SHEN - NASDAQ

Good morning, everyone. Welcome to Shenandoah Telecommunications’ Fourth 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 fourth quarter and year ending 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; 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’ll now turn the call over to Chris. Go ahead, Chris.

Thanks, Kirk. We appreciate everyone joining us this morning and hope everyone’s doing well. We’re very pleased with our results for 2024, which was a pivotal year for our company as we successfully expanded into Ohio through our acquisition of Horizon and set new records for construction sales in our Glo Fiber business. Slide 4 lists the highlights for our Horizon integration. We completed the integration of the remaining two back office systems in the fourth quarter. In all, we integrated six separate systems in nine months, which was three months faster than our original plan. The successful integration along with identifying new opportunities for improved productivity allowed us to upsize our annual run rate synergy savings from our original estimate of $9.6 million to $13.8 million. We realized $4.5 million of these savings in 2024 and expect to realize an additional $8.5 million in 2025 with the remaining amount expected to be realized in the first quarter of 2026. I’ll now turn to Slide 5 to give an update on execution of our Glo Fiber expansion plan. 2024 was the fourth consecutive year we increased both our construction pace and customer net additions. New passings released to sales were approximately 97,000 and customer net additions were over 21,000. We remain on target to complete Glo Fiber’s seven-year construction phase by the end of next year. Moving to Slide 6. Since Glo Fiber’s first full year in 2020, we have increased customers and revenue at compound annual growth rates of 99% and 135% respectively. While the construction phase of Glo Fiber is projected to be substantially complete in 2026. We expect Glo Fiber customer net additions and revenue to be an engine of growth for the next six to seven years with penetration levels expected to increase from the current 19% towards our projected terminal penetration rate of approximately 37%. We anticipate the Glo Fiber expansion markets will be our largest line of business in terms of customers by 2026 and revenue by 2029. 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, everyone. I’ll start on Slide 8 for our financial results for 2024. Revenue grew 22% to $328.1 million in 2024. The former Horizon markets contributed $47.7 million of revenue during the nine months of Shentel ownership. In the fourth quarter, we made a measurement period adjustment to Horizon’s commercial revenues of negative $2.6 million and established the corresponding deferred revenue liability to be recognized over the contract period. The measurement period adjustment defers revenue in future years and does not impact billings or cash collections. Excluding the former Horizon markets, revenues grew $11.2 million or 4.3% over 2023. Glo Fiber revenue grew $21.4 million or 61% driven by a 50.9% increase in subscribers and a 7.3% increase in ARPU. The legacy Glo Fiber revenue growth was partially offset by declines in Commercial Fiber and Incumbent Broadband Markets revenue. Commercial revenue declined $5.8 million due to $7.1 million in expected T-Mobile revenue churn offset by growth in recurring revenue. As reported throughout 2023, T-Mobile disconnected backhaul circuits as part of the decommissioning of the former Sprint network. The revenue churn reflects a full period of these disconnects and a reduction in related early termination fees. We expect the Commercial Fiber revenue to return to mid to high single digit growth rates in future periods. Incumbent Broadband Markets revenue declined $5 million due to a 16.9% decline in video RGUs due to cord cutting and a 1.6% decline in data RGUs with the majority of the decline due to the ACP program ending in 2024. Adjusted EBITDA grew 20% to $94.6 million. The former Horizon markets contributed $10.7 million of adjusted EBITDA. Excluding the former Horizon markets, adjusted EBITDA grew $4.9 million or 6% from 2023. The usual growth in adjusted EBITDA was primarily due to the $7.1 million decline in T-Mobile revenue mentioned earlier. Turning to Slide 9. I’d like to review our historical revenue and adjusted EBITDA growth rate since the first full year of Glo Fiber expansion. As we disclosed a year ago, consolidated revenues and adjusted EBITDA grew 9% and 18% respectively over the three-year period 2021 to 2023, driven by the rapid growth of Glo Fiber expansion markets that Chris shared earlier. 2024 was a transition year for Shentel as we sold our Tower business in March 2024, acquired Horizon in April 2024, incurred higher Horizon operating expenses during the integration period and experienced lower Shentel legacy growth due to the $7.1 million in T-Mobile revenue churn. With these one-time events behind us, we expect our long-term consolidated revenue and adjusted EBITDA compounded annual growth rates will return to similar levels that we achieved after we launched Glo Fiber. We expect the adjusted EBITDA margins to improve in future years as well, driven by high incremental margins of adding Glo Fiber customers and as the full impact of the synergy savings kick in. I’d now like to update you on our liquidity and debt positions on Slide 10. Liquidity was $400 million on December 31, including $46 million in cash, $100 million in available delayed draw term loans, $143 million in available revolver capacity and $111 million in remaining reimbursements available under government grants. As previously disclosed, we have been awarded $150 million in government grants to expand our broadband network to unserved homes and upgrade parts of our Middle Mile network. We have collected $39 million in grant funds to date and expect to collect the remaining as we complete these projects over the next few years. At the end of 2024, we had $418 million of outstanding debt. The first major maturity is June 2026 and we are planning to refinance the 2026 maturities in 2025. More to come on refinancing details in future quarters. And now, I’ll turn the call over to Ed.

