Shenandoah Telecommunications (SHEN) Q2 2021 Earnings Call Transcript

Shenandoah Telecommunications (SHEN -4.76%)
Q2 2021 Earnings Call
Jul 30, 2021, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, everyone. Welcome to Shenandoah Telecommunications second-quarter 2021 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. Please go ahead.

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 second quarter of 2021. Our results were announced in a press release distributed last night, 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; Edward H. 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, 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're 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. 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. It took three years since Sprint announced their merger with T-Mobile, but we're very pleased to have completed the $1.94 billion sale of our Wireless assets and operations to T-Mobile on July 1st. The sale successfully completes a 25-year chapter in the history of Shentel and allows us to temporarily delever our business, return significant value to our shareholders, and fully focus on our rapidly growing broadband business.

Immediately following the sale, we've repaid all of our outstanding term loans totaling 681 million, and our board of directors approved an $18.75 per share special dividend, totaling approximately 937 million. The special dividend will be paid on August 2nd. As we look forward to growing our Broadband business, we closed on a $400 million new financing facility that will provide growth capital to expand our broadband networks from 279,000 homes and business passings to 730,000 passings. Jim will provide more details on the financing shortly.

During the second quarter, we also began to transform our cost structure around our broadband and tower businesses. We announced workforce reductions in April that will allow us to realize 1.7 million in annual run rate cost savings in continuing operations as we exit the second quarter. As we complete these previously announced reductions, we expect the annual run rate cost savings to grow to 3.3 million as we exit the third quarter and 4 million as we enter 2022. Shifting now to our broadband network expansion on Slide 5.

We continued our strong construction momentum in the second quarter with 19,000 new passings being added with the total passings now just under 279,000. Our Glo Fiber branded Fiber to the Home business added 12,000 new passings, doubling the pace of the last two quarters, including the launch of service in the Virginia markets of Roanoke and Lynchburg in April. Our Beam fixed wireless network added over 6,500 passings during the quarter with our Beam service now available to over 21,000 homes in seven Virginia and West Virginia counties. We expect our integrated broadband network to reach approximately 329,000 passings by the end of 2021.

Turning to Slide 6. Broadband data net additions were over 3,900, despite a seasonal bump in churn due primarily to college student move-outs in several of our markets. The second quarter was a pivotal turning point in the mix of our net additions with Glo Fiber and Beam now contributing over 50% of our net adds. We anticipate this trend will continue over the next several years.

Data net additions over the last several quarters and reduction in corporate expenses were the primary drivers in the outstanding revenue and adjusted OIBDA growth during the second quarter. Before turning the call to our financial results, I'd like to introduce Edward H. McKay, who was recently promoted to chief operating officer on July 2nd. Ed has been with Shentel for over 17 years, most recently serving as senior vice president of engineering and operations.

Ed is an outstanding leader and has been instrumental in the growth -- the launch and growth of our Glo Fiber and Beam new services, making him a natural successor to lead our operations into the next chapter of our broadband centric business. 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 second quarter. Broadband revenues grew 12.2% to 56.2 million, driven by an increase of 6.3 million or 16.7% in residential and SMB revenue, due primarily from a 20.3% increase in broadband data RGUs. RLEC and other revenue declined $400,000 or 8.8% to 3.7 million, primarily from fewer DSL subscribers and lower government support.

Broadband adjusted OIBDA for the second quarter grew $500,000 or 2.5% to 20.3 million from the same period a year ago. The revenue increase of 6.1 million was partially offset by 5.6 million in higher expenses. 3 million of the increase supported the expansion of our Glo Fiber and Beam services, including 1.2 million of compensation, commission expense, 1.1 million of advertising and telemarketing expenses and $700,000 of maintenance and line costs. Software and professional fees increased 1 million due to enhancements in our -- to our back office systems.

We also incurred a recurring increase in video programming fees totaling $500,000 and a non-recurring increase in franchise and regulatory fees of $500,000. On Slide 9. Tower segment revenues grew 8.3% to 4.6 million, and adjusted OIBDA grew 9.3% to 3 million for the second quarter of 2021, due to an 8.5% growth in tenants. Moving to Slide 10.

Consolidated revenues grew 11.7% to 60.7 million in the second quarter of 2021. Consolidated adjusted OIBDA for the quarter grew 29.6% to 16.3 million. The increases were primarily due to strong Broadband and Tower revenue growth and a 30% decline in corporate expenses. The decline in corporate expenses were due to a combination of lower compensation, legal and professional fees.

