Shenandoah Telecommunications' (SHEN) CEO Christopher French on Q1 2016 Results - Earnings Call Transcript

Shenandoah Telecommunications Company (NASDAQ:SHEN)

Q1 2016 Results Earnings Conference Call

April 29, 2016 10:00 a.m. ET

Executives

Adele Skolits - Vice President, Finance, Chief Financial Officer and Treasurer

Christopher French - President and Chief Executive Officer

Earle MacKenzie - Executive Vice President and Chief Operating Officer

Analysts

Ric Prentiss - Raymond James

Barry Sine - Drexel Hamilton

Amy Young - Macquarie

David Dixon - FBR Capital Markets

Hamed Khorsand - BWS Financial

Operator

Good day, ladies and gentlemen, and welcome to the Shenandoah Telecommunications Company First Quarter Earnings Conference Call. [Operator Instructions] As a reminder this conference is being recorded.

I would now like to introduce your host for today's conference, Ms. Adele Skolits, CFO. Ms. Skolits, you may begin.

Adele Skolits

Good morning and thank you for joining us. The purpose of today's call is to review Shentel's results for the quarter ended March 31, 2016. Our results were announced in a press release distributed this morning, and the presentation we'll be reviewing is included on the Investor page of our Web site at www.shentel.com. 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; and Earle MacKenzie, our Executive Vice President and Chief Operating 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 these 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 statements.

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 turn the call over to Chris now.

Christopher French

Thank you, Adele. We appreciate everyone joining us this morning. We have gotten off to a great start for the year. In the first quarter we achieved revenue increases across all of our segments, grew our customer base and experienced improved operating income and net profitability. In addition, subsequent to the close of the quarter, we received FCC approval for our acquisition of nTelos Holdings. This was the last approval needed and we are now finalizing the transaction with an anticipated closing on May 6. We look forward to welcoming nTelos employees and to integrating the two companies.

The acquisition will significantly expand our wireless customer base and presence and also strengthen our relationship with Sprint. I will now discuss some highlights from the first quarter.

On Slide 5, you will see the first quarter 2016 net income increase 35% to $13.9 million compared to the prior year, driven by strong growth in the cable and wireline segments. Adjusted operating income before depreciation and amortization or OIBDA, for the quarter increased 12.8% to $40.4 million. Revenues were $92.6 million in the first quarter, a 9.8% increase from the prior year period. Revenues increased chiefly as a result of subscriber growth and improved product mix. Our cable segment revenues also improved as a result of an increase in the number of revenue generating units or RGUs and higher average revenue per customer as customers increasingly selected high-speed data and premium digital TV packages.

Wireless segment revenues benefitted from a reduction in postpaid fees retained by Sprint and from prepaid customers selecting higher priced services. Wireless highlights start on Slide 6. We experienced continued growth in our wireless segment with an 8.3% increase in customers for our postpaid offering. Growth again resulted from our upgraded network leveraging Sprint's national marketing and providing high quality local customer service. Consistent with recent quarters, we saw a decline of 3.5% in our smaller prepaid customer base but saw the net prepaid service revenue increase 4.3% due to changes in the mix of subscribers towards higher rate plans.

Wireless operating income grew 2.5% as compared to 2014. Turning to Slide 7. Our cable segment delivered outstanding growth in the quarter as demand for our high-speed Internet and voice services outpaced the anticipated decrease in video subscribers. Operating revenues increased 13.4% to $26.4 million, both from video rate increases to pass on programming cost and from customers opting for higher speed data offerings. Cable adjusted OIBDA grew almost 39% to $7 million, driven by the revenue growth and a 6.6% increase in RGUs.

As many of you know, we have diverse revenue streams and Slide 8 profiles two additional assets. Our fiber lease revenues increased more than 25% to $10 million and our 157 towers generated $1.9 million in OIBDA from sell-side lease revenue which was up 9.5% compared to last year's first quarter. From our strong performance in 2015, we continued the momentum into the new year with a great first quarter, achieving continued organic revenue growth and increased profitability. Our upgraded wireless and cable networks provide reliability and increased capabilities that our market demands and as a result we are attracting new customers and growing our customer base.

As we complete the nTelos acquisition and integrate our systems and networks, we look forward to providing our customers with even greater service capability and improved coverage. I will now turn the call back to Adele to review the details for our financial results.

Adele Skolits

Thank you, Chris. I will being with Slide 10, which shows our growth and profitability. In the top line, you can see that we had nearly a $2.8 million or 15% increase in operating income for Q1 '16 over Q1 '15. Over the same period, net income was up 35% and basic and fully diluted earnings per share are up 38% and 33% respectively.

