Good day, and thank you for standing by. Welcome to the ATN International third quarter 2022 earnings conference call and webcast. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. I would now like to hand the conference over to your speaker today, Mr.

Justin Benincasa, Chief Financial Officer of the Company. Please go ahead, sir..

Great. Thank you, operator, and good morning, everyone. Today, we'll be reviewing our third quarter 2022 earnings results. With me here is Michael Prior, ATN's Chief Executive Officer. Michael will be providing an update on our business and strategy, as well as high-level overview of our quarterly results.

I’ll cover the relevant financial information and provide additional color where necessary. As a reminder, we released our third quarter earnings press release last night after market close. Investors can find the release and summary slides for the call or on our Investor Relations website.

Before I turn the call over to Michael, I'd like to point out that this call, our press release and slides, contain forward-looking statements concerning our current expectations, objectives, and underlying assumptions regarding our future operating results.

These statements are subject to risks and uncertainties that could cause actual results to differ materially from those described. In an effort to provide useful information to investors, our comments today include non-GAAP financial measures.

For details on these measures and reconciliations to comparable GAAP measures, and for further information regarding the factors that may affect our future operating results, please refer to our earnings release on our website at atni.com or to the 8-K filing provided to the SEC. And I’ll now turn the call over to Michael for his prepared remarks..

All right. Thank you, Justin, and welcome, everyone. The third quarter of 2022 was another good quarter for ATN, one where we served our customers well, advanced our strategic broadband buildout, and made excellent progress toward our three-year growth objectives.

For example, we grew the homes passed by our broadband networks to about 614,000 at the end of the quarter, which was 9% higher than a year ago. Of this amount, we added about 29,000 new homes passed by fiber or other higher speed solutions. Our ongoing network investments are also reflected in our subscriber levels.

As of September 30, 2022, 54% of our 205,000 broadband subscribers were connected to our higher speed networks. That represents an increase of nearly 13% year-over-year. Other metrics we track as part of our three-year plan are also showing good progress.

For example, we ended the quarter with 356,000 mobile subscribers in our international segment, up about 9.5% from a year ago, as a result of our sales and marketing efforts and investments.

Both in the Caribbean and in the US, most of our expansion work is in markets that we believe will continue to benefit from growing demand and positive secular tailwinds, putting us in an excellent position to benefit from this growth, and to help enable it, as we provide these communities with the connectivity capabilities that will help them thrive.

Towards that end, our efforts in the US to reach many traditionally underserved communities were bolstered by some great wins in securing critical federal funding. Since July, we've been named recipients or subrecipients for roughly $144 million and awarded grants.

As part of our Alaska fiber optic project, we were jointly awarded two grants, each with an Alaska native corporation, for a total of about $103 million.

Working with our partners, we plan to utilize this funding to connect households, healthcare facilities, and schools in 25 communities across Alaska's rural Yukon Delta region to affordable high-speed internet for the first time.

Beyond the clear economic benefits to our business, these collaborations also have the potential to deliver transformative change for better living conditions and outcomes in these previously unconnected communities.

In the lower 48, we have been awarded $41 million in federal funding since July of this year, inclusive of the grant we announced last quarter for $10 million to connect homes and communities in the southwestern US. This will be spent to connect thousands of homes and many schools, businesses, and healthcare facilities to advance high-speed services.

And we anticipate applying for and winning additional grants and other funding support in the coming quarters. And we view this as a nice complement to our core efforts to execute our US strategy. Now, before turning to our quarterly results, I would like first take a moment to discuss the current economic and financial climate.

While we are closely monitoring developments, we remain confident in our market-leading positions, as well as our overall business prospects.

Along our way to becoming a leading connectivity provider to smaller markets and traditionally underserved segments, we have acquired highly valuable experience investing in, as well as building and operating, network-based businesses.

As part of this progression, we've managed our operations through multiple business cycles and events as well that have had significant economic impacts on the markets we serve.

So, while we take the recent economic developments and prospects seriously, and we'll adjust as we need to, it's worth noting why we believe we are well positioned to continue moving forward and generating value for our stakeholders. First is our differentiated model and strategy.

