Shenandoah Telecommunications (SHEN) Q4 2020 Earnings Call Transcript

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Shenandoah Telecommunications (SHEN 0.93%)
Q4 2020 Earnings Call
Feb 25, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, everyone. Welcome to the Shenandoah Telecommunications fourth-quarter 2020 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 -- Director of Financial Planning and Analysis

Good morning, and thank you for joining us. The purpose of today's call is to review Shentel's results for the fourth quarter and full-year 2020. 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; Dave Heimbach, 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 and 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 are 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.

Chris French -- President and Chief Executive Officer

Thanks, Kirk. We appreciate everyone joining us this morning, and I hope everyone is staying healthy and safe. As reflected on Slide 4, we had a record year of broadband results with about 18,800 high-speed data net additions, more than two and a half times higher than 2018 and '19. Our success was driven by excellent execution of our growth strategy that we accelerated over two years ago when Dave joined the company.

We now have three last-mile broadband networks tied together by over 6,700 route miles of fiber. Our largest and most developed network, the incumbent cable business, added over 14,600 net additions due to strong demand for faster data speeds at a fair value from our customers who are increasingly working and learning from home. Glo Fiber contributed 4,000 net additions in its first full year of operations, exceeding our expectations for construction pace, penetration rates and churn. Glo has validated our investment thesis, and we plan to accelerate the pace of expansion.

Our Beam fixed wireless broadband service was launched in late October and contributed approximately 100 net additions. Dave will provide more detail on these outstanding results later on the call. Turning to Slide 5. We now have product offerings to serve a variety of market dynamics with our Glo Fiber service targeting higher-density urban markets and Beam fixed wireless service targeting lower-density rural areas.

We now reach approximately 247,000 homes passed, an increase of over 38,000 from the end of 2019. We plan to accelerate our investments in both Glo and Beam and expect to reach approximately 730,000 homes passed over the next five years. The common denominator in all of our offerings is to provide the leading high-speed Internet service available in each market, combined with superior local customer service. With projected Glo and Beam terminal penetration rates in the low to mid-30s percent range and incumbent cable penetration in the mid-50% range, we expect our Broadband business to have industry-leading sustainable growth for the next several years.

Moving to Slide 6. I'd like to transition now to provide a brief update on the pending sale and expected use of proceeds that we announced earlier in February. With the T-Mobile exercise of the purchase option of our PCS assets and operation and the determination of the sales price behind us, we're now focused on executing the asset purchase agreement in the first quarter and obtaining required regulatory approvals and closing the transaction in the second quarter. After the sale is completed, we, of course, will have to pay taxes, and we'll need to pay off our existing credit agreements.

Our board of directors will then meet to consider the special dividend and set the record and payable dates. The first full year of Glo Fiber's operations and the launch of Beam were significant accomplishments for 2020 as was the work leading up to the successful outcome to the appraisal process for the PCS sale, but I'm most proud of how our entire organization address the impact of the pandemic. They quickly took steps to protect our employees while continuing to provide service and support for our customers. The year was perhaps one of the most challenging in our company's history, but the team not only met the challenge but became stronger in the process.

I'm very pleased with how our organization responded and how well Shentel is positioned for a very bright future. With that, I'll now turn the call over to Jim to review the details of our financial results.

Jim Volk -- Senior Vice President of Finance and Chief Financial Officer

Thank you, Chris, and good morning, everyone. Please refer to Slide 8 to discuss our financial results for the fourth quarter. Broadband revenue grew 7.8% to 53.7 million in the fourth quarter of 2020, driven by an increase of 4.3 million or 11.6% growth in residential and SMB revenue, due primarily from a 22.3% increase in broadband data net -- data RGUs. Commercial fiber revenue grew $700,000 or 8.7% to 8.7 million, driven by higher enterprise and backhaul connections.

RLEC and other revenue declined 1.1 million or 20.5% to 4.2 million, primarily from lower DSL subscribers and intercompany phone service. Broadband adjusted OIBDA for the fourth quarter grew $700,000 or 3.5% to 21.4 million from the same period a year ago. The revenue increase of 3.9 million was partially offset by higher maintenance costs of 1.2 million and compensation expense of 1.8 million due to a combination of Glo Fiber and Beam start-up staffing, higher incentive expense from strong operating results and enhanced benefit plans. On Slide 9, Tower segment revenue grew 20.4% to 4.6 million and adjusted OIBDA grew 18.9% to 2.9 million for the fourth-quarter 2020 due to 5.5% growth in tenants and 16.2% increase in the average lease rate due to amendments to the intercompany leases.

Moving to Slide 10. Consolidated revenue grew 8.5% to 58.1 million in the fourth quarter of 2020. Consolidated adjusted OIBDA for the quarter grew 20.4% to 15.7 million. The increase was due primarily to strong growth in towers and a 1.5 million reduction in corporate expenses.

Turning now to the full-year 2020 results on Slide 11. Broadband revenue grew year over year 5.4% to 204.3 million in 2020, driven by an increase of 12.7 million or 8.9% in residential and SMB revenue due primarily from the 22.3% increase in broadband data RGUS. Commercial fiber revenue grew 2.3 million or 7.7% to 32.8 million, driven by higher enterprise and backhaul connections. RLEC and other revenue declined 4.7 million or 22% to 16.6 million, primarily from the lower DSL subscribers, government support and intercompany phone service.