On Slide 11, you see that adjusted OIBDA grew by nearly $4.6 million or almost 13%. Depreciation grew by nearly $1.4 million in Q1 '16 over Q1 '15. Incremental share-based compensation was up by $223,000. Finally, the nTelos acquisition costs are up slightly to $332,000. The contributions of the three operating segments to the OIBDA growth are shown on Slide 12.

Adjusted wireless OIBDA has increased by $1.2 million or 4%, while cable results have improved by $1.9 million or 39%. Wireline results have increased by $1.4 million or 20%. On Slide 13, I have analyzed the changes in the adjusted wireless OIBDA results between Q1 '15 and Q1 '16. On January 1, the settlement structure was changed, as a result Sprint began paying Shentel for travel and these revenues totaled $1.8 million in Q1 '16 and are included in service revenues in the wireless section of the management discussion and analysis in 10-Q which we released this morning.

Postpaid revenues grew by $1.6 million. This growth is a result of the January 1 drop in the net service fee rates Sprint charges us from 14% to 8.6% and growth in the average customers of 8.4%. These two changes more than offset a 10% drop in the average billing rates. The cost Sprint charges us to support prepaid customers dropped by $800,000. Prepaid revenues grew by $500,000 as 7.6% growth in average billing rates net of Sprint fees, was partially offset by a 3% drop in average customer.

Network costs have grown by $900,000, as a result primarily of growth in the cost of cell site backhaul and rent. On January 1, Shentel began reimbursing Sprint for national channel commission and handset subsidy and receiving credit for related equipment sales. These items included a selling, general and administrative cost, cost of goods and services sold and equipment revenues respectively, totaled $3 million in Q1 '16.

On Slide 14, I have shown the components of changes to adjusted cable segment OIBDA. The positive changes include significant growth in high speed data revenues or HSD of $2.4 million as a result of a nearly 10% increase in average customers. In addition, the HSD customers are choosing higher speeds of transmission that carry higher service charges. Video revenues were up by $600,000, as the 1% loss of video customers was offset by increases in video rates driven by higher programming cost. Voice, equipment and other revenues are up by $200,000 driven partially by 9.6% increase in average voice customers.

Selling, general and administrative cost rose by $200,000 as a result of growth in commissions and advertising expenses. Network cost grew by $500,000 as a result of incurring additional cost to maintain the network. Finally, programming cost rose by $600,000 as a result of the increase in fee rates demanded by content providers.

On Slide 15, I have analyzed the changes in the wireline results between Q1 '16 and Q1 '15. Facility lease revenue has grown by $1.9 million as a result of increased fiber sales within our other revenue. Access revenues grew by $500,000 primarily related to growth as a result of having recorded an unfavorable adjustment to universal service fees in Q1 '15. Other revenue grew by $300,000, primarily as a result of growth in high speed data service revenue. The cost of goods and services sold increased by $1.3 million, primarily related to the increase in fiber sales.

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

Earle MacKenzie

Thank you, Adele and good morning everyone. My prepared remarks begin on Slide 17. We ended the first quarter with 315,231 postpaid customers, an increase of 24,153 in the past 12 months. We ended the quarter with 457,770 total customers. We continue to inch up our postpaid Smartphone penetration to 83%. 96% of our Smartphones are LTE capable with 76% also having enhanced LTE capabilities.

Slide 18 shows our gross and net postpaid activity for the first quarter. We had 17,356 gross adds, up slightly from last year. But even with lower churn due to the larger base, we added fewer net adds at 2,719, down from 3,211 last year. We did see a small seasonal uptick in churn from the fourth quarter but we are not concerned. Our port-in versus port-out ratio for the first quarter was 1.8 to 1, taking customers from all other carriers.

Let me add a few more stats. Again this quarter, our net adds were higher value phone adds, not lower revenue tablets. We actually had a net loss of tablets in the quarter, so more than 100% of our net adds were phone adds. 26% of gross adds were subsidized plans, 45% on leasing and 29% were installment sales. First quarter upgrade were light at 6.6% of the base with 36% selecting subsidized plans, 39% leasing and 25% installment sales.

As of March 31, 51% of our customers remain on a subsidized plan. The enhanced, cut your bill in half, that started in November 2015, continued into the first quarter. The promotion has contributed to increased traffic into the stores but only 26% of the gross adds took the promotion and in most cases the customers ended up paying us more than half price because we were able to up sell them to higher data bucket.