We provide essential communication services to rural and remote markets that most other operators have historically avoided serving.

By building out the necessary capabilities to support this market entry strategy, we have secured high recurring revenues, durable cash flows, sticky customer relationships, and a strong competitive footing, as well as other favorable business attributes, and we believe demand for our services will remain high across all our markets.

Second is our sound financial and capital allocation strategy. While we invest in those areas that we believe are attractive from a risk-adjusted perspective, we also maintain a strong balance sheet, underpinned by high recurring operating cash flows and limited non-discretionary capital expenditures.

This provides us with significant flexibility in our capital spending and allocation decisions. Based on market conditions and opportunities that arise, we are able to speed up, slow down, or change the network buildouts in our three-year plan.

Similarly, we have the ability to be opportunistic in accessing capital and capitalizing on new growth opportunities, or alternatively, to add the shareholder value in other ways. While this flexibility is compelling, we believe, in all market cycles, it is of particular relevance today given the current business climate.

Third, and not least, is our high-quality leadership team. Both at the parent and subsidiary levels, we have leadership team that are operational experience across multiple market cycles, and of course, the added benefit of seasoned managers and staff working with them.

We are proud of the culture we've built here at ATN over the past 30 plus years and consider it to be a critical strategic asset. So, now for a brief overview of our quarterly results, before Justin provides a deeper dive into our financial performance. In the third quarter, we grew total revenues by 9%, and adjusted EBITDA by 14% year-over-year.

This was driven by positive results across both of our operating segments, including a strong performance in Alaska, fiber and broadband customer addition, and mobile subscriber growth.

Consistent with the past, we continue to leverage cash flow durability from our more mature businesses, and to reinvest those proceeds in other markets that are earlier in their growth cycles, as well as in existing network infrastructure upgrades.

The healthy growth in our international mobile subscribers and revenue I noted earlier, is a nice success story, and we expect to see that positive momentum carry forward, as our improved sales and marketing capabilities and completed network upgrades bear fruit.

We are steadily expanding our broadband subscriber base and state-of-the-art communications infrastructure, both domestically and internationally.

In the US, as I mentioned at the top of the call, our multi-year network expansion strategy is benefiting from new sources of federal funding, which have both economic value and social benefits for all involved stakeholders. We're proud to be working with our partners both in Alaska and the southwestern US to help bridge the digital divide.

Of note, our Alaskan operations performed well in the quarter, with a substantial topline contribution and strong operating cash flows. While we continue to see resilient demand in Alaska for our enterprise and wholesale solutions, we also have made initial inroads to provide fiber premise services to select markets in the State.

This initiative is still in its early stages and we look forward to updating everyone on its progress in future quarters. So, in summary, we delivered good results in both the US and international markets during the third quarter.

We remain committed to being first-to-fiber in those markets that are aligned with our established criteria and where we believe we can also develop strong first-mover advantages. In addition, we continue to prioritize building and owning modern core digital communications infrastructure, consistent with our Glass and Steel strategy.

Most importantly, as we execute towards these two strategic objectives underpinning our three-year plan, we are also steadily expanding our overall broadband network and subscriber count.

And while that gives us confidence in our long-term growth targets, as well as our core financial objectives for the full fiscal year, our financial position allows us to be flexible in the execution of our strategies as we look to maximize value for shareholders. And that's it for now. I'll hand it over to you, Justin, for financial results. .

Great. Thanks, Michael. We delivered solid financial performance in the third quarter of 2022. During the period, total consolidated revenues were $182.2 million, up 9% year-over-year. Operating income was $1.4 million, improving from an operating loss of $1 million last year, and adjusted EBITDA was $41.9 million, up 13.8% year-over-year.

These improvements were mainly driven by the addition of a full quarter of Alaska Communications results, compared to a partial quarter last year, and the improved operational performance in Alaska on a pro forma full-quarter basis.

Notably, we also continued to see strong subscriber growth in other markets as we make significant network in operational investments, and continue to execute on our three-year strategic growth plan. Now turning to our segment breakdown, in the international segment, revenues were $90 million in the quarter, increasing 6% year-over-year.

