SHEN - NASDAQ

Good morning, everyone. Welcome to Shenandoah Telecommunications Third Quarter 2024 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Kirk Andrews, Director of Financial Planning and Analysis for Shentel.

Good morning, and thank you for joining us. The purpose of today's call is to review Shentel's results for the third quarter 2024. Our results were announced in a press release distributed this morning, and the presentation we'll be reviewing is included on the Investor page at our shentel.com website. Please note that an audio replay of this call will be made available later today. The details are set forth in the press release announcing this call. With us on the call today are Chris French, President and Chief Executive Officer; Ed McKay, Executive Vice President and Chief Operating Officer; 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.

Thanks, Kirk. We appreciate everyone joining us this morning and hope everyone is well. I will start my comments with an update on our Horizon integration on Slide 4. We've made significant progress during our seven months of ownership. We launched the Glo Fiber brand in Ohio and implemented leadership changes in the second quarter. Most recently, we successfully completed four of the six back-office system integrations, including the billing system conversion, which was the most complex of the six systems to convert. Work is well underway for the ERP and payroll conversions, which we expect to complete by January 2025. We've also integrated the commercial sales teams with one team now serving our carrier and wholesale customers for the combined company. We believe this change will provide upside in our sales bookings as we can provide more on-net solutions. The former Horizon customer care team has migrated over to the Shentel platform, providing better efficiencies and enhanced tools to provide a quality customer experience. We've also aligned our compensation and benefit programs to start in January 2025. We now have clear line of sight to realize our synergy savings and have upsized our target savings to $11 million. We expect the second quarter of 2025 will be the first quarter when all the synergy savings will be realized. I'll now turn to Slide 5 to give an update on our strategy execution. We ended the second quarter with approximately 320,000 Glo Fiber passings. We constructed and released to sales 101,000 new passings over the past year in addition to 15,500 passings we acquired with the Horizon transaction. This gives a 58% growth rate from a year ago. As of the end of September, we have over 59,000 Glo Fiber customers, also representing a 58% year-over-year growth rate. We have a record quarter with 6,000 net subscriber additions, and good sales momentum has continued into the fourth quarter. With that, I'll now turn the call over to Jim to review the details of our financial results.

Thank you, Chris, and good morning. I'll start on Slide 7 for our financial results for the third quarter. Revenue grew 30% to $87.6 million in the third quarter 2024. The former Horizon markets contributed $16.9 million of revenue. Excluding the former Horizon markets, revenue grew $3.3 million or 4.9% over the same period a year ago. We had another record quarter Glo Fiber third quarter revenue of $15.1 million. The Glo Fiber legacy markets grew revenue, subscribers and ARPU by 56%, 54% and 7%, respectively. The legacy Glo Fiber revenue growth of $5.3 million was partially offset by declines in commercial and incumbent broadband markets revenue. Commercial revenue declined $1.5 million due to the expected decline in T-Mobile revenue. As reported throughout 2023, T-Mobile disconnected backhaul circuits as part of the decommissioning of the former Sprint network. The revenue declines reflects a full period of these disconnects and a reduction in related early termination fees. Incumbent broadband markets revenue declined $1.3 million due to lower video and installation revenue. Incumbent broadband data revenue was flat with the same period in 2023 as ARPU growth offset the 1% decline in data RGUs. Adjusted EBITDA grew 31% to $26.6 million in the third quarter 2024. The former Horizon markets contributed $4.7 million of adjusted EBITDA. Excluding the former Horizon markets, adjusted EBITDA grew 8% from the same period a year ago. The slower-than-usual growth in adjusted EBITDA was due primarily to the expected decline in T-Mobile revenue. Adjusted EBITDA margin increased from 27% in the second quarter 2024 to 30% in the third quarter of 2024, driven by Glo Fiber revenue growth and the Horizon synergy savings beginning to be realized. We expect margins to improve in future quarters with continued growth in Glo Fiber revenue and as we realize the full $11 million in target expense synergies. I'd now like to update you on our liquidity and debt positions on Slide 8. Liquidity was $473 million on September 30, including $43 million in cash, $175 million in available delayed draw term loans, $143 million in available revolver capacity and $112 million in remaining reimbursements available under government grants. As previously disclosed, we have been awarded $143 million in government grants to expand our broadband network to unserved homes and upgrade parts of our middle-mile network. We have collected $31 million in grant funds to date and expect to collect the remaining when we complete these projects over the next two years. At the end of the third quarter, we had $345 million of outstanding debt. The first major maturity is June 2026. Our net leverage ratio based on our annualized third quarter 2024 adjusted EBITDA is 2.8 times. For bank loan purposes, net leverage is approximately 2.6 times when you consider add-backs for expected synergies and Glo Fiber market losses. And now I'll turn the call over to Ed.