Moving to Slide 19. We saw a continued decline in our monthly postpaid billed revenue per customer. On average for the first quarter -- our average for the first quarter was $55.15, down $5.91 in the past 12 months as more of our customers move from subsidized plan and we continue to offer price promotions. We expect the decline to continue for the foreseeable future as our base continues to shift towards lease and installment sales but with the increased data usage we believe the trend will reverse and average revenue will start to increase.

Although average postpaid billed revenue per user was down almost 10% in the past year, because of continued strong postpaid add our total gross billed revenue for the first quarter shown on Slide 20, only decreased 2%. As a result of the decrease in the settlement percentages retained by Sprint that Adele spoke of earlier from 22% to 16.8%, we actually saw a 4% increase in the net service revenues. Prepaid stats are shown on Slide 21.

We had a net decrease of 301 prepaid customers as we continue to see a dramatic shift in our prepaid base from Virgin Mobile and Assurance to Boost, that trend for the past 12 months has resulted in a loss of just over 5,000 prepaid customers. 81% of our prepaid customers have a Smartphone with 87% of the prepaid Smartphones having LTE capability.

On Slide 22 you see the impact of this shift to Boost. We continue to have elevated prepaid churn at 5% but we are building a base of more attractive Boost prepaid customers reflected by the increase of $2.14 per month over the past 12 months in the average prepaid build revenue. The result has been a more profitable prepaid business.

Network stats are shown on Slide 23. We have 556 cell sites. 95% have a second LTE carrier at 800 MHz. 35% have 3 LTE carriers with two at 1900 MHz and one at 800 MHz. We continue to launch 2.5 GHz with 61 sites on the air. Subject to having spectrum available, we will meet our goal of having all 125 2.5 sites on the air in 2016. 92% of our data traffic is now on LTE. The volume of data grew 19% in the first quarter and has grown 69% in the past 12 months.

Our average speed is approximately 5 Mbps but where we have 2.5 sites, the speed ranges up to 40 Mbps. We continue to have low dropped and blocked calls. We have fiber to 236 cell sites, 189 of our own, four to nTelos sites and 43 to others. We have added 21 year-to-date and plan to add a total of 52 in 2016. 27 in our legacy area and 25 in the nTelos service area.

Our cable segment continues to grow. RGU growth of 5,456 is shown on Slide 24. On January 1, we purchased Colane Cable in Southern West Virginia. The Colane network passes approximately 8,000 homes. We got 5,005 total RGUs broken down between 3,299 video RGU, 1,405 data RGUs and 302 voice RGUs. Colane offers speeds only up to 6 Mbps and just launched voice. So once we complete the upgrade of the network late this year, we see good upside opportunity in both data and voice.

For the first quarter excluding Colane, we saw the same continuing trend of increasing data and voice RGUs but a decline in video RGUs. So 1046 video RGU decline was accelerated by two events in addition to the industry trends of customers going over the top. First, we had our annual increase passing on programming cost and re-trans fees above $5 month and we made the decision not to continue to carry AMC and its sister channel. We lost approximately 300 customers due to AMC. To avoid the complaint that we took advantage of our customers, we made the decision to rebate the AMC programming cost savings to our customers with a recurring credit for 2016.

Net of the Colane addition, we added 1,737 data RGUs and 318 voice RGUs. Average monthly cable revenue per RGU and per customer is shown on Slide 25. We continue to see significant increase in revenue. The increase per RGU is $4.43 and $7.59 per customer. The increase was driven by the video price increase in January to offset the increase in programming cost and the continued increase in data ARPU as customers continue to purchase faster Internet speeds with larger data allowances.

Slide 6 shows the number of homes passed where we can each service and the penetration of each service. The numbers reflect the trends I have just discussed. An interesting side note. We now have more voice customers in our cable segment that we have in our regulated telephone operations. Wireline operations are shown on Slide 27. As previously announced, as of October 1, 2015, we no longer require our regulated telephone customers to have an access line to have DSL.

This change has resulted in a short-term accelerated decline in our access lines. Virtually all the access lines lost are customers that continue to purchase Internet service from Shentel. Without the bundled discount, each of these customer are paying at least $10 more for their Internet service. We also started offering 15 Mbps up to 101 Mbps by cable modem service on October 1. And as of the end of the first quarter, we had 624 signed up for the higher speed cable modem services.

Slide 28 shows the first quarter fiber lease revenue broken down between affiliated and non-affiliated. You see the total grew by 2 million with the growth of both affiliated and non-affiliated revenues. We had a good quarter in non-affiliated fiber sales with $7 million of new contracts signed in the first quarter of 2016. We continue to have great success in E-Rate sales to school systems on our fiber network, our estimate of 2016 capital spending on Slide 29 has not changed from the numbers we shared at our year-end earnings call. We have committed and set approximately 25% of the 2016 non-nTelos CapEx for the first quarter.

Let me conclude by giving you an update on nTelos. As reported, we got FCC approval on April 15, which was the final approval required. We anticipate closing the transaction on May 6. The delays in getting the approvals has been frustrating but it has allowed adequate time to plan for the transition. We have had great cooperation from nTelos and Sprint. The senior management of nTelos will be departing at closing and we will immediately start selling Sprint service out of the nTelos stores. We expect that the upgrade of nTelos network will continue without any delays. Our teams have worked together over the past month to assure that we don’t lose any momentum.

Currently 58% of the non-overlap nTelos sites have been upgraded to LTE. Network Vision sites have been delivered and are being installed. We will start to migrate existing nTelos customers to the Sprint back office before the end of May. As you recall, we will be able to upgrade all of the nTelos customers with an iPhone C or newer with a new SIM card but we will need to exchange all the other nTelos customer phones. The 300,000 Sprint customers in the nTelos area will require no migration efforts. We provided some guidance on our last call for the cost of the nTelos customer migration of up to $80 million along with our previous estimate of other one time transition and deal cost of $80 million.

As we continue to refine our estimates, we now believe that the total cost of transition, field cost and the customer migration will be between $130 million and $150 million, down from our initial estimate of $160 million. I will now turn the call back to Adele.

Adele Skolits

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Ric Prentiss with Raymond James. Your line is open.

Ric Prentiss

Couple of questions on the wireless side, if I could. On the gross billed revenue Slide, I was interested in the, bad debt seems that it's dropped quite a bit from year to year but discounts and credits have gone up. So can we talk a little bit about those two items within the gross billed revenue, please.

Earle MacKenzie

Sure, Rick, this is Earle. On the bad debt, as you know we control our own decisions on bad debt and have continued to keep a handle on that and just feel like, just good attention has kept that down. As far as the credit and adjustment, that’s always seasonal. We do -- if we offer any kind of promotion that gives a discount in the service fee, it does come through that account. So when we do some promotions, there have been some credits running through that. But it is not anything that we expect to be recurring.

Ric Prentiss

Okay. And then obviously now the new Sprint agreement is in place, so it's moved some items around with the travel revenue and then the spring national channel. Help us understand a little bit, will there be seasonality in the Sprint travel like is typical with the roaming business or is it different and then the same question on the national sales channel. How should we think about those costs now we have the first quarter of seeing some actuals.

Adele Skolits

Rick, this is Adele. The travel revenues of $1.8 million come in two forms. One is the retail travel revenues of $1,250,000 a month, and that has been set for the first three years of the contract. The variable piece is the wholesale revenues that amount to about $517,000 in the quarter. So that will be seasonal.

Ric Prentiss

Okay. And then how about the...

Adele Skolits

I am sorry, you asked about -- certainly the commissions cost and the handset subsidies net of equipment revenues will vary according to the gross adds.

Earle MacKenzie

So the one thing that we have a little change is that travel will go to $1.5 million a month on a recurring basis for 36 months or for three years once we close out the nTelos deal. So it was $417,000 a month for the first three months of this year but will go up to $1.5 million per month with the closing of nTelos.

Adele Skolits

You are absolutely right. I misspoke that. The $1,250,000 is the $417,000 roughly a month that Earle spoke about. So it's $1,250,000 for the quarter, $417,000 a month.

Ric Prentiss

Right. And then it jumps up when you close nTelos?

Adele Skolits

Right. Both of these will.

Ric Prentiss

Both the wholesale and the retail.

Adele Skolits

Right. As well as obviously the national commissions once we have the customers migrated or add customers onto the new relationship.

Ric Prentiss

And the final question from me is, can you update us a little bit, I think you said Sprint has 300,000 subs in the territory. Is that the latest number from Sprint in the territory as we look for the May 6 closing and any indication you can give us as far some of the nTelos subs you expect to come over on that May 6 timeframe just so we can kind of get the jump off model correct.

Earle MacKenzie

Neither have announced their first quarter numbers yet, so we are not -- feel comfortable giving a specific number and we have just used the $300,000 as kind of the same number we have used all along but expect that we can provide those information once they have announced their numbers.

Operator

Thank you. Our next question comes from the line of Barry Sine with Drexel Hamilton. Your line is open.

Barry Sine

I wanted to start off, kind of continuing talking about the nTelos integration and I know from talking to your folks that the extra timing of getting approvals has given you more time to plan and you are in pretty good shape once sun comes up on May 7. Can you give us your 30-day plan? Those first 30 days, what, if I was a customer walking to your store or if I was an nTelos customer, what would I see? What are you doing for that first 30 days to kick it off?

Earle MacKenzie

This is Earle. We are going to try to do a very soft launch. The information that we are providing to the nTelos customers that they don’t have to do anything on day 1. There phone is going to work. They are going to continue on their same price plan. The only thing that really is going to change is we are going to be upgrading all of their phones to allow them to have access to the Sprint LTE network nationwide. nTelos customers don’t have access to the LTE network today but they will on day 1 after close.

But what are we going to start doing is communicating to the customer, letting them know that over the next 18 months they will need to migrate. We are going to encourage them to set an appointment so that they can come in on a orderly basis. We are adding [80] [ph] positions within our stores that will be dedicated just to migrating the customers although any other employee in the store could help them if they are available. But obviously there will be people who walk in, who want to migrate. And so we will address then as they walk in the door. And I guess the important thing that we are basically saying both publically and internally, is that there is no rush for the customer to do anything.

Barry Sine

And I know you are not giving guidance on this but I am assuming it's your expectation as you convert those customers over that an average you will get an uplift in revenue per subscriber by bringing them into the store and walking through the sales process.

Earle MacKenzie

That’s our hope and we have talked about this before. We are looking at this as the cup being half full in that we are going to get an opportunity to talk to each customer. We will be looking at their current price plane, their current usage pattern. And hopefully we will be able to have an opportunity to get them into the right price plan, move them up into bigger data buckets. And because the customer is going to have the choice, they can either stay on their current price plan or they can select any one of the current Sprint price plan. And based on some market research that we have done and some questions that we are asking customers, we are encouraged because a fairly good percentage of nTelos customers would consider adding an additional line as part of this migration.

So I think we will see a lift in revenue.

Barry Sine

Okay. That’s helpful. I wanted to turn over to your fiber footprint. The focus is always on wireless with you guys, but you have a pretty sizable fiber footprint in your territory. You have talked about adding that going a little further, I think down [route 81] [ph] and doing more fiber to the tower. I wanted to ask about your enterprise sales efforts going after, for example banks, that they have facilities across the region. Government agencies. And if I contrast you with, let's say somebody like Lumos who is a little more dedicated on enterprise sales over fiber network, I don’t hear a lot from you. And I am assuming there is something going on but could you just update us on enterprise sales of that fiber footprint.

Earle MacKenzie

We do have a dedicated sales organization. Obviously, it's not as big a percentage of our business as fiber is for Lumos. But we did $22 million of new contracts last year. We did $7 million of new contracts in the first quarter. So we continue to go after those exact kind of customers, whether they are regional banks, medical. We have been incredibly successful at school systems and E-Rate. If you look at the school systems that we have onnet or are working to put onnet and looking at our fiber footprint, it's pretty impressive.

You know we are going to continue to accelerate that. We are actually adding a couple of new sales people this year in our fiber sales group. And so we see a good opportunity to leverage that fiber that, as we have said over and over again, is so critical for us from a strategic standpoint as far as our wireless and cable business. But because we do have more than adequate capacity, we are able to sell it to third parties with very nice margins.

Barry Sine

Last thing I wanted to ask you about, again shifting gears over to the cable segment. You have continued to talk a lot about programming cost, what's going on there. So multipart question if I could on programming. First of all, could you give us a heads up on what do we have in terms of additional AMCs out there? Do you have any other big programs where you have expirations of contracts coming up? And just from a general perspective, do these companies like AMC, do they even realize that they are not in the air anymore? And you have obviously have a smaller footprint. When I came down for the shareholders meeting I didn’t even realize I am going to watch a baseball game and you don’t carry the nationals big as [indiscernible] and obviously you haven't worked to be allowed with them. So just a general question on programming.

Earle MacKenzie

I will answer your second question first. Does AMC notice? The answer is, yes, they do. Chris French and myself and our head of customer service and our head of programming were targeted earlier this year when the Walking Dead season started. They actually were redirecting our customers who were coming to their Web site. And they were encouraging them to write an email to us telling us to put AMC back on. So the answer to your question is definitely, yes, they do no. We are not a significant percentage but when you take us plus the other members of the co-ops that dropped the programming, there were hundreds of thousands of video customers that are no longer getting the AMC channels.

On [Mazon] [ph] which is the regional sports channel that does carry the Washington Nationals and the Baltimore Orioles, we do not carry them once again because of cost. They require us to dedicate two channels year round, just in case the Orioles and the Nationals are playing at the same time. In most cases, there is no programming on those channels and when they are not carrying a baseball game, oftentimes they are just running ESPN Sports Center. And so it just doesn’t make sense for us to dedicate resources and pay several dollars per month per customer, 12 months of the year, to carry that regional sports channel.

As far as programming coming up this year, probably the biggest one that’s coming up this year is NBC Universal. Obviously that one would be very difficult to drop but we are not hearing the same kind of high increases from the bigger guys than we have from the smaller programmers in this cycle. The other thing that we don’t have coming up, we don’t have any retrans, renegotiations this year. That will be a next year event.

Barry Sine

Okay. All very helpful Earle. And Adele, I noticed the Q is out, so thank you.

Adele Skolits

It is. I thought that was particularly important given the changes in the relationship with Sprint.

Operator

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

Amy Young

A couple of quick questions. I guess when you called out the $130 million cost coming down from $160 million, can you just talk about what buckets of cost items we should be thinking about? And then just a couple of things on the wireless segment. When we look at the controlled channel, the 33% coming down from 39%, what should the normalized rate be and does it change with nTelos? And then my second question on the wireless segment is, the net loss you saw in tablets, is that largely as a result of promotions from Sprint ultimately lost. Thank you.

Adele Skolits

You want to take the wireless questions first, Earle.

Earle MacKenzie

Sure. You asked a lot of questions there, so if I missed them, please let me know. As far as the controlled channels, Amy in the past before we went to leasing and installment sales, we had a number of third party local sales agents who had direct relationships with us. And when that was the case, we were seeing about 50% to 55% of the sales came from our stores and from these third parties. Once we now have moved where the majority of the sales are on lease on installment sales, we now have set up those agents to have a direct relationship with Sprint because it just works better if they are going to do installment or leases to have the direct relationship with Sprint.

So those same group of companies are selling for us but they now fall into the national and regional group and so that’s why you see the 50% to 55% drop into the mid-30s.

If you look kind of, we always see this as kind of seasonal with the percentage of sales out of our stores being the lowest in the fourth quarter and then kind of bumps around in the other three. But I think generally you would see about a third, 35% of sales coming out of our stores. As we do take on the nTelos area, we expect that percentage to be higher. And the reason for that is just the sheer number of nTelos stores. As you probably know, nTelos had to national or large regional third party selling for them as we do. So when we move to the nTelos area, we are picking up the Best Buy's and the Wal-Mart because of our Sprint relationship. But nTelos had 34 stores, Sprint had 7 and so we will have over 40 stores. And so with that many stores relative to the geography there, we expect the percentage will be 45% to 50% of the gross adds will come out of the stores.

Adele Skolits

And with respect to the cost, you are looking at two buckets of cost. The first that we announced, the original $80 million to $85 million, included things such as, of the transaction fees including banking, legal, investment bankers and so forth. Then you have got the severance costs of the nTelos employees that we are letting go. All the early termination fees that we have on the duplicate cell sites, the duplicate backhaul and so forth. So those are the primary drivers to the original bucket of expenses. The incremental expenses related to the delays in migration are primarily related to all of the back office expenses that we had originally hoped Sprint would assume almost immediately. So that includes things like maintaining the nTelos customer care organization, their billing organization and a lot of the other back office areas that support those, like IT, for instance.

We also have new handset cost while all we have to do for the iPhones is buy a $5 SIM card. For the Android phones we will end up replacing a significant number of those phones over time. Did I miss anything? I think those are the primary drivers.

Amy Young

Great. Thank you. And can you just talk about the net loss in tablets?

Earle MacKenzie

Amy, we have always kind of deemphasized tablets. We actually have a very different commission plan for our people if they sell a phone service versus a tablet. And even when Sprint has been running tablet promotions, we have not always joined in. We do have the option whether to opt in or opt out on certain promotions. It's not that we don’t like tablets, we just don’t want to be focusing on only adding tablets. And in this quarter we didn’t do anything to deemphasize tablets, it just happened to be -- because we didn’t have a program to be putting tablets into the market. Just normal churn we lost on net of our tablets.

Operator

Thank you. Our next question comes from the line of David Dixon with FBR Capital Markets. Your line is open.

David Dixon

A quick question for you. I wanted to ask a big picture question on differentiator and just the opportunity on wireless segment going forward. If I look at the route metrics results that came out is showing that Sprint has got some good strength and momentum in about 15 markets now with speeds about 20 mega bits per second. And then we look at what competitors are doing, they are adding quite a bit to the low band spectrum portfolio, [indiscernible] incentive option coming up. And Shentel in contrast has got plenty of 2.5 to play with and we see focus on high power UE that we are pushing through 3 Gbp. That spectrum is going to behave a lot more like 1.9 with about a 30% gain in coverage. I think they were expecting China Mobile and Softbank and the estimates that we are seeing there in the tests.

So how do think about the growth opportunity to differentiate going forward? Do you see any opportunity to deploy 2.5 beyond like islands of coverage? I think you mentioned 125 sites. Is there opportunity to really increase that significantly and do you see a greater opportunity versus the threat from more low bans that your competitors will have relative to you versus the high band that you could perhaps deploy more broadly.

Earle MacKenzie

David, it's Earle. Couple of things. Number one, one of the advantages that we are having by the, of retaining nTelos, is we are picking up their 1900 spectrum. So when you look at the amount of 1900 spectrum that we have, we are going to have a very deep amount of spectrum at 1900. And we have built our network dense enough that we have very good handle at 1900. Obviously, the 800 has helped for in building coverage but as we continue to add more and more site for capacity, it just helps.

As far as the 2.5, we are starting out, as you said using islands. But our islands are pretty big. I mean we are talking about kind of, from our standpoint, they are metro areas. We are doing Harrisburg, we are doing York, we are doing Hagerstown, Winchester etcetera. And when you look at the coverage, it's not only the downtown areas of those but it is the suburbs, and I use that word loosely of those areas. You look at many of our cell sites. Many of our cell sites are truly rural areas without a lot of density and so we will continue to monitor it and there maybe some opportunities, for instance where there is a lot of activity for us to drop in some 2.5 spectrum but we really don’t see it as being ubiquitous. But we will continue to use the 2.5 where we have even in building or in small sites, or shopping malls and stadiums and that sort of thing where we think we continue to meet the capacity. So we are feeling pretty good about where we are.

I think from our standpoint, what has really been our differentiation as much as anything today is that we have had stayed ahead of the capacity. When you look at the fact that our average customer is consuming 4.5 to 5 gig a month, that is significantly higher than what other carriers are reporting. And so I think what we are doing is we are giving the customer a great data experience all the time. And part of it has just been our philosophy since day one to stay ahead on capacity. And as you know, because you have watched us for quite a while, I mean we have been having healthy increases in CapEx every year focused on capacity just so that we can make sure that that really is the differentiation between us and our competitors.

David Dixon

One of the things that strikes me though is that going forward, adding capacity once you have got the 2.5 in, it is an order of magnitude lower to add more capacity incrementally.

Earle MacKenzie

No question. And so we will have a very rich position on 2.5 that we will continue to use to make sure that we give the customers the best experience we can.

David Dixon

I wanted to switch across to an update if you could, on the progress of improvements in the network coverage around your network cage. I think that’s one of the things that has been a challenge in the past. It’s just those gateways in and out of the region. What's been happening on that front?

Earle MacKenzie

Things are continuing to improve but not nearly as fast as we would like them to. I mean what is [indiscernible], your comments on is that Sprint has done a lot of work and has improved a number of their markets. But they are still focusing primarily on the inside of the [beltway] [ph] area. Although we continue to work with them and focus on areas where we have particularly weak hand off areas. But as we have talked about before, we have had discussions and continue to have discussions with Sprint about expanding our footprint and we are hoping that maybe some of those areas get addressed by expanding our footprint rather than waiting for Sprint to build.

David Dixon

And so on that point, how are the discussions going with Sprint now? They have a new team in place now dedicated to working with rural partners on opportunities to built together or do some more deals that could increase your scale. Have you seen any signs of that starting to kick off in terms of discussions specifically with Shentel or is that perhaps a little early?

Earle MacKenzie

We are having some preliminary discussions but I think all of us decided we needed to get through this closing before we opened a new round of discussions. But we have had informal discussions about it and I am optimistic that we will be able to do something fruitful for Shentel and for Sprint.

Operator

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

Hamed Khorsand

Just a few questions from me. First off, do you expect that with the new cable modem offering that you could see a increase in ARPU similar to what you realized last year in your cable business with customers transitioning?

Earle MacKenzie

There is no question that we are seeing that in our wireline business. We have just got a much smaller base and I think that’s the things to kind of focus on here. In our cable segment we pass almost 180,000 homes with cable modem. In our wireline business we cover about 16,000 homes with the cable plan. And so I think as a percentage we will see similar growth but the absolute numbers will be smaller. But we are already seeing even in our DSL customers, we are seeing them drop their lower speeds and move to higher speeds. And so I think it is just kind of across every broadband platform.

Customers are demanding more capacity and higher speeds because they are just doing more and more data. And so I think we are going to continue to see even without any specific price increases, we are going to continue to see our ARPU increase from just demand on the customers side.