This growth was the product of higher mobile and broadband subscribers and the associated revenue, partially offset by a scheduled stepdown in federal high-cost support subsidies for the US Virgin Islands.

(Operating income was $13.4 million and Adjusted EBITDA) for the segment was $27.9 million in the quarter, up 3.77% year-over-year, driven by subscriber growth, as well as operational investments in customer acquisition, additional back-haul capacity, and increased resiliency to support our higher mobile and broadband revenue in the segment.

In our US segment, revenues were $92.2 million in the quarter, up 13% year-over-year. During the period, business and carrier services accounted for approximately 70% of the segment services revenue.

In line with our consolidated performance drivers, the increase in segment revenues was mainly due to the addition of a full quarter of Alaska's results, compared to a partial quarter in the same period a year ago, along with solid organic revenue growth year-over-year.

Consistent with our expectations, year-over-year revenue growth in the segment was partially offset by a reduction in legacy wholesale wireless revenues. FirstNet construction contributed $3.3 million to the segment revenues in the quarter.

We've completed approximately 70% of the site, and now expect to complete 75% of the build by the end of 2022 versus our prior forecast of 85%. This is mainly due to the timing of permitting and approvals as mentioned in prior quarters. Adjusted EBITDA for our US segment was $21.9 million in the quarter, up 33.6% year-over-year.

This increase was mainly due to the same factors which led to the higher segment revenues in the period. Net loss in the third quarter was $2.8 million, or a loss of $0.25 per share, compared with a net loss of $2.6 million, or a loss of $0.22 per share in the same period a year ago. We reported $38.9 million in CapEx spending for the quarter.

That includes $19.3 million in our US segment, and $19.4 million in our international segment. Now turning to our balance sheet and cash flows. We ended the quarter with total cash and cash equivalents of $77.8 million.

In addition, for the first nine months of the year, net cash provided by operating activities was $79 million, compared with $47.7 million a year ago. Year-to-date, we utilized approximately $36 million of cash to fund various working capital items, including prepaid circuits and inventory, as well as to reduce payable and accrued balances.

At the end of the third quarter, our total debt outstanding was $355.6 million.

This amount includes $220.6 million on Alaska Communications balance sheet, and excludes $43.5 million related to the FirstNet customer receivable financing facility, with a consolidated net debt to EBITDA ratio of under two times, including both non-recourse and parent-level debt.

We maintained strength in our balance sheet, as well as flexibility in our financial strategy, as Michael spoke to earlier in his remarks. In summary, we delivered solid financial results in the third quarter, and our outlook for the full fiscal year remains unchanged.

We're benefiting from our established leadership across our markets, as well as from our ongoing network expansions, network upgrades, and subscriber-based increases. As we consistently invest in line with our three-year strategic growth plan, we're also building out our foundation and setting up at ATN well for the long term.

We look forward to continuing to deliver value to all stakeholders across our operations, and updating everyone on our progress going forward. Thank you, everyone. That concludes my prepared remarks for today. I'll turn the call back to Michael for his closing comments. .

Thank you, Justin, and thank you, everyone, for joining us. We're excited about the future, given the essential nature of our offerings, the quality and growing reach of our network, and the early mover advantages we're enjoying in underserved communities, and lastly, the financial flexibility we have within our control.

I'll turn it back to the operator for questions..

[Operator Instructions] The first question that I have is coming from Ric Prentiss of Raymond James. Please go ahead..

Yes. Hey, everybody. Good morning. A couple of questions. First, obviously, you guys are trying to help out rural remote areas. You've gotten a couple of grants now, federal grants in Alaska. Help us understand - the social benefit is clear. Help us understand the economic value to you all.

What do these grants imply? Is it, you spend CapEx, then you get reimbursed CapEx, you get it through service revenues and kind of the timing. Help us understand how we should think about you announcing these grants and how we should be modeling it and thinking of the economic value-add..

Yes. Okay. Thank you, Ric. So, the grant - so, first thing, as we've said previously, I want to note, is that the grant size, and I think you're getting this with the questions, does not translate directly and immediately into economic value for ATN.

For example, building in remote areas of Alaska to serve small populations, right, might have less of an economic impact on our business or take longer to mature than some of our - the smaller grants we've won.