Thank you, Jim, and good morning. I'll start on Slide 10 with our integrated broadband network. We are currently constructing fiber in 28 markets and quickly evolving into a fiber-dominant network provider. We now pass approximately 554,000 homes and businesses with broadband services, and approximately 59% of these passings are served via fiber in our greenfield Glo Fiber expansion markets or as part of government-subsidized projects to bring broadband to unserved areas. In the third quarter, our engineering and construction teams added over 300 route miles of fiber and, our extensive regional fiber optic network now consists of approximately 16,400 fiber route miles. Slide 11 provides additional details on our fiber construction metrics. We added approximately 24,000 new fiber passings in the third quarter, improving our construction pace by nearly 18% over the third quarter of 2023. We now pass approximately 326,000 homes and businesses with fiber, including nearly 16,000 in former Horizon greenfield markets and over 6,000 in government-subsidized areas that were previously unserved. Our construction pipeline remains robust with 337,000 additional passings in various stages of engineering, permitting and construction, including 51,000 new passings in former Horizon markets. As we ramp up construction in Glo Fiber expansion markets, we continue to see strong customer growth as shown on Slide 12. As Chris mentioned, we had a record quarter for sales, adding approximately 6,000 net customers and reaching over 59,000 total customers at the end of the third quarter. Our total number of data, video and voice revenue-generating units reached 71,000 at the end of the quarter, up approximately 55% year-over-year. The broadband data penetration rate in our Glo Fiber expansion markets remained constant year-over-year at 18.5% as we constructed more than 101,000 new passings over the past 12 months. Our broadband data average revenue per user increased 6% year-over-year due to a combination of rate adjustments, additional equipment revenue and customers selecting higher speed tiers. In the third quarter, over 45% of our residential subscribers adopted speed tiers of 1 gig or higher, including 4% that took speeds of 2 gig or higher. Our broadband data churn for the third quarter was 1.17%, with former affordable connectivity program customers accounting for about 6 basis points of churn. Our churn to competitors remained extremely low and consistent with the previous year. On Slide 13, we've updated our data penetration rates as markets mature, and we continue to increase penetration rates across all cohorts. First year after launching the Glo Fiber market, we continue to see typical data penetration rates of approximately 17%. And after three years, penetration rates typically exceed 25%. We also continue to expect to reach average terminal penetration rates of about 37% five to six years after launching service in a new area. Our oldest cohort launched in late 2019 now has reached 40% penetration and cohorts launched in 2020 are quickly approaching our terminal penetration target. Moving on to Slide 14, we show our operating results for our incumbent broadband markets. These metrics cover our Shentel incumbent cable markets and former Horizon telephone markets with fiber-to-the-home passings. Broadband data subscribers increased slightly year-over-year to over 111,000, driven by the acquisition of approximately 3,000 broadband data customers from Horizon. Total data, voice and video revenue-generating units declined slightly year-over-year to approximately 185,000, with RGUs acquired from Horizon partially offsetting losses in Shentel incumbent cable markets. For the third quarter, broadband data subscribers remained flat despite the impact from the end of the affordable connectivity program. Data churn for the third quarter was 1.67%, and former ACP customers accounted for 12 basis points of the churn. Approximately 80% of former ACP customers remain as customers today. We believe ACP churn has peaked, and we expect minimal impact for the remainder of the year. Even with the ACP impact, we are pleased with the 7 basis point year-over-year improvement in churn in the third quarter. Our new rate cards giving customers more value and higher speeds for the same price have been effective at mitigating churn, and we initiated additional customer speed rolls at the end of October. Despite competitive pressure in portions of some incumbent markets, broadband data ARPU increased by 2.9% year-over-year to more than $84 due to a combination of rate adjustments and customers selecting higher speed tiers. Our overall broadband data penetration decreased to 47.5% at the end of the third quarter with penetration rates of 49.2% in the Shentel incumbent cable markets and 22.4% in former Horizon incumbent telephone markets. We continue to believe there's upside in the former Horizon markets to improve penetration and gain parity with the cable provider. Over the past year, we also constructed nearly 6,000 new fiber passings as part of government grant projects in unserved areas of our incumbent cable markets. And after launching data services in a new area, we typically see penetration rates of approximately 38% after 12 months and 50% after 18 months. As we make progress toward our goal of 28,000 government subsidized fiber passings over the next few years, we see significant customer growth opportunities in these unserved areas. Our commercial fiber business is highlighted on Slide 15. The addition of the former Horizon markets drove significant increases in both new sales bookings and installations of new monthly revenue. In the third quarter, we booked new sales totaling $132,000 in monthly revenue, up over 75% year-over-year, and our service delivery team installed new monthly revenue of approximately $235,000, up more than 140% year-over-year. We finished the quarter with an installation backlog of $598,000 in monthly revenue. Excluding the impact of the T-Mobile network rationalization that Jim discussed earlier, monthly churn and compression remained very low at 0.5% for the third quarter. Our year-to-date capital spending and full year guidance for 2024 are shown on Slide 16. Total capital investments through the end of the third quarter totaled approximately $226 million, including approximately $140 million for Glo Fiber expansion and $36 million for government subsidized projects in unserved areas adjacent to our incumbent cable markets. We expect approximately 50% of our capital expenditures for these grant projects to be reimbursed. We plan to finish the year with capital investments in the $293 million to $325 million range, in line with our previous guidance. Thank you very much. And operator, we're now ready for questions.