Thank you, Jim, and good morning. So I’ll start with an overview of our integrated broadband network on Slide 12. We now passed more than 585,000 homes and businesses with broadband services and we have continued our evolution to a fiber-dominant network provider with 61% of our passing served via fiber in our Glo Fiber expansion markets or as part of government subsidized projects. 2024 was a record year for fiber construction with our engineering and construction teams adding over 103,000 new fiber passings and more than 1,400 new route miles of fiber. In the fourth quarter, we added approximately 30,000 new fiber passings and our extensive regional fiber network now consists of approximately 16,800 route miles. Slide 13 provides additional details on our fiber construction metrics. As Chris mentioned, our engineering and construction teams added approximately 97,000 new Glo Fiber passings in 2024 and we also added over 6,000 new fiber passings as part of government grant projects. With the addition of the former Verizon network, we now pass approximately 356,000 homes and businesses with fiber, including approximately 10,000 in government subsidized areas that were previously unserved. Our pipeline for construction opportunities remains robust with 323,000 potential additional passings. This is more than enough to complete the construction phase of our fiber expansion initiative by year end 2026, and we plan to add more than 100,000 fiber passings in each of the next two years. As we continue to accelerate construction in Glo Fiber expansion markets, we also continue to accelerate customer growth as shown on Slide 14. In the fourth quarter, we added approximately 5,900 net customers to close out a record year for broadband sales. For the year, we added more than 21,000 net customers and finished 2024 with 65,000 total customers, up 56% year-over-year. Our total number of data, video and voice revenue generating units reached 78,000 at the end of 2024, up approximately 53% year-over-year. The broadband data penetration rate in our Glo Fiber expansion markets climbed to 18.8% at the end of 2024, up a full percentage point from the prior year. In our more mature markets with fiber passings released to sales two or more years ago, our average penetration has climbed over 26%. Broadband data average revenue per user increased as well, up 6% year-over-year due to a combination of rate adjustments, additional equipment revenue and customers selecting higher speed tiers. In the fourth quarter, over 49% of our residential subscribers adopted speed tiers of 1-gig or higher, including approximately 6% that took speeds of 2-gig or higher. Our monthly broadband data churn for the fourth quarter was very low at 0.94% and we finished the year at 1.04%. The slight increase year-over-year was primarily due to the end of the affordable connectivity program. On Slide 15, we have updated our data penetration rates as markets mature and we have seen growth across all cohorts over the past year, including our most mature markets. As we have expanded Glo Fiber service into new areas, we continue to see typical data penetration rates above 20% two years after launching service. Data penetration rates for our most mature cohorts launched in 2019 and 2020 have a weighted average growth rate of approximately 3 percentage points over the past year and they are well on their way to reaching our projected average terminal penetration rate of about 37%. Moving on to Slide 16, we show operating results in our incumbent broadband markets. These metrics cover our incumbent cable markets and 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 Verizon. In the fourth quarter, broadband data customers remained flat with broadband customer additions in our government subsidized markets and incumbent telephone markets offsetting losses to competitors in Incumbent Cable Markets. Total data, voice and revenue – video revenue generating units declined slightly year-over-year to approximately 183,000 with RGUs acquired from Horizon, partially offsetting losses in Shentel Incumbent Cable Markets due to customers moving to online streaming options. Monthly data churn for 2024 averaged 1.63% and former ACP customers accounted for about 8 basis points of churn. Despite the end of the ACP program, churn was down slightly from the prior year. For the fourth quarter of 2024, average monthly churn was 1.49%, down 5 basis points from the fourth quarter of 2023. Our new rate cards giving customers more value and higher speeds for the same price have been effective at mitigating churn. Despite the competitive pressures in portions of some incumbent markets, broadband data ARPU increased by 2.5% year-over-year to almost $85 due to a combination of rate adjustments and customers selecting higher speed tiers. Our overall broadband data penetration rate decreased to 46.6% at the end of 2024 with the addition of acquired Horizon passings and recently constructed government