2020 broadband adjusted OIBDA grew $400,000 to 81.5 million from 2019 as revenue growth was largely offset by higher compensation, software fees and professional service expenses. Compensation expenses increases were primarily due to new hiring for the launch of Beam and increasing the support staff of Glo Fiber in the four new markets that we launched in 2020, in addition to COVID-19 supplemental pay for customer-facing employees during the second quarter. On Slide 12, Tower segment revenue grew 31.3% to 17.1 million and adjusted OIBDA grew 29.7% to 10.7 million for 2020 in comparison to 2019 due to 5% growth in tenants and 23.4% increase in the average lease rate due to amendments to the intercompany leases. Moving to Slide 13.

Consolidated revenue grew year over year of 6.7% to 220.8 million in 2020. Consolidated adjusted OIBDA grew 15.8% to 57.2 million during the same time period. The increase was due primarily to strong growth in towers and a 5 million or 12.5% reduction in corporate expenses. We are also reaffirming our 2021 outlook that we disclosed earlier this month.

We expect consolidated revenues to be 241 to 248 million and adjusted OIBDA to range between 69 and 76 million. Moving to Slide 14. We ended the fourth quarter with 698 million of debt with an effective interest rate of 2.3% and 270 million in total liquidity, including 195 million of cash and equivalents. Continuing operations had 67 million of negative free cash flow in 2020, driven primarily by 59 million of capex and 5 million of negative contribution to adjusted OIBDA for Glo Fiber and Beam.

Our discontinued Wireless operations generated strong free cash flow of 232 million in 2020. And now I'll turn the call over to Dave.

Dave Heimbach -- Vice President and Chief Operating Officer

Thanks, Jim, and good morning, everyone. I'll begin on Slide 16 with our incumbent cable business in which total RGUs grew a robust 7.9% year over year in the fourth quarter to approximately 182,300 compared to approximately 168,900 in the same period in the prior year. We added roughly 2,100 net broadband data RGUs in the quarter and ended the year with 98,500 data RGUS, which is an exceptional 17.4% increase to the prior-year period. We're also very pleased to report that our incumbent cable broadband data penetration rate increased from 40.6% in the fourth quarter last year to 47.2% this quarter on the continued strength of our new broadband data speeds, our new rate card, service improvements and increased demand related to the pandemic.

Incumbent cable broadband data churn in the fourth quarter continued to improve, declining 10 basis points versus the prior-year quarter to an impressive 1.54%, representing the 15th consecutive quarter of year over year churn improvement. Broadband data average revenue per user in the quarter increased slightly versus the prior-year period to $78.14 as our new Powerhouse branded rate card leveraging an improved value proposition based on our DOCSIS 3.1 speed upgrades now comprises 74% of the base. At the end of the fourth-quarter 2019, 35% of incumbent cable data customers were on rate plans of 10 megabits per second or less, whereas now 79% are on plans of 25 megabits per second or higher with an average subscribed download speed of 83 megabits per second, which is well beyond the reach of our DSL competitors. Turning to Slide 17.

As Chris mentioned at the start of the call, we had an outstanding first full year executing our new Fiber to the Home Edge Out strategy, Glo Fiber. Glo had approximately 5,800 total RGUs at the end of the fourth quarter with a 14.5% aggregate broadband data penetration rate across all markets comprised of just over 4,000 new Glo Fiber customer relationships. We continue to see extraordinarily low churn in our Glo Fiber high-speed data product with less than 1% churn in the quarter at 0.88%. Broadband data ARPU was down sequentially to $77.25 in the quarter as a result of new activation revenue timing, but not due to discounting.

In fact, we continue to see a higher percentage of new subscribers electing our higher-priced gigabit speed tier, with 44% of new subs in the quarter adopting this plan comprising 40% of the overall Glo Fiber base. Our streaming TV and voice services continue to perform very well with 28% and 15% attachment rates in the quarter, respectively. At the end of 2020, 67% of Glo Fiber customers were a single-play broadband data only, 25% of subs were in a double-play and 8% were in a triple-play. Slide 18 depicts the status of our active and approved Glo Fiber markets as of the end of the fourth quarter.

Our first Glo Fiber market in Harrisonburg, Virginia reached 18.6% broadband data penetration at the end of the year with some of our most mature neighborhoods in that community approaching our target terminal penetration rate. Construction efforts are progressing very well and also exceeded our expectations in the fourth quarter and indeed all of 2020 in spite of concerns and delays related to COVID-19. Approximately 6,300 new residential and small business passings were constructed and released to sales in the quarter with a total of 27,000 Glo Fiber addresses added in 2020 and just under 29,000 overall at the end of the year. We launched the Salem, Virginia market in January, and we expect to construct and release to sales approximately 45,000 new Glo Fiber passings by the end of 2021, bringing total active passings to approximately 74,000.