Please note that effective with the Wireless sale, T-Mobile will now become our largest customer, representing approximately 7.5% of consolidated revenue. Turning now to full-year 2021 outlook on Slide 11. We are reaffirming our 2021 outlook with consolidated revenues expected around the midpoint of the 241 to 248 million range. And adjusted OIBDA expected in the lower end of the 69 to 76 million range due to higher non-recurring expenses, primarily related to the Wireless sale transaction.

We ended the second quarter with cash and equivalents of 248.8 million, an increase of 19.6 million from the first-quarter 2021 due to strong free cash flow from our Wireless segment reported as discontinued operations. Moving to Slide 12. We reflect our liquidity position pro forma for the Wireless sale, special dividend and the new financing transactions that Chris noted earlier. We expect over 480 million of liquidity will fully fund our business plan until we return to positive free cash flow in 2024.

On Slide 13, we summarized certain key terms of the new credit facility that we closed on July 1. The $400 million facility consists of 300 million in delayed draw term loans, 100 million in a revolving line of credit. We do not expect to draw on the new facility until the fourth quarter when we make estimated income tax payments related to the Wireless sale. We have significant financial flexibility with our new facility to add incremental debt up to four times total net leverage that will allow us to be opportunistic on the mergers and acquisition front.

Pricing of the new facility is attractive, reflecting the strong credit profile of our broadband centric business. We expect total net leverage to generally be below the 2.25 times ratio for most of the life of the facility, excluding the impact from any potential acquisitions. And now I'll turn the call over to Ed.

Ed McKay -- Executive Vice President and Chief Operating Officer

Thanks, Jim, and good morning, everyone. I'll begin on Slide 15, where we show our three primary product offerings. Our Shentel incumbent cable networks serve both small towns and rural areas with gigabit broadband, voice services and cable TV services across 211,000 homes in businesses in Virginia, West Virginia, Maryland and Kentucky. Our Glo Fiber service targets higher density urban and suburban areas, while our Beam fixed wireless Internet service targets lower density rural areas where it can be cost prohibitive to build fiber or cable.

We now passed 279,000 homes and businesses with our broadband services. This represents an increase of over 58,500 or almost 27% from the second quarter of 2020. Our Glo Fiber service is starting to edge-out of our original markets to areas with less existing Shentel fiber and into lower density suburban neighborhoods where utilities tend to be underground. These suburban areas have a higher cost to pass, but also typically have a higher penetration rate.

Based on our performance to-date, we have increased our target terminal penetration for Glo to 38%, and our target cost per passing has also increased to between $1,000 and $1,400 as we construct in these lower density areas. We continue to expect our Broadband business to have industry-leading sustainable growth as we build out our networks over the next several years. Turning to Slide 16. We have depicted our rapidly expanding broadband network now consists of over 7,000 route miles of fiber connecting our incumbent cable, Glo Fiber and fixed wireless broadband networks.

In addition to launching Glo Fiber service in Roanoke and Lynchburg, Virginia during the second quarter, we reached franchise agreements with Mountville Borough and East Hempfield township outside of Lancaster, Pennsylvania. In our Beam fixed wireless footprint, we launched service in seven additional counties, six in Virginia and our first county in West Virginia. Let's move on to our operating results in the second quarter, starting on Slide 17. In our incumbent cable business, total RGUs grew 6% year over year in the second quarter to almost 186,800 compared to about 176,100 in the same period during the prior year.

We added nearly 1,800 net broadband RGUs to end the quarter with approximately 103,500. This is a significant increase of 13.2% compared to the same period in the prior year. Our incumbent cable broadband data penetration increased from 44.1% in the second quarter of last year to 49.1% this quarter. The value of our broadband rate card, combined with service improvements in field operations and customer service are the primary drivers behind our success.

Shentel also leverages the Net Promoter Score research metric as an indicator of our overall customer satisfaction. We have seen a dramatic increase in our broadband customer Net Promoter Scores over the past two years, growing from a 10% rating in the second quarter of 2019 to a 39.7% rating in the second quarter of this year. Broadband data average revenue per user in the quarter increased modestly versus the prior-year period to $78.48, driven by our Powerhouse-branded rate card. 80% of our broadband data subscribers are now on plans of 25 megabits per second or higher, with an average subscribed download speed of 85 megabits per second, which is well beyond the reach of our DSL competitors.

Although churn in the second quarter increased by 26 basis points year over year to 1.59%, churn remains significantly lower than pre-COVID levels. Turning to Slide 18 for our Glo Fiber business. We had approximately 9,900 total RGUs at the end of the second quarter with a 15.5% aggregate broadband data penetration rate across all markets. Our Glo Fiber customer relationships increased over 5,800 year over year to end the quarter at almost 7,200.

