.

Operator

[Operator Instructions]. There are no further questions at this time. I will turn the call back over to Mr. Bob Udell.

Bob Udell -- President and Chief Executive Officer

Well, thank you. Casey and thank you everyone for joining us. This is a very exciting time for our company and a very important transition year for us and we appreciate you turning in and look forward to updating you on our first quarter results. Have a great day.

Operator

[Operator Closing Remarks]

Duration: 28 minutes

Call participants:

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

Bob Udell -- President and Chief Executive Officer

Steve Childers -- Chief Financial Officer

Greg Williams -- Cowen -- Sr. Equity Research Analyst

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