And the way we think about this, and I'll get back to the CapEx in a second, or Justin, will, but we view these grants more as a complimentary effort to our core strategy. So, that's - we look at being a primary provider of connectivity the multiple customer segments across our geographies.

And the grants allow us to serve more people, serve more communities to add economic underpinning to our other efforts, right? So, when we build in - fiber into a community in the southwest, for example, we are - to serve, let's say the schools or homes under a grant, we are also working that with our broader plans to extend to - fiber to towers, to build businesses and to build other communities that may not be grant-supported.

So, it's really just a piece of the pie. And then there's no direct CapEx with the grants we've talked about. So, it really is, these are really by and large, fully funded, with the exceptions of this small amount we talked about in July where I think we got $10 million and we had about $1 million match.

It may be under the BEAT program going forward that there are going to be a lot of matching plans, and we will look at whether our piece of CapEx has an adequate risk-adjusted return when we apply for it. But - and then - so then lastly, when will that impact us? You won't see much impact in our core numbers and deliverables next year.

It'll be minimal. As you go farther out, ‘24, ’25, some of these grants will yep, have a nice bolstering, we believe, to EBITDA and revenue, but they’re still just a piece of the pie, right? This is not a grant-only strategy we have.

Does that answer your question, Ric?.

Yes, it does. The second question, you guys had mentioned the Sacred Wind acquisition. Any update on that acquisition? I think you'd mentioned kind of a rough EBITDA number. Any thoughts on the timing? Any update to the revenue and EBITDA impact? And we noticed that in third quarter there was, I think, a $3.4 million transaction integration charge.

What was that related to?.

Okay. So, first, I'll take the last one. The transaction charges in the third quarter, that's just M&A-related charges. Some of it, yes, was Sacred Wind. Some of it were other activities. And as you know from the past, we don't comment on those activities, unless and until there's something to announce.

As to Sacred Wind’s economic impact, I think we did not - as we said last quarter, we expect the business will generate EBITDA of about $10 million in 2022. We didn't disclose the revenues for that.

So, we expect the business to bid to at that level or better in the next year, and it will be combined with our Commnet broadband operation and within our overall US segment..

And the timing of the closing, did it close?.

It is not closed, but we expect it to close in the fourth quarter. So, this quarter..

And lastly - yes. And the final for me is, obviously, a couple of times, you've highlighted your balance sheet, the financial flexibility.

Help us understand, is that to kind of comfort the market that other companies are seeing trouble raising money in a high interest rate environment to deploy capital programs? Is that also meant to say you're looking at some potential M&A?.

Well, it's meant to say multiple things. So, the question is, why do I keep talking about financial flexibility? And I - and so, first is to assure shareholders that we know the whole reason for being here is to reward our investors, right? That's our primary objective.

And in the economic environment we're in and the prospective environment, I think there are more questions from shareholders about, okay, what's your spending? Is that level of spending appropriate? How do we ensure that we see adequate returns as investors? And so, I think what we're saying is, we have the flexibility to - in our capital allocation, to do things for shareholders.

And we will weigh that against the other point which you raised, which is, because of our flexibility, a lot of our competitors don't have the same flexibility.

So, we do see an opportunity to seize first-mover advantage, generate nice returns, perhaps including M&A, and perhaps including bolt-on in particular M&A that can accelerate or enhance our existing strategy. But what we're really saying is, we're going to be very conscious of the environment.

We're not going to get too far ahead of our skis and we're going to adjust as we need to ensure shareholders’ benefit..

Okay. That's pretty clear. Appreciate it. Stay well, guys..

Thank you for your question. Now as we prepare for the next question. Our next question will be coming from Gregory Burns of Sidoti. Please go ahead. Your line is open..

Morning.

In the international segment, what was the - how much FCC support revenue were you still getting, and what's the timing of the winddown of the remainder of that?.

We're still getting about 1.4 million a quarter right now - a month, I should say, a quarter, sorry, a quarter. It's $5 million a year.

And the winddown, I don't know, Michael, do you want to talk on the schedule of the winddown?.

