Good morning. My name is Tamika, and I will be your conference operator today. At this time, I would like to welcome everyone to the Consolidated Communications' First Quarter Earnings Conference Call. Please be advised that today's conference is being recorded. .

I will now turn the call over to Jennifer Spaude, Senior Vice President of Investor Relations and Corporate Communications. Jennifer, you may begin your conference..

Thank you, and good morning. I'd like to welcome everyone to Consolidated Communications' First Quarter 2021 Earnings Call. On the call today are Bob Udell, President and Chief Executive Officer; and Steve Childers, our Chief Financial Officer. Bob's comments today will highlight our strategic initiatives and progress with our fiber build plans.

Steve will provide details on our first quarter financial performance and an update on guidance for 2021. Following the prepared remarks, we will open up the call for questions.

Before we proceed, I will remind you our earnings release, financial statements and earnings presentation are all posted on the Investor Relations section of our website at consolidated.com..

Thank you, Jennifer, and good morning, everyone. We are excited to be with you today, especially pleased to update you on the early phases of our gigabit fiber growth plan. We have never been better positioned with a stronger balance sheet, a fully funded growth plan and a strong first quarter result to begin an investment here.

First quarter marked the official start of our transformation as we set out to achieve a 5-year plan to upgrade at minimum 1.6 million locations. This will result in more than 70% of our total 2.7 million addressable homes and businesses across our footprint available to have gigabit broadband speeds or higher.

We're off to a great start having upgraded nearly 46,000 passings to gigabit fiber capable services in first quarter. To put this into perspective, the first quarter number of fiber passings upgraded is 20x the number we built in all of 2020.

We are making great progress on fiber builds and network upgrades, and I'm proud of what the team accomplished in the first quarter. Our first quarter results reflect strong operational performance and execution, which produced stable revenue and a very fast start to our fiber builds. Starting with our consumer channel. Broadband revenue grew 2.6%.

This is the eighth consecutive quarter of year-over-year broadband revenue growth. The consumer data ARPUs grew 7%, and we added more than 3,800 fiber broadband connections, a 10x increase over the same period last year.

Our build rate -- with our build rate in the first quarter, we are on track with our overall plan to upgrade at least 300,000 locations in 2021 as outlined on Slide 6 of our investor deck. The gigabit fiber upgrades were primarily in Northern New England, California and Texas.

Crews constructed 770 miles of new fiber just in the first quarter, placing 288 fiber count or larger cables to meet the high-capacity needs of our consumer, commercial and carrier customers for years to come..

Thanks, Bob, and good morning to everyone. We're pleased to report today on a remarkable start to the year. In addition to sharing our strong Q1 results, I'll also update you on a couple of recent refinancings, and I'll also reiterate our 2021 guidance. Our first quarter financial summary can be found on Slide 4 of our presentation.

Operating revenue totaled $324.8 million for the quarter and was down approximately 0.25% compared to a year ago. Adjusted EBITDA totaled $126.6 million, down 3.8%, and was in line with our expectations as we start to ramp our fiber expansion plan.

Now in looking at the revenue results, commercial and carrier revenue totaled $144.3 million in the first quarter, down $2.7 million or 1.8%, primarily due to equipment sales and the timing of construction projects. Data and transport revenue totaled $90.3 million and was up approximately 1% in the first quarter.

This compares to the 2% growth we achieved last year, and which is still our target for 2021. Voice revenue declined $1.4 million or 3.2%, which is consistent with improved voice trends we experienced throughout 2020.

Commercial, other products and services revenue declined $2 million, driven by a decline in our pole attachment revenue and lower equipment sales. But customers who held off equipment purchases in 2020 are starting to reengage again, especially within the medical sector. Now turning to our consumer channel.

Revenue totaled $123 million, which represents a year-over-year decline of 2.7%. This decline is within expectations, is primarily driven by voice reductions. Consumer broadband revenue was $65.8 million, up 2.6%, and represents our eighth consecutive quarter of growth on a year-over-year basis.

The consumer data ARPU in the first quarter was $55.24, up 7% year-over-year. We expect to continue to grow data ARPU as we increase speeds and upsell customers, especially as we roll out the fiber to the perim 1 gig product. Consumer voice revenue for the recent quarter was down 6.4% or $2.8 million from a year ago.

Our increasingly competitive broadband offers, combined with measured rate increases are contributing to our ability to sustain the improved revenue trends we realized in 2020..

Thank you, Steve. Finally, I'll provide a brief update on the second closing that Steve referenced with Searchlight Capital Partners. You can see the investment steps associated with this partnership on Slide 8 of our presentation. This week, our shareholders approved the issuance of shares to Searchlight as part of this transaction.

We expect to obtain the applicable state and FCC approvals in third quarter, which will then trigger the remaining $75 million of investment. With our strong balance sheet and strategic partner in Searchlight, we're building on an excellent platform for the future, and we're very focused and on our way to becoming a fiber-first broadband company.

