Good morning, everyone. And welcome to the Shenandoah Telecommunications Fourth Quarter and Year-End 2017 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Ms. Jennifer Belodeau of IMS and Investors Relations for Shentel..

Good morning and thank you for joining us. The purpose of today's call is to review Shentel's results for the quarter and year ended December 31, 2017. Our results were announced in a press release distributed this morning, and the presentation we'll be reviewing is included on our Investor page at our shentel.com website.

Please note that an audio replay of the 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 Christopher French, our President and Chief Executive Officer; Earle MacKenzie, our Executive Vice President and Chief Operating Officer; and Jim Woodward, Senior Vice President, Finance and Chief Financial Officer. After our prepared remarks, we'll 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.

Shentel provides a detailed discussion of various risk factors in our SEC filings, which you're strongly 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 statement.

Also, in an effort to provide useful information to investors, we note on Slide 3 that our comments today include non-GAAP financial measures. Details on these measures, including why we use them and reconciliations to the most comparable GAAP measures, are included in our SEC filings.

These reconciliations are also provided in an appendix to today's slide presentation. I'll now turn the call over to Chris..

Thank you, Jenn. We appreciate everyone joining us this morning. We continue to make significant progress on many different initiatives, growing the company and serving our communities and customers.

As of year-end 2017, we had completed over 60% of our planned expansion sites in the former nTelos area and are well on the way to finishing the remainder of this year. With our improved network, we are well-positioned to drive customer growth in these markets.

The fourth quarter marked our first full quarter of sales after completing the upgrade to 4G LTE in the former nTelos area and we’re very pleased with our results. Earlier this month, we again amended our agreement with Sprint to expand our affiliate service territory.

With this most recent expansion, we will serve a population of over $7 million in the mid-Atlantic region.

The expansion allows us to build networks that will improve coverage between our existing service areas and Sprint's metro networks, providing a better experience and more reliable service for our customers, as well as introducing significant opportunities for our continued growth.

For the year, Slide 5 shows the income statement increases reflecting the benefit from a full year’s results from the acquired nTelos markets. Revenue reads $612 million and operating income more than doubled to $46.5 million. Adjusted OIBDA was $281 million, representing a 46% margin and a 14% increase over the prior year.

On Slide 6, you’ll see that our fourth quarter revenue declined slightly whereas operating income increased 48% to 18 million. This quarter included the one-time non-cash benefit related to the new tax law, but absent that net income would be $7 million.

We continue to generate strong cash flows from operations with fourth-quarter adjusted OIBDA of $71 million, representing an OIBDA margin of 47%. Slide 7 shows our dividend history. We paid our annual dividend in December 2017, the 58th consecutive year of dividends.

This was also the fifth consecutive year with the dividend increase and we've raised our dividend 18 out of the last 20 years. During 2017, we continue to grow our customer base both in wireless and cable. Slide 8 shows highlights of our wireless business.

We increased both the postpaid and prepaid subscriber counts reaching almost 1 million subscribers. Moving to Slide 9, in our cable business, we again increased our RGUs as high-speed data and voice more than offset the expected decline in video. Adjusted OIBDA increased by 21% and our OIBDA margin improved for the sixth straight year.

Fiber and Tower numbers are shown in Slide 10. We continue to capitalize on our investment in our fiber network further growing both our fiber lease revenue and adjusted OIBDA. Changing gears, I want to mention that our search for our new Chief Operating Officer continues. It’s very important to us that we find the right person for this critical role.

I appreciate Earle continuing to serve while we search for his replacement and for being available to assist with the smooth transition. As you know, we filed a notice to extend the deadline for filing our 10-K.

The delay was principally due to the need to devote significant time and resources to evaluate the lease term used to record operating rent expense on a straight-line basis, primarily related to lease tower space.

We believe that the matters resolved are the previously disclosed material weaknesses, which have not been fully remediated as of December 31. We are correcting the material weaknesses we identified in our internal control.

