Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Shenandoah Telecommunications Company (NASDAQ:SHEN)

Q4 2008 Earnings Call

March 6, 2009 10:00 am ET

Executives

Adele M. Skolits – Chief Financial Officer

Christopher E. French – President & Chief Executive Officer

Earle A. MacKenzie – Executive Vice President & Chief Operating Officer

Analysts

Richard Prentiss - Raymond James

Will Lauber - Sterling Capital Management

Operator

Good day and welcome to the Shenandoah Telecommunications fourth quarter 2008 conference call. Today’s conference is being recorded. At this time I’d like to turn the conference over to Miss Adele Skolits. Please go ahead ma’am.

Adele M. Skolits

Good morning and thank you for joining us. The purpose of today’s call is to review Shentel’s results for the quarter and the year ended December 31, 2008. Our results were announced in a press release distributed Wednesday, and the presentation we’ll be reviewing is included on the About Us section of our website at www.shentel.com. Please note that a replay of the call will be made available later today. The details were set forth in the press release announcing this call.

With us on the call today are Christopher French, our President and Chief Executive Officer and Earle MacKenzie, our Executive Vice President and Chief Operating Officer. After our prepared remarks we will conduct a question-and-answer session.

I’ll begin with Slide 1 of the presentation. While we don’t provide guidance with respect to specific future financial results, we caution that this call may contain forward-looking statements which involve a number of known and unknown risks and uncertainties. These may cause our actual results to differ materially from these statements. Also, in an effort to provide useful information to investors, we note on Slide 2 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 throughout this presentation.

Shentel provides a detailed discussion of various risk factors in our SEC filings, which you are strongly encouraged to review. You are cautioned not to place undue reliance on these forward-looking statements. Except as required by law we undertake no obligation to publicly update or revise any forward-looking statement.

Now I’ll turn the call over to Chris.

Christopher E. French

Good morning and thank you everyone for joining us. I’m pleased to report 2008 was a great year for Shentel, particularly considering the nation’s economic conditions. As you can see on Slide 4, on a consolidated basis our net income from continuing operations for the year is a record $26.3 million as compared to $22.2 million for the year 2007. For fourth quarter 2008, net income from continuing operations is $5.4 million in comparison to $4.4 million for fourth quarter ’07.

As a result of our strong performance in 2008 the company increased its cash dividend to $0.30 per share in December, an 11% increase over 2007’s. We closed on a new $52 million debt facility with CoBank in the fourth quarter. This financing provides us the funds we need to continue to upgrade our existing networks, close on the Rapid Communications acquisition, and also leaves us with capacity to take advantage of new opportunities.

We announced last quarter that we had closed on the purchase of Rapid to acquire certain of their cable assets and customers in West Virginia and Alleghany County Virginia. We are currently working to consolidate and upgrade the networks in order to offer a triple play of services and operate the systems more efficiently. We expect to complete the bulk of the upgrade this year.

We announced in September that we would explore our options for the sale of our convert services operations. We’ve engaged a third party to assist with the sale and at this point many potential buyers are actively participating in the sales auction process. It’s still too early, however, to tell what will be the ultimate disposition of this business.

Moving to Slide 5, we have provided highlights for our PCS results. During the fourth quarter, PCS retail customers grew by over 5,600 bringing total customers to over 211,000. This growth gives us an increase of 17% in average customers for the year. We continued to invest in our PCS network, adding 33 new cell sites in the fourth quarter and bringing the total to 65 new sites added in 2008.

We further expanded our EVDO coverage and now offer high speed data services to 86% of our covered POPs. We’ve since seen increases in billed revenue per user from data services and these additional sites should help us continue that growth. Churn decreased from 2.3% in the fourth quarter of 2007 to 1.9% in the fourth quarter of 2008.

Before I turn the call back over to Adele, I want to briefly comment on adjustments we’re making due to the current economic conditions. As we’ll touch on in greater detail later in this call, our rates of growth in PCS additions have slowed and therefore our operating results, while still very very good, will likely soften. Overall, however, we remain a very strong and growing company and our traditionally conservative approach has positioned us very well for this period of economic uncertainty.