In total, Glo Fiber has approved franchised targeted passings of approximately 117,000 with a strong funnel of additional markets in our Edge Out strategy as we start 2021. On Slide 19, we have depicted our fiber, cable and fixed wireless broadband footprint. This map really helps illustrate the integrated nature of our broadband networks and how operating leverage will increase over time, given the overlap and adjacency of our operations and our growing footprint. This quarter, we've updated the map to include launched Beam fixed wireless markets.

We constructed 25 Beam macro sites in 2020, servicing nearly 9,500 target households and resulted in roughly 100 new Beam subscribers at the end of 2020 in Albemarle, Augusta, Louisa and Rockingham Counties in Virginia. We plan to construct 70 new Beam sites in 2021 and increase target households passed to approximately 45,000. As Chris stated at the start of the call, combined, our multipronged broadband growth strategy will more than triple homes passed to over 730,000 in the next five years. We'll continue to update you on the status of both our Glo Fiber and Beam Internet expansion plans as we continue to progress in our market development and construction efforts.

Turning to Slide 20. Total Tower tenants increased 5.7% year over year to 427. This includes 221 intercompany tenants, primarily for our Wireless business. We had a backlog of 151 open orders related to upgrades of existing tenants or the addition of new tenants at the end of 2020.

Finally, Slide 21 provides an update to our 2020 capital spending results and guidance for our continuing operations for 2021. We're no longer providing Wireless guidance as a result of the pending sale and discontinued operations presentation. Capital expenditures were 120 million in 2020 compared to 67 million in 2019. The primary driver of the year-over-year increase relates to the investments in our Glo Fiber and Beam Internet fixed wireless broadband initiative.

For 2021, our guidance for the full year is 157 to 168 million as we continue to invest aggressively in the expansion of our fiber cable and fixed wireless networks. Of the 55 to 60 million of capital spend in our legacy broadband operations, approximately 24 million is success-based in support of the continued growth in our commercial and wholesale fiber business and the increase in broadband data penetration we expect to achieve in our incumbent cable markets. Of the 100 to 105 million in Glo Fiber and Beam-related capital spend in 2021, approximately 74 million is related to design and construction of new fiber and fixed wireless target passings and 13 million is related to connecting new fiber and fixed wireless subscribers. Thank you very much.

And operator, we're now ready for questions.

Questions & Answers:

Operator

[Operator instructions] Your first question comes from the line of Hamed Khorsand with BWS Financial.

Hamed Khorsand -- BWS Financial -- Analyst

Hey, good morning. I was just -- the first question I had was about the Glo Fiber. I was looking to see -- if you're seeing this kind of penetration and results from subscribers early on, does that promote competition come in? How do you create a moat, so you're not seeing increased competition as you're seeing early success?

Dave Heimbach -- Vice President and Chief Operating Officer

Hamed, this is Dave. Yes, thanks for the question. The competitive landscape in the markets that we have targeted for Glo Fiber is universally the case where the incumbent LEC or the incumbent phone company is only providing DSL-based services and the vast majority of the share belongs to the incumbent cable company. We believe that with the construction of a fiber network, which, as I'm sure you can appreciate, is pretty disruptive to the community that that in and of itself, getting franchising, getting permitting and completing the construction is a competitive moat in and of itself, just having developed and deployed the infrastructure, No.1.

No. 2, we believe that the value proposition of a fully symmetrical, future-proof, fiber-based connection, which is far superior to anything anybody else can get in these markets, is the second aspect of that competitive moat. And thirdly, we think that those services provided by a local company that is adding jobs and investing in these communities is going to engender a lot of goodwill among the subscriber base, as well as the community is large. And so we're not particularly -- there's a lot of things that keep us up at night, but the competitive encroachment of somebody else is not one of those.

We're monitoring the competitive response by the cable incumbents very closely. But thus far, we've had success and don't see any signs of that slowing.

Hamed Khorsand -- BWS Financial -- Analyst

OK. And my other question was, are you seeing any seasonality in the business now that COVID restrictions are loosening? Or is it just too early?

Dave Heimbach -- Vice President and Chief Operating Officer

Too early for that. I'd say the only seasonality we're seeing at the start of the first quarter is we've had a lot of unpleasant weather in this part of the country, a lot of snow and ice storms, and that's hampered construction efforts and door-to-door selling efforts here more recently. But obviously, as the weather warms up, it's going to be close to 60 degrees here today, we think that will turn.

Hamed Khorsand -- BWS Financial -- Analyst

OK great. Thank you.

Operator

[Operator instructions] I am showing no further questions at this time. I would now like to turn the conference over to Jim Volk, CFO.

Jim Volk -- Senior Vice President of Finance and Chief Financial Officer

Well, thank you, everyone, for joining our call this morning. We look forward to keeping you updated on our progress with our broadband growth strategy in future quarters. Have a good day.

Operator

[Operator signoff]

Duration: 24 minutes

Call participants:

Kirk Andrews -- Director of Financial Planning and Analysis

Chris French -- President and Chief Executive Officer

Jim Volk -- Senior Vice President of Finance and Chief Financial Officer

Dave Heimbach -- Vice President and Chief Operating Officer

Hamed Khorsand -- BWS Financial -- Analyst

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