Our broadband data churn rate did increase 48 basis points year over year to 1.15%, but the prior year number was based on an extremely small customer base. We continue to be very bullish on our residential and small business fiber edge-out strategy and our low churn on broadband service. Glo Fiber ARPU was down year over year to $73.66 for the quarter. However, this is due to a beginning of the year accounting change for deferred revenue from the account level to the product level.

In the second quarter of 2021, 55% of new subs adopted our 1 gig speed tier, which now comprises 46% of the overall Glo Fiber customer base, an increase of 3% quarter over quarter. Our streaming TV and voice services continue to perform very well with 23% and 14% attachment rates in the quarter, respectively. At the end of the second quarter of 2021, 70% of Glo Fiber customers were single-play broadband only, 23% were in a double-play and 7% were in a triple play. Slide '19 depicts the status of our active and approved Glo markets as of the end of the second quarter.

Broadband data penetration in our most mature markets of Harrisonburg and Stanton, Virginia have reached 22.4% and 20.2%, respectively. And we first launched Glo with 1,700 households passed in the fourth quarter of 2019, and we now have reached 31% penetration in these neighborhoods after only 18 months. We now have approximately 46,400 residential and small business passings constructed and released to sales. And our construction rate of almost 12,000 new passings this quarter was more than 50% higher than the same period last year.

Low target passings in all franchise approved markets now exceed 200,000, as we continue to add new municipalities and the surrounding counties to our plans. Engineering and construction work is now underway in all approved markets as we work toward our goal of bringing multi-gigabit, symmetrical, low latency service to 300,000 Glo Fiber passings in the next several years. On Slide 20, we have highlighted our early results for our emerging Beam Internet fixed wireless broadband service. As a reminder, this is a purpose-built fixed wireless network, leveraging licensed 2.5 gigahertz and 3.5 gigahertz mid-band spectrum, standards-based 5G ready LTE technology and commercial-grade towers and small cells that are predominantly fiber-fed.

We provide a highly reliable, low latency service using high gain outdoor antennas at the customers' home and the same robust indoor WiFi technology that we leverage for our Glo Fiber and new incumbent cable customers. We completed nine new Beam Internet sites in the second quarter, and we now have a total of 36 sites on air. Our target markets are low-density rural areas without cable or fiber Internet options. We currently have service available to over 21,000 target households, and we expect to approximately double this number by the end of the year.

We increased our Beam broadband data RGUs by about 70% in the past quarter, and our penetration in this early stage investment is now 3.9%. We are encouraged by our strong churn numbers of approximately 1% and our ARPU of over $72. We continue to see approximately two thirds of our customers adopting the $80 per month, 50 megabit per second speed tier. Turning to Slide 21.

Total tower tenants increased 8.5% year over year to 448. This includes 239 intercompany tenants, primarily for our wireless operations. At the end of the second quarter, we had a backlog of 160 open orders related to upgrades of existing tenants or the addition of new tenants, including 15 applications from DISH as they begin to build their national 5G network in our market. Finally, Slide 22 provides current year-to-date capital spending results and guidance for our continuing operations for 2021.

Capital expenditures were approximately 80 million through the second quarter of 2021 compared to 52 million in the same time period in 2020. Glo Fiber and Beam Internet fixed wireless expansion are the drivers behind the increase, with year-to-date capital investments of approximately 45 million and 7 million, respectively. Of the 27 million in capital spending in our legacy broadband business, almost 13 million is success-based in support of our continued growth in our commercial and wholesale fiber business and our increase in broadband data penetration. We are confirming our guidance on capital spending for the year of between 157 and 168 million as we continue to invest aggressively in expanding our fiber and broadband networks.

Given our accelerated Glo Fiber construction, we are likely to come in on the high-end of that capital spending range. Thank you very much. And operator, we're now ready for questions.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from the line of Ric Prentiss with Raymond James. Your line is now open.

Ric Prentiss -- Raymond James -- Analyst

Thanks. Good morning guys. Just a couple of questions. First, as we listen to what's out there, we get a lot of questions on supply chain and COVID related questions.

Talk to us a little bit about your supply chain building out the Beam and the Glo, as well as labor force to hit kind of the targets for the homes passed.

Ed McKay -- Executive Vice President and Chief Operating Officer

Yes, Ric, this is Ed. I'll comment on that. We have seen a definite increase in the lead-times required for raw materials for our Glo Fiber construction, and that includes customer premise equipment as well. We're now ordering fiber over a year in advance.