Slide 6 lists a few high level points regarding adjustments we’re now making. Although we are still growing, we are taking steps to adjust our operating plans if the general economy worsens significantly or does not begin to turn around for an extended period of time. One key step is re-looking at all currently planned capital projects and re-prioritizing them based on their payback timeframes. Capital expenditures that will produce immediate savings in operating expenses will be given first priority. Conversely, projects planned to provide additional capacity may be postponed if lower projected growth rates are delaying when the extra capacity will be needed.

While we’re considering if any capital projects should be delayed, we also recognize that this environment may provide us with buying opportunities for strategic assets. With our very strong balance sheet, we have the ability to do additional acquisitions similar to our Rapid deal. But we’re only interested if they’re a good fit and are available at reasonable prices.

We’re also closely monitoring the various stimulus plans being developed to see if funds may be available to help finance further enhancements and/or expansion of our broadband service offerings. We know the importance of broadband to the communities we serve and to our future, so accelerating its deployment could be beneficial to both our company and our communities.

I’ll now turn the call back to Adele to review our financial results in more detail.

Adele M. Skolits

Thank you Chris. As Chris mentioned we’re very pleased with our 2008 results. I’ll begin on Slide 8. The company continues to deliver increased returns for its shareholders. For the Q4 ’08 earnings per share from continuing operations, it was $0.23 in comparison to $0.19 for Q4 ’07. This represents growth of 21%. Our earnings per share from continuing operations was $1.12 for 2008 or an increase of 19% over 2007.

On Slide 9 you can see that operating income grew by $2.3 million and adjusted operating income before depreciation and amortization or OIBDA grew by $800 thousand for Q4 ’08 from Q4 ’07. Operating revenues increased by $2.5 million primarily driven by increases in PCS revenues of $1.9 million and the impact of newly acquired cable operations in the quarter. Operating expenses grew by $223 thousand in Q4 ’08 over Q4 ’07. We incurred increased costs for PCS and other networks of $2.2 million and newly acquired cable operations of $970 thousand. Q4 ’07 operating expenses included $2.3 million of non-recurring expenses related to an early retirement program and stock compensation expense and pension and settlement costs of $700 thousand.

On Slide 9 you can also see that operating income grew by $8.9 million and adjusted OIBDA by $7.1 million for the year of 2008. This growth was as a result of a $14 million growth in revenues primarily related to growth in PCS customers and the inclusion of newly acquired cable businesses. Operating expenses for 2008 grew by $9.8 million over 2007 after adjusting 2007 for a $4 million non-recurring expense related to stock compensation and early retirement costs, and $700 thousand of pension settlement costs. The expense growth is primarily attributable to PCS network enhancements, changes in PCS sales distribution, and the newly acquired cable operations.

As Earle will address in a moment, in 2009 we plan to continue to enhance and expand the coverage in our PCS network. We will incur additional operating costs related to expanded and enhanced cell sites in advance of the incremental revenues they produce. In the short run, these increased expenses will reduce the margins in the PCS business. In the longer term, we expect that the margins will grow as a result of the additional data revenues and additional customers in new coverage areas.

Cash flows on a consolidated basis appear in Slide 10. Net cash from operations increased by $6.4 million in 2008 over 2007. Capital spending and other investments increased by $36.4 million in 2008, primarily as a result of our network improvement projects. Significant PCS network enhancements and the upgrade of the acquired cable TV assets will continue in 2009. We expect the existing credit facilities and cash flow from operations to be adequate to support these projects and our other capital expenditures.

As of December 31, 2008 we had drawn $23.7 million against the $52 million debt facility with CoBank. The terms allow us to draw upon the facility through December 31, 2009. While we do have the option of fixing this interest rate, we have not yet chosen to do so but this is something we continue to monitor. The debt carried a variable rate of 2.87% at December 31, 2008.

