Good morning, everyone. Welcome to Shenandoah Telecommunications Third Quarter 2021 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Kirk Andrews, Director of Financial Planning and Analysis for Shentel..

Good morning, and thank you for joining us. The purpose of today's call is to review Shentel's results for the third quarter of 2021. Our results were announced in our press release distributed last night, and the presentation we'll be reviewing is included on the Investor page at our website, www.shentel.com.

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 on various risk factors in our SEC filings, which you're 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 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 I hope everyone is staying healthy and safe. I'd like to start by providing an update on our strategy and future capital allocation plans. We continue to target 730,000 broadband passings by 2026. With strong momentum on business development, construction and sales.

We are upgrading our target for glow fiber from 300,000 to 450,000 service goal addresses by 2026. Our government relations team continues to get a warm embrace by municipalities looking to offer a choice of broadband providers for their local residences and businesses.

We have executed 17 new franchise agreements in 2021, adding approximately 160,000 future passings for a total of 304,000 passings with franchise approvals. Further, we have an attractive funnel of additional markets that have met our investment criteria, which we expect will lead to franchise agreements in the coming quarters.

We're very bullish about our Glo Fiber results and prospects and over the next five years plan to invest more than $500 million building fiber to the home and connecting customers. In addition to investing in Glo, our team has been analyzing new opportunities to build broadband to unserved homes.

Shentel has a long history investing in the latest technologies, so rural communities can enjoy the same state-of-the-art telecommunications services that are provided in rural markets -- excuse me in urban markets.

Our proven track record positions as well to partner with county and state governments to develop cost effective and timely broadband solutions to reach these unserved locations. And unserved homes currently defined by most government agencies as a home without access to speeds of 25 megabits per second down and 3 megabits per second up.

In the five states that we operate in. There are over $1.3 billion in government grant funds available to subsidize building broadband to these unserved locations. Most of the state grants are being funded by the American rescue plan that was passed by Congress in the first quarter.

While the unserved opportunity for us is less than 10% of the Glo target market, we have identified several attractive opportunities that we are pursuing in the region. We expect these will be accretive to our broadband business, if we're successful on being awarded government grants. Ed will provide more detail on the opportunities by each state.

As we stated in the past, one of our governing investment principles is to offer the best internet service in the markets we serve. With a large amount of government grant funds now available and possibly growing if the infrastructure bill Congress has passed. We are pausing our beam expansion plans.

These plans have focused on providing a fixed wireless service to the same low density rural unserved homes that may be eligible for government grants to build fiber.

Going forward, we are adopting a success based investment model for being where we've been awarded government grants to build fiber networks with wireless last mile connections for certain difficult to reach locations. The hybrid fiber fixed wireless network design is unique to Shentel.

Given our product offerings and licensed spectrum position, and allows us to lower the subsidies required by the local partner counties, and shortens the time to deliver broadband service to unserved homes. We plan to share more details in the coming quarters on this segment of the market.

In summary, our target remains at 730,000 serviceable addresses with a shift to a fiber first future-proof network. Shifting now to our broadband network expansion on Slide 5. We continued our strong construction momentum in the third quarter with 17,000 new passings being added. With total passings now approximately 296,000.

Glo Fiber had another record quarter of construction, adding over 14,000 new passings. We expect similar construction results in the fourth quarter with approximately 75,000 Glo Fiber passings by the end of the year. Beam passings grew to 24,000 during the quarter with a more targeted approach to beam expansion.

We now expect our beam network to reach 28,000 passings and our integrated broadband network to reach approximately 314,000 passings by the end of 2021. Turning to Slide 6, broadband data net additions were over 4,100 during the third quarter.

Glo Fiber contributed 2,100 or over half of our net additions reflecting a 43% growth rate over the same period a year-ago. We have added over 16,000 net data additions over the past four quarters, despite the COVID tailwinds on our Incumbent Cable business now being well behind us.

We have great momentum to continue this pace and increase it as we launch new Glo markets. On Slide 7, we turn to the annual dividend. On Tuesday, our Board of Directors declared a $0.07 per share dividend payable on December 1st to shareholders of record on November 8th. This is the 62nd consecutive year that Shentel is paid an annual dividend.

The dividend realigns with our now smaller company as a result of the sale our wireless operations. Annual dividend is an addition to the $18.75 special dividend that was paid to shareholders in August following the sale of our wireless assets and operations. Special dividend was equal to 95% of earnings per share from discontinued operations.

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. Please refer to Slide 9 to discuss our financial results for the third quarter. Broadband revenue grew 14.2% to $57.9 million, driven by an increase of $5.3 million or 13.4% in residential and SMB revenue, due primarily from a 17% increase in broadband data RGUs.