subsidized passings. The former Horizon incumbent telephone market had a broadband data penetration rate of 21.3% at the end of the year and we believe there is significant opportunity to take advantage of the Fiber-To-The-Home technology deployed in this market, improve our market share and gain parity with the local cable company. The overall data penetration rate in our Incumbent Cable Markets at the end of 2024 was 48.4%. Over the past year, we added over 6,000 additional fiber passings in these markets as government grant projects and we see significant growth opportunities in these areas as we complete our subsidized bills over the next two years. Our commercial fiber business is highlighted on Slide 17. The addition of the former Horizon markets drove significant increases in both new sales bookings and installations of new monthly revenue. In 2024, we booked new sales totaling $552,000 in monthly revenue, up approximately 58% year-over-year. And our service delivery team installed new monthly revenue of approximately $710,000 more than double our total from 2023. The fourth quarter was a record quarter for sales with new bookings totaling approximately $156,000 in monthly revenue and we finished the year with an installation backlog of almost $587,000 in monthly revenue. Excluding the impact of the T-Mobile network rationalization that Jim discussed, average monthly churning compression for 2024 remained low at approximately 0.6%. Our capital spending for 2024 and guidance for 2025 are shown on Slide 18. Capital expenditures in 2024 totaled $300 million with the increase over 2023 driven primarily by additional investments in government subsidized projects. In 2024, gross capital spending on government grant projects was approximately $83 million and we received approximately $19 million in reimbursements. These projects included broadband expansion to unserved areas in both incumbent cable and Glo Fiber markets, as well as a Middle Mile fiber network upgrade and expansion to support our commercial fiber business in Ohio. Grant funding is expected to cover more than 50% of the total cost for these projects. And as Jim mentioned, we expect to receive approximately $111 million in reimbursements in future years. For 2025, we are projecting capital spending in the $250 million to $280 million range as we continue to expand our fiber networks. This includes gross capital investments of approximately $80 million to $90 million in government grant projects and we expect to receive 2025 reimbursements in the $60 million to $70 million range. Our planned Glo Fiber investment of $175 million to $190 million will extend fiber to approximately 95,000 new passings and connect new customers. In our Incumbent Broadband Business, we plan to invest $40 million to $50 million in capital projects, including extending broadband service to approximately 9,000 government subsidized unserved homes and upgrading networks in competitive markets to support multi-gigabit speeds. Our planned commercial fiber investments are expected to be in the $35 million to $40 million range for success based spending for new revenue and upgrades to the former Horizon network, including the government grant project to expand our Middle Mile network and upgrade to 400-gig capable core network. As we approach the end of the construction phase of our fiber expansion projects, we wanted to provide long term guidance on capital intensity. Slide 19 shows our recent capital intensity as we have rapidly expanded our fiber networks. Net of government subsidies, our overall capital investments in 2024 were 91% of revenues. Glo Fiber expansion was the major driver behind the increased capital intensity, but incumbent broadband and commercial fiber investments have also been elevated due to grant projects to extend broadband service to unserved areas, grant projects to upgrade and expand middle mile networks and one-time projects in the former Verizon markets to upgrade networks and work through the large installation backlog. Our planned capital intensity has reached its peak and we expect our capital intensity to decline dramatically once we've substantially completed our Glo Fiber build-out in government grant projects in 2026. For both our Glo Fiber and Incumbent Broadband Businesses, we expect our long-term capital investments to be between 15% and 25% of our revenues. Initially, we will likely be on the hiring of this range as we connect new customers, but spending will come down over time once we have completed the initial drop installation to customers' homes. We expect our commercial fiber business to be more capital intensive in the 20% to 30% range due to success based spending to extend fiber networks to reach new customers. As we look out to 2027 and beyond, we expect our overall capital intensity to be 20% to 25%, while still growing revenues and adjusted EBITDA at high rates. Thank you very much. And operator, we're now ready for questions.