As we enter into the next phase of our growth and transformation, our strategic priorities continue to guide our work as outlined on Slide 10. Our #1 priority is accelerating our fiber build to scale and grow broadband services in the markets that we serve.

We will also leverage our fiber assets to continue to grow commercial and carrier data services, and we're focused on transforming the customer experience to make it easier for our customers to do business with us.

We're very confident in our plan and ability to deliver a differentiated superior fiber product offering with an excellent customer experience and digital capabilities. These priorities put us on a path to return to top line revenue growth in 2023. And this return to growth is extremely exciting.

Our plan is fully funded, and we are executing on our fiber expansion growth effort as we build momentum and become a stronger fiber-based broadband provider. In closing, I want to thank our dedicated employees who work hard every day to serve our customers and execute on our bold growth plans.

Our path forward is all about building long-term sustainability and value for our investors, our customers and our employees. And we have a strong, stable business, a significantly improved financial position and a growth plan that is transforming our company and the communities that we serve.

I couldn't be more excited for what the future holds for us. Tamika, I think we're now ready to take questions at this time..

. Your first question comes from the line of Gregory Williams with Cowen and Company..

You're off to a good start, and I had a couple of questions on that good start with Fiber To The Home. One, you did reiterate your Capex, but it's really great to see that your cost per home passed is coming in pretty low at $350 per home.

Where do you see that trajectory going? I imagine you just dealt with the low-hanging fruit, so to speak, in terms of home. And so as I think about the next tranche of homes over the next few quarters, where do you see that trajectory in light of your CapEx guide.

And as a tangent, I know it's early, you have early learnings, but are you seeing the cost to connect, the success-based CapEx, the drop, the OMT coming in around that $750 level? And then my last question, if I may, is on the cadence. You built out 46,000 homes. That leaves another 154,000 to go for the year.

How should I think about the cadence? Is it bulkier in the warmer months? And then maybe as it cools down in the fourth quarter, it slowdown? Or is it sort of a linear ramp or a steady ramp up?.

Yes. Greg, good morning, thanks for the questions. Let me start with the CapEx first, and both the passings and the success base. We're -- you're right. I mean, we're dealing with the lower hanging fruit, if you will, in the places that we could move most quickly in order to get the machine running.

And so we're going to see that CapEx number creep up as we get into underground, especially in northern New England where we know we'll have some duct work and repairs to do. So I would expect it, the trend towards the 450 in northern New England and probably between 500 and 550 in some of the areas where we have to do varied work.

But on the average, it will move towards that 500 number as we progress through the year. There'll be some that are 700, 800, and there'll be some that are in the 300 range, but it will average out in that 500 range, I think, towards the end of the year.

On the success-based side, we're actually -- because we don't have all the WiFi gear that we want from an experience perspective, we're in the 400 to 450 range on the install. The installs are going fairly quickly. It's a lot more efficient of an install. It's primarily plug and play.

And so we're looking at ways to continue to tweak the talent pool that we've put on that. So right now we're using high cost labor to make sure, the more technically proficient folks to make sure that nothing goes wrong, and we can improve on the process.

But as we smooth that out, I think there'll be higher equipment costs with more WiFi components, and it will increase above the 450 range that we're seeing right now. So those things are well within our expectations. On the cadence, I think the early learnings are that we can ramp construction fairly quickly.

We're feeling real good about first quarter. We've got roughly 70,000 planned in second quarter, and then we'll ramp through the end of the year because we can do some construction through the winter months as we've proven in first quarter in northern New England, it will just be weather-dependent in the fourth quarter to a certain degree.

But we have other markets that we're building in, like Texas and California, where we can continue to get passings in the tougher winter months. So the portfolio is serving us well. The only risk I see is availability of materials.

And so far, we've been well positioned for that and work ahead with our vendors and haven't seen that impact our build rate or our forecast for 2021 at this stage. So I think I covered it all three..

Your next question is from the line of Eric Luebchow with Wells Fargo..

Yes, I was wondering, you mentioned the supply chain shortages. We've heard about that, particularly in the chip market, Bob, about some concerns building.

So you haven't -- sounds like you haven't seen anything yet, but did you see anything in the future that could potentially impact the trajectory of the build pace? Or do you have enough purchase orders in that you feel pretty well insulated at least through the end of this year?.

Yes. Great question, Eric. We feel really good with the purchase orders that we have out. We're pretty well-planned-out through the end of the year. There's always a chance that someone won't deliver on what they've committed to or they'll delay a delivery.

And so far, because of the scale of the build we're doing and our relationships with suppliers, it's -- we're feeling pretty good. There's been a little bit of a challenge on fiber with resin now becoming a commodity that's hard to get. And that makes plastics cheap. And so we're hearing that could affect slice cases and things like that.

But we feel like we're in a good shape from a supplier perspective. On the chipset issue, we put those electronics orders in very early, and we're seeing the delivery so far hit on target. So I don't foresee it affecting us for this year as long as the POs that are committed deliver on time..