Thank you. We’ll now begin the question-and-answer session. [Operator Instructions] Our first question comes from Rob Palmisano from Raymond James. Please go ahead.

Hey, guys. Good morning. So have you seen any uptick in activity from Verizon in particular, but really any other competitors in your markets? And also, separately, some states have been putting BEAD funding out for bid. Anything in your territory that looks attractive and any meaningful amounts of -- or territories that you might be bidding on? Thank you.

Hey, Rob, this is Ed. I'll take that one. So as far as the Verizon question, we have not seen any significant new Verizon activity as far as fiber builds in our markets. As far as the BEAD question, we do see some opportunities in our incumbent telephone footprint areas, but those opportunities, we don't feel are nearly as big as the opportunities where we've already received grants through The American Rescue Plan Act funds. So we're looking at BEAD closely, but some opportunity, but it's going to be a modest opportunity for us.

Great. Thank you.

Thank you for the question. Coming to the next question. Our next question comes from the line of Hamed Khorsand from BWS Financial. Please go ahead.

Hey, good morning. First off, I just want to see, as far as the 6,000 adds you had this quarter, are you seeing any benefits from Horizon? Or is that primarily Shentel?

So that 6,000 number is a combined number, but that is primarily the legacy Shentel markets. Our number of fiber passings in the legacy Shentel markets is significantly larger than the Horizon markets. In the Horizon markets, we only have about 15,000 to 16,000 passings right now. But that will grow over time.

And that was going to be my follow-up, is there a timing as to when you would see the revenue synergies as far as Horizon is concerned?

As far as the revenue synergies on the commercial side or just in general?

In general, but primarily just because you're now Glo Fiber in Ohio as well.

Well, the big key there is ramping the construction engine back up for fiber-to-the-home. Horizon has hit the pause button on that construction. We've now restarted construction. We have about 51,000 new fiber passings in our construction pipeline. We've actually started construction. We turned up additional passings in October. So we're -- we should see some additional increases in customers in the fourth quarter in the Horizon markets with that new construction.

And now that your footprint is getting bigger, is there going to be any kind of seasonality in the net adds number for Glo Fiber?

We typically see second -- excuse me, third quarter as a large growth opportunity. The August time frame is typically our -- one of our larger months. So we'll continue to see seasonality similar to what we've seen in the past.

Okay. Thank you.

You’re welcome.

At this time, there are no further questions on the queue. May I hand the call back to Mr. Jim Volk for closing remarks?

Yeah. Thanks, everyone, for joining the call this morning. I hope you have a good day, and we look forward to updating you in future quarters of our progress with Glo Fiber and the rest of our broadband business. Thank you.