We announced in September that we had decided to explore the sale of our converged services operation and we still expect to accomplish this by mid-year 2009. The assets of this business are now classified as held for sale and its results are classified as discontinued. Consistent with this treatment, we stopped recognizing depreciation effective September 1, which had averaged over $400 thousand a month. The net losses from discontinued operations improved from $3.4 million in 2007, rather a net loss of $3.4 million in 2007 to $1.9 million in 2008, primarily as a result of this accounting change.

The net loss from these discontinued operations does not include certain general overhead expenses allocated to this segment of the business when it was considered a continuing operation. These are now considered costs of the other operating segment. We have stopped executing new sales contracts in this business and will make capital investments only to the extent required by the existing contracts.

Please keep in mind that Shentel is in the process of closing our defined benefit pension plan and distributing its assets. We are seeking a technical advice letter from the IRS as part of this process. We expect despite delays created by further IRS review that this plan will be terminated by year end 2009. When the final IRS approval is received and the assets are distributed, we expect to report an incremental $3.4 million of expense related to terminating the plan and make a payment of $2.3 million to fund the full liability to employees. Since these numbers are as of year end 2008, we expect the amounts to increase by approximately $100 thousand per quarter until the plan is terminated.

At this time I’ll turn the call over to Earle to go into greater depth on some of the operating factors driving our results.

Earle A. MacKenzie

Thank you Adele. In spite of the headwinds of the current economic conditions, we had a successful fourth quarter. As you can see on Slide 12, our PCS customers have grown at an annual compound rate of 20% over the last five years to over 211,000 customers at

December 31. Although the PCS customer growth rates were down from the previous years as reflected on Slide 13, we are pleased that we continue to add quality customers. The traffic into our distribution channels was down and that trend continues into the first quarter of 2009.

During the fourth quarter 2008, we had 17,329 gross additions and 5,685 net additions with churn at 1.9%. To date we are encouraged that we have not seen a significant uptick in either churn or bad debt. For 2008 we added 24,159 net customers, continuing double digit growth for an increase of 12.9% in total customers.

Total gross billed revenue per subscriber before any credits given on Slide 14 continues to increase at $55.98 per subscriber for 2008, up from $55.61 for 2007. Gross data revenue before credits in the fourth quarter 2008 was $15.90, continuing the upward trend that we’ve seen with the deployment of additional EVDO sites. We continue to assume that 30% of the billed revenue from bundled voice data plans is data revenue in calculating our data ARPU.

The service revenue line in our financial statement is shown net of bad debt write offs, credits and fees. On Slide 15 I’ve shown these components of service revenue separately. While write offs have grown commensurate with the growing – with gross billings for both the quarter and year end 2008 over 2007, credits have continued to increase to 11.2% of gross billings in 2008 compared to 9.7 in 2007. The increasing reliance upon credits to retain customers is a concern we continue to address with Sprint.

The top selling service plans in the fourth quarter shown on Slide 16 were the same as the third quarter. Almost 50% of total gross additions selected one of our top three plan, Everything Messaging Family 1,500; Everything Data Family 1,500; and Simply Everything. We continue to focus on increasing revenue per customer. Two of these plans are $100 per month and the Everything Data plan is $130. The top selling phones were the Sanyo Katana, Samsung Rant, LG Lotus, and the Samsung Instinct. A mobile broadband modem ranked in the top five devices sold in the fourth quarter.

We had a very aggressive PCS construction program in 2008. We spent and committed $46.4 million. The results of the program are shown on Slide 17. You can see there where 65 new cell sites and an additional 159 new EVDO sites plus additional switch capacity. 2008 was the first year of a two year plan with goals to stay ahead of capacity demand, retain the coverage advantage in our quad-state area, to gain coverage parity in Pennsylvania, and to make EVDO available to over 90% of our covered POPs. To reach those goals in 2009 we plan to add another 78 cell sites for a total of 489 and we’ll add an additional 107 EVDO sites for a total of 318. Once the 2009 plan is complete, we expect ongoing PCS capital spending to be primarily customer growth driven.