Commercial fiber revenue grew $1.8 million or 24% due to a combination of growth and customer connections, 700,000 non-recurring reduction in amortize revenue in 2020, and 500,000 non-recurring fiber sales type leases signed in 2021.

Broadband adjusted OIBDA for the third quarter grew $3 million or 15.4% to $22.6 million for the same period a year ago. The revenue increase of $7.2 million was partially offset by $4.2 million in higher expenses. $2 million of the expense increase supported the expansion of our Glo Fiber and beam services.

The incumbent cable expenses increased $2.2 million, primarily due to $1 million in higher maintenance costs and 600,000 in higher software fees due to enhancements in our back office systems. On Slide 10, Tower segment revenue declined 1.2% to $4.4 million in the third quarter 2021.

And it's increased 13% offset by a 14.1% reduction in the average revenue per tenant. During the third quarter, T-Mobile exercised an option to convert 80 assumed tower leases to a month to month term, resulting in a change in revenue recognition accounting driving the decline.

We anticipate these leases will churn in the next year or two, as T-Mobile rationalizes their network in our former wireless market. T-Mobile will continue to be our largest tenant post-rationalization with 182 leases with an average lease term of approximately seven years.

We also signed our first lease with DISH, as they build out their national network. We anticipate there is a sizable opportunity with DISH to lease tower space in the coming periods to replace a large portion of the turn expected from T-Mobile.

Adjusted OIBDA declined 8.7% to $2.6 million for the third quarter due to the revenue decline and higher ground lease expenses. Moving to Slide 11, consolidated revenue grew 12.8% to $62.2 million in the third quarter.

Consolidated adjusted OIBDA for the quarter grew 31.7% to $19.3 million, marking the third consecutive quarter of double-digit revenue and adjusted OIBDA growth rates. Their increases were primarily due to strong broadband revenue and a 20% decline in corporate expenses.

The decline in corporate expenses was due primarily to lower compensation and bank fees. The lower compensation expenses were due to a combination of savings from the previously announced reduction in workforce and lower expected incentive bonus accrual.

We realized approximately 800,000 in workforce reduction expense savings in the third quarter and expect to realize $3.3 million in annual run rate cost savings in the fourth quarter and $4 million as we enter 2022. Turning now to full-year 2021 outlook on Slide 12.

We are narrowing our 2021 outlook with consolidated revenues expected to range from $243 million to $246 million and adjusted OIBDA expected to be $70 million to $73 million consistent with our prior guidance.

Moving to Slide 13, we ended the third quarter with a strong liquidity position of $933 million, including $533 million of cash and equivalents and $400 million available from our credit facility.

Pro forma for the $428 million in income taxes from the wireless sale expected to be paid in mid-December, or liquidity will be approximately $500 million as we enter 2022. We expect to draw on the delayed draw term loans starting in the first quarter of 2022 with the upsizing of our target Glo Fiber passings to 450,000.

We now expect negative free cash flow to peak in 2023 and we expect to return the positive free cash flow by 2026. Our business plan is fully funded with our current credit facility and now expect our net leverage ratio to peak at 2.4 times. With that, I will now turn the call over to Ed..

Thanks, Jim and good morning. I'll begin on Slide 15. As Chris indicated earlier, we've updated our target 2026 passings for each of our services. Our Shentel incumbent cable networks are now expected to reach 220,000 homes and businesses as we age out our HFC networks and build a new housing developments.

We've increased our Glo Fiber target passings from 300,000 to 450,000 in our higher density, Tier 3 and 4 markets. With the influx of government grant funding for unserved areas we are reducing our beam fixed wireless target passings to 28,000.

These beam sites are either currently in service or are already under construction, and we expect to be complete by year-end. We plan to pause further beam expansion until we have better visibility in areas where government grants are awarded.

Finally, we have identified approximately 32,000 unserved homes where we are pursuing government grants to subsidize building broadband to these communities. We have proposed fiber to the home, fixed wireless or hybrid fiber and fixed wireless networks depending on the terrain and available funding.

We expect terminal penetration to be approximately 70% in these rural unserved markets where we build fiber -- the only true broadband provider. The cost per passing net of subsidies will be dependent on grant awards and network architecture. Our total target passings by 2026 remains at 730,000.

But with fiber passes now approximately 64% of total passings and fixed wireless only 6%. We expect to continue to have a broadband business have industry leading unsustainable growth as we build out our networks over the next several years. Our shift to a fiber first strategy is really driven by two factors.