Okay. Great. And then just one more for me. Maybe you could talk about, Steve, the Connect America Phase II program. I believe that sunsets at the end of this year.

Can you just kind of remind us any impact that will have as we kind of roll our model through to 2022 on EBITDA or free cash flow?.

Yes, Eric, this is Steve. Yes. So I think as we've talked before, the auctions kind get a different path on us than maybe what we had expected. We really kind of pivoted to -- let me be direct on your question.

We -- today, we get $48 million a year in CAF II funding as we pivot towards RDUF at start of 2022, that's going to drop down to about $6 million a year in annual revenue. But again, I remind you that our build plan, and I don't believe the Searchlight investment was predicated on long time dependency on CAF II or RDUF.

So we've said -- fortunately, we pivoted towards expanding our build plan, and that's why we went from 1 million passing for -- actually from 1.3 million to 1.6 million was because we wanted to be selective in the RDUF or some stocks that were really going to be high cost. Reserve pricing was going to 0.

So I think we are going to take a step down just on total revenue in 2022, but we will make that up from a retail basis as people accept the 1 gig product and then probably within a 2-year window. So we're really focused on the build plan, and maximize in execution on that..

The next question comes from the line of Michael Rollins with Citi..

Just curious, where you're upgrading fiber to over the next few years, what percent of that overlaps with cable competition? And can you remind us of how you think about the share opportunity from that as you get into those markets and compete with the fiber?.

Yes. Thanks, Mike. When you think about the way our plan is built, we assumed that we were in a duopoly position in all cases. In reality, we have 81% of our market overlaps with one competitor. And there's small percentage, 3 or 4 that has 2 competitors. And the rest has roughly 11%. I think that has no competitor.

And the majority of the builds are in a duopoly situation. Our experience is we end up with a 35-plus percent penetration in a duopoly situation when we have 1 gig offering. And in fact, in some of the more mature areas, after about 3 years, we've got 40% plus, 42% in some cases.

Our initial experience in our fiber cohorts are -- where there's no competition, really, we're in the 60% plus in a matter of 6 months and where there is competition after roughly 2 years we're at 36%, actually 38% in New York, where we had the state broadband partnership. And we have Charter as a competitor there.

So I think mid-30%, which is what it is in our model, is very doable, and our expectation is 40%-plus..

And in your experience, just given the importance of broadband, especially as many of us have been in remote environments in some form over the last year plus.

So in your experience, why doesn't everyone or all homes have broadband? What are the reasons that you find for that gap where it's not 100% penetration of homes in the market for you and your competitors?.

I think it's going to be rare. I think you had seasonal homes that aren't fully full-time occupied. You've got some that just won't depend on Internet at home and instead we'll use satellite. But I don't think you're going to see that remain in the 91% or whatever the rate is nationwide for long.

I think it's going to be like the telecom growth of voice to all of America is going to get replaced by broadband. And that's why you're seeing a rush to interest in investing in this space..

. Your next question is from the line of Rob Williams with Octagon Credit Investment..

Just a quick one from me. You've added a nice amount of home so far. I was wondering if you can give us just some color, kind of early days on the penetration rates. I know Bob just alluded to some of it.

But kind of how do we think of that 321,000 homes that are gig-enabled, what's the data subs for that right now as a broader just overall penetration rate?.

Yes. We're going to get more detailed in the penetration rates as the year progresses. And so it's really hard to give you a number without putting it in the context of how long those homes have been available. So in the homes that have been 3 years available with a gigabit fiber-based product or longer, our penetration is above 35%, 36%.

In the most recently deployed homes, it really depends on, for example, northern New England, it's been harder to do direct door-to-door sales. And so it's trending more closely to our plan of expecting 20% in the first -- 15% to 20% in the first year, getting close to high-20s in the second year and then mid-30s in the third year.

But in the areas where we've got long-time history, in the mid South and the longer-term fiber gig areas in the West Coast, we're in the 36%, 40%, 42% range. So we're looking at it cohort by cohort.

But towards the end of the year, as we build the momentum in second quarter, third quarter, there'll be more metrics that we're sharing because this is really the investment here in the transition of turning this ship into a growth engine, and we'll give you more examples on the overall fiber base as we blow out the metrics further..

Great. Yes, I think everyone would appreciate that. And then I guess my final one is just kind of getting back to some of the cost side on the inflation pressures potentially.

Are your -- I guess, are the contracts and the orders you guys put in, are they already fixed price? Are you getting adjustment if costs are rising?.

Yes. The POs that we put in now are fixed price. And we have POs that we're letting all the way into 2022. So we're watching the cost of materials carefully. But so far, we feel confident that there's room for some movement if prices go up..

. At this time there are no further questions. I will turn the call back over to Mr. Bob Udell. Please go ahead, sir..

Thank you. Well, thanks, everyone, for joining the call today. We're very excited about our progress in first quarter and well into the second quarter ramp. And we appreciate you tuning in and look forward to updating you on our first quarter -- our second quarter results. Thank you. Have a great day..

This concludes today's conference call. You may now disconnect..