We're ordering CPE a year in advance as well. And we have a lot of fiber right now in our warehouse. So up to this point, we have not had any impact on our construction schedule because of supply chain issues, but we're monitoring that very closely. From a labor perspective, we're monitoring that closely as well, but we have not had any problems at this point, getting contractors into our network to build our networks.

Ric Prentiss -- Raymond James -- Analyst

And then, obviously, been a very busy summer so far, looks like continue to be busy. You mentioned a couple of times opportunistic on the M&A front. Can you talk to us little bit about what is happening out there in the broadband universe, both maybe near your footprint and anything outside of footprint?

Ed McKay -- Executive Vice President and Chief Operating Officer

I'd say near our footprint, there's just not a lot of opportunities right now, pretty high end valuations, but we're being very disciplined in our M&A approach. We believe we have significant upside in our organic growth plan, but we're monitoring this closely.

Ric Prentiss -- Raymond James -- Analyst

And anything outside footprint, any large ones that are being shopped around out there?

Ed McKay -- Executive Vice President and Chief Operating Officer

Nothing at this point to comment on. No.

Ric Prentiss -- Raymond James -- Analyst

And the final one for me, on the tower business. How should we think about the potential for churn? You mentioned T-Mobile's 7.5% of consolidated revenues. How should we think about what might happen with the tower portfolio? And related question, you mentioned 160 orders backlog, what's kind of the process time you guys are targeting to get amendment and new colos on the towers?

Ed McKay -- Executive Vice President and Chief Operating Officer

It's typically a fairly long process. We'll likely see some of that revenue in the fourth quarter, but most of that revenue from new tenants, particularly a DISH Network build out, we won't see the impact of that until 2022. But with T-Mobile, we certainly think there will be some rationalization of the network. We don't have the exact details at this point.

But in general, we don't expect that rationalization to occur until after they turn down the Sprint CDMA network. We don't expect that to happen until 2022. As far as cell site backhaul that we provide now to T-Mobile, that's governed under a separate agreement, has industry standard early terminations provisions embedded in that. And from a tower portfolio standpoint, we don't consider that to be a strategic asset.

So we would consider monetizing that to fund a more transformative broadband acquisition as opposed to issuing credit in the future or issuing equity in the future.

Ric Prentiss -- Raymond James -- Analyst

Make sense. OK thanks guys. Stay well.

Ed McKay -- Executive Vice President and Chief Operating Officer

Thank you, Ric.

Operator

Thank you. Our next question comes from the line of Dan Day with B. Riley Securities. Your line is now open.

Dan Day -- B. Riley Securities -- Analyst

Yeah, hey guys. Good morning everybody. Thanks for taking my questions. So the 300,000/215,000 homes passed targets for Glo and Beam respectively, can you maybe just provide some commentary on -- and that's for 2026, I believe.

What needs to happen for you to either kind of materially exceed or miss those numbers? Just kind of -- and same question for the targeted penetration rates, just sort of looking for the level of variance and then the puts and takes on what we might need to think about for those numbers in the coming years?

Ed McKay -- Executive Vice President and Chief Operating Officer

Well, we feel very good about the construction plan at this point. As we've said earlier, we already have over 200,000 franchised households passed in the pipeline where we're actively doing engineering and construction work right now. So we feel very good about the construction there. We are keeping an eye on some of the universal broadband funding that is out there.

We believe that's probably more of an opportunity right now than a threat to us. That funding is not going to be available in areas that we serve, either with our incumbent broadband business or with Glo. We do think with the level of funding that's proposed, in the state of Virginia, for example, there could be additional opportunity for us to build out Glo Fiber to the home. But as that Glo Fiber to the home opportunity increases, that could decrease our total addressable market for our Beam service, so we have the ability to shift resources from Beam to Glo as needed, and we're prepared to do that.

Dan Day -- B. Riley Securities -- Analyst

And then a follow-up on pricing for Beam. Just -- I know it's very early days in that product, only a couple of hundred subscribers right now. Just two third, it sounds like are in sort of that middle tier. How do you think about how -- it's always tough pricing out a new product.

How do you think about maybe tweaking pricing? Do you think you have it right, especially for that higher tier, maybe to do switching from satellite? Just anything on pricing would be great.

Ed McKay -- Executive Vice President and Chief Operating Officer

We think we have it -- right, we have three tiers currently. We start out with $60 per month, 25 meg plan, then moved to a $50 per month plan -- or excuse me, 50 meg per month at $80. And then we have a higher 100 meg plan at $160 per month. But I think with these rural customers, reliability is most important.