First, our success in securing Glo Fiber franchise agreements and ramping up construction. And second, the large influx of government broadband funding over the past quarter. Slide 16 outlines the grant funding that is available within our current service territory.

Virginia has been a leader in broadband funding with the announcement of a $700 million universal broadband program in July. That is in addition to the current $50 million in annual funding through the Virginia telecommunications initiative, Maryland and West Virginia also recently announced extensive broadband programs.

Shentel's Partner with multiple counties in Virginia and Maryland to pursue broadband funding using both pure fiber to the home networks and hybrid fiber fixed wireless networks. We are anxiously awaiting funding details from other states in our region.

In addition to American rescue plan funding, it is likely that $42 billion in broadband infrastructure funding will be distributed to states if Congress approves the Federal Infrastructure bill. This funding will also focus on broadband infrastructure for unserved areas and the current version of the bill provides a subsidy for low income customers.

We believe this affordability subsidy would be very beneficial in many of our rural broadband markets. Turning to Slide 17, we have depicted our rapidly growing broadband network that now consists of over 7,200 route miles of fiber connecting our incumbent cable, Glo Fiber and fixed wireless broadband networks.

We have significantly expanded our Glo Fiber targeted passings to over 304,000 with new franchise agreements in Suffolk, Williamsburg and James City County in Eastern Virginia and York Township in Spring Garden Township in Pennsylvania.

In addition, we added six additional franchise agreements in towns surrounding our previously announced markets of Lancaster County, Pennsylvania, and Harrisonburg, Virginia. Let's move on to our operating results in the third quarter starting at Slide 18.

In our incumbent cable business, total RGUs grew 3% year-over-year in the third quarter to 187,000, compared to about 181,500 in the same period during the prior-year. We added more than 9,100 net broadband data RGUs in the quarter with approximately 105,100. This is a significant increase of 9.5% compared to the same period in the prior-year.

Our incumbent cable broadband data penetration has increased from 46.2% in the third quarter of last year to 49.8% this quarter. The value of our powerhouse broadband rate card in our local customer service continue to be drivers behind our success.

Broadband data average revenue per user in the quarter increased modestly versus the prior-year to $79.31 and more than 81% of broadband data subscribers are now on plans of 25 megabits per second or higher. Our average subscribe download speed is now 90 megabits per second and this continues to be well beyond the reach of our DSL competitors.

Churn in the third quarter decreased by 12 basis points year-over-year to 1.77%. And this remains significantly lower than pre-COVID levels. Turning to Slide 19 for our Glo Fiber business, we got approximately 12,600 total RGUs at the end of the third quarter with a 15.2% aggregate broadband data penetration rate across all markets.

Our Glo Fiber customer relationships increased over 6,400 year-over-year to end the quarter at over 9,200. Our broadband data churn rate did increased 34 basis points year-over-year to 1.32%. But the prior-year number was based on a very small customer base.

We continue to be very pleased with our low churn and positive customer feedback in our Glo markets. We offer the fastest speeds, straightforward pricing, and superior network reliability with a 100% fiber optic network. Glo Fiber data ARPU was down year-over-year to $73.69 in the quarter.

However, this is due to a beginning of year change in accounting for deferred revenue from the account level to the product level. Our data ARPU has remained consistent over the past three quarters. In the third quarter of 2021, 46% of new subs adopted the one gig speeds here, and 46% of our overall Glo customer base now subscribes to our 1 gig tier.

Our streaming TV and voice services continue to perform well with 20% and 14% attachment rates in the quarter respectively. At the end of the third quarter of 2021, 71% of our Glo Fiber customers were single play broadband data only, 23% were in a double play and 6% were in a triple play.

Slide 20 depicts the status of our active and approved Glo markets as of the end of the third quarter. Broadband data penetration rates in our most mature markets of Harrisonburg and Stanton Virginia have reached 23.7% and 21.9% respectively. We now have approximately 60,800 residential and small business passings constructed and released to sales.

Our construction rate of more than 14,400 new passings in the quarter was a new record and more than 55% higher than the same period last year. Glo Fiber target passings in all franchise approved markets now exceed 304,000 as we continue to add new municipalities and the surrounding counties to our plans.

Engineering and construction work is now underway in all approved markets as we work toward our goal of bringing multi gigabit symmetrical low latency service to over 450,000 Glo Fiber passings in the next several years. On Slide 21, we have highlighted our Beam Internet fixed wireless broadband service.

We configured 11 new Beam Internet sites in the third quarter. We now have a total of 47 sites on air and we have service available to over 24,000 target households. We increased our Beam broadband data RGUs by about 41% in the past quarter and our penetration is now 4.9%.