On Slide 18 telephone operations continued to be a solid performer. We actually had a net gain of 16 access lines in the fourth quarter, but ended the year with a loss of 127 access lines or 1.3% during 2008. We went over 10,000 DSL customers and ended the year at 10,038 or approximately 41.5% of access lines. Incremental revenues from DSL customer additions more than offset the loss in dial-up customers. Effective March 1 of this year, our first local rate increase in 30 years was approved by the Virginia State Corporation Commission, totaling approximately $300 thousand per year.

We continue to progress with the sales of converged services unit. We’ve had significant interest and are currently in the due diligence cycle with a number of prospective buyers. We anticipate that the process will be successfully completed in the late second of early third quarter. Although now reported as a discontinued operation, in 2008 we saw revenues grow by 14.7% and total revenue generating units increase by 13.2%.

Our cable TV customers are given on Slide 19. During December we began the integration of the Rapid Communications customers and organization. Significant efforts have been put into stopping the churn of customers, doing much needed maintenance, and implementing the Shentel policies and procedures. All of those objectives are progressing well. Work is already underway on previously announced upgrades of the network. We are in the engineering stage for the properties in West Virginia with construction expected to begin in the second quarter. Less work was necessary to the Virginia properties acquired. We’ve already begun work in Virginia to upgrade to plan with completion expected during the second quarter.

By year end, we anticipate offering expanded video offerings to over 85% of the homes [passed] including HD, DVR and Video on Demand in addition to Internet and voice products. At year end 2008, the recently acquired properties had 17,127 video customers and 18,413 total revenue generating units. Combined with our existing cable operations in Shenandoah County Virginia we had 25,369 video subscribers.

I’ll now turn it back over to Adele.

Adele M. Skolits

This concludes our prepared remarks. Katie, would you review the instructions for posing a question, please?

Question-and-Answer Session

Operator

Certainly. (Operator Instructions) Your first question comes from Richard Prentiss - Raymond James.

Richard Prentiss - Raymond James

A couple of questions. First, well I think you mentioned you guys were really pleased that there really hadn’t seen any pickup so far on churn or bad debt with the economy. I was wondering what that had to do with fourth quarter and you can also echo maybe what you’re seeing so far in January and February.

Christopher E. French

The trend continues through the first part of 2009.

Richard Prentiss - Raymond James

The other day when IPCS reported their results, they’d received a pretty significant settlement from disputed items from Sprint, some of which that were booked into the fourth quarter, some of which that are being booked into the first quarter. I think some of that had to do with bad debt collections, credits that you kind of talked to on your call as well. Do you have a similar process going on with Sprint right now as far as some disputes that are going on? And where do you stand as far as if there are already settlements coming?

Adele M. Skolits

We don’t have any settlements to announce at this point, but we certainly are reviewing those items.

Richard Prentiss - Raymond James

And have you already officially disputed them with Sprint?

Adele M. Skolits

Not in a formal way.

Richard Prentiss - Raymond James

Probably asking the unknowable here, but you guys are closer to Washington than I am. The stimulus package – any thoughts about what are the gating factors? What’s the timeline? What agencies have to be involved? How should we think about watching this whole rural broadband and other stimulus items that might benefit you guys? What should we be watching for?

Christopher E. French

Rick that may be unknowable at this point. I guess there’s a couple of different programs, NTIA I think is one entity that’s going to be distributing some funds and RUS, the Rural Utility Service, at least that’s what we currently know of or have heard. But I guess the real question is what timeframe and what conditions and how those funds will be distributed. We’re kind of guessing RUS maybe can move faster, just because of some of the programs that they’ve had in place in the past. And certainly we historically were an RUS borrower, have paid off any outstanding loans we’ve had with them last year or so. So that’s one area that we’ll continue to monitor, but a lot of unknowns right now.

Richard Prentiss - Raymond James

And then on the wireless side, adding 78 cell sites in ’09. I missed the number of DO cell sites. I wasn’t writing fast enough. How many DO new sites did you put in in ’08 and that you’ll add to in ’09?

Adele M. Skolits

That’s actually available on the presentation on our website, Rick, but I think Earle has it handy.

Earle A. MacKenzie

We’ll be adding 107 EVDO sites in 2009. That’s the plan and end the year at 318. For 2008 I believe the number was 157.