Yes. I mean, we're still talking to the FCC about that, and trying to understand it with respect to how that market is served and whether it will be adequately served. So, but that's about all I would have to say on that..

Okay. And then on the mobile side, excuse me, churn is still going up, but you're spending more to acquire the customers. So, but they're staying around for a shorter period of time.

Can you just talk about maybe that dynamic and the return you're expecting to get there? Or are you - do you have plans to try and bring churn down?.

Yes, Greg. So, churn on mobile, the first thing I'd note, it is up a little, but recognize that we have a very high prepaid base, right? So, the percentage of our base that is prepaid is quite significant. So, I don't think those churn levels, that the blended churn number are bad. That said, of course, lower churn is always better.

And there is some - probably some of the slight uptick is because of promotional activity, right? So, if you grow gross adds, you're going to see some of those will stick. Some of those won't, particularly in a prepaid basis, or when promotions roll off.

But net-net, we like the economics around it and we'll continue watching carefully, but we like the economics around it..

Okay, great.

And then lastly, are you still funding your private networks business? What is the status of that?.

It's really a much smaller business. It is subsumed within our US segment, within Commnet, and it had de minimis funding requirements in this last quarter and probably positive contribution going forward, but small..

In terms of your kind of refocus strategy around first-to-fiber and Glass and Steel, does that still fit in with the strategy, or is that something that maybe is no longer a focus of the business?.

Are you - Greg, you're asking if we still - the private network fits within our first-to-fiber and Glass and Steel strategy?.

Right.

Is it like a non-core asset now that maybe does not fit anymore?.

Yes. So, I think, and just maybe for everybody listening, because some people might not know what we mean by private networks, so private networks is essentially campus or in building or customer premise advanced wireless connectivity, just to keep it simple. And so, we still are offering that service.

We're offering that service in multiple markets, but we really view it as a service add-on to our existing business. It's not a core part of our strategy to expand that service..

Okay, great. Thank you..

Thank you. One moment for our next question. And we have our next question is coming from Hamed Khorsand of BWS Financial. Your line is open..

Hi. This is Hamed Khorsand. Just want to ask you about the subscriber growth commentary.

How sustainable is this growth, and what are you doing in terms of trying to upsell that customer to get into the more fiber and the higher end of the broadband spectrum that you're providing?.

So, Hamed, just to be clear, and good morning, you’re asking about, really about the broadband subscriber side?.

Yes..

Okay. So, I think it's very sustainable. In fact, we're - with our plan, we expect to continue to grow both the percentage of our customers who are on higher speeds and the overall number, I think.

So, and in terms of upselling, we have seen, as many operators have seen, a continued interest in existing customers to take - to upgrade to higher speeds and higher capabilities, or add mesh solutions and things like that. So, we continue to have success there.

And we've also seen in a lot of our newer fiber builds, if we look at our plans and sort of demographics, we are typically seeing take-up at higher plan levels than we had built into our business plan, so - which is great.

So, I think as we see this growth, I think you'll see some positive impact on ARPUs from that, from people buying more speed and then, of course, the growth in subscribers. So, I think we're quite bullish on it..

Okay.

And then my other question was, as far as the mobile side is concerned, what is the competitive risk here as you add more and more subscribers, seeing more of a degradation in pricing?.

You always worry about that and you always keep an eye, you’re always sort of paranoid about competition, paranoid about pricing, and you keep a careful eye on it. It's not really something that's front-of-mind worrying at this point, either on the competitive or the pricing. I think, if anything, we expect to be growing ARPUs over time in mobile.

So, and I spoke to churn before as well. We all - we’re not concerned about that expanding within the two segments of prepaid and post-paid. But it's something we'll always keep an eye on and react too quickly if we see a change.

And did the growth in these two segments, the broadband and mobile, will that help you at all get to a free cash flow positive state in ’23, or is that still further out?.

Yes. So, the growth in overall revenue of course flows down and benefits free cash flow. Free cash flow, again, is somewhat discretionary. So, we have high operating cash flow today. We have a relatively low sort of what we would call maintenance CapEx.

So, if we wanted to start - stop expanding or slow down expanding, our free cash flow would grow, right? We would start taking that high operating cash flow and have excess, right, relatively easily.

So, I think that's the main feature, and I don't know if, Justin, you want add?.

No, I think you covered it. Think we have strong free cash flow today, and a lot of our CapEx, as Michael mentioned, is kind of forward-looking. So, we have the ability to control that as much as we want to control the CapEx spending. .

And the other point Hamed, on that though is, it is true, if you look at our market and as a core part of our strategy, there is a layering effect in any market as we add subs, and as we add customers, whether it's mobile or fixed, whether it's consumer or business or government, there is an economy of scale benefit.

So, as we grow those revenues within that market, you see higher margins, contribution margins, and free cash flow expansion..

Okay. That's it for me. Thank you..

Thank you. One moment while we prepare for our next question. And our next question is coming from Ric Prentiss of Raymond James. Your line is open..

Yes. Hey, I wanted to come in with a follow-up if I could. A lot of discussion on satellites lately. We've had T-Mobile and SpaceX Starlink, we've had Apple and Globalstar, as far as putting satellite capabilities, satellite communication capabilities in the iPhone port team. We get the question a lot from investors.

First, how do you guys view the potential competitive threat from satellites into your differing markets? And then associated with that, you guys have had a relationship established with OneWeb.

Where's that at? And if they complete the merger, which we think they will with Eutelsat, what does that bode for you guys?.

I think we think satellite is largely complementary to our businesses. As I noted before, we're always paranoid, right? But we think it's largely complementary where - because of the inherent capacity differences, along with some performance characteristics and costs, we view it mostly as an attractive fill-in. And so, that's where we partner.

We’ve partnered actually to deliver to people in our broader operating area where satellite is a good solution and it's a more economical solution than something we could provide by building network ourselves. And we'll continue to do that.

In fact, we're continuing to look at that, and we're looking at wholesale relationships too, providing back-haul and transport for the satellite companies. So, I think there's clear value to what they bring, and I view it - I think we view it as largely complementary to what we have.

And from a standpoint of any competition on the mobile side?.

Yes. On the mobile side, I just - I think that is largely hyper competitive markets trying to me too for now. I don't see it as a major factor, certainly for us. I can't speak to those players, but in our markets, I really don't see it as a major factor, and should it become important to our subscribers to provide some capability like that.

I think there's going to be multiple satellite operators to choose from, to partner with to provide that solution when it's really ready. So, I don't think there's more impact that I can see..

Okay. And you touched on a little bit the macroeconomic environment. Help us understand a little bit about how inflation is affecting your companies and operations directly.

Are you feeling anything from a recessionary impact potentially out there? And with a high interest rate environment, any change in thoughts of all those items? Inflation turns to maybe recession and then high interest rates as far as what this all might mean for your guidances?.

Yes. So, like everyone else, we’re seeing inflationary pressures in certain areas such as labor, materials, equipment. We're also keeping an eye on potential economic churn around the low end of our subscriber base, but we haven't seen any meaningful there.

And so, what we're doing about it is, at the moment, it's not really had a material impact on our business. But we are actively monitoring local, national, global economic factors, and we're working hard to make the business more efficient, reduce costs. And we've also raised prices on our services in select markets where it makes sense.

And we do this, Ric, typically by delivering additional value such as higher speed in return for higher monthly service fee. So, we're continuing to evaluate it, but that's - so far, that's what we're seeing and that's what we're doing..

And on the interest rate side, any changing thoughts on what you might do with your guidance?.

No. I mean, we've given the EBITDA guidance. So, right now, we’re pretty confident where we are in terms of our ability to - on our loan facilities and whatnot. So, we feel confident with where we are now, Ric..

Okay, very good thanks..

Thank you There are no further questions at this time. I will now turn the call back to Michael for closing remarks. Go ahead, sir..

All right, thank you, Operator. So, ATN continued to execute at a high level this quarter, with steady momentum across our markets. We're serving our customers well, advancing our strategic broadband build-outs, and making excellent progress toward our three-year growth objectives.

In addition, we are proud to be working with our partners in Alaska and the lower 48 to help bridge the digital divide. So, thank you all. .

Take care, everyone..

This concludes today's conference. You may disconnect. Have a great day..