So we believe we're priced very competitively to go up against other wireless ISPs that may already be there. And typically, they could be charging $100 per month for a 10 meg service. And we also believe we have an advantage over satellite and DSL. So I think reliability is the key.

We believe these customers will pay to get that reliable service out in these rural markets.

Dan Day -- B. Riley Securities -- Analyst

The EBV program, can you provide any commentary around that? Is it so far mostly existing customers upgrading speeds? Or are you seeing a material number of new customers coming in because of that program? And just anything around that would be great.

Ed McKay -- Executive Vice President and Chief Operating Officer

So total right now, we have about 450 EBB customers. The vast majority of them have been existing customers. So we're not seeing a whole lot of traction with new customers at this point. But that is something with our door-to-door sales team, we are having leave behind materials so that customers can get into the EBB program.

Dan Day -- B. Riley Securities -- Analyst

Great. Well thanks guys for taking my questions. I'll turn it over.

Ed McKay -- Executive Vice President and Chief Operating Officer

You're welcome.

Operator

Thank you. Our next question comes from the line of Hamed Khorsand with BWS Financial. Your line is now open.

Hamed Khorsand -- BWS Financial -- Analyst

Hey good morning. So first off, I just want to ask, if you're seeing any changes in the consumer habits as far as subscription and churn now that COVID restrictions are much looser?

Ed McKay -- Executive Vice President and Chief Operating Officer

Churn is up slightly, as we mentioned, but it is much lower than it was for pre-COVID levels. So we have not seen a dramatic change. A slight increase in churn, but it's still very, very positive across all of our product lines.

Hamed Khorsand -- BWS Financial -- Analyst

But your adds in cable were down quite a bit. Is that a return to the seasonality of pre-COVID?

Ed McKay -- Executive Vice President and Chief Operating Officer

Correct. The net adds were down quite a bit. But yes, that is going -- that's the tailwinds from COVID are decreasing. So we expect to be more in line with our net adds this quarter going forward as opposed to how we were last year in the middle of COVID.

We are starting to see a shift in our net adds toward Glo and Beam. Over 50% of our net adds in the past quarter were Glo and Beam, and we expect to see that continue to accelerate. But in our incumbent cable business, we think this quarter is -- represents what we're likely to see going forward.

Hamed Khorsand -- BWS Financial -- Analyst

And as far as T-Mobile being 7.5% of revenue, how long would that last for? Do you have a time frame from T-Mobile?

Ed McKay -- Executive Vice President and Chief Operating Officer

We do not yet. We still don't have details on their plan at this point. We are engaging conversations with them, but we just don't have an update for that at this time.

Hamed Khorsand -- BWS Financial -- Analyst

And then I know previous questions about the acquisitions, but is there any plans to make acquisitions that you would make a comment like that?

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

Yes. Ed, if I could jump in on this one. We have a great organic growth plan that's going to allow us to grow the business quite a bit in the next five years and create a lot of shareholder value. I would view us as an opportunistic M&A player here.

We are looking for acquisitions. We've done some small tuck-ins, and we'll continue to do that and maybe something bigger if the right opportunity crosses.

Hamed Khorsand -- BWS Financial -- Analyst

But that was really the reason why I was asking questions, because you've laid out a capex program that kind of is robust. So I was trying to see like, where do you think it's lacking that you would think that acquisition is cheaper to do it? Or you want to grow somewhere.

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

Yes. On acquisitions, generally the tuck-ins are just unique opportunities. They tend to be very accretive. We're buying.

They're not -- those deals aren't as frothy as some of the larger deals that have been announced in the last year or so. And then for something more transformative, it would be a scale opportunity. It will allow us to have a bigger platform and a bigger scale and hopefully allow us to expand our Glo and Beam products that we're launching.

Hamed Khorsand -- BWS Financial -- Analyst

OK. Thank you.

Operator

Thank you. There are no further questions at this time. I would now like to turn the call over to Mr. Jim Volk for closing remarks.

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

Well, thank you again for everyone joining our call and following our progress. July has been a pretty busy month. Early August, we'll come kind of to the end of our transformation process here with the special dividend being paid. And we just want to thank everyone for being loyal shareholders, and I look forward to keeping you updated on our progress going forward.

Thank you.

Operator

[Operator signoff]

Duration: 34 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

Ed McKay -- Executive Vice President and Chief Operating Officer

Ric Prentiss -- Raymond James -- Analyst

Dan Day -- B. Riley Securities -- Analyst

Hamed Khorsand -- BWS Financial -- Analyst

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