Operator

Your next question comes from Will Lauber - Sterling Capital Management.

Will Lauber - Sterling Capital Management

Can you guys comment about the local economy in your area? I know in the past the unemployment rate has been below the national average. Can you give kind of any update on that?

Christopher E. French

Rick – or Will, excuse me, I don’t have any specific numbers. I do remember seeing something locally in one of the papers that certainly unemployment has started to go up but still is significantly lower than the state and I think the Virginia is lower than the national economy. Anecdotally, you know, hearing some slowdowns in some of the industries, some of the manufacturing plants, certainly some concerns in those industries but really haven’t seen any major employers, I guess, but just a lot of concern.

I guess we do benefit due to our fairly close proximity to D.C. And I guess as the government looks to spend a lot more money, you know, they’re going to need federal employees to do that. There’s already been efforts underway for some government entities to establish facilities out in the northern Shenandoah Valley and the West Virginia Panhandle, so certainly not as rosy as it has been but I think better than the rest of the state and the rest of the country.

Will Lauber - Sterling Capital Management

On the different parts of your business, on the cable side have you seen people scaling down their packages or any kind of deterioration of the business there?

Earle A. MacKenzie

Will, this is Earle. No. And when I really look across all of our business lines, to date we’ve really not seen any significant change in pattern on the part of our customers. As we pointed out, in the fourth quarter actually 50% of our gross adds bought the high end packages. What we have seen though is some business accounts have dropped some of the lines that they had. And we’re not seeing the growth in second lines as robust as we have in the past. But as far as – and as I mentioned earlier, we actually had an increase in telephone lines in the fourth quarter, which is kind of an indication of the local health of the economy.

Will Lauber - Sterling Capital Management

With the – I guess the slowdown in the growth of the wireless business, maybe you addressed this – I was busy doing something else and then I was having a hard time finding your presentation, but what are the main drivers in the slowdown of the growth? Is it the economy? Is it your competitors doing better? What’s the drivers there?

Earle A. MacKenzie

I think it’s primarily the economy. People are just being cautious and where they would have added additional lines to their account, I think they’re kind of taking a “wait and see”. But we still are having positive growth. It’s just not at the same pace that we’ve had over the last couple of years.

Will Lauber - Sterling Capital Management

So is it more business accounts or is it consumers or where?

Earle A. MacKenzie

The largest percentage of our customers are consumers and small business. We’re not in an area where we have lots of large major accounts.

Will Lauber - Sterling Capital Management

So between the consumer and the small business are there any differences there that you’re seeing?

Earle A. MacKenzie

Probably small business being a little bit more cautious than the consumer, but in both cases we still continue to see growth.

Operator

Your next question comes from Richard Prentiss - Raymond James.

Richard Prentiss - Raymond James

One of the questions I would ask on the economy side, it is interesting access line growth. Can you update us a little bit about where cable competition is in your legacy landline markets? If you see any change coming there and what else you think might insulate you from where the big guys, AT&T and Verizon are seeing kind of double digit losses in access lines.

Earle A. MacKenzie

Rick, this is Earle. The advantage that we have is that we have the cable franchise where we are at the [lack] so we don’t have that pressure of having a Comcast or someone coming in and selling a VoIP product. And also even with our rate increase that we just had approved our local rate is $8.70 so there’s not a lot of room for another competitor to come in on price.

Richard Prentiss - Raymond James

It sure seems like it should be very defensible, you know, absent any economic issues as far as not seeing the same kind of pressures that the bigger guys have seen.

Earle A. MacKenzie

Yes. I think that’s absolutely true. So when you look over the last even three or four years, we’ve had approximately a 1% loss in access lines annually, which is significantly better than the industry at large.

Operator

And Miss Skolits, you have no more questions at this time.

Adele M. Skolits

Great. Thank you for participating. I’d like to extend an invitation to each of you to let me know if there are additional details you’d like to see us review in future calls. My contact information was provided on the press release.

Operator

And that does conclude today’s conference call. We thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Shenandoah Telecommunications Company Q4 2008 Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts