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Executives

Adele Skolits - CFO, Vice President of Finance

Christopher French – President and CEO

Earle MacKenzie - EVP, COO

Edward McKay - Vice President of Engineering and Planning

Analysts

Ric Prentiss - Raymond James

Gregory Burns - Sidoti & Company, LLC

Will Lauber – Sterling Capital Management

Shenandoah Telecommunications Co (SHEN) Call to discuss Amended Sprint Nextel Agreement February 6, 2012 11:00 AM ET

Operator

Good morning everyone and welcome to the Shenandoah Telecommunications conference call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Ms. Adele Skolits, CFO. Please go ahead, ma’am.

Adele Skolits

Good morning and thank you for joining us. The purpose of today’s call is to discuss the recent amendment to our agreement with Sprint Nextel. The amendment was announced in a press release distributed Thursday evening and the presentation we’ll be reviewing is included on 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; Earle MacKenzie, our Executive Vice President and Chief Operating Officer; and Ed McKay, our Vice President of Engineering and Planning. After our prepared remarks, we’ll conduct a question-and-answer session.

I’ll begin with slide two 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.

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

I’ll turn the call over to Chris now.

Christopher French

Thank you, Adele and good morning. I am excited to report that Shentel has continued to leverage our good relationship with Sprint, and we’ve reached an agreement to amend our contract and take another step forward with our affiliation.

The amendment creates a win-win situation for both Sprint Nextel and Shentel and allows us to upgrade our network in accordance with Sprint’s Network Vision plans. As a result, we will be able to continue providing great service to our customers and our network will remain an important part of the Sprint’s high quality nation-wide network.

I am sure that everyone on this call is familiar with Sprint’s network upgrade project referred to as Network Vision. So I won’t go into any detail about the network itself.

I will begin my presentation on slide four. From our perspective, there are many benefits we will get from making this investment. These include: keeping our network aligned with Sprint’s to provide a seamless nationwide network for our customers; letting us remain competitive with Verizon and AT&T in our service area; improving customers’ experience through faster data speeds and better coverage; allowing us to initially launch LTE in the 1900 megahertz G block in parts of our network by the third quarter of 2012.

The network will also make use of the 1800 megahertz spectrum that Sprint is harvesting from their iDEN network, giving us better in building and overall coverage. The Addendum gives Shentel the potential to leverage our investment in this new network to host other companies’ spectrum such as LightSquared. We will also be able to convert existing iDEN customers to our network.

The Addendum was signed on February 2 and was attached to our 8-K release that evening. We’re very pleased with the terms we’ve been able to reach.

In addition to the benefits I’ve just highlighted, key contract points which are outlined on slide five are as follows. Shentel will use our best efforts to complete the upgrade by December 31, 2013. Initial 20-year term of our current affiliate contract has been extended to five additional years, now going out to November 2024. Additionally, our agreement retains the provisions for two 10-year extensions.

Our current contract has limits on the level of capital expenditures that Sprint can require Shentel to make in our network. Those limits remain in effect.

Continuing on slide six, Shentel will benefit from the migration of adding customers in our service area. Sprint will have a migration plan to move the postpaid and prepaid customers currently on the iDEN network, and we anticipate this will begin later this year and be completed by the end of 2013. There is no change to the 8% management fee we currently pay to Sprint, but the net service fee cap that’s currently 12% on net billed revenues will increase to 14% on July 1, 2013. That does not mean that the net service fee will necessarily increase to 14% on that date, but if an analysis of the balance of payments between Sprint and Shentel supports raising the rate, Sprint could increase the net service fee to 14% at that time.

As was the case with the 12% cap, the 14% cap cannot be changed without the mutual consent of both parties. Retaining the cap for all the services that Sprint provides was an important contract term for Shentel as it gives us the ability to forecast our expected financial results with more accuracy.

And finally, the contract continues to enable us to purchase network equipment and services from Alcatel Lucent at the same price they are sold to Sprint.

Moving to slide seven, planning and preconstruction work is already underway, and we expect to start our deployment late in the second quarter. We estimate that the capital cost of the upgrading the Network Vision is approximately $115 million over two years with $60 million spent this year and $55 million spent in 2012. We anticipate that some sites and dollars may be pushed into 2014 if there are delays beyond our control.

In addition to upgrading the current network, we anticipate that additional capacity will be required due to continued customer growth. So the total wireless capital budget will be $83 million for 2012 and $70 million for 2013.

I will now turn it over to Adele to discuss the anticipated impact on our financial statements and to talk about our plans to finance the project.

Adele Skolits

Thank you, Chris. I will begin on slide nine. The Network Vision project will affect our financial results in several significant ways. Most importantly, it provides us with the opportunity to continue to compete effectively for wireless customers. We’ve consistently delivered more than 5% net growth in postpaid customers in each of the last three years.

More recently, prepaid customers have doubled since the inception of this service when we purchased 50,000 Virgin Mobile customers from Sprint Nextel in June 2010. Sustaining this kind of growth would not be possible in future years absent a robust 4G product. The access to additional spectrum will also enable us to minimize future sales splits.

In addition, we will have the opportunity to participate in Sprint’s program to migrate iDEN customers to CDMA. Sprint estimates that there are currently approximately 50,000 postpaid and 11,000 prepaid iDEN customers within the Shentel footprint. The cost of the migration will be $350 per postpaid subscriber and $150 per prepaid subscriber, which will include the customer receiving a new phone.

How many of these customers will remain at the point that Sprint initiates the program to migrate them to CDMA and how many will be willing to move is difficult to estimate. We plan to upgrade 274 cell sites to Network Vision standards in 2012 and the remainder in 2013. We expect to accelerate the depreciation on some of our current equipment to ensure that the net book value at the point of trade-in approximates the trade-in value. This will increase otherwise expected depreciation by $7.3 million in 2012 and $5.3 million in 2013.

Moving to slide 10, the new 4G cell sites will require either fiber or microwave backhaul. This backhaul is more robust than the existing backhaul, the majority of which is copper or T-1 based. The fiber or microwave backhaul in most instances will provide excess capacity, thereby postponing the need for further upgrade. However, it will come with some immediate costs. These incremental costs include non-recurring installation fees of approximately $1 million in 2012 and $700,000 in 2013.

In addition, we have assumed that the existing backhaul will be left in place for two months after the new backhaul is installed to provide adequate time to swap out the existing base stations. The cost of this redundancy is estimated to be $1.6 million in 2012 and $1.1 million in 2013.

Finally, the incremental monthly cost of the expanding capacity is estimated to be $900,000 in 2012 and $800,000 in 2013. The capital expenditures of Network Vision in combination with the completion of our cable upgrade and other capital projects are given at the top of slide 11.

These cash requirements will exceed internally generated funds provided from operations. As a result, we expect to take advantage of the full array of credit facilities available to our existing syndicated credit agreement. In addition to the fully drawn term loan facilities, we have $50 million revolver and $100 million accordion feature available to us.

The revolver is priced consistent with the existing loan facility which currently carries an interest rate of LIBOR plus 3%. The accordion of $100 million is available to us on market terms to be determined at the time the funds are drawn. We will be evaluating the merits of exercising our options under the existing credit facilities relative to refinancing the facilities under a longer term credit arrangement. The existing credit facilities impose a limit on capital spending through a covenant for a fixed charge coverage ratio.

Last week, our lenders approved the elimination of this ratio which will allow us remain compliant with our covenants as we undertake our significant capital projects.

This concludes our prepared remarks. Alley, would you now review the instructions for posing the questions.

Question-and-Answer Session

(Operator Instructions) We will go first to Ric Prentiss of Raymond James. Please go ahead.

Ric Prentiss - Raymond James

Hey, a couple of questions if I could. First, Adele, in one of the slides you mentioned 274 cell sites. It says ‘13 on the cell site but I think you meant ’12. Just wanted to confirm if the cell sites will be upgraded in ’12 with the remainder in ’14?

Adele Skolits

That’s correct.

Ric Prentiss - Raymond James

Okay. And how many would that be in ’14?

Christopher French

It’s ’12 and ’13.

Ric Prentiss - Raymond James

So 274 in ’12 and then how many would be left in ’13?

Christopher French

We have a total of 510 so that would be what, 230.

Ric Prentiss - Raymond James

Okay. So all of them would be upgraded to the new. And then when you think about the CapEx being $60 million incremental in 2012 and $55 million in 2013, can you walk us through exactly what all you are getting for that CapEx?

Adele Skolits

Certainly. Ed McKay is with us and he’d be happy to review that with you.

Edward McKay

Yes, with that we will be getting new multi-modal base station in each one of our cell sites, capable of operating in our current PCS A and B blocks can be utilized, also launching LTE in the PCS G block and with the capability of launching voice service in the 800 megahertz iDEN block.

Ric Prentiss - Raymond James

And any changes at the switch or any changes – just trying to think, is it strictly of the base station that the CapEx is focused?

Edward McKay

There will also be core switching and core data network upgrade as well to handle the 4G LTE traffic.

Ric Prentiss - Raymond James

And I think when we’ve talked with like Bob Azzi and some of the other Sprint technology guys, the concept is to put the radio up at the top of the tower, So a radio head is that kind of the concept here to – see if you are buying a radio for the 1900 and a radio for the 1800 as well in this purchasing?

Edward McKay

Yes, that is correct. We will be deploying the remote radio head technology.

Ric Prentiss - Raymond James

Then Adele, when you mentioned the upgrade to fiber or microwave backhaul and the costs, are any of those CapEx costs that were included or are all those OpEx costs that you were talking to?

Adele Skolits

I was speaking to the OpEx costs.

Ric Prentiss - Raymond James

And so this would be services that you would be buying from other providers instead of laying your own fiber?

Adele Skolits

Well, in some cases it could provide laying our own fiber, depends on the location.

Earle MacKenzie

Ric, this is Earle. Approximately 25% to 30% will be our own fiber but those capital expenditures are going to be made in our wireline segment and are not included in the numbers we provided to you. We’ve actually been building fiber to our towers for the last several years. And so a good portion of the wireline CapEx that we have been sharing for the last couple of years has actually been in preparation of upgrading our network, in preparation to go to LTE.

Ric Prentiss - Raymond James

Okay. And then the total ’12 CapEx guidance that you’ve provided with us, the $15 million for the landline side, that includes improving and increasing the amount of fiber to the cell sites.

Earle MacKenzie

Yes.

Ric Prentiss - Raymond James

Okay. I will come back with some other questions. I’ll let some other folks in.

Operator

(Operator Instructions) Our next question comes from Greg Burns of Sidoti & Company. Please go ahead.

Gregory Burns - Sidoti & Company, LLC

In terms of distribution inside your footprint, was there any changes in, i.e. the cost of acquisition in terms of a subscriber coming in through one of your stores versus say like a third party distributor or is that still the same?

Earle MacKenzie

This is Earle, Greg. Nothing has changed relative to that. We still have the same arrangement where we control the local stores and our local agents. And we are under the Sprint national agreements and regional agreements for Best Buys and Walmarts and RadioShack.

Gregory Burns - Sidoti & Company, LLC

Okay. And in terms of the two-month overlap, I guess exactly when is that going to occur, when does the duplicate expense roll off in terms of – for the fiber backhaul?

Earle MacKenzie

That’s going to start probably in the second quarter, and then it will be rolling through the end of the project until the end of 2013. It’s a cell site by cell site management.

Operator

Our next question comes from Ric Prentiss of Raymond James. Please go ahead.

Ric Prentiss - Raymond James

All right. I was trying to let some other folks in, I was going back to the end of the Q. I will ask couple more and then come back in. Obviously a large part of this process is to get at the 800 frequency. You had the exhibit in the 8-K talking about which band within the -- which carriers within that 800 might be available when. First question is, are there any push to talk devices on the CDMA side that currently have that frequency in the handset that you will be able to start offering?

Earle MacKenzie

Ric, not today, not on the CDMA side. But the plan is to have that available this year.

Ric Prentiss - Raymond James

Probably more towards the year end, I would guess, than middle.

Earle MacKenzie

I can’t give you a specific date. I just really don’t know.

Ric Prentiss - Raymond James

Okay. So the process of getting the network out there, getting the PCS frequency and the 800 frequency, the hope is to get that better and building penetration open up, but that’s handset wise year end, and then hopefully it helps more in ’13. Okay.

Are there any other operating costs associated with Vision that we should be aware of as far as any change to cell site rentals? I am trying to think how many cell sites you have that were not on your own towers? Just trying to think of, is there any other duplicate expense periods we need to be worried about?

Earle MacKenzie

As far as on our own towers, we have about 150 of the 500 are ours. So the majority are third parties. We have really just started that process. We do anticipate that there will be some additional monthly rent, knowing exactly what that is, probably somewhere in the $300 to $500 range. But we are still in negotiations on that.

Ric Prentiss - Raymond James

Sure. And you guys don’t have the iDEN network as part of your expenses. So if iDEN does get turned down at some point, that’d be expense savings on rent for Sprint but not for you guys. So this would be just truly additive rent as far as having the extra equipment out there.

Adele Skolits

That’s accurate.

Ric Prentiss - Raymond James

Okay. And speaking of iDEN, you guys have mentioned Sprint now has quantified how many they think are in your territory. Do you know what kind of ARPU you can expect to get from these customers? I know you have mentioned they will pay $350 per postpaid and $150 for prepaid. But just trying gauge what kind of revenue we might think or churn factors, just think of the lifetime value of that customer, what do you guys think you are getting from that base?

Christopher French

We believe that the ARPU will be pretty much in line with our current CDMA customers. The characteristics will be pretty similar. Although they are obviously a quite loyal customer because they’ve gone through quite a bit on that iDEN network.

Ric Prentiss - Raymond James

Yeah so even though iDEN doesn’t have a much robust data offering since it’s kind of a 2, 2.5G network, you are thinking that a postpaid iDEN customer would be a gross ARPU to you guys in kind of that mid-50, high 50 range?

Christopher French

Yeah, because a lot of them are going to be business accounts that have some discounts built in based on multiple subscribers on the same account.

Ric Prentiss - Raymond James

But mid-50s, high-50s does feel like the gross revenue – and this will be the same way when I mention gross, because this will look like just a normal Sprint customer to you guys also, right?

Christopher French

It will – we will pay the 8% and the 12% on the revenue just like we do any other customer.

Ric Prentiss - Raymond James

Right. And on the prepaid side, is there a sense that the revenue is – I mean, you guys don’t have a lot of experience on prepaid yet. But what’s your thoughts as far as with the prepaid base as they had some of those Boost unlimited’s, could it be actually maybe higher iDEN prepaid versus what you’ve seen on CDMA?

Christopher French

Yeah, I think on the prepaid side, we will see a higher than average revenue because of the fact that they are Boost customers but on the iDEN network and we see a higher Boost revenue than we do of Virgin Mobile revenue on our prepaid.

Ric Prentiss - Raymond James

Okay. I will drop off and come back in if anyone else has questions.

Operator

Our next question comes from Will Lauber of Sterling Capital. Please go ahead.

Will Lauber – Sterling Capital Management

Could you guys give us an update on the cable upgrades? I assume the weather has been pretty cooperative.

Adele Skolits

Well, we are not prepared to talk about cable this morning. Our 10-K and the call related to last year’s earnings will be held. At this point, we expect early March and we will be prepared to address that at that time.

Will Lauber – Sterling Capital Management

Okay. Do you guys have any idea of how much money you save by getting the same prices that Sprint did from Lucent?

Adele Skolits

I don’t know that we are prepared to disclose that at this point. Obviously the fact that we enjoy the same discount that Sprint does as a national provider is a distinct advantage to us over a regional player.

Will Lauber – Sterling Capital Management

And do you have any idea of whether Sprint is thinking about raising any data pricing to kind of make up for this capital spending?

Adele Skolits

We don’t have any insights to offer there aside from what is publicly available, the Sprint’s public disclosures.

Operator

Our next question comes from Ric Prentiss from Raymond James. Please go ahead.

Ric Prentiss - Raymond James

I hate to seem like a broken record, but tons of questions for you with this obviously very major announcement that you guys made. On the iDEN customer acquisitions, or on customers as they convert from iDEN to CDMA, how will you book that payment to Sprint? Is it going to affect EBITDA, is it customer – I am just trying to think how that would flow through?

Adele Skolits

That’s a great question. It will be booked as a prepaid expense that we amortize similar to what we did the Virgin Mobile customer acquisitions over the expected life of the customer.

Ric Prentiss - Raymond James

Right. So that’s not going to affect your EBITDA, that will affect any of the covenant issues that might be –

Adele Skolits

Correct.

Ric Prentiss - Raymond James

And as far as the timeline, as far as when we might expect to see customers start moving from iDEN over to CDMA. Earle, based on that handset availability as it sounds like we shouldn’t expect maybe too much of that customer moving in ’12, that’s more ’13?

Earle MacKenzie

I think that’s accurate because if a customer is satisfied with the iDEN network, they’re probably going to be reluctant to move over until later. And so we’ve anticipated that there would be a nominal number this year but the predominant number of transfers will be in 2013.

Ric Prentiss - Raymond James

And then hopefully the handset line-up gets even better in ’13 as far as what you can offer. Are they expected to more than just one style device for push to talk on using the 800 band that you are getting?

Earle MacKenzie

That’s my understanding is they will have a range of phones.

Ric Prentiss - Raymond James

I think you can probably talk to this one. It seems like Sprint was pretty, I think, flabbergasted might have been the right phrase when RadioShack came out the other day talking about problems in the channel, any thoughts on if RadioShack just completely fell out of bed, or if there was some issues there?

Earle MacKenzie

As far as the impact on us?

Ric Prentiss - Raymond James

Yeah.

Earle MacKenzie

They are a good partner but they are not a dominant partner with us. So if we lose them, it would have some impact but a not significant impact on our distribution.

Ric Prentiss - Raymond James

And then any thoughts on iPhone as far as how you guys are managing that expense, if you will, of the heavy iPhone thinking through your financing needs, looking at how many – how you want to manage your smartphone mix, I guess?

Adele Skolits

Once again, Ric, we will be prepared to answer those kinds of questions when we get on the call for the annual review.

Ric Prentiss - Raymond James

Sure. That make sense. And then as far as approaching the market for the revolver, the accordion (ph), is there anything physical you have to do or are they both able to just draw down?

Adele Skolits

The revolver is very straightforward, and the terms are very well defined in the existing facilities agreement. As I have said the accordion, it would have to be priced at the time we undertake the draws and would be based on prevailing market conditions at that time. So that will be more involved.

Ric Prentiss - Raymond James

And then when you think about CapEx in 2012, you’ve laid out nicely for us the different categories. When you look into ’13 and I know you haven’t given guidance yet on’13. But directionally, the Vision spend is down a little bit, the total wireless is down a little bit. What do we think as far as directionally for cable TV and landline? It sounds like you maybe would be done or pretty much wrapping up maybe on the fiber to cell site need on the landline side. Just trying to gauge directionally what CapEx looks like in ’13 given what ’12 is looking like?

Adele Skolits

I think it’s reasonable to expect that it would be lower based upon having completed the cable upgrade.

Ric Prentiss - Raymond James

Okay. Appreciate all the extra colors. Thanks guys.

Operator

And I am showing no further questions at this time. I’d like to turn the conference back to Adele Skolits for any closing remarks.

Adele Skolits

Thank you for participating as always. I invite you to let me know if there are additional details regarding our business you would like to see on future calls. My contact information is provided on the press release.

Operator

Ladies and gentlemen, this does conclude today’s conference. We thank you for your participation. You may now disconnect.

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