Hamed Khorsand

Do you think that last comment is true for the cable business as well?

Earle MacKenzie

Absolutely. We are continuing to see every month customers migrate to higher speeds and when new customers come on, they are coming on in higher speed than what we would have seen a couple of years ago?

Hamed Khorsand

Okay. And on the wireless side, can you just speak about the competitive landscape where your net adds aren't performing as well as last year?

Earle MacKenzie

There really is no specific area. As I mentioned, we are at 1.8 to 1 as far as porting. That was down from fourth quarter where we were over two. But still we are taking share from every carrier. And so I don’t think there is any particular weakness, it's just we really didn’t have a new promotion in the first quarter. Sprint's promotion was a continuation of cut your bill in half from fourth quarter and I think it gave us a good boost in the fourth quarter, it carried into the first quarter of this year. But the other part of it is that we had a net loss of tablets in the quarter. So if we had had some kind of a tablet promotion or had pushed tablets, we could have had as many or more adds this year but necessarily the same average revenue adds.

Hamed Khorsand

Okay. And my last question is, where do you see the floor as far as the wireless ARPU for the post-paid subscriber?

Earle MacKenzie

I really don’t know where that is. Two things. If you kind of look through the rest of the industry, T-Mobile is in the mid-40s. That’s a significant difference from where we are and not still believe that we are going to see that kind of a drop but I think that is kind of the floor today for the industry is kind of where T-Mobile is. And I think really it's a -- there's a lot of moving parts there. You have got the shift, the subsidized plans to the non-subsidized plans. You have price promotions that are entering and exiting the market all the time and you have got the counter to that is customers are using more and more data. The fact that our data usage almost went up 70%. I wish we had added 70% increasing customers but we didn’t. So what's that showing you is the existing customers continue to use more and more data. And as customers hit and exceed those data buckets, we are going to start seeing overages. So I really am, I guess the word is optimistic, that we may see a continued decline for a couple of more quarters but at some point in time as customers fill up the buckets that they have bought, they either are going to have buy larger data buckets on a recurring basis or still have overages.

Hamed Khorsand

That 70% increase in data usage you saw, was that in relation to the customers buying higher capacity plans or was it...

Earle MacKenzie

No. That’s just -- that’s just absolute usage on the wireless network was up 70%.

Hamed Khorsand

Okay. What I am trying to get to is, like how many of your customers are hitting that threshold where they should be upgrading or they will be soon going over their plan limit?

Earle MacKenzie

I don’t have that percentage right in front of me but I would -- it's probably at least 25% or close to or exceeding. I know that on the cable side what we do have data allowances and we notify them, 5% of our customers are exceeding the data allowance every month. And in addition to that customers are upgrading to bigger buckets but they don’t hit the data allowances.

Operator

Thank you. And we have a follow up question from the line of Ric Prentiss with Raymond James.

Ric Prentiss

I wanted to get one other question if I could. Adele, you have that chart where you gave the waterfall on the cable TV year-over-year. Could you do a similar one or help us understand what the quarter to quarter difference was in cable OIBDA?

Adele Skolits

Are you referring to Slide 14, Ric?

Ric Prentiss

Yes, exactly. So Slide 14 was the year-over-year change where EBITDA grew nicely on the cable segment from like $5 million to $7 million. So just wondering quarter-to-quarter, 4Q '15, I think was about $8 million and then it dropped to a million from 4Q '15 to 1Q '16. Just trying to understand the dynamics of that change?

Adele Skolits

I am not prepared to do that off the top of my head but I can work something up for you certainly.

Ric Prentiss

Yes. That would be great because obviously programming cost would probably go up as you talked about how the annual price increase went up as well. So that would just help to understand as far as the quarterly change there. That would be great.

Adele Skolits

Yes. Certainly. Even on Slide 14 you can see the video revenues went up $600,000 and the programming cost went up $600,000. So consistent with Earle's advice on this subject before, we are going to increase our billing rates to cover all of these increases in cost. So we maintain our absolute margin if not our relative one.

Ric Prentiss

Right. It would just help to understand a little bit more of the quarter to quarter changes in there. So if you can look into that.

Adele Skolits

Understood. Yes.

Operator

Thank you. This concludes today's Q&A session. I would now like to turn the call back over to Ms. Adele Skolits for any closing remarks.

Adele Skolits

Thank you for participating. I would like to invite you to let me know if there are additional details, such as what Ric just mentioned that he would like to see in the future. My contact information was provided in the press release.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect. Everyone have a great day.

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