Going forward, it is the top priority for us to have our controlled environment more robust and we are committed to resolving these issues and implementing a strong internal control environment. Before I turn the call over to Jim, I want to say how pleased we are with the progress we made during the fourth quarter, as well as 2017 overall.

We’re very excited about the opportunities ahead of us. At this point, we have completed our upgrade to a state-of-the-art 4G LTE network. We have further expanded our affiliate relationship with Sprint demonstrating our commitment to offering expansive coverage and reliable service to those in the markets we serve.

Our brand is known for solid network performance and strong customer service. Given our progress over the past year in terms of building a robust network, we are in an increasingly competitive position from which to capture new customers, all while providing the highest quality service options.

I’ll now turn the call over to Jim Woodward, our CFO to review the details of our financial results..

Thank you, Chris, and good morning everyone. I’ll begin with Slide 12, which shows changes in our operating revenues and net income. Revenues for the fourth quarter 2017 were $152 million, compared to $156 million in 2016.

The decrease is primarily the result of lower average revenue per wireless subscriber, which was driven by lower price plans from Sprint and the move away from subsidized plans. Our operating income increased to $18 million or 48% over the prior year's quarter.

We recorded net income of $61 million, compared to a slight loss of $200,000 in the last quarter. Net income includes a one-time non-cash benefit of $53 million related to the remeasurement of our deferred taxes to reflect the lower tax rates as part of the 2017 Tax Act.

While we have made a reasonable estimate of the impact of the Tax Act on our deferred tax assets and liabilities that estimate could change as we complete our analysis of all the impacts of the 2017 Tax Act. Excluding the impact of tax reform, our 2017 Q4 net income would be 7 million, compared to a loss of 200,000 in 2016.

Moving to Slide 13, adjusted OIBDA for Q4 was $71 million, compared to 76 million in 2016, representing an adjusted OIBDA margin of 47%. Also, on Slide 13 is continuing OIBDA, which includes the impact of the waived Sprint management fee.

I’d also like to point out that excluding the impact of integration and acquisition related expenses, adjusted OIBDA was even with last year at $70 million. As a reminder, when we acquired nTelos, Sprint committed to waiving the 8% postpaid and 6% prepaid management fees up to $4.2 million a month until the total waived fee reaches 256 million.

We provide the continuing OIBDA measure to ensure that investors are aware of the impact of the waive management fees. We expect the waived management fee will end in 2022. To better understand the factors driving the consolidated results, on Slide 14 is our fourth quarter adjusted OIBDA results by segment.

Cable and wireline adjusted OIBDA was up over the prior year. Wireless adjusted OIBDA was down, but only slightly once you factor out the one-time integration and acquisition-related expenses. On Slide 15 is a walk of the drivers of the changes in our wireless adjusted OIBDA.

Wireless adjusted OIBDA declined 7 million from Q4 2016 to Q4 2017, driven by lower postpaid revenues and higher prepaid acquisition costs. Prepaid costs were higher due to increases in prepaid handset subsidies and the boost in Virgin mobile brands, as well as heavy promotional activity in Q4 2017.

On Slide 16 is a walk of the drivers and the changes in cable adjusted OIBDA. Cable adjusted OIBDA grew $2 million quarter-over-quarter, primarily as a result of increases in high-speed data and voice revenues.

The lift in high-speed data revenues reflects the changing habits of our customers as they consume more streaming Internet-based video, which requires higher speeds and greater data consumption.

The changing consumer habits are also demonstrated by the reduction in traditional media revenues as the cost of programing fees rise and the alternatives to video continent have grown. We also continue to grow our fiber revenue supporting our investment in that area.

Turning to our capital metrics as of 12/31/2017 we had 837 million of debt outstanding and our leverage ratio was 2.9 times well inside of our debt covenant of 375. Borrowing any significant acquisitions, we expect our debt levels and leverage to decline. Also, in late February we repriced our debt reducing the interest rate by 50 basis points.

We expect the repricing to reduce to 2018 interest expense by approximately 3.4 million. As a result of the 2017 Tax Act and the lower tax rate and accelerated depreciation on our capital investments, would you not expect to pay any cash federal or state income taxes in 2018.

Lastly, I wanted to discuss the 2017 audit and the follow-up on the material weaknesses reported in 2016 K. As Chris mentioned, we needed additional time to review our lease accounting, mainly the straight-line rent expense and the accounting for amendments made during the original lease term. The analysis did not impact cash rent expense.

To a large extent, this is a continuation of the previous material weaknesses reported in 2016. During 2017, the company made significant progress on remediating the material weaknesses noted in 2016.

The weaknesses in internal control remain open, and we’re committed to clearing these items and improving our internal controls over financial reporting. Before I turn the call to Earle, I would like to give you an update on FASB’s ASX 606 or the new revenue recognition standard.

Shentel adopted the new revenue guidance effective January 1, 2018, based on the company's evaluation, which has not been finalized. We do not expect the adoption of this standard to have any material impact on our results of operations or cash flows in the periods after adoption. The most significant changes will be in geography.

Items that were previously accounted for as operating revenues – operating expenses will become a reduction in revenue. This is driven primarily by the fact that under ASC 606, Sprint is our customer and amounts payable to the customer are generally a reduction in revenue versus in operating expense.

The expected impact on net income and adjusted OIBDA is immaterial. There is an additional information in our 10-K, which we plan to file today. At this time, I’ll turn the call over to Earle to go into some greater depth on some of the operating factors driving our results..

Thanks Jim and good morning. I’ll start on Slide 18. We provided year-end subscriber numbers and fourth quarter activity in the press release on January 22, but I’ll recap. We ended the year with 737,000 postpaid and 226,000 prepaid wireless subs, excluding assurance customers.

As of year-end, approximately 26% of our postpaid customers remain on subsidized rate plans. On Slide 19, we had 51,442 fourth quarter gross postpaid ads, which was a 7% increase over fourth quarter 2016. The exciting news is that 57% of the gross ads wherein the former nTelos area, which has approximately 52% of the covered pops.

We had 14,035 net adds in 2017 with 8,643 net adds in the fourth quarter. Over 55% of the fourth-quarter net ads wherein the former nTelos area. 67% of the fourth-quarter net ads were phones with 33% being data and data devices. Tablets and data devices.

Included in the data devices were approximately 1,100 Apple watches, which were – had free service for 90 days, upgrades in the fourth quarter where higher at 9.4% of the postpaid base. We reported a fourth-quarter port-in ratio of 1.24 to 1.

Additional good news is the port-in ratio in the former nTelos area grew from approximately 1.1 to 1 in October, up to 1.4 to 1 in December. We have seen that momentum continue into 2018 with the port-in ratio averaging 1.4 to 1 in the former nTelos area for January and February. Sales have been particularly strong investor Virginia.

With the integration and transformation of nTelos complete, we don't plan to provide separate stats for the former nTelos area going forward. Slide 20 shows the churn numbers that we have previously reported along with postpaid ARPU.

The decrease in fourth-quarter ARPU is primarily due to further reductions in postpaid customers on subsidized phone plans and multi-line customers taking advantage of the unlimited plans with the promotional third, fourth, and fifth lines free. As these promotions expire, we will collect up to $30 on the third, fourth, and fifth lines.

Moving to prepaid on Slide 21, fourth quarter gross ads were down 4% from the same quarter last year. We had 19,115 net prepaid ads in 2017 with 1,213 [ph] net ads in the fourth quarter. The trend continues with strong boost net ads and net losses of Virgin Mobile customers.

Fourth quarter prepaid churn shown on Slide 22 is significantly down from the same quarter last year, but you recall that the churn in 2016 was elevated, due to the shutdown of the nTelos prepaid platform in December 2016. Prepaid ARPU remain strong. Slide 23 is our report card on the $240 million upgrade and expansion of the nTelos network.

As we reported last quarter, we completed the upgrade of the network from 3G to 4G added the 800-megahertz spectrum and have decommissioned the overlapping sites. We added a significant number of new sell sites in the fourth quarter and now have approximately 65% of the new coverage sites completed.

The remaining news sites will be completed this year. Systemwide, we added 155 new sell sites in 2017 and will add approximately 150 in 2018, which will increase our operating cost in 2018 and into 2019.

Moving to cable on Slide 24, we previously reported that we ended the year with 133,086 revenue generating units with net addition in the fourth quarter of 476 high speed data users, 136 phone users, and a loss of 766 video users.

Significant increases in our 2008 programming and retran [ph] costs were passed on to our video users in January 2018, which we believe will elevate video losses this year. The increase in revenue per cable RGU and for our customers shown on Slide 25 continues the same pattern we’ve seen over the past quarters.

Our average revenue per high speed data customer now exceeds $70 per month. We continue to have 700 plus existing high-speed data users, upgrade their speed each month contributing to the significant increase in operating income and OIBDA margins.

Slide 26 tells similar story of increasing voice and high-speed data penetrations and decreasing video penetrations. We just completed a high-speed data customer speed role. We eliminated our 15-meg tier, enrolled all of our 15, 25, 50, and 101 meg customers up one speed at the same price they were paying, having no impact on service revenues.

We made no change to our data customers at 10 Meg and below. As you can expect the reaction from the impacted customers was very positive. Slide 27 shows our wireline segment customer results.

We continue to lose regulated telephone access lines, but the loss has slowed to levels similar to the period before we no longer required a customer to have a voice service to get broadband. We continue to add broadband customers with customers migrating from DSL to cable modem.

In 2018, we are going to be more aggressive in moving DSL customers to cable modem where it is an option. Over the next few years, we plan to move all DSL customers in our cable footprint to cable modem and shut down the DSL network in the cable area that overlaps our regulated telephone service area.

We are continuing to invest to provide higher DSL speeds in the parts of our regulated telephone networks where we only have a coper network. Moving to Slide 28, you see that both affiliated and nonaffiliated fiber revenues continue to grow, up over 22% from 2016.

We signed $23 million of new nonaffiliated fiber contracts in 2017, down $3.2 million from 2016. We had a lower dollar total but signed more contracts in 2017 then 2016. Slide 29 shows our CapEx for the years 2015 through 2017, and our projected CapEx for 2018.

Due to timing of projects, we spent $138 million in 2017 less than $141 million estimated we provided in the fourth quarter call. With some 2017 carryforward in addition to dollars for finishing in the nTelos expansion, along with the new wireless service areas, the projected 2018 budget is $163.2 million.

As shown on the right side of the slide, 52% of the amount is for the upgrade and expansion of the acquired territories, including finishing up the coverage in the nTelos area. 14% for maintenance, 12% for increased capacity, 9% for expanding the network, and 13% is success-based.

Success-based means we only spend these dollars if there are new revenues being generated such as building into a new fiber customer. Before I turn the call back over to Jim, I’d like to take a moment to talk about the recent expansion agreement signed with Sprint effective February 1. We see this as a strategic addition to Shentel.

As I have discussed before, our wireless customers are twice as likely to churn if they live in a county on the parameter of our network. The reason is that for many of our customers their community of interest is outside of our network.

So, they often travel into the Sprint network areas, they don't have the quality of service that Sprint provides in the urban areas.

Taking over these in between areas allows us to improve the quality of service to match the rest of our network and provide a bridge to the quality network that Sprint has in the urban areas, providing all Sprint customers a better network experience.

The new territory covers approximately 1.1 million POPs with currently 105 cell sites providing coverage to approximately 600,000 POPs. We have the option, but no obligation to cover an additional 200,000 POPs in Eastern Kentucky. We expect to invest $56 million in the network over the next three years.

We initially reported that we were getting approximately 67,000 customers, but upon a more detailed accounting in splitting up the Sprint market areas, the actual number is approximately 59,000. We have received an $8 million price adjustment to the 65 million previously reported for a revised amount of 57 million.