Certainly. [Operator Instructions] And our first question coming from the line of Frank Louthan with Raymond James. Your line is now open.

Great. Thanks. On the revenue adjustment with Horizon, can you just give us – remind us what the percentage of their revenue is at monthly amortized revenue versus monthly recurring revenue? And then on the commercial business returning to mid to high-single digits, when will all this T-Mobile churn be finished and what's kind of the expectation for what's left in the numbers? And then can you give us an idea of the cash impact of any of those future disconnects as well that would be great? Thanks.

Good morning, Frank. On your first question, I don't have the exact numbers, but I can follow-up with you on the amount of revenue that is amortized revenue from Horizon. I don't think it's a significant portion, but I can follow-up and provide that to you later. In regards to the T Mobile, the Shentel business, that is behind us. So that is now all flowed through the system. Most of the disconnects occurred in 2023, but when you look at the year-over-year results, we continue to see year-over-year declines as a result of the churn that occurred in different parts of 2023. And as far as for the cash impact, that is pretty high gross margin revenue. There was very little operating expenses that go away with that revenue churn. So most – almost all of that $7.1 million of T-Mobile churn affected EBITDA and affected net income.

Okay. But after this quarter, that's done. We shouldn't see any more of that?

That is behind us.

Okay.

That's good.

One quick follow-up on Slide 16 just looking at the incumbent data penetration, so what is the source of that competition? Is any of that stuff that you're cannibalizing into maybe to your fiber business? I don't think that's the case, but just checking and then where is that competition coming from that's causing that high churn?

Frank, this is Ed. So there's no cannibalization from our Glo Fiber business. Glo Fiber is building in new markets, not overbuilding our cable. In our legacy Shentel Cable Markets, we do have about 23% of our passings that have overlap with a fiber or cable competitor. And then also part of our incumbent business now is the Horizon Telephone markets where they've deployed fiber to the home and that has 100 overlap with a local cable company. So all in all about 28% of our incumbent passings have a cable or fiber competitor. And that's a combination of the incumbent cable companies and in a few cases we do have some fiber overbuild activity as well.

Okay. And have they just gotten – have they gotten more competitive recently or what's – has anything changed in the last six to 12 months or is it just general pace of business? And where do you expect that to end up? Are they on pace to pass 40% or are they kind of done or what do you think?

I think the pace of construction has actually slowed down over the past six months. With the projects that have been announced, we expect that overlap probably goes to 30% over the next couple of years. But beyond that, our cable markets are still very rural with low density and some challenging demographics in some areas. We think overbuilt are less likely.

All right, great. Thank you very much.

Yes. And Frank, I just looked up the monthly amortized revenue on the Horizon part of the business. That's about 8% of their revenues was amortized revenue.

Okay, great. Thank you very much.

Thank you. [Operator Instructions] Our next question coming from the line of Hamed Khorsand with BWS Financial. Your line is open.

Hamed, if you're there, we're not able to hear your questions.

Sorry. Sorry. Sorry. I was on mute. What kind of pressures are you seeing just from the other service providers that you're competing with the 28% that you're sharing markets with?

Yes. So the largest competitors are the two big cable companies in our Glo Fiber markets. We are seeing promotional offers, but they're typically discounting, putting more heavily discounted pricing on their lower end products. So we're continuing to have significant success in the middle of the high end of the range, but they are taking some of the lower tier products.

Okay. And then as far as your Glo Fiber is concerned, do you feel like you got to go into each market with a low ball promotional offer? Or is it demand pretty sustainable without any kind of promotions or discounts?

When we initially go into the market, we typically don't go in there with heavily discounted pricing. We do offer some promotions $100 off your total bill for the first year, for example. But typically we don't go in there with heavily discounted promotions. And now over time, once we've gotten our initial market share, we will go back in with some targeted promotional offers to increase penetration in some of the mature passings. But typically we're able to compete effectively with our standard everyday pricing.

Okay. Thank you.

Thank you. Now, there are no further questions in the queue. I will now turn the call back over to Mr. Jim Volk for any closing remarks.

Yes. Thank you, everyone, for joining our call this morning. We look forward to updating you on our growth prospects and status in future quarters. Have a good day.