Our ARPU increased slightly to over $73 and we continue to see approximately two-thirds of our customers adopting our $80 per month 50 megabit per second tier. As Chris mentioned earlier, we're pausing our fixed wireless deployments until we have further clarity on government broadband funding for unserved areas in our markets.

However, we have proven that we can offer a highly reliable broadband service using our licensed mid-band spectrum. And our current numbers for the third quarter were outstanding at 0.42%.

We believe this wireless technology translates well into a hybrid fiber fixed wireless network using wireless drops to bridge the last mile to the customers' homes and rural areas. Turning to Slide 22, total tower tenants increased 13% year-over-year to 470. This includes 34 intercompany tenants primarily for our Beam Fixed wireless operations.

At the end of the third quarter, we had a backlog of 213 open orders related to upgrades of existing tenants, or the addition of new tenants, including 18 applications from DISH as they begin to build out their national 5G network in our markets.

Finally, Slide 23 provides current year-to-date capital spending results and guidance for our continuing operations for 2021. Capital expenditures were approximately $119 million through the third quarter of 2021 compared to $83 million in the same time period in 2020.

Glo Fiber and Beam Internet fixed wireless expansion are the drivers behind the increase with year-to-date capital investments of approximately $65 million and $12 million respectively.

Of the $40 million in capital spending in our legacy broadband business approximately $17 million is success based in support of our continued growth in our commercial and wholesale fiber business and our increase in broadband data penetration.

Our plan capital spending for the year is between $161 million and $166 million, which is within range of our previous guidance. However, we have shifted investments from Beam Fixed Wireless to Glo Fiber as we invest in additional fiber inventory to accelerate our construction in 2022. Thank you very much and operator we're now ready for questions..

Thank you. Our first question comes from Ric Prentiss with Raymond James. Your line is open..

Hey, good morning..

Good morning, Ric..

Thanks for taking questions, couple of question guys. First, on the dividend obviously, resizing it to the new size of the company post the wire sale. But walk us little bit about, why pay a dividend at all, I know you've got 62 years of history that you are in a capital deployment phase, and it is a very modest yielding dividend.

So just walk us through the logic of how you thought through the different options?.

Hey, Ric, this is Chris. I guess the dividend is trying to balance multiple issues. As you're aware, we still have a large retail shareholder base. So there is somewhat of a tradition in history of paying an annual dividend. And as you recognize we had like that when we point out that we've done it for 62 consecutive years now.

So it is -- we did resize it. Obviously, the company is significantly smaller post the sale of wireless. But we also think with the growth prospects that we have. And our pretty fortress strength balance sheet that we have the ability to both invest in those growth opportunities to create more value.

And then hopefully over time is that growth phase in returns that we're able to share some of those returns with shareholders..

And how about stock buybacks.

Remind us where you are as far as the availability to do stock buyback and appetite?.

Jim can correct me, but I think we're able to. But at this point, given the growth prospects that we have, any excess cash that we have we're planning to reinvest in the growth of the business. And of course, we're keeping an eye also on the discussions in the federal government right now with some discussion about potential tax on buybacks.

So we don't know how that's going to play out either..

Yes, Rick, we do have capacity in our credit agreement to do stock buybacks if we so choose. But as Chris mentioned, we think the best use of our capital right now is to invest in fiber to them..

Okay, a couple other quick ones. On Slide 11 you've point out the corporate costs. Obviously, the debts in this quarter. You mentioned, we're taking more costs out of the corporate side $3.3 million run rate. In fourth quarter another $4 million run rate in early '22.

So should we then assume that corporate costs instead of like on Slide 12 in the $28.9 million.

I will connect it down to $21 million and tend to go even lower than that?.

Ric, there is some expense reductions that we're seeing this year that won't repeat next year. Specifically related to the -- to our incentive bonus. We do expect that to go up. And that's about a $1 million lower expenses in the third quarter than what we would typically have.

So I would guide you for the near-term about expenses of around $7 million a quarter is probably about right. And then as we've talked about in the past. We do this is an area that we're focusing on.

But it will take us a couple years to reduce it meaningfully down to where we can get our total SG&A expenses to be about 20% of revenues, which is our goal as we get three or four years down the road. And that will be due to a combination of lowering expenses and also growing top-line revenues as well and scaling our Glo Fiber and Beam businesses..

Okay, last one for me probably to Ed. You guys mentioned how you really got good service compared to the copper DSL out as the Glo Fiber out there. Where do people turn to, I had an investor ask the other day, I thought it was really good question.

If DSL is the only choice as the people that are just leaving the category completely or what where are they turning to? And what's kind of the exit called why they're leaving?.

A lot of cases their turn is moving out of the area. We do have some involuntary churn in there. But in most cases, they are not moving to the DSL competitor in the market..

Okay, thanks guys..

Thank you, Rick..

Thank you. Our next question comes from Dan Day with B. Riley Securities. Your line is open..

Yes, good morning guys. Thanks for taking my question.

Just wondering if obviously big pivot here to the fiber as opposed to the fixed wireless, just -- if you could share some of the feedback you've gotten from municipalities on why they heavily prefer the fiber build as opposed to fixed wireless? Is it concerns around the price or the speed or reliability, whatever on the fixed wireless side, or kind of what's driving that and what's changed in your thinking?.

So really, it's the state that's driving that. And Virginia is the one that's furthest along right now, but it's really speeds that are driving the decision toward fiber.

And with the level of funding that's out there, there is significant more dollars that can fund fiber to the home, whether that's Shentel, building the fiber to the home or another provider building fiber to home areas, we believe there is going to be a lot more fiber, as opposed to fixed wireless in the future..

Yes, great. Just -- and then with the fiber build, you know, you're kind of two years in, I think October 19 was the first one. Can you maybe talk a little bit about your marketing approach here, what's changed, what you've kind of learned works and doesn't work and getting people to take the product.

And then specifically interested in how promotional you're kind of willing to get maybe one year teaser rates or something like that to induce that switch from the incumbent cable providers?.

Yes, up to this point, we have not done much in the area of promotions, we've been able to win customers just based on the superior the speeds that we're offering particularly on the upstream speeds.

But as far as competitive response, we have not seen anything that we haven't expected from the incumbent cable companies up to this point, nothing that would change our projections, we are considering options for additional promotions going forward to continue to grow that customer base..

Dan, the one thing I add there, I think one of our keys to success with Glo Fiber is we're differentiating by our customer service, when they call -- they're talking to somebody locally, Virginia, and we only think that makes a very big difference..

Got you. Thank you guys, and then last one for me. It looks like in the markets you've launched so far, you're getting about 12 to 13 points of penetration a year. So that gets you about three or a little over three years to get to that terminal 38% penetration rate. Is that the right way to think about it.

You think you can accelerate that timeline? And anything around that would be great..

Yes, I think that's generally the right timeline. It is somewhat market specific, depending on the demographics in that market. Really, I think that's generally the right timeline. Those markets that we launched back in the fourth quarter of 2019, they're in the low 30s right now, as far as penetration rate..

Great. All right, guys, appreciate you taking my questions. I'll turn it over..

All right. Thanks, Dan..

Thank you. Our next question comes from Hamed Khorsand with BWS Financial. Your line is open..

Hey, good morning. I just wanted to see if the risk here on the Beam pass about, it sounds like you're depending on government to create the funding to for future investments. I mean, is there considerable risk that you're taking on that front? It just ends up being a dormant business..

So at this point, we think there's still significant upside in the areas that we have Beam deployed with the rules right now for funding that government funding is not available in those areas where we've already deployed that, that Beam broadband service. So we're continuing to support the Beam product.

We don't have any plan to terminate that service. And we do believe there's significant upside there with those existing households every pass..

Okay, and then on the franchises for your Glo Fiber expansion.

Is that really more about the local governments looking at fiber as the main draw or are they saying like, look, there's wireless opportunity as well? Is that becoming a competitive factor if you're winning those franchises?.

For Glo, the focus of those municipalities is they want fiber in there, and they want a competitor in there.

So I'd say at this point, fixed wireless is not is not really on the radar screen, within these municipalities, they want fiber, and then they want local companies, the fact that we're local has helped us get a lot of traction with these municipalities as far as getting the franchise agreements..

Okay, have you seen any changes as far as the adoption curve is concerned with Glo Fiber as now you're in multiple markets with customers adopting service, and how much you have to invest in to get those incremental customers?.

We've not seen significant changes at this point. But as we go into these new markets, brand awareness is very, very important. We're targeting really local marketing.

We've assigned Regional Sales Directors in each one of our markets that specifically targets that markets, Phil's relationships in that market and takes care of both the marketing and the sales. So we think that local focus will help drive growth..

Okay, great. Thank you..

Thank you, and I'm currently showing no further questions at this time, I'd like to turn the call back over to Jim Volk for closing remarks..

Well, I want to thank everyone for joining our call early on a Friday morning. I hope everybody has a great day and a great weekend and we look forward to continuing to cover story in future quarters. Thank you..

This concludes today's conference call. Thank you for participating. You may now disconnect..