Slide 31 is the map that we have on our website and referenced in our press release. We’ve added Lancaster County, Pennsylvania, which is an important missing link to enhance our service between Harrisburg York, Pennsylvania and Philadelphia.

We picked up a number of counties in Central Virginia that will bridge the coverage between our service area and Washington D.C. and Richmond. This expansion gives us the entire state of West Virginia, excluding the wheeling area outside of Pittsburgh. I’ll now turn the call back over to Jim..

Thank you. That concludes our prepared remarks. Operator, would you review the instructions for posting the question..

Absolutely. [Operator Instructions] We will go first to Ric Prentiss of Raymond James. Your line is open..

Hi guys it’s [indiscernible] on for Ric.

Just had a quick one on the cost of goods and services and wireless seem to drop quarter and year-over-year, is that related to the straight-line or what was driving that?.

Yes, primarily it was, very little of it was a straight line, but the cost of goods in wireless over time had more to do I think with the reflection and revenues..

Great. Thanks..

Thank you. Our next question comes from Amy Young of Macquarie. Your line is now open..

Good morning Earle, good morning Jim. Hope you are doing well? Couple of quick questions. First, on the new expansion deal that you have with Sprint. Can you just clarify the CapEx expectations for 2018? Is it 162 [ph] that you're expect contemplate the 56 [ph] over the next 3 years? And then I have a couple of more follow-ups. Thanks..

Yes, this is Earle. Yes, it does. It includes - money is to finish up the approximately 90 sites that we have to do in the nTelos area in order to finish up that expansion.

It includes dollars for the Parkersburg, Cumberland expansion that we announced last year and it also includes some dollars, but not a significant number of amount of the 56 for the most recent expansion and that obviously takes some time to do planning.

So, most of what we will be spending in that part of the expansion will be in the fourth quarter of this year..

Got it. And then did I hear this correctly that you’re basically inheriting 60,000 subs or 59 rather? Can you help us walk through what kind of penetration rates we should be assuming for 1.1 million over the next two years, obviously your track record has been – your track record is developing very strong now.

So, we should we assume kind of the same penetration rates that you have been able to achieve with nTelos in this new expansion agreement?.

Over time the answer is, yes.

We do expect that we can achieve the same kind of results, but realistically it’s going to take us 18 months to 24 months to get there because the coverage although there is some coverage and some customers there, there is not great coverage yet, and we’re not going to spend a lot of marketing dollars in these areas until we have a competitive network.

So, I think the way – the best way to think about it is that most of the growth accelerated growth for this year will come out of the nTelos footprint.

Towards the middle of next year, we will start seeing numbers come out of the Parkersburg, Cumberland area and then towards the end of 2019, early 2020 is when we will start seeing numbers accelerate out of the most recent expansion..

Got you. And then, maybe if I could just squeeze in one last question. I think you're expecting that OpEx is going to be little bit elevated in 2018 and 2019 as a result of this, can you just give us a sense on the magnitude of the jumps? Thanks..

Yes, I think the best way to think about it is, we’re talking about between last year and this year adding 300 plus new sell sites. The average cost per month for a new cell site is about 55, $5600 a month when you look at the rent on the tower or the backhaul, the electricity and maintenance.

So, you can see that over $60,000 per sell side per month is a fairly significant increase in expenses. Obviously, all that’s not coming in one month because we’re building those towers, those sites over that period of time, but we will see the cost of goods sold part of the income statement increase as we are bringing on these sites..

Great. Thank you..

You're welcome..

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

Hi, good morning.

So, first off as far as the new wireless subscriber ads goes in Q4, was there any impact from the late iPhone launch this past quarter and are you seeing any spillover effect into Q1 because of that late release?.

Actually Hamed, probably the iPhone release has little impact this year that I’ve seen in the last several years.

What we’re finding is that customers are keeping their phone longer and I think that’s probably is reflected in what you're seeing on some of the promotions that you’re seeing in the marketplace where there has been quite a few buy-one get-one free for the iPhone 8.

And so, although it does have some impact no doubt about it, we really haven't seen in 2017 nearly the lift that we have seen in previous years by having the iPhone release..

Okay.

And then what’s the timing as far as when you would see the roll-off of the Sprint promo you were talking about? What’s the additional ARPU from the lines 3, 4, and 5?.

Hamed really what we’re talking about is, they are certainly the ones that I specifically mentioned in the fourth quarter. They will roll-off in a year, but what’s more important for us is they are all the promotions that Sprint has been giving over the last several years.

As you probably know Sprint has announced publicly that they are going to pull back on those promotions, and so we’re expecting them to start to take away some of those promotional dollars from customers starting the end of this quarter into the second quarter on those people who have had promotions for several years.

If you remember some of the promotions that they have run in the past is to cut the bill in half and maybe then have five lines for $90.

So, we know that it’s not going to happen all at once, but we expect that over the next year and going forward we should start seeing some impact of having those promotions roll-up and potentially that should translate into higher ARPU..

Okay.

And lastly, what kind of trends are you seeing as far as the – now that you have more than one quarter of the ad spend increase with the new wireless subscriber additions going to Q1 and Q2, are you seeing any traction here?.

Yes, so we're definitely seeing traction. We are, as I mentioned, we had elevated gross ads. We’re starting to see more traffic in the stores in the former and nTelos area. When people are coming in we’re having a very high rate of closing them when we’re able to tell them the story and they understand where our coverage is.

And we're starting to see the impact of churn going down. The only part of our nTelos customer base that where the churn hasn't really started to decrease yet, as you recall when we acquired nTelos we got two customer groups. We got the nTelos customer group and we got Sprint's customers in that footprint.

The nTelos customers who we’ve had to come into one of our stores and get a new phone and we were able to tell the story to, churn in that group has dropped very, very nicely. What we haven't seen churn dropping yet is in those customers who came over from Sprint because we really had no ability or reason to touch those customers.

They were already getting a Sprint bill. They already had a Sprint phone. As the network continues to get better and better we assume that that will impact that group.

Perception always lags reality and so as we’re looking forward we expected that the churn in the nTelos area will start dropping over this year and by this time next year we don't really see any reason why the churn in that area would be any different than our legacy area?.

Okay. And then finally, just as far as total subscribers go you’ve seen a nice increase as far as postpaid subscribers bill, while you are lagging on prepaid.

Are you seeing a conversion here of users going from prepaid to postpaid or is this more just mechanics of last year's accounting adjustments in Sprints adjustments to what it comes to prepaid customer?.

That’s a good question. We have not seen a lot of customers moving up from prepaid to postpaid. They really are different segment of the population that buy those. And a lot of what you saw, especially the fourth quarter Hamed is time of the year. Fourth quarter is not the best prepaid quarter, first quarter is.

And I can tell you, we’re having a very, very good prepaid first quarter. The other thing that kind of impacts our numbers is the shift within our customer base from Virgin mobile to Boost.

Sprint is not spending nearly the money to support the Virgin mobile brand that they are the Boost brand and so what we’re seeing is very nice monthly increases in our Boost customer base, but because that Virgin mobile brand is not being supported at the same level, we’re having decreases in our virgin mobile customer base.

So, I guess at some point in time that percentage of our customers that our Virgin mobile be pretty small and will have the biggest impact. We’re still seeing the prepaid business is being very robust, very solid for us and as I mentioned we are having a very, very good first quarter..

All right. Thank you for your time..

You're welcome..

Thank you. And I’m showing no further questions in queue at this time. I would like to turn the conference back over to Jim Woodward for closing remarks..

Thank you everyone for participating in our call today and your interest in Shentel. And we look forward to updating you on our progress in future calls..

Ladies and gentlemen, thank you for your participation in today's conference. This concludes today's program. You may now disconnect. Everyone, have a good day..